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

Thank you for being here. I am Patrick Donnelly, Tools and Diagnostics Analyst here at Citi. Happy to have Mike and AmirAli with us from Guardant Health, talk a little bit of screening, a little bit on the financial side.

But yes, AmirAli, maybe to start, certainly the news last week that seemed to get the most attention was the ADCOM piece. So maybe we can start there and just -- maybe tell us what happened? It seemed like it was an FDA decision and kind of this panelist filling the panelist spot, but I'll leave it to you to kind of tell us what happened and where we go from here.

Yes, sure. So yes, it's all logistics and scheduling related. So FDA initially told us tentatively, they are planning to add this ADCOM end of March. And then very recently, they notified us that they cannot do that. And now they are planning to do it late Q2. The reason that they told us is this panel, which supposed to have 10 members just have 5 members at the time that they send the initial notification to us. They need to find new panelist members, but -- and then schedule a meeting based on availability of all the panel members. So -- hence they said that March 28 would not be practical. I think something to note, though, this does not impact the overall time line for the FDA review cycle. This ADCOM just happens somewhere in the middle of the review cycle. So this should not generate any kind of delay to get any kind of decision by FDA [indiscernible].

And in terms of kind of when the ADCOM is expected to happen now, what's your expectation?

Late second quarter, that's based on what FDA told us. So -- and we are very excited to get to that time point. It's like 3, 4 months from now. And by that time, we are going to have a lot more clarity and further confirmation about the progress that we are making in this FDA review cycle. And our team is working very hard and excited to get to this milestone.

Yes. And maybe on the panel, I mean we've gotten questions just about what they're reviewing some people the last [indiscernible] going to be involved? Is it just you guys? Maybe just kind of clarify what the panel is about? It is just you guys, but -- at least my understanding. So maybe just kind of talk about what the panel is looking at, what the outcomes can be?

Sure. So this is an ADCOM in the review process of Shield PMA package. So what's going to get discussed there is trial divides background information of Shield. We are going to present first. FDA is going to present an open public comment hearing section and then some questions and deliberation between panel members, and then they go to a voting, which is a natural part of that they really have been. And the votings are about 3 questions. Based on everything you heard today, is this device safe? Is this device effective? And would it benefit outweigh the risk? This is at the high level. Still, we don't know the detailed agenda in terms of the kind of questions or deliberation topics that FDA is going to bring up. But at a high level, this should be the overall structure of that.

Yes. I think with the FDA, a lot of people kind of go to things like drugs in terms of approval to your point, safety. What is the bar in terms of being safe for a diagnostic like [indiscernible]?

So in terms of safety, like at the end, we are blood tests, and the safety, the direct safety parameters are just associated with safety of blood draw. So there is nothing unexpected there. We quantified that as part of our clinical validation study big clips. So those numbers is going to be actually disclosed, but it's like phlebotomy, the risk and adverse events associated phlebotomy. So that's all. There are some kind of indirect risk that also get kind of considered in terms of -- if there are false positives or false negatives, with this device, what does that mean in terms of the safety profile of this test. The good thing about Shield is we passed all the endpoints of this study in terms of minimum performance, sensitivity and specificity for CRC. So we are in good shape on that.

Yes. And then I guess the outcome in terms of first line, second line, maybe just talk a little bit about that. I know you guys have done a nice job of sizing up the market for both and we'll talk through that as well.

Yes, thanks for asking that question because I think this is something that -- in fact, I think it's a misunderstanding on the market side. So when you look at 120 million people who are average risk colon cancer screening, aged 45 to 84. Out of those 120 million, 55 million of them are getting screened through colonoscopy today. About 15 million, they are getting screened through a stool-based methodology FIT or colo, and 50 million are unscreened. So first-line indication is effectively for the whole 120 million based on the label of the test, but commercially, the reality is colonoscopy is the first-line test by doctors. When patients have access to colonoscopy and is okay to go through that procedure and has the means to go through that procedure. That's the first one. So the commercial opportunity really for first-line testing is 65 million people, the people who are not going through colonoscopy. And commercial opportunity for the second line is for 50 million unscreened patient coverage. And logistically, the delta between first line and second line is a difference in physician attestation when they order the test. The difference would be for second line, the doctor needs to add to state that this test is clinically necessary and the patient is unwilling or unable to go through other modalities and order the test accordingly. That would be a difference. We have good confidence that Shield would be a successful brand as long as we get FDA approval, even for that label because of commercial experience that we have with Shield LDT too, but we've been selling Shield LDT as a second line and now its for about 2 years. We have market feedback. We've seen the product market that we've seen that how the doctors have ordered this test and responded to our message. We've seen the depth of ordering. So as long as we get FDA approval, I think Shield is going to contribute to guard in a very meaningful way.

