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

Okay. Great. I think we can get started, everyone. Kallum Titchmarsh here from the Life Sciences team at Morgan Stanley. Really pleased today to be joined by Helmy Eltoukhy, Chairman, Co-Founder and Co-CEO; AmirAli Talasaz, Co-Founder and Co-CEO; and we have Mike Bell, CFO as well with us. So before we get started, I have to read you some disclosures. So please see the Morgan Stanley research disclosure website at www.morganstanley.com/researchdisclosures. So maybe let's start off kind of high level, Helmy. It's now 13 years post founding. Each year, obviously brings a lot of new stuff to discuss. So maybe just reflect on how you feel the company has progressed over this time and whether where we sit today aligns with your mission back in 2012.

Yes. Look, when we started the company, we had a crazy idea of having a blood test at an annual physical that could sort of keep cancer at bay and detect it early. And we wanted to do that systematically by launching tests in therapy selection, MRD and screening. And here we are 13 years later with the first company that has Medicare reimbursed products across all 3 areas of patient care. So it's -- on the one hand, it was part of the plan. But on the other hand, looking back, it's pretty amazing that we actually set out to do it and accomplished that now. And obviously, the details are very different from a technology point of view of how we actually got there versus how we thought we would get there. But I think it's a testament to the team, to the strong team that we've built and the grit and resilience and perseverance we've had despite a number of twists and turns to get to this point where we're impacting now potentially millions of patients around the world with more time free from the disease.

Great. And I want to begin actually on screening with you, AmirAli. On the PathGroup partnership you announced this morning, exciting stuff. Maybe just frame up what this partnership means for Shield, bigger picture. And then obviously, we are filled with investors here. So we want to hear about the revenue upside as well.

Yes, sure. We are very excited about actually the opportunity that Shield could have. It has the potential to be the biggest diagnostic plan ever outside COVID testing. And we are very excited with the early adoption that we are seeing in the marketplace for Shield. There is a strong pull. And we want to make sure that we provide access to the patients who are eligible for Shield testing as soon as possible and accelerate that distribution plan that we are building. We are doing it through our own direct sales force and building EMR integration with different health systems. And also, we are exploring partnership opportunities to accelerate some of those plans. Now this PathGroup announcement that we had this morning is one of the opportunities that we are very excited about. PathGroup is expanding very fast within the Southeast. They are integrated with 250 health systems and sites serving over 15,000 physicians, majority PCPs, OB/GYN and GI. And they are testing over 5 million patients with PathGroup tests. They are the entity that they call themselves physician-led distribution network, physician-led for physicians. And we are excited to be in this partnership. It would really accelerate the accessibility of Shield for some patients in the community and the rural area. In terms of opportunity and upside for it. We didn't count on this partnership in 2025 guidance that we set out a few months ago. And still, it's going to take us some time to integrate with PathGroup. And then once we get integrated, hopefully, it would be an interesting upside for us as we go to 2026.

Got you. And then we also saw data from V2 last week. Just talk us through how that stacked up versus your expectations.

Yes. Actually, what we saw was 2x higher analytical sensitivity. And then once we unblinded the clinical database, what it translates was 7% improvement in Stage 1 performance relative to the current FDA Shield approved and blended sensitivity improvement of plus 1%. So I think the interesting part and positive part is, obviously, the pathway that we figure out based on the data and biological insight that we have, how we could improve Stage 1 performance for Shield. As a reminder, the currently FDA-approved Shield has very, very high sensitivity in detecting Stage 2, 3, 4, like we saw 100% in that pivotal trial when we run Shield 2 years ago. And then the ones that we are missing were Stage 1. So seeing that level of improvement in Stage 1 was validating the road map and the understanding of science and biology and technology road map that we have. But we are hoping to see more than plus 1% blended sensitivity improvement when we are making such an improvement with Stage 1. But we take any small wins as a win. This endorses the pathway that we have for future upgrade for this test. And we are also very excited about progress we are making on the multi-cancer detection front for Shield. Not only we are working to improve CRC performance of the test. In near future, we are going to broaden access for patients to get access to multi-cancer detection findings for the same Shield test. And patients and physicians are going to have the access to the test that can look at up to 10 different cancer types.

