Guardant Health Inc

NASDAQ:GH

Earnings Call Transcript 2021-Q1

[Operator]

Thank you for standing by, and welcome to the Guardant Health Q1 2021 Earnings Call. All lines are currently in a listen-only mode. After the speakers' presentation, there will a question-and-answer session. [Operator Instructions]. As a reminder, today's conference is being recorded.

It is now my pleasure to hand the conference over to Carrie Mendivil of Investor Relations.

[Carrie Mendivil, IR]

Thank you. Earlier today, Guardant Health released financial results for the quarter ended March 31, 2021. If you've not received this news release or if you'd like to be added to the company's distribution list, please send an email to Investors at guardanthealth.com. Joining me today from Guardant is Helmy Eltoukhy, Chief Executive Officer; AmirAli Talasaz, President; and Mike Bell, Chief Financial Officer.

Before we begin, I'd like to remind you that management will make statements during this call that are 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.

Additional information regarding these risks and uncertainties appears in the section entitled forward-looking statements in the press release Guardant issued today. For a more complete list and description, please see the Risk Factors section of the company's annual report on Form 10-K for the year ended December 31, 2020, and in its other filings with the Securities and Exchange Commission.

This call will also include a discussion of certain financial measures that are not calculated in accordance with generally accepted accounting principles. Reconciliation to the most directly comparable GAAP financial measure may be found in today's earnings release submitted to the SEC.

Except as required by law, Guardant disclaims any intention or obligation to update or revise any financial projections or forward-looking statements, whether because of new information, future events or otherwise. This conference call contains time-sensitive information and is accurate only as of the live broadcast, May 6, 2021.

With that, I'd like to turn the call over to Helmy.

[Helmy Eltoukhy, CEO]

Thanks, Carrie. Good afternoon and thank you for joining our first quarter 2021 earnings call. Everything we do at Guardant is motivated by our commitment to serve patients. In line with our patient first commitment, I will start off our call today with a patient story.

Six years ago, a 64-year-old man was diagnosed with metastatic colorectal adenocarcinoma and went through numerous therapy regimens and surgeries. In the spring of 2020, his cancer recurred and his new oncologist ordered a Guardant360 test. A BRAF V600 E mutation was identified. It is estimated that this mutation occurs in approximately 8% to 10% of colorectal cancers.

By identifying this actionable mutation, he was able to begin treatment with a combination of targeted therapies of encorafenib plus binimetinib only recently approved by the FDA. Fortunately, the patient responded to the subject therapy. But as we know, tumors are constantly evolving.

After about six months, the patient was showing signs of progression. His oncologist ordered another Guardant360 test with our standard panel that includes tumor mutational burden, or TMB. The second Guardant360 test identified the patient's tumor as TMB high.

A few months earlier, the FDA had approved pembrolizumab for patients with TMB high tumors of 10 mutations per megabase and above. So this finding opened up another therapeutic avenue for this patient. This story highlights how genomic profiling using Guardant360 can keep up with the evolution of a tumor and identify ongoing therapeutic options.

Turning to our first quarter performance. We started the year strong, with revenue growing 17% to approximately $79 million. I am really proud of our team for their continued hard work this quarter, which translated to solid growth in our clinical business as well as progress across our product pipeline.

As expected, we continue to see residual COVID impact at the beginning of the year, but over the course of the quarter as physician offices started to reopen, business improved further. Even with the persistent presence of COVID headwinds, clinical volume grew 21% to record levels of 18,390 tests.

We continue to extend our position as the liquid biopsy leader for therapy selection and there is still a vast amount of greenfield opportunity ahead in this market. The underlying fundamentals of our clinical business are very strong, and we continue to see growth in both new physician adds and repeat orders.

Even with the residual impact from COVID that we anticipate this year, we expect our clinical volume to grow more than 40% over 2020. We also made important progress on the reimbursement front.

At the end of March, CMS confirmed that our Guardant360 CDx test meets the criteria for Advanced Diagnostic Laboratory Test or ADLT status, which is reserved for FDA approved tests as well as for innovative products that provide novel clinical information that cannot be obtained by any other method. With ADLT status, Guardant360 CDx will be reimbursed at a rate of $5,000 for all Medicare patients in line with our internal expectations.

Now moving on to our recurrence monitoring opportunity with Guardant Reveal. We are very pleased with the tremendous enthusiasm we are hearing from oncologists since its launch in mid February. As a reminder, Reveal is the first blood-only liquid biopsy test for the detection of residual and recurrent disease.

