Guardant Health, Inc. (NASDAQ:GH) Q2 2023 Earnings Call Transcript

Guardant Health, Inc. (NASDAQ:GH) Q2 2023 Earnings Call Transcript August 3, 2023

Guardant Health, Inc. misses on earnings expectations. Reported EPS is $-0.67 EPS, expectations were $1.25.

Operator: Hello, everyone, and welcome to the Guardant Health Second Quarter 2023 Earnings Call. My name is Emily, and I’ll be coordinating your call today. [Operator Instructions]. I’ll now turn the call over to Investor Relations. Please go ahead. Thank you.

Carrie Mendivil: Earlier today, Guardant Health released financial results for the quarter ended June 30, 2023. Joining me today from Garden are Helmy Eltoukhy, Co-CEO; and AmirAli Talasaz, Co-CEO; and Mike Bell, Chief Financial Officer. Before we begin, I’d like to remind you that during this call, management will make forward-looking statements within the meaning of federal securities laws. These statements involve material risks and uncertainties that could cause actual results or events to materially differ from those anticipated. This call will also include a discussion of non-GAAP financial measures, which are adjusted to exclude certain specified items. Additional information regarding material risks and uncertainties as well as reconciliation to most directly comparable GAAP financial measures are available in the press release Guardant issued today as well as in our Form 10-K and other filings with the SEC.

Guardant disclaims any intention or obligation to update or revise financial projections and forward-looking statements, whether because of no information, future events or otherwise. The information in this conference call is accurate only as of the live broadcast. With that, I’d like to turn the call over to Helmy.

Helmy Eltoukhy: Thanks, Carrie. Good afternoon, and thank you for joining our second quarter 2023 earnings I will start off our call today with our top line results for the second quarter and go into more detail on our progress in therapy selection and MRD. I will then turn the call over to AmirAli for an update on end finally, Mike will provide a more detailed look at our financials and outlook for the remainder of 2023. Starting on Slide 3. At Guardant, we are singularly focused on our mission to help patients across all stages of cancer live longer and healthier lives with the data provided from our powerful blood tests. In line with this priority, we will start our call up by sharing patient story. In September 2021, a 56-year-old woman had a colonoscopy that revealed colon cancer.

She then had curative intent surgery, which removed 32 lymph nodes. Pathology indicated a diagnosis of stage 2 colorectal cancer with no evidence of disease in the removed lymph nodes as well as negative margins on the reception. With this information, her oncologist determined there was a low risk of recurrence and chose not to administer adjuvant chemotherapy. At a checkup 3 months post surgery, a CEA test was drawn and showed normal results. At our next 3-month check-in, her CEA doubled, but was still within normal limits. The patient requested that her oncologists order a Guardant reveal test. The results were positive for cTDNA and as a result, her oncologists put her back on chemotherapy. Since then, she has had 2 consecutive follow-up reveal tests showing here to be ctDNA negative.

And today, she is fortunately showing no evidence of disease. This story highlights the power of our test to provide meaningful decision support to oncologists and patients earlier in the cancer journey in the MRD setting. Guardant is the liquid biopsy industry leader in therapy selection, giving us a strong foundation in cancer patient care. From this foundation, we are building out our pipeline of multibillion dollar opportunities in MRD and screening, which we believe will lead to a step change in the magnitude of impact we can have when patients lives. Turning to top line performance on Slide 4. We had another very strong quarter with revenue growing 26% to $137.2 million. This robust growth was driven by Precision Oncology revenue, which increased 36% in the quarter.

I am really pleased by the great progress that we continue to make in our therapy selection business, that illustrates we are still in the early innings of its uptake with much more growth ahead. Turning to Slide 5. Indeed, our team delivered strong growth across oncology surpassing 50,000 combined tests during the quarter. Clinical test volume during the second quarter reached 43,500 tests, an increase of 49% from the prior year quarter. Clinical growth was driven by strong contributions from our key products, supported by a robust commercial platform. For biopharma, we delivered 6,700 tests, increasing 12% year-over-year. Turning to Slide 6. Looking more closely at the growth drivers for our therapy selection clinical volume. We continue to benefit from the tailwinds we saw at the beginning of the year with strong growth with continued strength of our high performance and rapid turnaround Guardant360 test.