Yes. And maybe just in terms of -- you mentioned the LDT launch, what are the kind of the key learnings been? I know you talk a lot about the willingness, the adherence rate in terms of the willingness to do a blood draw versus stool or colonoscopy. Maybe just talk about being on the market for a little while.

Yes, sure. So in the first 20,000 cases that we've done, 94% of the patients completed the test. It's very different than in colonoscopy and stool-based test. That level of completion ranges between like 35% to 65% or 70%. And that's really the unmet need in the field of CRC screening, how to increase compliance rate with the way that the current modalities have not been able to do and Shield we have that real-world evidence that we can do that at sizable number of accounts throughout the last 3 years. The other KPI that we pay attention is the depth of ordering when we let the accounts to really order deeply, because we are managing the volume, we'll be clicking the kits. But when we let them to go and run, we are seeing the depth of ordering in these accounts for blood is very respectful. So when you combine higher debt of ordering, when you combine higher completion rate, that translates to higher efficiency of S&M and directly contribute to the profit margin of the brand. We don't have loss sell, right? So we are excited about all these confirmation that we are achieving in the marketplace.

Yes. And then in the panel again, big people ask you talked intervals, reimbursement. It's clearly not in your expectation that the FDA would weigh in on that, but maybe just your perspective in terms of -- is there a potential for them to discuss that part? Or is that left for CMS?

Yes. Like it's very unexpected like pricing and those like the reimbursement would come. In fact, an area that is the promise of blood test is having an equitable accessible test for underserved patient population. In fact, if this is a positive thing for a brand like Shield versus a negative thing in terms of those kind of conversation, but we don't expect anything about the cost of care at those matters to come.

And then maybe on Shield, you guys have already talked about a V2. Maybe just talk about what improvements you've seen, what the catalyst set on that front would be just in terms of timing, data and things like that.

As a reminder, with Shield V1 not last December, the December before. We started very solid performance from our perspective of 83% CRC sensitivity with 90% specificity. And effectively, like 100% sensitivity and retaking Stage 2 colon cancers and above. So -- and what we've shown so far in some kind of case control studies. When we use our upgraded Shield test, which we call it Shield V2. On a set of CRCs, V2 detects more CRCs than V1 on the same cohort. We show the data on 45 CRCs that for instance, V1 and that's number of CRCs detected 84% of the cases, similar to what we saw interesting with our ECLIPSE PMA study and V2 in that the same cohorts on 91%. We are -- what we are confident is V2 is more sensitive than V1. Now the exact delta, we have to see in a pivotal study, what we are going to see. But that gives us actually confidence that as long as we get V1 to the finish line with the FDA and get FDA approval we can go through this upgrade cycle and even upgrade the performance claim of Shield within a reasonable timeframe as in our Investor Day talked about potentially we could have this upgrade sometime in 2025.

Yes. And maybe last one on Shield and then we'll loop Mike in on some of the numbers. Just in terms of the panel, things like trial design, we've gotten asked about I'm sure you have as well. Are you comfortable -- you and the FDA have obviously had some back and forth ahead of this. Has that come up? We'll sort what you think about just the trial design portion of the FDA being happy, comfortable and everything?

So the review process is still ongoing. Like this review process till we get the PMA letter at the end from FDA. Still, we are under review. But as I mentioned actually before, I'm pleased with the progress that we made and we continue to make steady progress throughout this review process. But again, it's not done until it's completely done. So -- but so far, we are making good progress.

Okay. Just a follow up on the dynamic with [indiscernible]. I think you guys did a straight [indiscernible].