With a simple blood draw, the test improved disease management of early stage colorectal cancer patients by detecting ctDNA in blood after surgery to identify patients with a residual disease who may benefit most from adjuvant therapy, and by detecting recurrence months earlier than current standard of care.

We believe Guardant Reveal is truly in a class of its own, with industry leading sensitivity and specificity and an average turnaround time of only seven days compared to other tests that require a tissue biopsy and have turnaround times of four to eight weeks. Much as we saw with the launch of Guardant360, a blood-only solution addresses the significant logistical challenges posed by tissues in this setting.

Today, the standard of care is CEA, a blood test where you get your results a few days later. Importantly, Guardant Reveal fits into an oncologist workflow in the exact same way as CEA is used but gives them extraordinarily better performance. CEA has a sensitivity of 59% with 64% specificity in the surveillance setting versus 91% sensitivity with 100% specificity for Guardant Reveal.

So, they are getting the better product market fit with the benefits of improved performance. It is still early but we are seeing strong uptake from both new users as well as customers that have been using other products on the market and benefiting from the deep relationships we have within the oncology community.

From the onset, we have said that it takes more than just great technologies to drive durable, long-term adoption of new products. This type of sustained growth requires seamless integration into clinical workflows, demonstrated clinical utilities, regulatory approval and broad reimbursement.

As for our work with Guardant360, we are committed to achieving excellence in each of these to ensure that our product drives superior value to the market and maximizes access for patients. We are making great progress in the reimbursement front and are confident we will have Medicare reimbursement in place for Guardant Reveal by end of 2021.

At the beginning of April, the New York State Department of Health Clinical Laboratory Evaluation Program, or CLEP, approved Guardant Reveal for the detection and monitoring of MRD in patients with early-stage cancer. This approval is an important proof point for Reveal and builds on our commitment to improving care for all cancer patients by expanding access to our test through compliance with the appropriate clinical laboratory regulations.

I'm so excited about what is ahead for Guardant and believe 2021 will be a pivotal year for us as we expand our product portfolio and invest across our business to build the foundation for complete cancer testing across the continuum of care. Looking ahead, in our therapy selection business, we will continue to expand the utility of Guardant360 with additional clinical data and broaden use of the test in the molecular response and monitoring settings.

There have been more than 40 publications to date that highlight the utility of Guardant360 in this setting. We have generated data across multiple tumor sites; including lung, breast, gastric and bladder cancers, and multiple classes of therapies, including immuno-therapies that demonstrated detecting Guardant360 test a few weeks after treatment initiation can segment responders versus non-responders.

To that end, a new study recently published in JCO Precision Oncology shows that Guardant360 provides an early indication of treatment response to pembrolizumab-based immunotherapy by detecting molecular response as measured by changes in circulating tumor DNA levels early on.

This study adds to the growing body of evidence showing that our Guardant360 test can effectively measure molecular response, giving clinicians an earlier indication of whether to continue or stop treatment, to explore other therapeutic regimens, or to enroll the patient in the clinical trial.

Monitoring molecular response is an important application of our technology platform that will soon usher in a new era of adaptive management of treatments and disease, all within the reach of any oncologist using a simple blood draw.

We are also looking forward to the upcoming launch of our first tissue product, which we believe will address the unmet need that persists in the therapy selection market today due to the challenges with many of the existing tissue offerings.

In recurrence monitoring, we will continue to drive the adoption of Guardant Reveal just as we did with Guardant360 several years ago, ushering in a new era of precision oncology for earlier stage patients.

And finally in screening, we expect to complete enrollment of our ECLIPSE trial before the end of the year and to begin work in our expansion into other cancers types. To support our ambitious vision, we are continuing to grow our incredible team.

I'm excited to welcome Dr. Craig Eagle who recently joined Guardant as our new Chief Medical Officer. Craig most recently served as Vice President of Medical Affairs Oncology for Genentech where he oversaw the medical programs across the oncology portfolio.

Craig has a wealth of experience driving medical affairs, clinical development and clinical trial operations at leading pharmaceutical companies, and he will undoubtedly make a great impact as we continue to develop and commercialize best-in-class products and scale the company for the future.

With that, I will now turn the call over to AmirAli for more details on our biopharma business and our pipeline activities.

[AmirAli Talasaz, President and COO]

Thanks, Helmy. Our biopharma business as a whole is roughly back in line with the pre-COVID levels, and we are pleased with the progress we have made in Q1. Looking at biopharma samples, as expected, volumes for the first quarter was sequentially down from Q4 levels, but higher than the COVID trough we saw in Q2 and Q3 of 2020. Biopharma sample volumes were 3,522 tests for the first quarter, a decline of 33% from the prior year period.

