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

Thank you, everybody, for joining us. Today, we have Guardant Health, AmirAli, the Co-CEO; and Mike Bell, the CFO. Guardant Health probably doesn't need too much of an introduction, so maybe let's just dive into a little bit more about some of your innovation here.

Can you talk about smart liquid biopsy, AI and the constant improvement of your assays that you're doing, starting from Guardant360, through the portfolio, the constant innovation and compound innovation, as you like to call it?

Yes, sure. Hello, everybody. Good to be here. So as the tagline of the company says, conquer cancer with data. We are a company that has been focused on capturing data, high-quality data that would help with this mission of adding value in helping cancer patients. It started with Guardant360 on the advanced cancer side, running and generating data from over 0.5 million samples and correlating a bunch of those kind of genomic finding with clinical medical records. When we look at -- actually, fast forward almost like 10 years post-commercialization of Guardant360, we are leveraging and we are benefiting from this treasure of the database that we have captured. This data not only help us to improve our technologies to find the genomic biomarkers better, but understand the biology of this disease better that, over time, help us to build products for earlier-stage detection, especially the latest asset that we have around cancer screening with Shield, that benefit from all the insight that we gathered so far. Now kind of double-clicking over some of these matters, smart liquid biopsies, the new platform technology that has been rooted in this clinical insight and the data that we have captured over the years, it's mainly a new generation of epigenomic technologies that are getting added to the whole portfolio of the products that we have at Guardant. It would generate new insights, some therapeutic relevant information for managing cancer patients, all the way to cancer screening. It was incorporated into our Shield product first, this small liquid biopsy, and we are very close to actually incorporating that to Guardant Reveal. As we go through the next year, we are going to incorporate that into Guardant360. So all of our products are going to get operated with smart liquid biopsy, which gives us higher performance, lower cost and totally new insights that, for instance, Guardant360 or Reveal, the prior generations, could not give to the physicians. Connecting that to the AI, it's something that we have used in our products, even some aspects of 360 is not kind of new for us. But maybe something notable, we started adding AI into our digital pathology on the tissue front, that's around Guardant Galaxy. We incorporated that into Guardant TissueNext product. But we are looking at PD-L1 with some AI kind of power engine. And what we are finding here is like we find 20% more PD-L1 expressions on the low expressers. We generated actually a bunch of excitement for us and our physicians.

Got it. Great answer. So let's just dive into a little on ESR1. I think this is something you can only find in liquid. You got the benefit here in the first half and then you noted a backlog that you got, captured in the first half. Can you help us understand why would there be a backlog on this? What advantage do you have in ESR1 capture? And kind of how big this market could be?

So ESR1 mutation actually has generated transformation in metastatic breast cancer management. It's a mutation that happens -- it could happen in ER-positive HER2-negative breast cancer patients. [ Actually ], the breast cancer cases, 70% to 80% of the cases are ER-positive HER2-negative. And it's something that mainly is emerging mutation. And it means like you don't find it typically in the primary tumor, it gets evolved as a result of some of the therapeutic pressure. And it's very actionable now. And because metastatic breast cancer patients survive long, and based on all the advancements that have been made in the field, all these patients were eligible for getting tested with ESR1 once the drug got approved with the companion diagnostic of Guardant360. So very quickly, once that approval came earlier this year, we saw a huge jump in utilization of our test as companion to that therapeutic intervention, and we saw a huge jump in utilization of Guardant360 in breast cancer side. So that generated the bolus of kind of sample processing for us in the first half and generated a huge growth year-over-year, and that huge growth of year-over-year continued for us. And we are -- like our breast cancer use cases add a new baseline as we speak now, and it's going to continue to grow from this baseline that we have.

Great. What's the latest time lines on Shield? When is approval expected? I know you said 2024, is there any -- I think you said in the middle of the year in previous cases. How long do you expect to go to market? How long do you expect for CMS coverage? And when do you expect the readout on Shield 2.0?