In breast, fueled by a recent Guardant360 CDx approval for ESR1 mutation positive patients and in tissue aided by our AI powered Galaxy Suite. As a reminder, we introduced the Garden Galaxy Suite of advanced AI analytics for digital pathology applications in partnership with to enhance our portfolio of cancer tests starting with the tissue net CDL1 some to improve biomarker detection by more than 20% in non-small cell lung cancer. For MRD, Reveal continued to do well, and we again saw strong volume growth of greater than 100% year-over-year. We are also making excellent progress in our clinical data pipeline for Reveal and look forward to sharing more about this at our upcoming Investor Day. Our team has worked incredibly hard to establish Guardant as a leader in liquid biopsy.

We have made critical investments into our commercial infrastructure that are now paying dividends. We lead the market in share of voice and overall satisfaction with customer experience. To that end, we have finished development and begun integration with the top 3 oncology EMR providers in the United States. These providers selectively cover nearly 2/3 of all oncology practices the country. As expected, we see strong increases in ordering volumes once a particular account is able to order our tests through their EMR system. As we continue to broaden our customer base, we look forward to driving further increases in volumes across our product portfolio within such accounts. Moving on to Slide 7. We had some big breakthroughs in payer coverage during the past quarter that will provide tailwinds for our clinical business in the near term.

Since our last earnings call, we secured coverage from Anthem, Blue Cross Blue Shield, Aetna and Humana for our Guardant360 test. These tests are now covered for comprehensive genomic profiling by all major U.S. commercial health insurers with over $300 million of covered lives. We are also making good progress on increasing covered lives for newer products in our portfolio. For example, with Tissue Net, we are approaching 200 million covered lives and hope to cross this threshold later this year. We also recently received our first commercial coverage for Garden Reveal. Blue Cross and Blue Shield of Louisiana is providing coverage for Garden Reveal for individuals with Stage 2 or Stage 3 colorectal cancer after period including surgery. This is a major milestone for patients.

This is the first time a liquid only MRD test has been granted reimbursement coverage by a private payer to inform physicians decision about post-treatment therapy and to monitor for disease progression, recurrence or relapse. Importantly, this coverage provides broad access for CRC patients at Stage 2 or 3, which amounts to a significant number of tests for patients across the adjuvant and surveillance settings in line with NCCN monitoring guidelines. On to Slide 8. Outside of the United States, we are continuing to make progress on our strategy of achieving global scale with a focus on large core markets. Most notably, we recently received national reimbursement approval from the Japanese Ministry of Health, Labor and Welfare for Guardant360 CDx, which became effective at the end of July.

Japan currently represents the largest expansion opportunity for our portfolio of products outside of the United States. There are more than 390,000 — from cancer each year in Japan and more than 1 million new cancer cases annually. And despite this large population, CGP testing is still in its very early option with currently about 25,000 CGP tests performed annually and only 15% to 20% of that in blood-based testing. In addition, Japan has focused centralized care with about 250 core genomic hospitals. Importantly, Japan is a single-payer health care system, and we received pricing better in line with our U.S. ASP of $2,600 to $2,700. With this pricing, we expect our clinical testing for Japan to have positive margins and contribute to our therapy selection business, reaching breakeven by the end of the year.

This reimbursement decision represents a significant milestone for our international business. We are encouraged by the strong support we have received from oncologists in Japan, and we look forward to furthering these partnerships as we continue our commitment to democratize assets to precision oncology and bring blood-based component of genomic profiling to patients and care teams across the region. Beyond Japan, we are also very excited about our oppurtunities in the U.K. and China, and we look forward to providing updates on our progress across our international business in the future. With that, I will now turn the call over to AmirAli to provide an update on our screening business.

AmirAli Talasaz: Thanks, Helmy. Turning to Slide 9. We are continuing to make advancements in our screening business as we spread had a new patient preferred category in the screening market with our shale blood tests. We are making steady progress with the FDA review of our PMA package for Shell, and we are pleased with the recent successful preapproval inspection by the agency. We continue to expect FDA approval and the launch of SHIELD IVD in 2024. Turning to Slide 10. We continue to believe that SHIELD will transform CRC screening and result in more life –. We have developed and validated a discrete event simulation model, integrating real-world magnitudinal adherence rates evaluate the effectiveness of SHIELD relative to existing screening modalities.