And maybe nitpicking here, but I think Stage 3 sensitivity dropped down to 96%. What happened there? I think V1 was 100%, right?

Yes. I think some of it is just really like the variability of the cohorts when you're actually running a bunch of these samples. We know the technology has very, very high performance at stage 1 and above, but sometimes you may get one that's maybe a little bit harder than the other one. So that's what we dealt with. If that one was not there, maybe we're talking about a little bit better blended sensitivity for Shield as well.

And on the commercialization plans for V2, any change in time lines or as you communicated before?

So we just got to the data readout, and we are planning to put any of the Shield upgrades that we are going to have in front of FDA and we go from there.

How much better could this product get?

I think the science of liquid biopsy is interesting. I think there are some literature that actually has come up that even advanced adenomas have biomarkers and similar biomarkers to colorectal cancer, but at much, much lower level of shedding in circulation. So the science is there that even like some of these harder to catch adenomas, their signature is there. It's just a matter of would you have the sensitivity of finding that lower and lower level of shedding in circulation now through V2 patent algorithm improvement with the additional data that we had at the time of between V1 and V2, we got to 2x improvement. And time will tell how much more we can improve. This is an AI-based learning-based kind of algorithm that we have. In theory, more and more data we capture, better biological insight we are going to find and the algorithm over time would get better. And with the scale of Shield adoption that we are seeing in the market, the potential is out there for this algorithm to be able to distinguish this cancer signature in blood more accurately over time, but time will tell.

Great. And then just on the guideline side. So CRC, Shield now included in the NCCN guidelines. What read-throughs can we take to ACS guidelines there?

So we are -- maybe for some people who are newer to the field, we are very excited that actually very early in the game after FDA approval, NCCN, which is the voice of oncologists, the experts in the field have included Shield as a modality for colorectal cancer screening. And they are typically laggers, but they decided to take this action much earlier than what we expected. We didn't expect to hear from NCCN anytime soon. I think that's an endorsement of something that just even common sense you should believe in which 75% of colorectal cancer mortality is coming from the patients who are unscreened or they are not up to date to cancer, 50 million people. And as long as you detect colorectal cancer at Stage 2, you can cure or offer very long-term survival to the patient as long as you detect them at Stage 2. And we have a blood test that can detect these cancers with very, very high performance. What do you think the guidelines should do? Common sense says unscreened patients should get this blood test at least instead of remaining unscreened. So I think this just endorses this common sense and belief and confidence that we have that guidelines would recommend Shield for screening of cancers for colorectal cancer.

Great. And just on the commercial team, I think the plan is north of 250 reps by year-end. How are you thinking about that ramp to reach full productivity for the reps themselves? How long does that typically take?

We are building that infrastructure as quickly as we can. So we are on track to end the year with more than 250 sales reps promoting Shield in different PCP accounts. And the productivity that we are seeing in our recently hired reps are better than what we originally expected, and that's contributing to the fact that the initial ramp is growing faster than what we internally forecasted. In general, in diagnostic, you expect after 6 to 9 months the reps to generate some material contribution, and then it takes them 12 to 18 months to get to better part of their health care. So -- and the tenure of our reps in the field is on average about 9 months right now. So still, we are going through that growth of productivity.

And then just on the commercial coverage side, maybe talk about some of the efforts there to broaden that. And any color as well on ASPs would be appreciated.

Maybe I'll start with coverage and Mike, if you want to talk about ASP, please. So guideline inclusion is a catalyst for commercial payer. After NCCN, we started accelerating some of our conversation with other commercial payers to broaden access for Shield to younger patients. Right now, Shield is covered by Medicare and VA, so about roughly 60 million people out of 120 million people have access to Shield in terms of their coverage policy. And the rest is going to get opened up after American Cancer Society guidelines and USPSTF includes Shield in their guidelines. We are not counting on any commercial coverage until we get to really ACS and USPSTF guidelines.

