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

Welcome, everybody. Good afternoon. I'm Matt Sykes, the life science tools and diagnostics analyst at Goldman Sachs, and I have the pleasure of welcoming Guardant Health here with us today. We have Helmy Eltoukhy, the Chairman and Co-CEO, AmirAli Talasaz, the co-CEO; and Mike Bell, the CFO. Mike, AmirAli, Helmy, thanks for joining me today.

Appreciate it.

Thanks for having us.

Maybe we just start out, just focusing on your H1 results, which were very strong, driven by very solid results in therapy selection. Maybe just walk us through some of the high-level takeaways from the quarter after you've kind of digested some of the feedback and conversations you've had with investors?

Yes. No, we're very pleased with the results we had. We made progress really across all aspects of our business. We continue to make progress with therapy selection, both in terms of the clinical testing and a huge bright spot for us, which I think is pretty singular as the biopharma business, where we continue to see really strong engagement with our biopharma partners. We had 170 biopharma companies that quarter, and we're seeing essentially them using us really across the board in terms of their programs, thinking about these more complex signatures and thinking about things like molecular response. We see -- we saw great progress in therapy selection, where we continue to make a really strong connection through EMR integration, through commitment to data. We hit 500 peer-reviewed publications. And then MRD, we submitted our data for the surveillance indication for CRC. We have Breast not that far behind, and we continue to see that we are a sort of singular -- our place is very singular in terms of being able to help those patients, those 15 million cancer survivors of which 12 million are 5 years out from surgery. We are really the only company, the only solution that is there for them to give them peace of mind in terms of detecting recurrence from cancer. And then obviously, we had spectacular progress around screening in terms of the New England Journal of Medicine publication and really making a lot of progress there to finally get that through the final stages of FDA approval.

Got it. And I'm not going to wait too long to get into the other big events. Clearly, a very positive decision in terms of the vote from the AdCom for Shield. Could you -- maybe how we start out, like what were your expectations going into that prior? What were you surprised by that happened during that? And then sort of post that sort of like next steps and how we should think about it? And I've got a couple more questions you can imagine on it, but maybe start there.

Yes, sure. So first, I start by saying how proud I feel with the preparation that the Guardant team went through and really how well they represented Guardant Shield. I think, frankly, even the whole field of liquid biopsy on that day. I think that would be a memorable day for the whole field for many, many years to come. In terms of our expectation, we had a proposed indication of use, which we had some good clinical and scientific justification that are in the indication of uses very well suited based on the performance of the Shield that we saw in our pivotal study. But as you know, whenever you go through these kind of advisory panels and you talk to 9, 10 people just a matter of 1 day and a few hours, there is some aspects of unknown unknowns that could happen. I think we went with the mentality of trusting the process, which contain our presentation. I think a solid deliberation by the team around the pros and cons of using blood test in this field. At the end, ended with very strong positive recommendation by the advisory panel for approvability of Shield and in the proposed indication of use that we had, which was for first line CRC. We are very excited about that.

Got it. And maybe talk a little bit about how sort of your expectations going in for advanced adenoma. I think you were very upfront during the AdCom about what your thoughts were on that. But just talk about how we should think about advanced adenoma as part of label or warnings, et cetera, that might be attached to that and what you're thinking about on that?

And we've been very consistent about it during the last many quarters about the fact that the Shield based on the data that we have is really can add value in CRC detection and CRC screening for cancer detection. Cancer Prevention is a very important subject. But that's not going to be the goal of this test, and we are going to have limited contribution for cancer prevention. So -- in fact, our proposed label, we've proposed limitation that Shield has a limited sensitivity for detecting advanced adenomas. At the end, we are detecting 13% of advanced adenomas. It's -- that's what it is. And having specific limitations about this matter is something that we've been very proactive about it.