So I'm actually pretty excited, frankly, that after 15 months of waiting for them to show their cards, the time line for USPSTF is forcing them maybe to show their cards at the end. So we are very excited to get to that point. And frankly, just see what they have and what we have and about some of the details of lessons learned since we are in this business for a much longer period of time, and we have some time advantage. Maybe we can talk more details after they show their cards. But I mentioned previously that for clinical grade assays [indiscernible] if we thought that the cell-free DNA plus proteomics has a low probability of success and with dual testing that way. So we will just do cell-free DNA only. So [indiscernible] it was learning for us too, but we'll see. In a few weeks, I think you're going to see what they will tell.

Was there a level of surprise [indiscernible] that assay kind of perform worse. What I guess, was your kind of read on that? [indiscernible]

And what scientifically we know proteomics is a more finicky biomarker. Still, you can have some clinical tests based on proteins, but the stability of cell-free DNA has that has is not easily to beat. And when you're adding another component to cell-free DNA, it means you are taking some budget off cell-free DNA to give it to other modalities, right? So you need to think about was that the best decision to give that budget to proteomic or other modalities versus still committing to that extra budget to cell-free DNA and squeeze more out of it, right? That's what we sell. But again, maybe we can have more conversation after cards kind of on table.

And 1 more just on V2. What would the process look like? Was that in terms of -- let's assume you get the PMA on V1. What does the follow-on process look like for kind of the improved asset you'll need to [indiscernible]?

So we need to actually coordinate the clinical study plan with FDA in terms of exactly like how many new CRCs they want us to run -- unwinded CRCs they want us to run with that V2 to confirm that this algorithm is actually improving their performance. And after alignment with the FDA running that study and then submitting that package as an upgrade to the currently appropriate PMA events. So when you look at the sequence of event that would have it potentially, we could have that kind of upgrade sometime in 2025.

Okay. And then Mike, just on the numbers, I guess you guys kind of pulled Shield out of the guidance. May be talk about the moving pieces of the guide, doesn't -- go ahead. I don't think Shield is in there?

No, Shield is definitely not in the guide. And I think, yes, I mean, obviously, I think we'd have been a bit silly to put some Shield numbers in there because we've got to go through an FDA approval process. And then after that, we need to get them the initial Medicare rates. And so that we'll have an initial sort of gap fill rate before we get to an ADLT rate. And so that's a little bit of an unknown. And even the timing of that and how we can recognize revenue on that is unknown. So our revenue guide is purely on therapy selection and MRD.

Yes, maybe on kind of the core business. either you can answer, I suppose, just in terms of the performance, I think you put up 29%, 30% volume growth in 4Q. Can you just talk about therapy selection, MRD, what you're seeing feels like pretty good underlying trends there, but maybe just talk about the recent performance and expectations overall.

Yes. No. Q4, I think we finished the year very strongly. Guardant360 was the key growth driver. And in Q4, we saw -- in the U.S., we saw growth across all cancer types. And so that was reflected in the sequential growth we saw in Q4 as well. And there was this issue where we had the bolus effect on breast cancer impacts now sequential growth in Q3. So yes, breast sort of grew again in Q4. So back to growth again across all cancer types. And actually, that sets us up very well going into 2024, and especially a lot of the work that we've done in the U.S. on integrating into EMR systems. By the end of the year, we're in 475 accounts. And so that sets us up very well going into '24. Also in Q4, we started to see contribution from Japan and the U.K. Japan got reimbursement coverage back in Q3. And so we start to see the volume there. And really, in Q4 was the first quarter of Royal Marsden, our partnership in the U.K. coming online with going from the NHS. And so I think, again, they set us up very well for '24, and we're expecting contribution, volume and revenue from both Japan and the U.K. And then I suppose the other thing on Guardant360 is the ASP lift that we saw throughout 2023. At the start of '23, we saw -- we gained additional commercial coverage. That really started to come through in the back end of the year as the payers sort of started -- those payments started to come through. And so we saw good traction on that. We had that initial interim Medicare gap fill rate for Guardant360 LDT. So we finished the year with a rate of around $2,750 and we know going into '24 at that rate because of the new crosswalk rate for Guardant360 LDT to Medicare, the rates can be $2,850 to $2,900. So that's a positive. And then maybe I'll just finish on the biopharma business. that came in very strongly again in Q4. I think we booked the trend a little bit from other companies who saw really somewhat decline in revenue from biopharma customers. We actually saw an acceleration in the back half of the year. So that was very positive. And we've got a good pipeline going into the first half of the year with biopharma. So I think it sets us up well for our 2024. We guided 655 to 670. And I think we see a lot of room for potential upsides on the ASP side for volume for Guardant 360 in the U.S. and internationally and also on biopharma.

