Guardant Health, Inc. (GH) Earnings Call Transcript & Summary

Hi, everyone. Good afternoon. Congratulations on making it to the last session of today. For those of you who don't know me, my name is Andrew Brackmann, I cover Diagnostics for the equity research team at William Blair. This afternoon, we have the team from Guardant Health joining us. We have co-founders and co-CEOs, Helmy Eltoukhy and AmirAli Talasaz; CFO, Mike Bell. And in the crowd, we've got Alex Kleban from Investor Relations. In terms of housekeeping, I am required to tell you that for a full list of research disclosures and potential conflicts of interest, please see williamblair.com. And in terms of a breakout session, given this is the last one of the day, we'll just stick in here after the formal presentation's over. So with that, I'll turn it over to the team. Thanks.

Thanks, Andrew, for the great introduction. And so let's get into it. Please note our forward-looking statement. So at Guardant, we founded the company 11 years ago now to really push the boundaries of what's possible with the blood diagnostics in cancer. The way the technology works is we take a tube of blood from a potentially a patient with cancer or someone who may be screened for cancer. And what we've developed are really 3 main components to the technology and ability to really exquisitely extract DNA and other biomarkers from that tube of blood, do it with very high conversion efficiency, sequence it and then use machine learning where, as we collect more samples over time, the performance improves. We now have over 500 patents and patents pending on this technology. And what it's allowed us to do is open up 3 very large markets across cancer. The first one was therapy selection, where we launched Guardant360 back in 2014. This is a flagship liquid biopsy test in the field, in the space of therapy selection. And what that test does is essentially can be given -- can be administered to a late-stage cancer patient where without the need of an invasive biopsy, a physician can match that patient to the most appropriate therapy. There are about 700,000 metastatic patients in the United States, and it's a $10 billion market opportunity. And the second market is recurrence monitoring. These are 15 million cancer survivors that, with a blood test, could be given what we call quantitative peace of mind. Essentially, these are early-stage patients. They're given a curative resection. They're told they're cured of cancer. And essentially, this blood test could come in and detect recurrence as early as possible, give them peace of mind that they're still free and clear of the disease. This is a $20 billion opportunity, and we have a test we launched a couple of years ago called Guardant Reveal, which is the only -- blood-only recurrence monitoring test in the field. And then finally, the largest opportunity is screening of asymptomatic average-risk individuals. We have a test called Shield that is initially targeted towards colorectal cancer screening and then we'll expand to multi-cancer screening over time. There are 120 million average risk individuals in the U.S. that this test can be applicable for opening up a $100 billion opportunity. We've had a track record of very strong execution over time. We now have over 300 million covered lives for Guardant360; over 400,000 cumulative tests ordered; with 12,000 out of the 13,000 or 14,000 oncologists in the U.S. having -- have ordered Guardant360. And we have -- we work with over 150 biopharma companies in the space, helping them develop their targeted therapies and cancer-related therapies. And in the latest year of 2022, we reached $450 million in revenue, annual revenue with a 49% CAGR. So I'll dive a little bit deeper into therapy selection. We have 4 tests in the therapy selection franchise that are now approved by Medicare. The first one is our flagship Guardant360 CDx test, which was the first liquid biopsy that was approved by the FDA. We have Guardant360, which is a next-generation version of the Guardant360 CDx test that interrogates many, many more genes. We have Guardant360 Response, which we just got Medicare coverage for, which is the first blood-only liquid biopsy to monitor therapeutic response. And so this is a second test that can be used in conjunction with Guardant360 to essentially tell whether the administered therapy is working or not. And then finally, we have a tissue biopsy test called Guardant360 TissueNext, which can be used in conjunction with other tests. In terms of the drivers of our business right now in the clinical side, in the latest quarter, we saw 45% year-over-year clinical volume growth. And a lot of that is fueled by Guardant360 in the first quarter. We recently won the first approval for ESR1 mutation targeted therapies in breast cancer. We saw a step change in our breast cancer volume as a result as soon as this was approved. And other tailwinds we're seeing are payer coverage expansion, which I'll detail in the next slide. On the biopharma side, as I mentioned, we have about 150 biopharma partners we're working with. We launched a new test, our smart liquid biopsy in the research setting and that's called GuardantINFINITY, and that is further driving growth in our biopharma business. And in addition to the approved ESR1 therapy CDx collaboration, we recently won, we have 5 other ones that we are kind of engaged with. And then finally, on the international expansion side, we'll have our China lab hopefully up and running second half of this year, late 2023. And we have a very strong pipeline in terms of pharma collaborations there. And this business is approaching cash flow breakeven in the next 6 to 9 months. Expanding on the payer coverage component for Guardant360, we recently won commercial plan coverage from United, Anthem Blue Cross and Blue Shield, Aetna and Humana in the recent months. We believe this is going to be a very strong tailwind for us in terms of continued driving ASPs higher. And so we now have, as I said, over 300 million covered lives. I believe we have coverage or partial coverage with almost every payer that is more than 1 million lives in the United States now. Guardant360 Response, we recently won Medicare coverage for. It's the first and only liquid biopsy, where you don't need a tissue sample. And this can be used for essentially monitoring molecular response to immunotherapy. So it's telling whether the patient is responding to I-O. And so we now have 5 total tests, including our MRD tests that are covered by Medicare. Shifting gears to the recurrence monitoring business. This is, as I said, about a $20 billion business where we believe about half -- less than half are accessible with tissue-based approaches. There are 2 approaches to this, either using a blood-only approach or what's called a tumor-informed approach, where you have to sequence the tissue biopsy, develop an assay and then monitor the patient using the developed assay. The beauty of our approach is it has a fast turnaround time. It's simple, and it can access those patients without biopsies readily available. We recently saw, in the most recent quarter, 100% year-over-year volume growth. And so this is a business that's continuing to grow very rapidly. Growth drivers in 2023, our continued penetration in colorectal cancer, breast and lung cancer, reimbursement from some additional cancers. We have CRC reimbursed in the adjuvant setting, and we are working on expanding that as well as getting breast cancer reimbursed. And then we have a very major platform technology upgrade that will be happening in the next couple of months, and it's around the smart liquid biopsy. And so we launched in 2014, the first comprehensive liquid biopsy in this space. And we believe that this is really as profound of a change of platform shift in terms of what will be happening initially with our MRD business, recurrence monitoring business and then with our therapy selection business. And this technology really allows us to engage and really utilize the full power of the Hfe genome in terms of applications of improving the performance of the test, improving sensitivity as well as doing things that seem like science fiction now, telling where the tumor is, telling where recurrence is happening as well as predicting outcomes of patients. And so we're very excited for this transformative change in our platform. And with that, I'll pass it over to AmirAli to give you an update on our screening business.