Got it. Maybe just talk about sort of the discussion that took place around first line versus second line. Obviously, the vote -- about first line. But in terms of like what you thought about the debate and where do you think it should stand? And how does the market size change if it's first line or second line, understanding that what the AdCom said was first line, but I just want to kind of get your view of the sensitivities around that decision?

Yes, sure. So as part of the process when this 7, 10 people gather, as part of the process and the agenda is for them to deliberate about the good and bad of the data and the intended use statement that they are getting faced with. So the agenda for that deliberation is debating and talking about all the positive and negative things that they think need to come on the table. And at the end, it's -- the process ends with the transparent vote around safety, efficacy and the risk-benefit balance for the proposed indication that, that AdCom debated around. At that time, I think the voting would be very clear and crystal clear in terms of what they were thinking in terms of yes or no about much of these answers. So now in terms of like the topics that got discussed, which sounds then actually we are in agreement. I think there's been a bunch of reservation around the impact of blood test with colonoscopy rates. And I think some of the points where blood could be so good and so easy that many people do blood testing and then we don't do any colonoscopy and kind of exaggerating, and then that could be harmful. I think a bunch of conversations about majority of, I think, rational conversation around debate that should be first line or second line was about preservation of the value of colonoscopy which we're in agreement. Colonoscopy is a different kind of device. It has a different kind of intended usage interventional. It's a prioritized option if people are willing to go through it. But the reality is majority of people are not willing to go through it or don't have access to them, that's the place for noninvasive in vitro diagnostics. And the conversation about first line and second line really is between the test within that category of noninvasive tests, which effectively becomes our blood test and stool test and another blood test that got approved by agency many years back versus, I think, concerns about preservation or substitution of colonoscopy. Now in terms of market opportunity, when we look at average CRC screen, there are 120 million people in the U.S. in that age category that based on guidelines, which recommend for them to get screening. First-line label allows marketing and promotion of the test towards all 120 million people, where reality, as I mentioned, colonoscopy is a prioritized option and 55 million people are getting screening by colonoscopy. We are not seeing a lot of evidence in the commercial world that people are willing to replace colonoscopy with noninvasive tests. So really, the commercial opportunity for first-line test from our perspective of 65 million people, out of which 50 million are on screen, which are eligible for second-line label. So it's a market size of 65 million versus 50 million first line and second line, still, we prefer this first line in terms of the road map for some indication expansions that we have in line for Shield. There's going to be some good advantage for us to continue to secure this first-line label for us versus second line. But within the CRC market, that would be the impact of 65 million versus 50 million.

Got it. And as what you heard at the AdCom at all change your view in terms of the spend that you're willing to put towards Shield? You haven't changed anything in public form. So -- but I'm just wondering if that is all affected how you think about it?

So we continue to believe this brand is going to be one of the biggest diagnostic brand ever existed, if not the biggest. And again, even for starting with 50 million people that 16 million annual testing opportunity, that's $8 billion TAM opportunity. At 65 million first line, that's about $12 billion market opportunity. We continue to believe this market opportunity is very big. We just need to make sure we get FDA approval. If we can't secure FDA approval, we are going to have some serious conversation in terms of material adjustment in terms of our spend and operating plan. But we have strong conviction that we are on the right path -- even in the right path for a good label. So -- but we'll see at the end when FDA finalizes their decision.

And last question on this -- on spending. You've talked in the past about blood test, given the adherence spend might not have to be as much. Could you see yourself kind of ratchet down spend as you see that adherence taking hold? And is there any sort of gating measures you're using for spend outside of obviously the approval and things you talked about in the past. But I'm just wondering how often you're going to be thinking about that spend over time as you roll out the test post potential approval?

