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

Thanks, everybody, for joining. Good afternoon, I'm Matt Sykes covers life sciences tools and diagnostics at Goldman Sachs. I have the pleasure of welcoming the Guardant Health management team here today. To my right is Helmy Eltoukhy, Co-Founder, Co-CEO; AmirAli Talasaz, Co-Founder, Co-CEO; and Mike Bell, the CFO. Thank you, guys, for joining today. Thanks for coming down.

Appreciate it.

Maybe if you could just help us kind of set the stage first. Talk about some of the more recent results you've had and what trends you're seeing in your business as we enter into the second half of this year?

Yes. No. I mean we're really pleased in terms of how we started the year. We started very strong in our core with some of the approvals in terms of ESR1, some of the coverage decisions that were very positive with United and Aetna and Anthem now. And I believe we have coverage or partial coverage with every plan that's more than 1 million lives in the United States now, which -- it took a while, but we're finally there with 360, and I think bodes well for continued sort of positive coverage decisions over time. And I think the nice thing about this year is with some of the macroeconomic backdrop, we think there's a little bit more rationality ruling in terms of how companies are really managing their businesses and we've always tried to focus on both the top and bottom line and be very judicious in terms of where we spend. And so we built our business the right way, and I think we're reaping some of those rewards now this year in terms of seeing some of our competitors have some layoffs with some of their teams and we just continue to grow organically as our volume continues to increase. And then obviously, we've made great progress on the screening side as well with the submission of our package to the FDA and some of the staging data that came out that I think showed really an impressive profile in terms of what the future of screening with blood could mean.

Great. Still some in line under for the next couple of questions but right now, It's a great overview. But maybe talk about the core business. I mean, it has always been a strength of Guardant. It just seems to have hit a certain inflection point this year, either investors are noticing it or there was inflection point. I think part of that is coverage. Maybe talk about where you see the Guardant360 business today versus 1 year, 1.5 years ago? And what kind of durable growth rate do you think you can generate from that business?

Yes. No, I mean we've actually have always seen the strength in that business. I think with some of the sort of -- I think noise that's been around some of the certain aspects of our business with some of the data releases and so on. I think we took the opportunity to just kind of shine a light back on the core, which for a business in its ninth year with the 360 business, I think, growing nearly 30% year-over-year is really exciting. And I think there are a couple of aspects to that, that are underappreciated, which is, a lot of the first 8 or 9 years has been this 0 to 1 phase of how do we get each patient, 1 test per lifetime. How do we stand shoulder to shoulder with tissue biopsy and really initiate this era of liquid biopsy being a standard clinical tool. And I think we're there now. But now we're really shifting into the next year, which is thinking about how can liquid biopsy be used to manage essentially dynamically and adaptively patient care. And this is taking the opportunity from 1 test for lifetime to perhaps 4 or 5 tests per year per patient. And so this is a huge multiplication of the TAM where instead of being 20%, 30%, 40% penetrated in that 0 to 1 sort of calculus, we're only single-digit penetrated. And this is where that ESR1 approval, I think, is early, it's first of its kind sort of paradigm shift where we're going from -- there are about 40,000 to 50,000 metastatic patients diagnosed every year, but many of them fortunately live for multiple years and have fairly long sort of overall survival. And so there are actually multiple testing opportunities in terms of those patients potentially having an emergence of an ESR1 mutation or failing the aromatase inhibitors that are on and so the testing opportunity is actually much larger than initially appeared. And we think that sort of idea of testing early and testing often will be really initiated across many different tumor types, and it's the major opportunity we have ahead of us now.

Could you maybe talk about the 9 years of building this business? And what lessons you've learned as you start building out MRD and screening and things that you would do differently today than you would have done back that.