Thank you, Helmy. So talking about screening and the updates on that side. So this was our vision from the beginning, to have a blood test that can detect cancers at early stages across all cancer types. CRC became our first lead indication for this test. So maybe let's go deeper into CRC screening market. In order to have a successful screening test, you need to have a test that first works in terms of high performance. Meaning, detecting CRCs with high efficiencies when patients or consumers are taking the test; and second, high patient participation or adherence, meaning that they complete that test. 120 million average risk patient population are based on U.S. guidelines. They need to get screened for CRC. Right now, there are 70 -- about 70 million are getting screening done and about 50 million people are unscreened. And one of the main reasons, main contributors is the adherence or the rate of participation of the patients, consumers in completing those tests. You see the adherence for stool-based test or scoping-based test ranges from 40% to 65%. It's very interesting when we look at some of the consumer and patient survey. 7 out of 10 people who've done stool testing as a mode of screening, they don't want to do it again. And when we are looking at the experience with blood tests, in a real-world experience with our lab-developed test, Shield, which is in market for about a year, we are seeing adherence rate of more than 90%. That's why we believe blood-based CRC screening with high performance and more than 90% adherence will be the solution to fill this gap of on screening. To prove the performance of our blood-based test, we conducted a study a pivotal study called ECLIPSE. We are proud with the high diversity trial operation that we conducted. This is one of very few studies that the active participants, really, their demographic mirror the U.S. patient population with more than 20% of participants coming were nonwhite. And what about the performance? The ECLIPSE met the co-primary endpoints. We saw the CRC sensitivity of 83%, specificity at 90%, which this performance is in the range of other guideline recommended CRC screening options with sensitivities ranging between 74% to 92%. When we look at the sensitivity by stage of the disease, and looking at Stage 1 to 3 blended sensitivity, where the 5-year outcome survival are pretty long in this specific case, in this specific cancer type, we observed 81% sensitivity. We also saw 72% sensitivity of detecting localized disease, meaning at Stage I/II, also 100% regional and distant. And further breaking down by stage, we saw 100% sensitivity of Stage II; 100% Stage III; 100% Stage IV; and 55% Stage I. This is a bar that actually meets the criteria for getting FDA approval and also getting Medicare coverage, pending the approval of these tests. So going back to effective screening modalities, we talked about the screening test needs to have good sensitivity and also patient adherence. Considering the CRC screening for different tests and adherence based on real-world evidence, we are confident that blood -- Shield blood-based test has the potential to be a highly effective mode of screening and detecting CRCs. As I mentioned earlier, CRC is our lead and first indication, but not the only indication. In fact, our journey is toward multi-cancer screening enabled by Shield with accessibility and first indication being CRC. We are already working on long indication. We are running a pivotal study to show the performance of the same test in detecting lung cancers and also multi-cancer screening is in development. We submitted our application to FDA, and we are expecting FDA approval and launch of that IVD device sometime in 2024. We believe this road map would really enable us to be the first FDA-approved and reimbursed multi-cancer test. With that, I give it to Mike to talk about our financials. Mike?