Yes. Great. Covered a lot of ground there. Maybe on the ASP piece, to your point, you guys got that bump last year. I think this year, you're talking on the clinical side at $2,500 plus or something like that. I think the long-term goal is $3,000. I guess what's the path getting there? Is it just kind of bringing on additional payers on? Does that bump give you room to talk to them and try to drive price later?

Yes. That guidance we gave at Investor Day was that by 2028, we get to a $3,000 ASP for Guardant360. So I think this crosswalk for their LDT, it accelerates our path to get ready and that we see from the commercial phase in '23, I think also accelerates that pathway in it. And there are upsides in '23 on ASP as well. We've not factored into that guide of $2,850 to $2,900. The potential uplift we might see from Medicare Advantage plans as well for the LDT. They should move the LDT rate from $3,500 to $5,000. So that always takes time to get those payers to recognize that increase in price. But that's an upside. And again, I think having now 2 distinct CPT codes for Guardant360 with well-defined Medicare price at $5,000 just really could enable us to pull through better coverage and better rates from commercial payers. So I think, yes, that $3,000, we just have a lot more confidence that we can get there and hopefully we can get there before -- well before 2028.

Yes. Maybe on G360, obviously been a great product. It's been around for a little bit. How do you think about just the growth profile here? What can continue to drive really strong volume growth. I know you guys are adding, I think, it's a smart liquid biopsy. Does that change things at all in terms of the long-term demand trajectory? Maybe just kind of talk G360 a little bit.

Yes. No, I think moving to smart liquid biopsy, just further helps us differentiate the products and continuing that innovation. It's a competitive field in therapy selection. We still see ourselves definitely as the market leader in liquid, but we want to keep on innovating and improving the product and improving the offering. That enables us to continue growth. There's still a lot of blocking and tackling as well that getting integrated into EMR and getting embedded in workflows of our customers is again very important for us to do. Increased coverage, and there's still room for us to get more commercial coverage just opens the door to more patients getting the test and so increasing the access. I think that's something we're very focused on. Things like the recent NCCN guidelines where you can now have a liquid test with a tissue, I think it's a positive for us. on the liquid side, but also can boost the tissue next for us as well. So I think there's many paths to continued growth. And that's just in the U.S. And again, I just talked about U.K. and Japan, and we see those as -- it could be very strong growth drivers going forward.

Yes. And maybe we can jump over to MRD. Obviously, been a big focus for you guys. Can you just talk about, I guess, the outlook there? I don't think you've ever given volume numbers, but just how you're thinking about the go forward? There's a peer that reported last night pretty healthy results -- pretty healthy expectations for this year. Clearly, it feels like this market big, early innings. But -- yes, maybe your outlook on the market and then we would love to talk a little bit in terms of your product offering versus others in terms of tissue informed and tissue agnostic.

Yes. I mean we recognize it's a large market and a large opportunity. We mentioned on our earnings call last week. We're making significant investment in MRD. We'll invest over $100 million in MRD in 2024. And I think that sometimes lost a little bit when people are looking at our P&L and trying to understand the burn. But a lot of our focus is on MRD and driving that. The one thing that we really focused on is developing clinical data. We need that because we need to expand reimbursement. We've got reimbursement at the moment in CRC in the post surgery setting. So we're focused on CRC surveillance and breast, and we know we hope to get publications in the near future and submit to MolDX. And really, when we get that reimbursement, that's going to allow us to really put -- take our foot off the break on volume and drive volume. And then we think we can really accelerate not just the volume, but the revenue growth as well. So yes, we're excited about MRD, but at the moment, we're trying to take a balanced approach until we've got that data and we've got the reimbursement and then we can really push hard.

Let me maybe add something to this MRD story. I think when you think about CRC, we showed a very good data for CRC in the surveillance setting, which that data meets the bar for expanding our Medicare coverage from adjuvant only to adjuvant plus surveillance. Now that we have that data, we need to get it published after publication to the package in front of MolDX. So the risk of clinical data and the technology for expansion of that coverage actually has been removed, but it's going to take us some time to prepare that publication and go through the process. That's kind of boost the ASP for review in a very significant way and really change this revealed brand from a gross margin negative test for us right now to something which would be generating positive gross profit for us.