At the conference in late June, we presented the initial results from our health outcome modeling. This model examining the simulation of average risk U.S. adults receiving a SHIELD screening test every 3 years. On the left, we see the health outcomes over a lifetime horizon when assuming real-world adherence to different screening modalities. LifeHear’s gain for SHIELD was 217 with 820 total colonoscopies while the life years gain for other modalities was in the range of 126 to 255 with 126 to 1,996 total colonoscopies. This initial data shows for SHIELD, the life years gained versus the number of colonoscopy is in range, even favorable compared with other guideline recommended tests. At Guardant, it is in our DNA to stay at the forefront of innovation.

With Guardant360, we launched the best-in-class liquid biopsy and have maintained our market leadership continued performance enhancements. We are taking the same approach with SHIELD. We are confident that the performance of current version of SHIELD exceeds the bar for approval guideline inclusion and reimbursement, but this is just the beginning for what SHIELD can offer. Since we filed our PMA with the FDA, we have made progress developing a more sensitive next-generation SHIELD powered by data and clinical insights gathered from early-stage GRCs, including Stage 1 Maligan polyps. We look forward to sharing more later this year. Moving on to Slide 11. At Guardant, we have always had a vision for blood-based multi-cancer shrinking. We started with CRC as the first indication for SHIELD because of the established pathways for FDA approval and reimbursement, which allow for broad access.

We are planning to add lung cancer as the second indication. is the leading cause of cancer-related mortality. There are about 15 million high-risk eligible for lung cancer screening. However, the overall screening rate is less than 15% due to the complexity of guideline recommended screening modality and significant follow-up requirements. This is where the value of our differentiated blood-based test comes into play. We are pleased with our progress in our NCIRE study. We are also making good progress on recruitment for our pivotal SHIELD LUNG study and have surpassed 6,000 patients in row. Beyond line, we plan to add a large panel of cancers, all to the same time. As a reminder, we are committed to an operating loss from our screening pipeline of less than $200 million for the next 12 months.

This will fund our top priorities in screening and set us up to achieve our upcoming milestones. With that, I will now turn the call over to Mike for more detail on our financials.

Michael Bell: Thanks, AmirAli. Turning to Slide 12 to review our financial results. Total revenue for the second quarter of 2023 grew 26% to $137.2 million compared to $109.1 million in the prior year quarter. Total precision oncology testing revenue for the second quarter was $125.2 million, increasing 36% compared to $92.1 million in the prior year quarter. As in previous quarters, this increase was driven by strong year-over-year growth in clinical and biopharma volumes. Precision oncology revenue from clinical tests in the second quarter totaled $100.2 million, up 42% from $70.5 million for the prior year quarter. Second quarter clinical test volume was 43,500, an increase of 49% from the same period of the prior year and an increase of 11% or 4,400 tests from Q1 2023.

With Guardant360 continues to be the main revenue driver with continued strong growth in lung cancer and a significant uptick in breast cancer. We again saw very strong year-over-year volume growth in both Reveal and TissueNext both growing over 100%. Second quarter Guardant360 ASP continues to be at the upper end of our target range of $2,600 to $2,700. As Helmy mentioned, we had some big breakthroughs in coverage during the past quarter. While this additional coverage will provide tailwinds for our clinical business in the near term, we expect, however, that it will take some time for these upsides to flow through to our clinical ASP due to the length of time it takes to contract with insurers. Blended clinical ASP was approximately $2,300 in line with our expectations.

As a reminder, lending clinical ASP will continue to be influenced by both the volume mix between Gardant360, TissueNext, Reveal and response as well as the mix of overall clinical volume between U.S. and international. Precision oncology revenue from biopharma tests in the second quarter totaled $25.0 million up 16% from $21.6 million for the prior year quarter. Biopharma test volume was strong, with second quarter totaling approximately 6,700 tests, up 12% from the prior year quarter. Biopharma ASP in the second quarter was approximately $3,700, which was higher than both last quarter at $3,550 and the prior year quarter at $3,600 due to the product mix. Development Services and other revenue for the second quarter totaled $11.9 million, down $5.2 million or 30% from the prior quarter.