Yes. I think things ended up pretty well in terms of where we ended up with 360. But I think we have a good sense of kind of what the bar is for clinical validity, clinical utility, what it takes to sort of bring physicians and payers on board and that balance of how much do you pre-invest before reimbursement in terms of market shaping and market adoption versus post-reimbursement. And so we have a much better sense of, let's say, when it's not competitive, you have the luxury of time, it's developing the data and developing reimbursement and when it is more competitive, you obviously do the former or more aggressive. The other thing we have that we didn't have back then is we have a brand, we're a known entity in the oncology space, we're much more sophisticated in terms of our commercial enterprise right now with hundreds of sales reps and we essentially in almost every metric, we -- every quarter, we get rated in terms of our marketing data as really some of the most helpful and most informative of sales representatives and medical affairs staff in the diagnostics field. And that's a huge asset we have as we roll out new products. I think the reason diagnostic is changing is that it's not like on the consumer side where you build something and you ship it, you have to get 5 or 6 different things right. You have to obviously get the technology right. Regulatory is not easy. The clinical study is not easy getting KLOs to believe in it, reimbursement, commercialization is not easy and we're fortunate that we've built a solid sort of competency framework in each one of those areas.

Got it. And where do you thing you are in terms of EMR integration and the potential impact on clinical volumes from that?

So, that's another tailwind, really fantastic one that we have before us. We are just starting with Epic returning on the first few sites that flywheel is really spinning in terms of the number of sites that have come on board. We'll have -- we're in the process of turning on [ OncoEMR ], which is another 20% of the market. And there's a couple of others that we're working with. So I think by end of this year, we should have somewhere between 60% to 80% of the market where we can integrate directly with their electronic medical record systems. What we're seeing in the early innings is as we turn each one of these on, we're getting about a 50% to 100% boost in volume. And so yes, we're very excited to see where that takes us.

And you talked about the coverage for Guardant360 and how that's progressed. Can you talk about some of the learnings you might have picked up that might inform your strategy about commercial coverage ramp for MRD and eventually screening in terms of duration and expectations for that.

Yes. So the first step in terms of MRD is to get Medicare coverage. That's where the bar is around validity data. And I think 1 thing that's underappreciated is that even that validity data requires multiple years of follow-up. If you think about those studies, they are -- they could be relatively small studies, maybe 100 patients or so on. But it requires 2 to 3 years of follow-up in terms of essentially following those patients, seeing where ctDNA detects recurrence versus a CT scan or radiography and so this -- and you have to do that per indication. So that's a lot of data that needs to be collected a lot of time and companies that are just getting into that without having collected that are really at a disadvantage. And the nice thing is we've spent the last 4 or 5 years collecting all of this data. We have tens of thousands of samples, either collected or earmarked for these types of studies. And so we have that first kind of check box, Mark, in terms of validity and getting the pipeline for Medicare coverage. The next layer is private payer reimbursement. And right now, some of these biomarker -- state biomarker testing bills are sort of positive trend. We work very closely with American Cancer Society and helping to get a lot of these bills passed in many states. But I would say that based on a data point of view, a lot of these private payers, and we think the guidelines are going to require clinical utility data, this is really where you show that not only can you detect recurrence earlier than a CT scan, but you have to show that it makes a difference in terms of outcomes. And so these are interventional trials. And once again, we turned that on many years ago. We have some trials that are now 3 or 4 years in the making, one of them that's going to read out later this year or early next year in terms of de-escalation trial and so we're very pleased in terms of the progress we're making there. And then maybe for screening, I'll turn it over to AmirAli.

In terms of the commercial payers on it. Definitely having the step in the door helps in terms of having the right contacts, having the channel of communication open, where we are with that is like on the commercial payer side, we have a bunch of awards for educational purposes to make sure they are well aware of actually this blood-based cancer screening is coming and the performance that we have and we are focused on getting our FDA approval to really get into that CMS coverage, Medicare Advantage claim is going to get paid post-FDA approval and CMS coverage. And then getting into ACS guidelines. I think ACS guidelines some of the states would follow that, some state-level mandates would get kicked in. We have -- we started some conversation with regional payers in those state that they've ACS-level mandates, but we are in the educational phase. But definitely, like having a step in the door of those payers is helping us.