We have some milestone and base gates that we've defined. For instance, one of them was this favorable outcome. Then the next one is FDA approval. And as we launch them getting into ACS guidelines showing the revenue, showing the market traction. As long as we are meeting those milestones, we are going to continue the investments with the ring-fenced spend that actually we talked about before, but it's not that under all scenarios, we are going to continue this investment. As long as we are meeting those milestones, the next round of financing is going to get released for continuation of building this brand. Now I think with this level of net burn of $175 million to [ $200 ] million next year, we are adequately resourced. And that's a fair question that, okay, why historically took much larger investment for stool-based tests. I point to two main issues: One, our understanding of the market is for stool test, there's a lot of pushing to market that needs to happen for patients and providers to use stool options. 7 out of 10 people who've done stool tests do not want to do it again if they get other options versus blood testing is so easy, so convenient that, in fact, we are dealing with the concerns that, hey, maybe it's going to be too easy that we are worried about colonoscopy, right? We have a different kind of issue. So S&M efficiency would be much higher. Related point when stool test commercial engine sells like 3 tests -- 3 stool tests. More than often, 1 out of those 3 tests never come to the lab and as a result, does not become billable. For blood test, almost all order tests would result into billable cases. That all translates into more favorable unit economics and more favorable S&M engine to produce billable cases. I think the last point I make about this, Matt, is we are leveraging a lot of scaled infrastructure that Guardant Health has, like the G&A function of Guardant industry are really like almost paying it for the profitable core business for therapy selection that we have, but we are leveraging that core infrastructure and some other infrastructure at Guardant. So -- as a result, we can have much better margins over time with our screening business.

And how should we be thinking about COGS? I know you've stated in the past to 1 million samples like $250, but that's not where we're going to start, but how should we think about -- Mike, how should we think about COGS for Shield in the sort of early periods of time?

Yes. Very, very quickly after launch, we'd expect to get the COGS below $500. And we've said once we get an ADLT rate, then ASP would be above $500. So very quickly, we'll have a positive gross margin with Shield. And yes, we've said over time, and by the time we get to 2028, 1 million tests per year, then the cost per test will be $200. And we've got -- I think we've got a very strong road map to get us from that $500 to $200. Obviously, a lot of that reduction will come from just increased volume, but we're very focused on the workflow. We've got a lot of efforts ongoing around automation. Within the company, we've got some very experienced people who've built large-scale automation, very large-scale labs. So I think we know -- we know how to do this. And yes, we're confident that over time, we'll get that cost per test down to $200.

Got it. And Helmy, coming back to you on therapy selection. You've got a sort of an implied guide of sort of a step up of 20% in the second half for clinical volumes. What are some of the key drivers of volume growth? What's your sort of level of confidence in that? What's sort of the visibility into that?

Yes. No, we're very pleased with the start of the year. I would say that few different sort of vectors we have for the year, really improving the experience in terms of the ordering aspects, the digital integration, EMR integration. That's been going really well. Partnering with center is really top down, doing sort of a key account function. I think we announced a partnership with [ McKesson ] and we'll hopefully announce a few more as time goes on. And then really, the products that we're bringing to market. We just launched essentially an upgrade to our tissue product last week, expanding that to 500 genes. We'll have, obviously, the rollout of smart liquid biopsy second half of this year. I can tell you that at both AACR and ASCO, we had just so much excitement and engagement around some of these features we're bringing really the fact that with this full epigenetic backbone, we're able to see insights into disease that is even very difficult to see with tissue testing. We're able to see transitions and histology of the disease from adeno to neuroendocrine, like things that are just very difficult to track in terms of the landscape, seeing things like cardio toxicity, liver toxicity with this platform. And then that's just scratching the surface basically more immuno-oncology applications, HRD applications and so on. And -- so that, for the first time, we sort of gave a sneak preview at AACR last month, and I can tell you there's -- we're seeing engagement with academic centers that remind me if when we first launched Guardant360 back in 2014 in terms of really the initial promise of liquid biopsy. And so we're very confident that we can reengage essentially the top centers. And really rekindle that excitement about the sort of next big thing in liquid biopsy with our smart liquid biopsy platform.