This was primarily due to the timing and amount of milestones related to our partnership agreement and the change in companion diagnostics collaboration projects with biopharma customers. Gross profit for the second quarter of 2023 was $83.3 million compared to a gross profit of $72.4 million in the same period of the prior year. Gross margin was 61% compared 66% in the prior year quarter. The change in gross margin was driven by a number of factors. For Precision Oncology, gross margin was 61% in the second quarter of 2023 compared to 63% in Q2 2022. This reduction was due to the change in mix between clinical and biopharma revenue with clinical revenue growing faster than biopharma revenue as well as the year-over-year change in blended clinical ASP from $2,400 to $2,300 due to the increased proportion of clinical volume coming from Reveal, TissueNext and Response.

Development Services and other gross margin was 62% in the second quarter of 2023 compared to 86% in Q2 2022. The change in margin was primarily due to the cost of processing Shield LDT samples as part of our market development activities for which we are currently booking minimal revenue. We continue to expect overall gross margin to be approximately 60% for the full year 2023. Operating expenses for the second quarter of 2023 returned $202.9 million compared to $202.7 million in Q2 2022. Net loss was $72.8 million or $0.67 per share for the second quarter of 2023 compared to $229.4 million or $2.25 per share in the second quarter of 2022. The year-over-year reduction in net loss is primarily due to Firstly, our loss from operations reduced from $130.3 million in Q2 2022 to $119.6 million in Q2 2023.

Secondly, in Q2 2022, we booked another expense of approximately $100 million to reflect the increase in the fair value of the outstanding shares in our EMEA joint venture, which we acquired in June 2022. Finally, in the second quarter of 2023, we recorded a $64 million unrealized gain related to our strategic equity investment in Lunit, our AI partner for TissueNext, which had its IPO in Korea last year and has seen a substantial increase in its share price over the last few months. Moving on to non-GAAP financial measures on Slide 13. Non-GAAP operating expenses were $180.5 million for the second quarter of 2023, a 2% increase from $176.2 million in the prior year quarter. Non-GAAP net loss was $88.7 million or $0.82 per share for the second quarter of 2023 compared to $101.8 million or $1.00 per share for the second quarter of 2022.

Adjusted EBITDA was a loss of $85.2 million in the second quarter of 2023 compared to $94.3 million loss in the second quarter of 2022. Free cash flow for the second quarter of 2023 was negative $100.5 million compared to negative $135.0 million in Q2 2022. We continue to make very good progress in diligently managing our operating expenses and cash burn and we are confident that we will achieve our stated goal of lowering our full year operating expenses compared to 2022 as well as reducing our free cash flow to approximately negative $350 million for the full year. Turning to Slide 14. In May, we completed a successful equity offering where we raised $381 million in net proceeds. This puts us in a very strong position with approximately $1.2 billion of cash, which provides the runway to reach cash flow breakeven, which we are targeting in 2027, ’28, 1 to 2 years following shield inclusion in CRC screening guidelines.

As we look ahead, we are still on track to achieve cash flow breakeven in therapy selection within the next 3 to 6 months. We’ll be able to achieve this milestone as we are now gaining significant leverage from the investments we’ve made over the last few years to scale our core therapy selection business across commercial, lab and back office operations, and as we’ve been able to maintain high volume growth and consistently strong ASPs and gross margins for Guardant360. MRD spend will continue to be focused on increasing our market penetration, our technical platform upgrade and developing clinical data to support reimbursement coverage. However, we are confident that the total investment in MRD across the next 5 years can be [indiscernible] from the total contribution generated from therapy selection and from increasing Reveal revenue driven by reimbursement coverage.

For screening, we anticipate that the operating loss from our screening pipeline will be approximately $200 million per year over the next 5 years. Over the next 12 months, we will be ready for the SHIELD IVD launch upon successful FDA approval to deliver the next generation of SHIELD with potentially even better early-stage performance and make significant progress on indication expansion to lung and other centers. Investments beyond this will be contingent upon receiving FDA approval and engaged by ongoing commercial success and revenue milestones. Now turning to our outlook for the full year 2023 on Slide 15. We are raising our full year 2023 revenue guidance and now expect revenue to be in the range of $545 million to $558 million, representing growth of approximately 21% to 22% compared 2022.