Yes. Maybe to add on ASPs. I mean we've seen since launch really good traction on ASPs. Of course, we got the ADLT rate that went into effect on 1st of April this year. So that increased our Medicare rate from $920 to $1,495. And then since then, we've seen really good pull-through on Medicare Advantage. So a lot of the Medicare Advantage payers now have sort of quickly sort of fallen into line and are paying us at that Medicare rate as well. And so our focus at the moment has been very much heavily weighted towards Medicare Advantage patients. So I think that set us up with a really good ASP. I think going forward, obviously, our aims will be when we do get to coverage from commercial payers to keep a high ASP, and we want to be targeting that $1,495. But as AmirAli said, it will take time for that commercial payment to come through. But yes, we're really pleased with where the ASPs are today.

Great. Maybe shifting to therapy selection. Before we dive deeper, just give us a sense of where the market is today? What percent of patients are getting no testing versus hospital testing versus CGP?

Yes. I think the estimates vary, but you could say maybe Tissue market is about 50% penetrated with some kind of panel testing. Some of them may be smaller panels and then maybe 30% on the liquid side. And that's really for one test per patient per lifetime.

And you're guiding to, I think, north of 27% volume growth for oncology. G360 has been around for a number of years now. How are you still able to outpace the market here?

I think it's really a testament to innovation that we've had. We -- about a year ago, we really did the first of this major upgrade to smart liquid biopsy, and that has really accelerated the growth on the G360 side of the picture. And it's because we're providing so much more utility, I think, than what exists out there per test. And that utility is only growing. We added 11 more applications onto that framework, under that test just a few months ago. That's really resonating with the field very well. There's a lot of excitement there. And it really is sort of capturing the enthusiasm we first saw when we launched Guardant360 maybe 10 years ago. We're seeing that same kind of excitement in terms of all of the new capabilities of this platform. And the nice thing about it is this is truly a platform. The -- we've now completed the upgrade of our entire portfolio to smart liquid biopsy with Reveal last year and now Tissue just a few months ago. And the nice thing about that is that essentially, this framework allows us to plug and play these apps into each of those tests. And so that there's a common design language, common framework, sort of common utility, shared utility between these tests and then really haven't turned on that sort of synergistic framework yet. And as we turn that on, we think that will further catalyze adoption of our portfolio.

And you recently highlighted the launch of 11 Smart LB applications for G360 liquid. So high-level overview of the applications launched so far. And again, investors, I think, want to know when that starts converting to the top line.

Yes. Look, I mean, we're already seeing traction with those apps. It's one of the most talked about aspects of our launch. Even I was at ASCO and June, just, I think, a couple of weeks after we launched them. And I can tell you the enthusiasm there was at a very high level. And in terms of applications, we see -- we can now essentially see tumor biology in blood. We can see -- essentially define the histology of disease. We can do what was once only the realm of tissue slides and H&E and IHC and so on in blood to a large extent, almost redefining and frankly, defining in higher resolution, the underlying biology of a patient's disease. And what does that mean? That means we can see things that were even very difficult to capture in tissue, like histological changes in disease under therapeutic pressure, patients who had non-small cell lung cancer shifting towards small cell lung cancer, which really has implications around essentially changing therapy and so on that were undetected before Guardant360. We can see other changes. I think some of the new apps that are in the road map, we have something like 50 apps that are under development that still will be launching once they're validated. We're going to be able to predict essentially response to major classes of therapies as well in a way that's far better than the current approaches. It's going to blow stuff like tumor mutational burden out of the water in terms of precision and the ability to really find those patients who can benefit. We can see things where typically, you have drugs that are targeted therapies that essentially find most of the patients with those targeted therapies. But there always tends to be some responders outside of that class, and we can actually find those responders that may not have an oncogenic mutation, but may still be candidates for that therapy. So it's really exciting what we can do with this platform. And I think you saw in our pharma business, the year before, we had this major step-up in our pharma volumes, major step-up in the number of pharma companies that are working with us. And that is kind of what they were seeing maybe a year earlier than the clinical markets.