Got it. I do want to focus on the EMR integration efforts because a lot of companies talk about them. They're actually really significant, very difficult to kind of do, but once they're embedded in there, they're a huge tailwind. Could you maybe talk about how sort of like how much of that is remaining? How much sort of additional runway you have on that? And when we should start -- if we haven't already started seeing that uplift from that EMR integration what you've been doing?

Yes. So it depends on the vendor. Some are sort of SaaS platforms where once you turn the switch on that is rolled out across their installed base. And others like Epic is really a one by one sort of blocking and tackling exercise where we have to turn switches on at each center successively. And I can tell you that Epic is certainly worth it in terms of the initial results we're seeing where because the whole center is engaged in terms of that process. There's a lot of awareness that essentially Guardant is coming to their platform, to their system. And so we tend to see an uplift of volume even before we turn things on and just because of the level of sort of visibility that we have. And that's an area where we're still in the early innings in terms of Epic integration, probably less than 20%. But we're essentially doubling our efforts there in terms of increasing the funnel and increasing the queue so that we can go more quickly there. But others like -- onc EMR or inomed were sort of well through most of the heavy lifting there.

Got it. And then shifting to Reveal, could you just maybe give us some of the key updates in the last quarter from that? And then some of the key catalysts you're waiting for in order to push harder on those Reveal volumes, I think your CRC surveillance, but maybe just remind us kind of what you're looking for in order to start really pushing that?

Yes. Look, we're really heads down in terms of getting that surveillance reimbursement indication. Right now, we have CRC in the adjuvant setting. But the utility of a sort of tumor-agnostic approach, a blood-only approach is really in that surveillance setting essentially all patients that are 1 year out up to 5 years, 7 years and so on. And that's really where the majority of patients sit today. And so we are, hopefully, a few months away from having our CRC surveillance publication out there. As soon as that gets accepted, we'll be submitting that to Medicare for reimbursement. And we're hopeful that by end of this year, early next year, we'll have that CRC surveillance reimbursement. Breast is probably a couple of months behind that in terms of time line, and we're very excited with the data that we have there. Those 2 indications alone in the surveillance setting are probably something like 4 million to 5 million of the 12 million patients that are 5 years out. So that would really make up sort of really a big part of the potential reimbursement for our MRD franchise. And then the third sort of thing that's happening at the same time is a really major COGS reduction initiative we have in terms of the platform. We think we'll be able to reduce COGS by 50%. And so we'll see a sharp sort of crossing over of the lines, ASP going up, early significantly when we get those 2 indications, and COGS going down very significantly. And all of that should be in place by sort of first half of next year. And that's really where we can start really accelerating volumes because now will be positive gross margins, and that will be accretive to our bottom line.

Maybe this question for Mike, would you dig a little bit into that COGS reduction in Reveal and what steps you need to take? And sort of what you're really attacking on that?

Yes. I mean the main focus is really leveraging a lot of the platform and the learnings that we've had from the low-cost Shield platform, and just moving the Reveal onto a similar platform. So if we can do that again, it's going to significantly reduce the cost per test. I think the other -- the other driver that then we'll see on top of that is once we start to push on the volumes of Reveal, that's going to have a further impact on reducing the cost per test. So yes, we're excited to get that in place. The team working very hard back at Guardant developing that, yes, Helmy said, if that comes in the first half of 2025 along with ASP increases, then it changes Reveal dramatically.

Got it. And Helmy, just for Guardant360 in the U.K., your recent partnership to expand the NHS study. Can you talk about what kind of impact that can have? And you've done for your sort of international European strategy, you've done a lot of these types of partnerships, and that sort of seems like to be the preferred way you're doing things. But maybe talk about NHS itself might have impact. And then just talk about your international strategy in general.