Thanks, AmirAli. So yes, just maybe first, a recap of our Q1 numbers and specifically on revenue. We had a really great start to the year. You'll see there our revenue growing from $96 million to $129 million in the first quarter, so a 34% year-over-year growth. Let me touch on a few of the drivers of that growth, mainly the key driver being on the clinical side of the business. So our clinical volumes grew up 45% year-over-year. And that was really led by Guardant360 and Guardant360 was the real driver of that revenue growth. Again, Helmy mentioned that we got the ESR1 FDA approval in Q1. That led to an almost overnight 40% increase in the volume on breast cancer. And also Helmy mentioned the payer coverage tailwinds that we've seen. In the first quarter, it was just United. And then subsequent to that, we've had Anthem, Aetna and Humana. So as well as ASP upside that hopefully, we'll see as we move forward, we're definitely seeing volume impact, positive volume impact from that because it's taking away a lot of the friction for the patients. So really positive tailwinds there. And maybe just to touch on a couple of other things. If some of you may recall at the start of the year, we did a workforce reduction. One area that we didn't touch in the business was our oncology sales force. We kept that intact. And in fact, we've added to that since the start of the first quarter. And that team really performed exceptionally well in the first quarter. We reaped the benefits from keeping that team intact and keeping them very well focused. And also we're starting to reap the benefits from investments that we've made, particularly in EMR over the last year or so. Last year, we signed an agreement with Epic, and we started to integrate our portfolio of tests into the system. And at the start of the year, we started to roll that out to customers. And we've seen, as we've rolled that out to customers, we've had a very nice positive impact at those customer sites. So again, a really strong Q1 from the revenue side. Switching next on the operating expenses and cash burn. At the start of the year, we gave guidance on both our operating expenses and our free cash flow. On operating expenses, our guidance was that this year, we're actually bringing down our operating expense compared to 2022. And on the free cash flow side, 2022, we see as being our peak cash burn year. And for 2023, we guided that our cash burn for the year would be around $350 million. So again, we made a really good start in the first quarter. This chart is just showing the sort of the sequential change on both OpEx and free cash flow from Q4 to Q1. And for both of those, we made significant reductions. So really pleased with how we've managed to sort of implement the changes and still continue to drive the business in the first quarter. Next on our successful equity offering. Probably many of you know that a few weeks ago, we had an equity offering. The net proceeds that we raised from that was $381 million. We were really pleased again with how that offering went, and it's put us in a really strong position going forward. Pro forma cash balance after the offering, we've got something like $1.3 billion of cash on the balance sheet. And that now gives us the runway to get the company to cash flow breakeven. We've always targeted to be at a breakeven point 1 to 2 years after being in guidelines on the screening side of the business. So '27, '28, so in sort of 4, 5 years' time. So maybe just to break how that looks from the different areas of the business and what our investment needs are in those areas of the business. Firstly, on therapy selection. So that's our core business, mainly Guardant360 and also on the clinical side and on the biopharma side, that now is on track to be breakeven by the end of the year. And in fact, from 2024 onwards, that's going to start to positively contribute cash to the business. And that, in part, is going to be able to enable us to fund our MRD investments. So MRD recurrence monitoring, that's in investment mode at the moment. We're building the market. We're building the volume. At the moment, a lot of that volume isn't getting reimbursed. So that's a cost to us. And we're also investing heavily on the clinical data development. But as time goes forward and as we start to get incremental reimbursement, that business is going to flip to be breakeven and profitable. But in the meantime, if you look over that 5-year period and you look at therapy selection and MRD together as an oncology business, that's going to be self-funding. So the cash being generated from therapy selection and the reimbursement that we're going to get from Reveal is going to fund that business over the next 5 years. So that basically leaves us with screening. Screening this year, we're managing our spend, our burn to $200 million. And we plan to do that over the next 5 years, up until we get into guidelines, until the company gets to breakeven. The spend profile is going to change this year. It's heavily heavy on the R&D side. We've got continuing enrollment in our ECLIPSE study and the Shield study. So they're major investments. They'll end by the end of this year. So we'll have a reduction in R&D expense this year. And then next year, as we get closer to FDA approval, we'll start to be able to ramp up our commercial team there. And then over time, as we grow the revenue on the screening side of the business, we'll be investing on a sort of gated level on our commercial infrastructure. But overall, we're confident we can manage the spend on screening to be less than $200 million over the next 5 years until we get to a breakeven point. And then, finally, just to wrap up the presentation, just looking at the key milestones for the business on therapy selection. Again, we've had good progress so far. We've got our CMS reimbursement for Guardant Response as well as the additional coverage for Guardant360. I mentioned the EMR customer integration. For the remainder of the year, we're looking at potentially getting Guardant360 reimbursement in Japan. That will be a major driver for us in the future. And on TissueNext, we're close to exceeding 200 million covered lives. On the MRD recurrence monitoring business, we're doing our upgrade, Helmy mentioned it before, very soon to the smart liquid biopsy platform, and we're continuing to invest in developing data. And on the screening side, of course, we've submitted our submission to the FDA. And for the remainder of the year, we're looking at peer reviews study publications for Eclipse and publishing data on our LUNG prospective study. So we're off to a great start in Q1, and I think we're doing very well on our milestones for the remainder of the year. I think that was our last slide. Andrew, up to you.

Yes. So we'll cut the webcast.