Mike, maybe back to you on ASPs for G360, I think now between the $3,000 to $3,100 range. So talk us through what's needed to get that higher and maybe some targets 2, 3 years out?

Yes. I mean, if I think back to our Investor Day 2 years ago, we set a target of $3,000 by 2028. So -- we're already ahead of that with this $3,000, $3,100. And what's really driven that was that at the start of '24, we got an increased Medicare rate to $5,000. So both the CDx version and the LDT version of Guardant360 Liquid are now at $5,000. And then the team has done a fantastic job of pulling through the Medicare Advantage payments as well. So effectively, we're getting very, very high payments on the -- from Medicare Advantage payers. Where we've still got opportunity to increase is really on the commercial side and expanding the coverage. So we've got very good coverage now over 300 million lives primarily focused on lung and breast. But I think for other indications, that's where our opportunity is. So we're really focused on the large national payers and expanding the coverage and contracting where it makes sense. We think over the next couple of years, that range can now go up maybe another 10%, $3,200, $3,300. And we feel pretty confident that we've got a good pathway to get there.

Fantastic. SERENA-6, I think you've described that as confirming an MRD-like opportunity for G360, potentially doubling your breast cancer volumes. What's the testing frequency per patient today? And what could that number go to as a result of camizestrant approval?

Yes. Right now, this is, I think, the exciting part of sort of leading in liquid on the therapy selection side is that we see a future where it's not just one test per patient per lifetime, but patients should be tested, obviously, at diagnosis at every progression. They should be tested in terms of monitoring response in between. So you can imagine a world where patients are getting tested 3 or 4 times per year and a world where the drugs are essentially allowing patients to live much longer. They're second, third, fourth line therapies. And right now, we're just at the very beginning of that new paradigm. We're still, I think, around 1.2, 1.3 tests per patient when you think about Guardant360. So we're still very much at the early innings there. It's inching up as patients are being tested at progression. But I think catalysts like ESR1, if that gets approved for camizestrant, I think that will usher in much more quickly that new paradigm of testing early, testing often and essentially treating molecular progression of disease, which is ultimately where we believe all of advanced and even early-stage oncology will be going.

Any other cancer types that you'd call out for that similar?

Yes, there's a similar paradigm with AR resistance in prostate cancer as well, and there's a few others as well. So this is not one and done. This is just the beginning of, I think, a tip of the spear in terms of really sort of a new era of monitoring disease, switching rapidly as you see emerging clones and emerging genotypes in patients.

Okay. Moving across the portfolio on the MRD side, how would you describe physician willingness to try a tumor-naive approach once they already have a bunch of patients on Signatera? Is that a gating factor at all?

No. I mean there's -- I would say there's a huge need for a tissue-free approach in the market right now. Depending on the cancer type, there's -- and the neoadjuvant setting as well, which is increasingly becoming standard of care, there is a lack of tissue for a large swath of patients, anywhere from 10% to 40% of patients may not have adequate tissue for a tumor-informed approach in that early-stage setting. Furthermore, when you think about essentially the fact that this market of 15 million to 18 million cancer survivors, 12 million of them are more than 5 years out from surgery, where that initial tissue that was taken or the surgical specimen that was taken may not truly still be representative of the disease that emerges 3 years later or 4 years later or 5 years later. And that's where I think a tissue-free approach with a wider catchment to be able to detect secondary primaries and other similar disease that may be emerging there is extremely important. So I do believe that right now, the market, just like with Tissue CGP may have started with tumor-informed, but that ultimately, the larger market will be tissue-free over time as those applications become more and more commonplace.

How long do you think that will take kind of 10 years from now, what do you think the market looks like?

I think 10 years from now, I'd be very surprised if tissue-free is not more than half the market opportunity or kind of actually realized in the market. Just look at where liquid is today in the CGP side, we launched 360 in 2014. And now you can see we're fairly dominant in terms of the volumes, in terms of the -- we're testing at least in breast and lung and colorectal, probably approaching 25% of all advanced cancer patients. And so that is, I think, a similar dynamic we see playing out on the MRD side.

And Mike, just on the Reveal ASPs, I think now just sitting over $600 following Medicare coverage. What are the key drivers to achieve that $1,000 target by 2028?