Yes. I guess on that point, I think Mike, you kind of said the balanced approach this year. I know we've gone a little bit about it. You guys seem to kind of want to hold back a little bit because these are being run at a loss, obviously. How do you balance the view of -- as we saw yesterday, there's volumes that we have here. We need to go and get kind of a land grab versus we can't burn all this money. But where is the balance there? And where are you on review in terms of -- obviously, again, hold back a little bit in terms of letting the full volumes flow. How do you think about just that potential market share?

Yes. No, I mean it's a tough balancing act. I mean, we would love to really be pushing hard on the volume, and driving that as hard as possible. But you do that and there's an impact on our gross margin. There's an impact on the bottom line. There's an impact on the cash burn. And as a company, we're committed to reducing our cash burn every year. We're committed to get into cash flow breakeven by 2028. And so we have to take that balanced approach, because also we're investing heavily on screening. So it's not easy. We spend a lot of time thinking about this. We spend a lot of time developing our budgets, developing our plans, making sure that everything that we're doing is going in the right direction. But yes, I think we set expectations, again, how we're going to manage the business over the next few years and so I think at the moment, we stick to that. We stay very disciplined on MRD. And yes, the real focus for the business is publications, data and reimbursement.

Yes. I guess on CRC and breast, how do you think about the reimbursement path? Breast, I think is maybe tied? Is it the COSMO study that maybe is computed there? Maybe just talk about just the time lines and how that reimbursement could ramp for the MRD piece?

I think what we've assumed for this year is that we'll publish the data, CRC surveillance and breast. And we'll submit to MolDX. Our guide doesn't include any incremental reimbursement this year. from MolDX to Medicare for other CRC surveillance or breast. And so that's probably a 2025 story for us. If it comes this year, then that's great, that will be an upside for us, as one of our potential upsides. But yes, I think it's more likely to be '25. And again, then, once we get to a certain level of ASP and reimbursement, we can really start to really push the volumes.

Okay. Got you. And again, I think that's another one that's been upgraded already the smart liquid biopsy. I know there was some -- at the Analyst Day showed a little bit of kind of past data or right before the Analyst Day, I should say. And then I guess all the go forward is kind of the better platform to start with the biopsy. Is that the right way to think about the MRDs?

Yes.

Okay. And then again, I guess, how do you guys think about that market in terms of tissue informed, tissue agnostic. Obviously, a little bit of a debate out there. You guys obviously have your opinion. I would love to just talk through it and why you guys feel like your offering is the best in the market?

So I think like when you look at the MRD market, frankly, there are 2 categories. There are some patients that tissue-informed MRD testing is an option. There is a piece of market that tissue-informed MRD testing is not an option, but still the doctors want to get to the MRD information. That's the place that at the minimum for blood only, that segment of the market, like we don't see any competition right now. We are the only commercial test clinically validated that its blood only, with no competition. So but when it comes into competition between blood-only and tissue-informed based on what we are seeing, especially like on CRC that we have a lot of data, not only can have a very good performance on par with tissue-informed assets. So I think that this kind of perception that if you don't have tissue information, if it's not tumor informed, for sure, you would need to sacrifice sensitivity and specificity. Over time, it's going to become clear that at least for a few cancer types, it's not going to be the case. Blood have similar kind of performance. So then even for the people that you have tissue as an option, blood can be very competitive when you have faster turnaround, when you have all the logistical advantage of a simple blood test versus the hassle of figuring out the tissue. But some of this, it's going to take some time for the cards to get play.

Okay. And then, Mike, you touched a little bit on international earlier. Obviously, Japan is one you guys have talked about for the past -- probably a year or so, they have a pretty big opportunity. Just talk through where we are on some of the international markets?