We continue to serve a growing number of biopharma customers with more than 70 partnerships currently underway. We are supporting an increasing number of studies, and we have a robust pipeline of discussions for future collaborations. However, while clinical trials are picking back up and growing patient volumes are still depressed compared to pre-COVID levels, we continue to impact both prospective and retrospective sample volumes.

Looking at development services, we continue to see strong interest in our companion diagnostic business following FDA approval of Guardant360 in 2020. Development services revenue for the first quarter 2021 grew more than 100% to 14.9 million.

Last week, we announced a strategic collaboration with Daiichi Sankyo to pursue regulatory approval and commercialization of Guardant360 CDx as a companion diagnostic for Enhertu, a HER2-directed antibody-drug conjugate, being studied in the treatment of patients with advanced metastatic non-small cell lung cancer. This further strengthens the importance of comprehensive profiling as more and more biomarkers are being pursued in this disease.

We are also investing in our global companion diagnostic footprint as part of our mission to make CGP broadly available to patients around the world. To that end, we recently received our CIVB [ph] self certification for the EU, and submitted our initial PMDA filing in Japan. Our platform continues to generate data that further demonstrates the clinical utility of our product portfolio.

At AACR, Amgen presented a clinical study that demonstrated how our Guardant360 CDx was effective at selecting patients with KRASG12C who may benefit from treatment with sotorasib. This mutation exists in one out of every eight patients with non-small cell lung cancer. So there is a critical need to improve access to high quality diagnostics and more routine biomarker screening.

Now, turning to Guardant Reveal. Before its launch, ctDNA-based test developed to detect MRD mainly require tumor tissue to identify patient specific tumor mutations. A new study led by Massachusetts General Hospital Cancer Center, which was published in Clinical Cancer Research demonstrated that Guardant Reveal identifies patients most likely to recur with high clinical accuracy.

The integration of cancer-specific epigenomic and genomic signatures allows Guardant Reveal to detect minimal residual disease in early-stage colorectal cancers with industry-leading performance and without the need for tumor tissue.

In the primary landmark analysis, 84 blood samples were taken from the curative intent patient population one month after completion of definitive treatment. In the subset of patients with at least one year of clinical follow up, all patients with detectable ctDNA recurred.

Guardant Reveal sensitivity and specificity were 55.6% and 100%, respectively, for this single time point. By incorporating longitudinal surveillance samples, sensitivity improved to 91%. Tissue dependent MRD tests have previously reported sensitivities of 40% to 50% with a single post surgical blood drop. Interestingly, integrating epigenomic signatures increased test sensitivity by 36% versus just using genomic alteration alone.

Also CEA test, the standard of care in colorectal cancer, did not predict recurrence in this patient cohort. We believe that Guardant Reveal can be a powerful decision-making tool for oncologists managing patients with early-stage colorectal cancer. In addition, our blood-only approach offers a more streamlined workflow and faster turnaround time for clinical decision making.

We remain committed to generating clinical utility evidence based on prospective interventional studies. We are pleased with our progress in multiple studies, including COBRA, Stand Up to Cancer and PEGASUS trials. We continue to believe that demonstrated clinical utility will be the critical component to drive long-term and deep adoption in this space.

Turning to screening and our ECLIPSE trial. We continue to see robust patient enrollment throughout the first quarter. We now have over 180 sites enrolling patients. Overall, we are pleased with our progress and we remain on track to complete enrollment by end of this year.

As we prepare for the readout of ECLIPSE, we are beginning to establish a commercial team engaging industry groups and lay the foundation for a commercial organization to focus on this screening opportunity ahead. In parallel, we are continuing to develop screening data for CRC internally, and look forward to presenting data from our largest early-stage patient cohort to date at ASCO in early June.

We are also looking further ahead to the opportunities beyond CRC. We are starting to plan our next screening clinical study in other cancer types, and expect to share more updates about this in latter part of 2021.

With that, I will now turn the call over to Mike for more details of our financials.

[Mike Bell, CFO]

Thanks, AmirAli. Total revenue for the first quarter of 2021 was 78.7 million, up 17% from 67.5 million in the prior year quarter. This growth was driven by a year-over-year increase in both precision oncology testing revenue and development services and other revenue. Total precision oncology testing revenue for the first quarter was 63.7 million, a growth of 6% compared to $60.2 million in the prior year quarter. Precision oncology revenue from clinical testing in first quarter was 49.8 million, up 31% from $38 million for the prior year quarter.