Yes. So we submitted our premarket approval application to agency in March of this year. And once we submitted that PMA, we said that we expect to get approval sometime in 2024. And since then, we are making steady progress with agency, it's been very collaborative -- and collaborative and collegial kind of review process for us. We are making good progress, and our team has good confidence that approval is going to be sometime in 2024. In terms of the launch, we are getting ready to launch the IVD version of the Shield right after approval. But the test is already in market as a lab-developed test with the small commercial channel that we had. There are 1,000-plus accounts that have been using Shield as early experience kind of setting for them. But we are gearing up to launch this test now post-FDA approval. And as we speak, we just started the commercial expansion on that team. So we are excited about what could happen in 2024.

Got you. What is an ADLT and how do you expect to use it for your pricing advantages?

So once we get FDA approval for Shield, there is national coverage determination already in place for blood-based colorectal cancer screening. At that point that test to meet some specific performance criteria and if FDA approved, it's going to benefit from that national coverage determination. Our pivotal trial showed that the performance of Shield is well above that minimum bar. And once we get FDA approval, effectively, we are going to get Medicare coverage. Now connecting that to ADLT process, ADLT stands for advanced diagnostics lab tests. It's a favorable pathway to incentivize manufacturers to do innovation and come up with innovative technologies that can add value on the diagnostics side. Once we are FDA approved, we can apply for that ADLT status and FDA-approved tests would qualify for that status. And that would enable a favorable pathway for pricing for Medicare, which is going to be in place for some time. It's kind of a mechanical process that after the approval we have to go through, and we expect that ADLT pricing to be in place for us in early 2025.

Got you. If there's any questions, I'm going to move on to the MRD portion of the portfolio. I don't know if anyone has any Shield questions? Okay. So right now, there's -- it's clear that tumor-independent or if you like to call it tumor-naive, I don't know which definition you like to call it, has advantages particularly in convenience. Sometimes when you talk to oncologists though, they do tend to find that tumor-informed tends to be a lot more intuitive, i.e., there's tissue. We understand tissue, that kind of thing. Is there an analog that can be made from maybe tissue-based CGP and eventual acceptance of liquid biopsy, if you think about from the psychology of the oncologists?

There are some similarities. The standard of care before liquid CGP was even in existence with just tissue CGP, and it was more straightforward. Tissue testing was around even for single gene testing. And you have a sample, let's profile it, let's do the treatment management based on that. During those early days, even CGP through liquid looked like a sci-fi and wishful thinking, until some of the technological advancement has been made and then the clinical data supported that. In fact, you can get high accuracy information. In the MRD front, I think it's even more interesting because not only blood-based MRD tests, like TissueNext blood tests, not only can do what tissue-informed can do, also, it can provide some additional information and insight that is not in existence in tissue testing. I'll give you an example. Let's say a patient with colorectal cancer goes through surgery and you want to do MRD testing in that patient. Tissue-informed MRD test would tell you if this patient still had a residual disease or not, right? Blood tests, not only has convenience factor, but based on the technologies that we use, not only would tell the patient is MRD positive or not, but can potentially say where that residual disease is. And this has therapeutic impact. Like a colon cancer patients who have residual disease still in colon or has now residual disease in a distant tissue, like liver, the intervention would be different. Some of these over time need to play out in terms of validation and in terms of showing that once you're using this information therapeutically, you can add value. But the science is there and the vision is there. And this is unique opportunities, I think, for blood-based MRD testing versus just blood-based CGP, which the main goal was try to get as similar information as tissue CGP but just through simple blood testing.

Got you. If we look through the years, let's say, 5 years from now, 10 years from now, what do you think the split will be in terms of tumor-informed versus tumor-agnostic or tumor-naive?

Obviously, I'm biased. But it's -- frankly, it's hard to predict what exactly we are going to be 5 years from today. But when you look at which modality has the best product market fit, we don't have any concern that the convenience factor of blood-based testing, the turnaround time of blood-based testing, additional insight that only exists in blood, not tissue-informed based testing, would really make blood-based and tissue-naive testing the way to go. But validation studies need to be performed, utility studies need to be shown, some of the intervention based on these blood findings needs to be proven. So some activities needs to be done, but we believe in this vision and we believe the future would be very bright for blood-based MRD testing.