Got it. And Mike, maybe one for you. Just given the discussions around coverage and what you guys have achieved, in therapy selection, could you talk about sort of the trends in ASPs you're seeing for that business?

Yes. I mean we're seeing good trends in ASP. In the first quarter, we saw ASP for Guardant360 on the clinical side, get towards the top end of the range of the $2,600, $2,700 that we've been talking about for the last 18 months or so. And the big driver in Q1 was really the mix between the CDx and the LDT. And with the FDA approvals that we've had recently, it's pushed that mix a little bit more towards the CDx side. And of course, we get higher reimbursement from Medicare on the CDx side, it's $5,000 compared with the LDT $3500. And then with these private payer coverage decisions now from United, Aetna and Anthem, I think over time, as we contract with those payers, definitely, we're going to see the ASP increase. We think once we've got all those payers covering Guardant360 across all cancer types and across the CDx and LDT, we can get north of $3,000 per test. But that's -- it's going to take time. It's going to take time to get those contracts in place. Overall, our ASP, it moves about a bit, and that's because -- although we've seen the positive headwinds on Guardant360, we're seeing additional covered lives with TissueNext, and we just got the medical reimbursement on Response. We're trying to manage our reveal volume because at the moment, it's about 15% of the reveal volume gets reimbursed at the moment from [ Medicare ]. So we're doing a lot of tests that aren't getting reimbursed. So as that volume is going up, it's having a bit of an impact on the blended rate. But I think overall, if you look across all products, we're making good progress in ASPs across each one of them. And we would see a step change when we get additional reimbursement for Reveal for CRC in the surveillance setting, then we would have a step-up overall on the blended.

Got it. I would say -- I was just going to ask the obligatory AI question. But with Guardant actually, there's clear evidence of utilizing that for some time. Maybe talk about how AI is embedded in the smart liquid biopsy and screening. And just the overall tech stack and how you guys are utilizing that? I know you have a collaboration with Lunit and you're doing a number of different things. But maybe sort of help investors understand better the AI story behind Guardant.

Yes, sure. So thanks for asking that question. We are a comment since day 1, we believe in the value of the data and the tagline of the company as a result of that is conquer cancer with data. And we are seeing some of the fruits of that kind of vision and actually investments that we've done on our technology and some of our infrastructure that we have at Guardant. I'll give a few examples like on the technology and performance side, the performance of our assays are getting better with the high-quality data that we are generating. It's just automatically getting better because algorithms are getting trained on higher quality samples at higher scale. For instance, an example of it is the Shield [ V2 ] which looks like has a higher analytical sensitivity relative to the first generation of the Shield that we use in ECLIPSE trial by about a factor of 2 and it's really got enabled by more data and the algorithm got better with the AI and learning engines that we have. But that's not the only place for years, even I remember 5, 6 years ago, we are using actually some AI-based learning-based solutions for our billing practices, see how we can optimize building our optimizing -- our billing operation to the payers. Another example is now we have tens of thousands of documents at Guardant. And we are using actually some at the early stage, but kind of emerging for us that how could we reduce that burden of documentation and effectively use AI based on the documents that we have that AI generates a template or a first draft of documents for us and our scientists, our other personal at Guardant just reviewed and edit it. We are going to get huge amounts of productivity boost with those kind of infrastructure and systems that we have. And frankly, it would become one of the competitive edge that we have relative to other companies. We don't have this much biological data. We don't have the scale of documents that we have. And we can show more progress and better productivity over time.

Maybe if we shift to the environment, you guys have called out issues with small biotech customers early on. We're also seeing some softness from large pharma, although that's largely concentrated capital equipment. Could you talk about the spend environment for your biopharma customers that you're seeing today?