First quarter clinical test volume was 18,390, up 21% from the prior year quarter. The clinical test average selling price was 2,710 in the first quarter of 2021, up from 2,499 in the prior year period. First quarter 2021 clinical cash revenue of includes approximately $5 million recognized from cash collected for Guardant360 tests performed in prior periods. There are several factors that will impact the ASP of Guardant360 for the remainder of 2021.

Firstly, we will have a positive impact from the new ADLT Medicare reimbursement rate of $5,000 for Guardant360 CDx. As a reminder, the $5,000 Medicare rate took effect on April 1, 2021 and will continue until January 1, 2022 at which time the rate will change to the median private payer rate. However, we continue to anticipate that the April 1 change to the ADLT billing code may have a short-term impact on the processing and payment of Guardant360 CDx by non-contracted private payers, which could offset the positive impact we receive from the increased ADLT Medicare reimbursement.

In addition, we expect the impact on ASP caused by prior period cash collections to start to reduce in the second half of the year, as our revenue recognition becomes more weighted towards test performed in the current period. On the whole, we expect ASP to Guardant360 to average approximately $2,600 for 2021.

Now that it will take time to receive Medicare and private payer reimbursement coverage for newly launched clinical test, such as Guardant Reveal, as a result we expect minimal revenue for this newly launched test in 2021, which in turn and depending on volume could impact the overall clinical ASP.

Precision oncology revenue from biopharma tests in the first quarter totaled 13.9 million, down 38% from 22.3 million for the prior year quarter. First quarter biopharma tests totaled 3,522, down 33% from the prior year quarter. As previously mentioned, biopharma volume is now back of both the lows we saw in second and third quarter of 2020, but we are still facing headwinds with respect to clinical trial patient volumes.

Biopharma tests ASP is 3,944, down 70% from 4,230 in the prior year period, primarily due to changes in the mix of tests performed. Development services and other revenue continue to be a strong growth driver, and in the first quarter totaled 14.9 million, up 106% from the prior year quarter.

Gross profit for the first quarter of 2021 was $49.9 million compared to a gross profit of $47.0 million in the same period of the prior year. Gross margin was in line with our expectations and in first quarter was 63% compared to 70% during the first quarter of 2020. Operating expenses for the first quarter of 2021 were 157.8 million, an increase of 93% compared to 81.9 million in the first quarter of 2020.

Non-GAAP operating expenses exclude stock-based compensation and related employer payroll tax payments, acquisition-related expenses, amortization of intangible assets and changes in fair value of contingent consideration.

Non-GAAP operating expenses for the first quarter of 2021 were 100.7 million, a 52% increase from 65.9 million in the first quarter of 2020. As mentioned during our last earnings call, we expect operating expenses to continue to accelerate in 2021 as we invest in our LUNAR program, ECLIPSE study and other development activities, as well as launch new products and expand our commercial organization based in the U.S. and internationally.

Net loss was 109.7 million or $1.09 per share for the first quarter of 2021 compared to 27.7 million or $0.29 per share for the first quarter of 2020. Adjusted EBITDA was a loss of 45.4 million in the first quarter of 2021 compared to 15.5 million in the first quarter of 2020.

We define adjusted EBITDA as non-GAAP net loss adjusted for interest, income tax, depreciation, amortization and other income and expense. We ended the first quarter of 2021 with $1.9 billion in cash, cash equivalents and marketable securities.

Now turning to our revenue outlook for the full year 2021. We are pleased with our solid start to the year and believe the fundamental drivers of our business to be very strong. However, we are not yet through the global COVID pandemic. As Helmy mentioned, we are still seeing COVID impacts in our clinical business, as some physician offices remain close.

Related to our biopharma business, while clinical trials are picking back up, patient volumes and still depressed compared to pre-COVID levels continuing to impact both prospective and retrospective sample volumes.

Given this backdrop, we continue to expect revenue to be between $360 million to $370 million, representing growth of approximately 27% over 2020 at the midpoint of the range. We also expect clinical sample volume for 2021 to be greater than 90,000 tests, which represents growth of at least 42% over 2020.

At this point, I’d like to turn the call back to Helmy for closing comments.

[Helmy Eltoukhy, CEO]

Thanks, Mike. Before closing, I want to thank our team for their incredible work to bring to fruition the vision we had when we founded Guardant of significantly improving outcomes across the entire continuum of cancer care.

2021 will be a pivotal year for us as we expand our product portfolio and invest across our business to open up the massive opportunity to transform cancer care for millions of patients.

These new products also mark an important inflection point as we begin to transform Guardant from the leading liquid biopsy company to the leading cancer testing company. I’m so excited about what is ahead for Guardant and look forward to updating you on our progress.

With that, we will now open it up to questions.

[Operator]

[Operator Instructions].