This compares to our previous expectation of $535 million to $545 million. This update reflects the very strong performance of our clinical business in the second quarter. For the remainder of the year, we expect to see a sequential decline in Development Services and other revenue in Q3 due to the timing of project milestones and declining role [indiscernible]. So for the fourth quarter, we expect to see a seasonal uptick in biopharma volume that we’ve historically seen towards the end of each year. Finally, as just mentioned, we continue to expect 2023 operating expenses to be below full year 2022 and free cash flow to improve to be approximately negative $350 million in 2023 and to consistently improve in the following years. Turning to Slide 16.

Our long-term vision is to transform cancer diagnostics through cutting-edge technology, a focus on high-impact opportunities and consistent execution. In the second quarter, we were very pleased to achieve major reimbursement milestones, obtaining national reimbursement coverage for Guardant360 in Japan, and our first U.S. commercial reimbursement coverage Guardant Reveal. Finally, turning to Slide 17. We’ll be hosting our first Investor Day on Thursday, September 7 in New York City. We look forward to sharing the deeper dive across our business. Please reach out to investors@guardanthealth.com for more information. At this point, we’ll now open the call up to questions.

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Q&A Session

Operator: [Operator Instructions]. The first question today comes from the line of Jack Meehan with Nephron Research.

Jack Meehan: I wanted to ask about — so the clinical volume really showed strong momentum this quarter. Is it possible to call out seeing high cancer indications like breast cancer with the CDx approval versus lung or others?

Helmy Eltoukhy: Yes, it’s a great question, Jack. Yes, we’re seeing, I think, really strong growth across multiple indications. And I would say that it’s both lung and breast that are carrying the momentum we started from the beginning of the year. I think we’re just seeing further consolidation behind our product, given the leading turnaround time and leading performance we have with lung, which really does have the product market is good. We see that we’re probably testing more lung cancer patients in the United States in the metastatic setting with MGS and really any other modality, tissue or liquid. It’s really a great place to be, and I think we’re just seeing continued momentum there. And then obviously, with the breast [indiscernible] drug approval, we’re continuing to see a nice volume lift.

Breast has really taken sort of swing up. In terms of volumes, we’re doing a very large percentage of metastatic breast cancer patients now in the United States. We’ve really been pleased by the progress we’ve made there, but the growth is just not limited to the indications we’ve seen it across the word.

Jack Meehan: Great. And then a follow-up for Mike. On the clinical ASP, I know you said the G360 towards the top end, 2,600, 2,700, I was wondering if there were — we’ve heard one other lab that reported tonight talk about some claims issues with some Blues plans. I heard others talk about payment integrity I was wondering if maybe you’re seeing incremental traction with some of the new coverage, but were there any headwinds that are kind of keeping it within the range versus above the top end?

Helmy Eltoukhy: Yes, Jack. No, there’s no headwinds that we’re seeing with payers, and we’re not seeing any sort of negative traction with any payers. I think we definitely had tailwinds with respect to future ASPs. We’ve gained coverage now from these major payers in the last 3 months. And I think Yes, we’ve been at pains to sort of point out that even though we’ve got the coverage, it’s just going to take time to see that coverage come through to ASPs because we need to go through the contracting phase, and then we need to start to see the sort of new rates come through from this pace. So we’re confident that over time, ASPs will continue to track upwards and potentially beyond that range that we’re currently in. But yes, it will just take time.

We’ve not seen it now. And maybe just to add, for the remainder of the year, we’re still sort of forecasting within this rates. So if things were to happen quicker than expected on the contract inside with the payers, we could have some upside there. But we are so far things are steady.

Operator: Our next question comes from the line of Puneet Souda with Leerink Partners.

Puneet Souda: So first 1 on Reveal. Wondering if you can provide any context around contribution in the quarter? What are you within the guide for the full year? And is there any update on upgrade of the assay because obviously, the upgrade of the assay then drives to the common MRD LTV that is out there. Maybe just if you could outline the sort of the time line on that? And then I have a follow-up on FDA primarily.

Helmy Eltoukhy: Take the first part of analysis.