Yes. I mean, really, the key drivers in the short term is going to be breast reimbursement. We've submitted to MolDX. We would expect to get that by the end of the year, early next year. We've also submitted to MolDx for IO. So getting both of those will have a nice step-up. We've seen some traction with commercial payers. It's still -- the commercial element of our overall 600 to 700 ASP, the commercial element is still relatively small, but it is increasing. And we have a team that's really focused on expanding their commercial coverage. So I think we feel confident with those steps that can get us to the $1,000.

What percent of Reveal volumes come from breast today?

Well, I mean, if we break that out, CRC, it's about 50% of the volume. And then next is breast followed by lung.

And you mentioned Reveal is currently tracking around 1.7 tests per patient. You have market comps at 4 to 5, I believe, per patient. Which initiatives are you implementing to increase that metric? And what time lines would you put to close that gap?

Yes. We've improved over the 1.7 now with some of the operational machinery we've put into place. A lot of it has to do with logistics around pulling subsequent draws, subsequent orders from those patients. And it's things like off-site phlebotomy, nudges in the portal and being able to essentially prod and prompt both the physicians and patients that there's another test do. And so we've had good success with those measures so far, and we see that continuing to convert volume or orders into volume over time.

How did the Medicare CRC surveillance coverage impact patient starts and I guess, repeat test frequency as well?

Everything has been going up since we got that. So we've been very pleased with the kind of the awareness and the sort of push that was made possible with that coverage.

And I guess beyond what we've discussed, CRC, breast cancer, IO monitoring, which other cancer types are in the reimbursement pipeline? And how do you prioritize which indications to pursue next?

Yes. A lot of it is dictated on maturity of the cohorts that we have for other indications. I think we talked about a couple of years ago, I think we have like something like 12 to 15 tumor types that we're working on in terms of cohorts and samples and testing. And I can tell you that we're making a lot of progress with those tumor types. So hopefully, we'll be able to update everyone around some of that progress soon.

And which smart liquid biopsy capabilities are you planning to incorporate into Reveal just to further differentiate that offering?

Yes. I mean I think some of the exciting things are the ability to essentially monitor toxicity of drugs. When you think about some of these drugs, they're -- unfortunately, they have high liver toxicity, cardiotoxicity, other organ issues. And so I think when we think about where Reveal is going, we see a test that right now, people are doing the apples-to-apples comparison in terms of just detecting tumor burden and sensitivity and specificity. But we believe that Reveal could eventually become a test that is much more holistic in terms of really monitoring the health of the patient in a much more complete way. And so it really becomes a sort of different kind of test than exists in the market today. And the nice thing about how Reveal works is that it is very synergistic because it's built on the same railroad tracks as Guardant360. And so when someone has a positive test, we can easily essentially cascade them to a Guardant360 test and vice versa. So they work very nicely with one another.

And it's gross margin positive Reveal for the first time. What are the plans to further reduce costs while scaling volume? And what's a reasonable kind of midterm, 2-, 3-year target for the gross margin there?

For Reveal, yes, I mean, we've made significant progress in the COGS over the last 12 months. A year ago, cost per test was over $1,000. Now it's under $500. And that's been driven really by workflow improvements, reducing the sequencing costs quite dramatically. I think -- two things going forward can really help Reveal. One is going to be volume. So I think, yes, volume continues to ramp up, that's going to have an impact. And then secondly, automation. It's something we talk about a lot with Shield. We're investing heavily in automation with Shield. We've got a very experienced team who've built large volume, large-scale labs in the past with automation. So we're planning to put that in place first with Shield, but then that automation is easily transportable to Reveal. And so I think that can also drive down. So our long sort of 2028 target for Reveal COGS of $400 per test. We feel confident that we can at least get to that and if not, further lower the cost. And that would mean if we've got a $1,000 ASP in 2028 and $400 COGS, of course, 60% gross margin. So we feel we're well on track, both on the ASP side and the cost per test side to get to that 60%.