Yes. I mean I think we're -- it's kind of in line with how we kind of thought the year would go out so far, which is fortunate, but I think one of the benefits we have is that we work with over 150 biopharma companies. So we have a good amount of diversification. Yes, we are seeing some challenges, I think, in the small companies, there some people drop in, others drop out. And then seeing reshuffling, I would say, of budgets on the large pharma side. I think there's concern around small molecules and some of those programs because of the IRA. And so we're seeing, I think big pharma really think about what are the new ideas, what are the new areas they should be investing in. And in some ways, we benefited from that because certainly, this idea of precision medicine and precision oncology is certainly going to be a tool that is going to be, I think, very instrumental and any new kind of framework or a continuing framework that large pharma has. But yes, so we had outlined maybe second half of the year would be a little bit weaker. I think so far, we're very pleased with the progress to the year, but we're continuing to kind of watch the environment and are hopeful that some of that uncertainty sort of results itself.

AmirAli, on the screening side, you submitted the PMA in March, so likely a decision under Q1 and Q2 next year. Could you talk about the discussions you're having with the FDA and what gives you confidence in approval for Shield in CRC?

So, so far so good. Actually, it's going as we expected. In general, the kind of feedback that we are getting from agencies in line with what we anticipated we get from them. So -- so far, so good. So hopefully, we can take you to the finish line actually within the time line that we talked about before, which should be, hopefully, sometime next year, we get FDA approval and launch it.

Got it. And could you remind me -- remind us of the time line for other indications? I know long is next, but just what could that look like over the next few years?

So we are a company that we believe with the blood test, you can do multi-cancer screening. And in fact, it's possible to detect early-stage disease with high performance with the core technologies that we have. CRC was our leading indication to get FDA approval, make sure that the tests become accessible for all. And then you're adding other indication on top of the same -- for the same test. So for lung cancer, we started a pivotal study last year, another 10,000 patients screening study. We're planning to enroll 10,000 patients over 3 years, so far so good. We are in the second year of enrollment and more than 5,000 patients already got enrolled in this study. We expect the study to get to the readout sometime in 2025, and then we submitted to FDA for indication expansion for Shield.

Got it. Maybe talk a little bit about the adherence concept. I mean you've talked about the best test is the test that gets done. But should we be looking at adherence justed sensitivity? And will the FDA and USPSTF consider these factors in their decisions? And how does this resonate with the KOLs?

So it's well known that the unmet need in the field of CRC screening is making sure the people who are not up to date with their screening or they are on screened to get the testing done. As a result, the best test is, in fact, the test that patients complete. 75% of the patients who are dying because of colorectal cancer is those patients who are unscreened or not up to date with their screening. That's why it's so important to increase this adherence. And so on top of the mind of actually KLOs in the field, FDA already approved. If you may recall, there was a blood test called Epi proColon that FDA approved that test just because of the improvement of adherence rates, when even the performance of that test was lower than the bar they had for clinical study to pass. It was even worse than FIT. But approval was based on successful adherence study. And in terms of USPSTF guidelines, actually, if you read it carefully, you're going to see there are notions that real-world adherence is low. It's not 100%, and we need solution to actually increase the adherence rate. And if you talk to the KOLs, you're going to hear this consistently across all stakeholders. That's why we believe the blood test with the performance that we've seen. CRC sensitivities are better than it is well above the minimum requirements for guidelines to consider it. If you look at actually an ad board that we hosted post DDW presentation that we had that we talked about more details of Eclipse data readout and the staging information. You've been hear from the former Interim Chief Medical Officer of ACS, the former Scientific Director of USPSTF. The 2 major guideline bodies that this test with this kind of performance need to get seriously considered. So we'll see. And we are very positive about it.

Got it. And are you still -- I know you talked about it earlier days with the LDT, you were hitting like 90% type of adherence. Are you still seeing that kind of rate in the subsequent LDT volumes.