All right. So Mike, sorry, we've been ignoring you the whole time. So let's just maybe talk about some of the OpEx. Where is the profiling right now in terms of cash flow breakeven? What's the OpEx right now in terms of screening?

Yes. I mean cash flow breakeven, we sort of -- we laid that out at our recent Investor Day. We're focused on reducing our cash burn every year. This year, we've been successful or we will be successful in reducing the cash burn to about $350 million. And I think we expect each year from now to reduce that cash burn. And by 2028, free cash flow breakeven. So -- and we assume that at a revenue run rate of around $2 billion. And yes, and as part of that is managing OpEx. And again, this year, we set the target of reducing our OpEx in '23 versus '22, and we're going to be successful in doing that. So we're on track to do that. And still whilst we're reducing OpEx this year, driving revenue growth over 20%. And I think as we look maybe to next year, I think OpEx overall is probably going to grow similar to an inflationary rate, but there's going to be some puts and takes. I think we'd expect research and development costs to come down. We've incurred significant costs over the last 2 years with ECLIPSE. That's now completed enrollment, we continued that through this year. So that would drop off. So I think we should see a small reduction in R&D expense next year. We'd expect G&A to be relatively flat next year. Our biggest investment next year, of course, is going to be on the sales and marketing lines. We're going to be in a launch year for Shield and we want to build up the commercial there. And so I think we can do that, but still manage our OpEx growth, again, to be sort of at an inflationary sort of level next year.

Got you. And let's talk about the puts and takes on gross margins outside of screening. As we look into 2024 and beyond, maybe talk about the potential royalty headwind. Is there may be some offsets in terms of favorable pricing in Guardant360 and Reveal that maybe still have potential to come around?

Yes. I mean I think if you look at gross margins, it's better to look at it product by product. And I mean starting with Guardant360, that's got very healthy gross margins. We just got confirmed, just last week or the week before, the crosswalk of the Guardant360 LDT to $5,000. So that has been finalized, and that will kick in from the 1st of January. So that's a positive for us. And that will push our Guardant360 overall ASP on the clinical side to $2,850 to $2,900. So a nice upside for us there. And if you look at our gross margins on Guardant360, on the clinical side, those gross margins were in the high 60s. And on the biopharma side, where, again, we've seen improved ASPs through GuardantINFINITY, then gross margins are in the sort of mid-70s. So Guardant360 has very healthy gross margins. And even if there's some royalties coming down the line on that, I think we can still manage the gross margins to a very, very healthy level. TissueNext and Reveal and the mix between them, we try to manage that, so we'd get an overall gross margin of 60% for the company. I think TissueNext, we're making good progress in ASPs. We've got Medicare coverage. We're at 200 million covered lives now. But there's room for the ASP to increase and there's room for our cost per test to decrease as the volume grows. So I think that, at the moment, is lower than 60%, but it can definitely improve over time. And Reveal, at the moment, it's gross margin negative. And the 2 key focus areas for us there, obviously, is ASP, getting reimbursement. We've talked a lot about our focus is on data development. And hopefully, again, in CRC surveillance reimbursement and breast reimbursement from Medicare. At some point in the near future, that's going to help gross margins there. And then with smart liquid biopsy and moving to our epigenomic form, we can really drive the cost down on Reveal. So we want to improve the ASPs and have a low a low-cost on Reveal. And so I think, overall, we try to manage the gross margins to be at least 60%. But I think as we go and if we can hit all of our initiatives, we can have gross margins trending towards 70% over the next few years.

Got you. Well -- so if we look -- go back to the core growth of the business. I mean I think that the new products have definitely helped drive growth -- Reveal, TissueNext, Response, et cetera. In the coming years, I mean, should we think about this as continued innovation even in -- continued new products in the profiling business, in the monitoring business, to help drive that growth? And what do those products look like? I think, intuitively, adding Tissue, adding Response, adding MRD is all very intuitive and kind of offered by a lot of companies. I mean is there -- what's the room for innovation here to be added to that portfolio?