I mean they're still all at an early stage. And again, the 2 near-term opportunities that we have are Japan -- on the clinical side, at least on Japan and U.K. And Japan, again, we got national reimbursement coverage in the second half of last year, we launched then and so we've seen good traction. So we're making steady progress there. The U.K. is very interesting for us. We've had this partnership with Royal Marsden. The NHS is very interested in using CGP and they're looking at piloting a program where almost they're using Guardant360 as a first line to manage the lung cancer patients. And in the U.K., they have a huge issue with waiting list. And so this is a way that NHS can reduce their waiting list. So together with Royal Marsden we are part of this pilot program. We have a profit-sharing arrangement with Royal Marsden. So we're not having to invest in sales infrastructure there in building or the lab infrastructure. We're basically providing our technology. And so it's a very good partnership that we have with them. So those are the 2 near-term opportunities we have. And then on the biopharma side, we partnered with Adicon, one of the large labs in China. And that opens up the China market for us in biopharma, but also it can strengthen our sort of global presence, and there's a lot of biopharma partners who in order to do those studies need presence in China as well. So that's helping drive not only business in China but globally as well. So we're excited about each of those opportunities.

And then maybe just on the expense side. Obviously, you talked a little bit about MRD, you guys need to balance that this world that we're in, in terms of focused on kind of the expense burn. How do you think about -- I know you provided some guidance in terms of the expense growth this year being pretty minimal. How do you think about, I guess, this year and then the go forward for things like screening coming in and out in terms of maybe some of the trials and then the commercial build. Obviously, a lot of moving pieces here over the next few years. Maybe just talk through the expense side.

Yes. Yes, this year in '24, our OpEx will increase, we've said about 1% to 3%. So minimal increase. And we've got some puts and takes because our recent development expense such in '24 is going to reduce. We had the big lift of ECLIPSE over the last few years. And now that study is finished. So we'll have a reduction in R&D expense and really whether increases are going to come is on the sales and marketing side. So some on the oncology side because we want to continue to grow the business. But the majority of that increase is ring-fenced really for the launch of Shield. And as we get closer to approval, then we'll start to build out that commercial force. And I think as we look forward over the next few years, there's a lot of leverage that we can really build off now, the infrastructure that we've created over the last -- yes, so I think we look at research and development expenses staying relatively flat over the next -- over the short to midterm. G&A expenses will just grow minimally to support the business. And while, of course, where we're going to invest is going to be on the commercial side. And we've talked a lot about on Shield and screening. Those commercial investments are going to be very much gated on commercial traction. So whether it's on volume growth or in coverage or in ASP growth. And so we're going to be very thoughtful on how we grow that. But that's how you should really look at OpEx trajectory.

Yes, maybe on the back of that, just the cash burn. You kind of mentioned you want to keep that going down. You guys did a raise last year. But how do you think about the cash burn and cash position. I know you have that conversion still a few years away. When you need to address that? And then how do you think about the cash flow?

I think from a cash side, we ended '23 with $1.2 billion in cash. And again, as we laid out on our Investor Day, that's more than sufficient to get us to cash flow breakeven. I think we talked about how we're going to manage the expenses. Are we going to manage the burn on screening to be maximum $200 million a year. So I think we're going to continue that discipline. I think one thing that's important and often gets missed is therapy selection now is -- it was cash flow breakeven at the end of '23. It's a profitable business going forward into '24. It's going to start to generate positive cash. And so we want to drive as much bottom line for therapy selection as possible over the next few years. With the convertible, yes, that's something that, at some point, will need to be addressed. I don't think -- we're almost 4 years away from maturity. It's a [indiscernible]. So it's not an urgent thing that we need to address. But yes, at some point in time, we'll need to address that, refinance that and really look at that.

And you mentioned obviously screening spend. I guess AmirAli with everything you know now, right, the data that you guys have, the competitive landscape that we'll see. I mean is your commitment level still as high as ever in terms of screening piece and kind of maybe continue to view that as a big market or part of the Guardant store?

As we learn more from real-world doctor feedback, market feedback, we continue to actually see our investment thesis has been right, and we remain bullish on the potential of Shield as long as we get FDA approval. So but again, we are not just going to go with vision and the feeling that we have, we are going to be data-driven based on the performance. Again, first milestone is FDA approval. And after that, are we selling this brand based on the projections that we have. And we outlaid that in our Investor Day, what do we expect to happen within the next 5 years. So if we continue to see that kind of attraction and value contribution, we will continue. If not, we can use our resources for better mix. And within our -- just keeping our balance sheet instead of investment that we're spending.

Guys, we're up on time. Thank you guys so much for coming.

Thank you.

Thank you.