Yes, it continues to be the same. Something that we believe many of you guys believe is blood test is more patient-friendly. We're not patient-friendly, it's something that needs almost 0 participation from patients. Because the patients are getting blood draw for some other tests, annual checkup or any other kind of test that PCP is ordering. And effectively, it just needs 2 more tubes of blood to be drawn in the same kind of blood test episode that the patient is going through. That almost 0 patient participation is increasing adherence rate to completing the test, the roof. We continue to see more than 90% adherence rate, meaning when the doctor orders a test, more than 90% of the cases, blood test shows up in our lab for processing. Very exciting.

Maybe talk a little bit about what your expectations are for commercial spend for Shield and how that ramp look like pre- and post-potential approval?

So we are going to actually start incremental investment on commercialization of Shield right before FDA approval. Not right now, as we get very, very close to FDA approval, we are going to start increasing that. But we are going to be very milestone driven, very pragmatic about incremental investments that we are going to do. We put a guidance that we believe with this about $200 million contributing operating loss for Shield on our screening division, we should be able to manage this operation as we even get close to the USPSTF. And the main reason is because we believe we can have higher efficiency commercialization for blood test and comparator stool test. It's a test that based on our LDT experience, we are seeing higher ordering debt per MD paramount than still ever seen. And also, we are seeing this improve adherence. Or stool test between 1/3 to 50% of the cases that the doctor order never shows up in the lab. For us, that number is less than 10%. That goes directly to the bottom line. That's why we believe with a sales force of about 150 to 200 people, even post-FDA approved -- approval. We can win in many of the targetable -- targeted actually accounts that we have in mind and bring material revenue and contribution for Guardant. And then we would reinvest back to positive gross profit that we would generate with this brand into additional commercialization investment. Long story short, we believe with this about $200 million contributing operating loss we can manage this brand for the next few years.

Got it. Mike, maybe turning to you, you've hopefully in the past, talked about sort of the breakdown of OpEx or the cash burn spent on a per segment basis. Kind of remind everybody what that looks like over the course of this year? And how that could potentially change and shift as you reemphasize or reprioritize some of your efforts?

Yes. I mean from an OpEx point of view, we've sort of said this year, our overall OpEx spend is going to be lower than it was last year. And as we look forward, there's a few different parts that are moving parts. One is this year where we're continuing to invest heavily in Eclipse. We continued the enrollment into this year. And so we've got about $40 million spend in ECLIPSE that we're incurring this year that we won't incur next year. So we should expect our research and development expense next year to actually sort of come down. But next year, the focus, especially on the screening side of the business is going to shift to sales and marketing. And as we get ready for an FDA-approved launch, we'll be sort of as AmirAli, were saying, we'll start to ramp up the sales and marketing effort there. I think if you look across how we're going to manage the burn across the business, we talked about therapy selection, MRD and screening. And we have the target where we're targeting to be at breakeven for the company 1 to 2 years after being screening guidelines. So around about 2027, 28. And the way we look at that over the next 5 years is therapy selection is very close to being breakeven now. And actually, over the next 5 years, it's going to generate positive cash flow. MRD is still in investment phase. We're still having to fund the samples that don't get reimbursed. We're still doing the market development. We're still doing the data development. But as we start to get incremental reimbursement that will flip to being cash flow positive. And as we look over that 5-year period, basically therapy selection and MRD, you put them together as an oncology business, they're going to be self-funded over the next 5 years. And then as AmirAli was saying, when we look at the screening over the next 5 years, that's a maximum of $200 million burn. So we know we can manage with the cash balance that we have now, which was $1.3 billion after this raise. We can manage our OpEx spend to get to breakeven within the cash balance that we currently have.

Got it. And then just on gross margins, you touched on ASPs earlier and gave us a good sense for where trends are going. Can you talk about the COGS side and what kind of efforts you're putting into lowering those COGS, whether it be automation, I mean I think sequencing costs will happen but not probably for a little while out, but just maybe talk about sort of the development you've made on COGS.