Obviously, strong -- across the board, strong oncology growth this year expected to hit that 20% mark. How sustainable is that revenue growth as we look to 2026 and beyond? Again, high level, you can hit it however you want.

Do you want that?

Well, yes, I mean, we feel -- I think we've talked about a lot of the drivers. I mean, ASP, we think we've got ASP upside from where we are now across the portfolio. We've not talked much about Tissue, but I think, again, that we've reached a $2,000 ASP. We think there's a lot more room and a lot additional increase that we can get on that ASP. So I think across Guardant360 Liquid, Tissue and Reveal ASP is going to be one of those drivers. And then again, with smart liquid biopsy with the opportunity for monitoring with Guardant360 Liquid, I think with Tissue with an upgraded test now with a best-in-class test and still a relatively small market share. We feel we've got a lot of opportunity ahead of us to grow that. And I think, again, we talked about Reveal, and we think it's still early days, indication expansion and just driving the commercial execution on Reveal. So we feel we're well set up for continued growth over the long term with oncology business.

I didn't want to ignore the biopharma and data business. I think you raised expectations there as well. So maybe just give us the overview of what you're seeing and how sustainable you think those levels of growth are?

Yes, it's been really exciting to see a lot of our partnerships with the biopharma companies we've been working with, really grow into more of a strategic sort of nature where we're working not just with single programs, but working across a large swath of their development and research portfolio and really helping with optimization of some of the assets in the portfolio in terms of scaling certain arms or -- failing certain arms. And a lot of it has to do with the fact that Liquid is just so easy to basically use to both characterize patient disease, monitor patient disease, monitor whether the drugs are working. But I think even more excitingly is really the smart liquid biopsy aspect, the epigenetics aspect where -- which is allowing us to essentially -- and allowing them to view the disease with an entirely different lens that allows them to give sort of a little bit more ability to kind of decide, is this drug really working? How is it working and really understand the functionality and mechanism of action of some of these therapies. And so that has been really exciting. I think we're just at the really early innings of using that technology to its fullest with biopharma. The other sort of driver has been international aspect of biopharma. The China business has been very strong for us, and I think will continue to be a nice sort of driver of business in the coming years.

And how do you think about that trade-off between investing for growth, but also wanting to scale a profitable cash-generative company? I mean, again, this isn't a new story, still waiting for that consistent operating profitability. So just talk us through how we should be expecting the next few years to play out and when we can start seeing that consistent cash generation come through.

Yes. I mean it's obviously something we're very focused on. It's definitely a balancing act on reinvesting for growth as well as driving to profitability. We set a target of -- by the end of 2028 to be cash flow breakeven across the whole company. I think we're making really good strides to get there. If you look at the business, excluding screening, we're closing in on being cash flow breakeven. We expect to be there -- we're very confident we'll be there by the end of this year. And then following that, that business, excluding screening again, is going to start to generate positive cash flow. And so we want a lot of that incremental gross profit to be dropping down to the bottom line. Screening is a little bit different. We're in an expansion phase at the moment. We're reinvesting all of that incremental gross profit into the commercial build-out. That's going to take a couple of years. We're going as fast as we can. We expect similarly in '26, we'll have a similar level of burn. But I think we expect by 2027, when we built out that commercial infrastructure to such a level of scale, then we'll see an inflection point, and we'll start to see the burn on screening rapidly come down. So yes, we're sat here really pleased with how the business is performing and feeling very confident to get to that breakeven at least by end of 2028.

Great. One more and we've got to be quick. What's something you wish investors paid more attention to or ask you more about? I'll leave that open to anyone.

Yes. I think it's really like looking at where the puck is headed in all of our businesses. We think about liquid CGP going from one test maybe per lifetime to multiple tests. Same thing in terms of MRD, where the sort of puck is going to be in terms of the huge opportunity around Tissue free. And then certainly, in screening, when you think about going from single cancer to multi-cancer to maybe even more with this sort of amazing vehicle we have called Shield. So I think as exciting as the present is, the future is probably 10x more exciting in terms of where we can go with this platform.

Great. Helmy, AmirAli, Mike, thank you so much.

Thank you.