I think still the opportunity is huge in terms of what we are seeing, what we can do with our products across the continuum of care, there's a lot of trapped value that we can unlock. But it's not just Guardant innovation that drive this additional opportunities for us. I'd go back again to ESR1 approval. That's not going to be the last CDx approval for metastatic cancer patients. In fact, there are a pipeline of other activities, some that we are working with pharma companies, some that pharma companies are working with others or independently themselves. Any kind of new approvals have opportunities for us to kind of drive the demand and growth. When we think about internationalization of our offerings, like we are very excited about what we can do in Japan with our Guardant360 franchise, right? So it's not just innovation that will drive those kind of growth opportunity for us, but just bunch of approvals and globalization that can drive those growth for us too.

Yes. I think in CGP, we see a lot of different companies with pretty decent market share. When we look at liquid-based CGP, we don't really find that much competitors. I mean who do you see in the marketplace? And I mean do you expect to see others? And why do you think it's been maybe slower to seeing competitive responses in liquid than, I don't know, maybe we would have guessed 2 years ago?

We're consistently talking about there are multiple barriers to really get to this market. First is technology. Like on tissue side, like there are mom-and-pop shops that could just start a tiny lab and be able to sequence FFP samples, right? Liquid is not that easy. [ They can ] as operation, lab operation. Now, on average, we have 5-day turnaround time for our Guardant360 CDx. This is not easy. And this is the way market is shaped. When about 20% of advanced cancer patients are getting tested with 360 with this level of experience, do you think easily somebody can just bring a test up? And then what happens? Typically, like there are some companies that try it, they launch it and they had 3 weeks turnaround time. What do you think the adoption would be? They were in the market and they left the market, right? So when you think about the clinical evidence that has been generated for Guardant360, this is not commodity testing. That as long as you can just do liquid CGP, it means clinical performance and clinical utilities [ inherited ]? No. All those kind of validation, publication, experiences that we have developed across globe are kind of adding to this barrier. Reimbursement. When more than 300 million people have access to Guardant360, like a company that want to go through a lot of billing or huge amount of investments to grow and enable the access, still they can enable that 300 million kind of reimbursement? These are not straightforward. As a result, yes, some companies came and gone out of this market. There are still like -- it used to be a competitive landscape and it continues to be a competitive landscape, but we feel very good in the market position that we have on the liquid side.

I think one of the unanswered questions that I think a lot of investors are looking at is post pandemic screening backlog. And what I mean by that is, during the pandemic, we didn't see as many, say, colonoscopies as we saw before. And then coming out, you see 2022, 2023, maybe they're running to Cologuard, maybe they're running to colonoscopies, and suddenly you see a lot of cancer patients. And has this helped Reveal? Has this helped Guardant360? Has this -- so any thoughts to whether or not we've seen a pull forward? Or even adding in the 45 to 50 age population to the screening, has that had any impact on finding more late-stage cancer or even mid-stage cancer that would be applicable to screening -- I mean, to MRD?

So we looked at it to some extent. And we don't believe that was a major material growth driver for us. And the reason is for metastatic breast cancer patient, the survival is so short that the delayed screening is not -- if a person is going to have advance cancer, unfortunately like within 12 to 18 months, the journey would be over for a bunch of kind of indications. And that kind of a lag of pandemic did not generate a significant amount of bolus of new testing that needed to happen. Unlike the screenings, like it was very dominant in terms of screening. But we are going to continue to monitor the field. I think especially for CRC, as more patients are going to get diagnosed presymptomatically, that could have some kind of influence down the road for MRD testing when there are more presymptomatic patients that go through surgery. So -- but I think when we look at our growth trajectory, I don't think those would be any kind of dominant major kind of drivers for us.

Got you. We have 20 seconds. So just as we look back, it's 10 years from now, it's 2023, you're at the Piper conference, what are you most proud of that you've accomplished in these last 10 years?

Frankly, a lot of patient impacts that we have and contribution to the cancer field. Now, liquid testing is standard of care and it was just a wishful thinking 10 years ago. And I think we delivered on a bunch of promises during our IPO road show. And we look at our summary Investor Day as our second IPO promise to the field in terms of what we are going to deliver for the next 5 years, and we are very excited of what we can do.

Thank you.

Thanks.