Yes. I mean we're continuing always to focus on the cost per test. I mean, we just hired a very experienced Chief Operating Officer, who came from background of labs that we're testing millions of tests. And so we've got a real focus on automation. I mean our gross margins, if you look at the core business at G360, very healthy gross margins there. On the clinical side, sort of high 60s and the biopharma side, the gross margins are on the 70s. What's impacting our gross margin more than anything at the moment, again, is the sort of unreimbursed volume. It's on the Reveal side, but also on the Shield side as well, probably not appreciated by everybody, but got the Shield LDT. The volumes are going very well now, in fact, better than we expected. And that's a cost to us in our cost of revenue line. So I think there's something like a 300-basis-point impact just in Q1 on our overall gross margin. So we're trying to balance those volumes of unreimbursed tests as well as a lot of focus on automation. And you mentioned sequencing. I mean if those costs come down, then obviously, we'll have a positive impact from them going forward.

You recently raised money to bolster the balance sheet. You talked about the timing of that raise and where this puts you in terms of the ability to scale the commercial leverage for Shield. And sort of what the timing cadence of that spend looks like. We talked a little bit about it, but I just want to understand better the rationale and sort of how you're thinking about the balance sheet.

Yes. No, I mean, I would say, first of all, we were really pleased with the outcome of the financing, both with our ability to sort of upsize that to from $250 million to $400 million, which puts us in a really strong position. We're also really pleased with the sort of the quality and the depth of the investors that participated is a real sort of -- those investors really reaffirming the confidence in the company and the strategy. So we're really pleased with the outcome. But yes, again, I think post that raise again, we have a cash balance of around $1.3 billion. And based on our financial plan and what we were just talking about with the different businesses, that enables us really to fund ourselves through to breakeven. And the timing was important for us. We didn't feel that at the moment we had a financing balance sheet overhang. But what we don't want to be is in a position getting close to an FDA approval, where we know we're going to have to start investing on the sales and marketing side, and we have a lower cash balance for people start to thinking there was a financing overhang an expectation that we would absolutely need to go and raise equity. So I think it's just in the strongest position, it could possibly be in at the moment, and that's going to enable us to really push hard when we get to an FDA approval. And do everything we want to do across the impact across all of the business units.

Maybe as we wrap up here, AmirAli, just sort of a high-level question for you. I mean you're building essentially a pan-cancer portfolio, screening on one cancer tested at a time, one indication at a time versus the other strategy of multi-cancer early detection just going after them all at once. Maybe talk about the merits, whether it's it specificity, commercial, the merits of sort of your approach versus the [indiscernible] approach of doing it all.

Yes. So we believe, as we talked earlier, it was very important for us to start with CRC as the indication to make sure we did approval and actually the path for accessibility of the test would be open for 120 million people in the U.S. hopefully. And then we are doing long as the second indication because it would increase the interval testing to every year in high-risk patient population and stuff every 3 years. But we don't have plan to go after indications one by one and do independent study for each cancer type one by one. It's going to take forever. And it's not our plan. After CRC launch, we are going to add a panel of cancers into the same device as a panel. And we are exploring actually the pathway for it in terms of even potential FDA clearance for it. But Potentially, we can consider a CRC plus long FDA-approved device can detect other cancer type as a lab-developed test potentially. We are still exploring different ways of how the mechanism would work, but we don't have a plan of adding cancers one by one after CRC and like.

And then maybe just to wrap up, AmirAli. What do you think is the most misunderstood about Guardant today. I mean I can think of 4 or 5 things. But if you had to boil it down in the 51 seconds we have left, unfair question, but maybe talk a little bit about what you feel is misunderstood about Guardant at this stage.

I think there's -- I think the bar for making sort of claims in this space is very low. But actually, achieving and success and traction so is very high. And I think we're a company that has always been heads down just kind of breaking barrier after barrier helping patient after patient. And I think the next few years, we're very confident that we're essentially going to show in third, just like we have in therapy selection, just kind of what it takes to win an MRG and what it's going to take to win in screening. And so yes, we're intellectually humble kind of company, but one that just keeps driving forward and having this field forward.

Great. Great place to end. Thank you very much. I appreciate it.

Thank you.