Yes. I think the U.K. is one of those markets if you can make it there, you can make it anywhere else. That's as much challenging in terms of pricing. And so we're very excited with the success we've had there now. We essentially decided many years ago to invest there in a way that sort of made sense with the reimbursement framework that we saw developing there, which is build a lab sort of inside that ecosystem and -- in one of the leading centers in the U.K., the Royal Marsden. And essentially go to bat with those top KOLs in terms of really deciding how that technology should be integrated into their health care system in terms of how it can help specifically the patients over there. And so we're -- this is now really a model of success that we want to essentially use in all of the EU5 and multiple other countries around the world. And what we found over there was that because of some of the challenges in terms of how lung cancer patients are diagnosed, how they're treated, was taking 4 months for the average lung cancer patient to actually get on treatment, keep in mind that the average life expectancy of a late-stage lung cancer patient is 11 months. We did a pilot there and we found that we were able to cut that down to just a couple of weeks in terms of when you use liquid biopsy in that setting. And so obviously, they were very excited to NHS in terms of the promise of this. We're rolling it out to essentially 10,000 lung cancer patients and probably it will roll out to all lung cancer patients. Over the next couple of years, they want to expand this to other cancer types as well. And so quickly, U.K. went from a small market to us -- for us to one that is maybe as large as Japan potentially in terms of the sort of revenue potential and testing volumes. And we're seeing that model really -- we're seeing a lot of other countries take note. We have a lab in Spain that I think is progressing and potentially discussions around many of the other countries in the U.K. and certainly Middle East and other places. So this is really -- the international has been a challenging, I think, aspect for a lot of U.S.-based diagnostic companies. And this is really one of the initial models that we've seen finally work and finally take off in terms of being sort of a profitable model that's accretive to the business.

Got it. And maybe more of a higher-level question, the FDA LDT regulation. Could you maybe talk about how that impacts your business? Is there a certain percent of tests that are approved, not approved by the New York State pathway and things like that to sort of make it fine for you? And I mean, my personal view is that I think it's really good for the incumbents might be challenging from the innovation side, but I would love to get your thoughts on that LTC regulation, how Guardant factors into that?

Yes. I mean, frankly, we were, I think, well equipped no matter how it ended up just because we do have tests that have gone all the way through FDA approval with Guardant360 and knock on wood Shield soon. And I think -- but the way that it ended up virtually all of our tests are New York State approved. We're a national lab. New York is an important state. So for us to not get approval there doesn't make a lot of sense. So it's become something of, I would say, kind of not much of a big issue for us. But -- yes, it will be interesting to see how this sort of ends in terms of some of the reporting requirements and so on, which will add a little bit more complexity to testing. But -- yes, it's really something that is -- that's not going to affect our business really in any way.

Got it. And then, Mike, just maybe talk a little bit about sort of dealing with cash collections, reducing no pay sort of the whole revenue cycle management, which has been sort of a greater focus with diagnosis of the industry over the past 1.5 years and how you've kind of set that up and are dealing with that?

Well, I'd say we're -- I'd say we've been very successful with the reimbursement and how we manage the billing. We've got an incredibly strong team at Guardant that manages that and they've been doing that for many years. And I think that on top of the tailwinds that we've had on ASPs over the last year or so, I've been really helped drive our gross margins and our bottom line and our cash collection is very strong. Maybe just to touch on the ASPs for a moment. We saw great tailwinds with the Medicare increase in the LDT rate from 3,500 to 5,000 at start of year. We've had really good tailwinds from the collections that we've had from commercial payers. We've got this additional coverage from some of the national payers 12 months or so ago. And that's really coming through now. And again, the billing team is doing incredibly well in collecting that cash. And going forward, I think there's opportunities for us with Medicare Advantage related to the LDT and starting to see an uplift on the Medicare Advantage rates that we get paid. And there's still gaps in our commercial coverage for some of these national payers. So I think there's a huge focus still within the business on cash collections, but also improving those ASPs even further.

Got it. And then maybe just talk about your reduced cash burn guide for 2024 and sort of the drivers are there and how we should expect that as we move into '25?

Yes. I mean, there's effectively 2 drivers. We reduced the cash burn sort of $40 million, $50 million compared with our guidance and something like $60 million compared with last year. But the change in the guidance was driven by 2 things: One is the uplift in ASPs that we saw. And we increased our ASP guidance for Guardant360 to this [ 2900, 2950 ]. And that's effectively -- it was $15 million to $20 million upside on revenue, but also that falls down to the bottom line. And then the second element to the reducing the cash burn was on the screening side. So we guided the spend at $200 million. Because of the pushback of the AdCom, we just held back some of the commercial expense and we brought that down to $175 million maximum this year.

And how should we think about the balance sheet? Obviously, you've got a strong balance sheet. There is debt on the balance sheet as well. How should we be thinking about it over the next few years?

I think from a cash perspective, we ended last quarter with $1.1 billion in cash. So we feel in a very position that can get us through to our breakeven target. We said that would be, at our Investor Day, we said that would be 2028. Where we come with on Guardant360, we could even bring that forward a little bit. But we feel that $1.1 billion is more than sufficient to get us how we've talked about on the screening side, $1.15 billion, it matures end of 2027. So we've got another 3.5 years, and it's a 0% coupon. So that's nice to have on the balance sheet. We know that before end of '27, we're going to have to address this. I think we're looking all the time at ways to do that. I think we've got a lot of optionality, and we've got a lot of time to be able to do that. So one thing we don't want to do is let the convertible become an overhang on the balance sheet. We want to manage it well, and we want to be proactive in doing that. But we're not finding any urgency or pressure to do anything immediately.

Okay. And AmirAli, I want to go back to you on Shield. USPSTF is obviously some time away. But certainly, a topic of discussion in terms of interval. How are you thinking about that as you answer these questions from people. But how are you thinking about that dynamic?

Yes, sure. So keep in mind just the FDA approval would open up people at 865 and above completely. That's a huge market by itself. So we have a lot of business to mind and grow in that patient population while we are waiting for guidelines to take action. We are also excited with American Cancer Society guideline. We are in conversation with them. We know they've been monitoring our field very, very closely. We expect to get FDA approval sometime this year and get recommended by ACS sometime next year, 2025. That would give us actually a lot of interesting opportunities. There are 10 states that have state-level mandates for local payers to cover colorectal cancer screening test as long as they are recommended by ACS. So that's going to open up access to a younger patient population 10 out of 50 states in the United States, and then we are going to wait for USPSTF. We continue to actually be very positive about what could happen there. Again, keep in mind 50 million on screen patients. 76% of the colorectal cancer that is coming from the people who are not up to date with screening, and now there is a blood test that people easily do. -- colorectal cancers at curable stage. What do you think is going to happen? I'm very excited to see those days. So...

Okay. And then just before we leave, one thing that has been discussed a lot like recently is Shield LUNG and sort of updated time line for that. Maybe just kind of remind people about what the work you've been doing there and what the time line is for that?

So our vision, I've Guardant [indiscernible] founding base was a simple blood test and -- cancers and Shield body against this disease, guard your body against this disease. And CRC was our lead anchor indication to make sure we find a reimbursable pathway to make sure people would get access to this blood test. So once we get FDA approval, we are going to be on a task to add indications to Shield test. A strategic indication for us is LUNG. We are doing a second cancer screening study over 10,000 patients. We're in the third year of enrollment, and we're very excited. We actually the progress that we are making there. But we don't expect to do these kind of trials one by one. You could imagine a panel of multi-cancer detection altogether would get added to the same Shield test that people would get access to because they are going to use it for CRC screening. We are very excited about what could be the future of Shield in the era of multi-cancer detection.

I think it's a great place to stop. Guys, thank you so much for your time. Really appreciate it.

Thank you.

Thank you .

Thank you.