G(rowt)H

Investment Analysis Clubs Saul’s Investing Discussions
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Last quarter GH grew revenue 178%. This quarter quarter 180.3%.

With massive growth in clinical oncology testing.

Recent Highlights
• Total revenue for the third quarter of 2019 was $60.8 million, a 181% increase over the third quarter of 2018
• Reported 13,259 tests to clinical customers and 5,280 tests to biopharmaceutical customers in the third quarter of 2019, representing increases of 89% and 111%, respectively, over the third quarter of 2018

And check this out. You are reading correctly. Gross profit increased 3.6X

Gross profit, or total revenue less cost of precision oncology testing and cost of development services, was $42.3 million for the third quarter of 2019, an increase of $30.7 million from $11.6 million for the corresponding prior year period. Gross margin, or gross profit divided by total revenue, was 70% for the third quarter of 2019, as compared to 54% for the corresponding prior year period. These results are inclusive of the benefits from the $5.5 million of appeals revenue.

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Hey Darth,

I’ve owned GH about a year now and they have been great! Even with the price 30% and change off their highs. Since last year, they have continued great progress with the testing, completed the NILE trial successfully, and continue progress with Lunar I and II.

Also to note with the release:

Initiated ECLIPSE, a large-scale registrational study designed to support the performance of the company’s LUNAR-2 blood test in colorectal cancer screening in average-risk adults

• Submitted Premarket Approval Application package for Guardant360 to the U.S. Food and Drug Administration

• Launched CLIA-version of the LUNAR Assay for use in prospective clinical trials

I know there is competition in the works, but they seem to me to be way behind.

Best,
Matt

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The ECLIPSE study could help set the stage for a huge long term opportunity for Guardant. The Guardant blood test will be used in conjunction with a colonoscopy (The current test) to check for colon polyps or signs of colorectal cancer. For those of us over 50, this is an incredibly important test that every adult needs to have every couple of years as colorectal cancer is treatable but only if caught early. Unfortunately colonoscopies are inconvenient and most adults either put it off or avoid it altogether. As a result many times the cancer is only discovered in advanced stages or spread to other organs. A simple blood test to detect cancer would help prevent what is the 3rd most leading cause of cancer. It’s also a test that all adults would probably need multiple times as they grow older, especially if you have risk factors like family history, etc.

If The ECLIPSE study successfully shows that the LUNAR-2 test detects cancer at comparable levels to the colonoscopy then it could set the stage for a massive new opportunity for Guardant. Patients will flock to a much less intrusive replacement for the colonoscopy and Insurance companies will be happy to swap out an expensive procedure performed under anesthesia for a simple outpatient blood test(Post FDA approval). This is just one use case but it’s a massive opportunity. It looks like this is a two year study so results not likely until down the road, but it speaks to the multitude of opportunities for Guardant and the other companies in this space. This is in addition to other use cases that they’re already pursuing for their liquid biopsy tests.

Apologies in advance to any doctors on this board for potential mangling of medical information but my info comes from a family member who’s a medical writer. She covers cancer research meetings and has written about breakthroughs in liquid biopsy tests. I told her about my GH investment and she said the sky is the limit for this company.

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The biggest point of colonoscopy is to detect tumors while they are still in the pre cancerous stage. Polyps.Adenomas. Apparently a series of mutations is needed to turn a small polyp into cancer. You want them removed at this pre-cancer stage.
Does the Guardant test detect them at this early stage, when they can be easily snipped off during the colonoscopy? Does it detect them better or earlier than a test for blood in the stool?
If you don’t have any polyps you don’t need a colonoscopy more than once a decade .
https://choosingwiselycanada.org/colonoscopy/ .

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Well Exact Sciences is going gangbusters off the back of colon testing.

https://seekingalpha.com/pr/17679084-exact-sciences-reports-…

They are nearly at $1bn run rate and growing 85%.

Presentation on the market and performance is here:-
https://seekingalpha.com/article/4300105-exact-sciences-corp…

Ant

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The biggest point of colonoscopy is to detect tumors while they are still in the pre cancerous stage. Polyps.Adenomas. Apparently a series of mutations is needed to turn a small polyp into cancer. You want them removed at this pre-cancer stage.
Does the Guardant test detect them at this early stage, when they can be easily snipped off during the colonoscopy?

I recently had my first colonoscopy. My doc said that 1/3 of people have polyps at age 50. He said that colon cancer is preventable and he told my that all polyps will eventually become cancerous (I read somewhere else that not all polyps become cancerous so one of these sources is incorrect). The polyps are removed during the colonoscopy procedure (no separate procedure for removing the polyps). A positive blood test would then still require a colonoscopy as a second step to remove the polyps. But, the key question was asked by Mauser: does the blood test detect the polyps? Which test (colonoscopy or blood test) will detect the pre-cancerous polyps sooner? That’s the test that I would want. And I wouldn’t want any blood test that could have a false negative result. In my case, there were no polyps so they told me to come back for another colonoscopy in 10 years. BTW, I felt no discomfort from the procedure; the worst part of the 100% liquid diet (essentially no food for a day) the day before the procedure.

Chris

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With an ageing population this has to be a growth opportunity. I remember a former colleague moving back to New Zealand and searching for property - he’s a bit of serial real estate investor/speculator. When he was researching property in Auckland apparently the highest value and highest yield opportunity he came across was investing in a property that was converting its land use designation from residential to commercial and establishing a single focus colonoscopy clinic. It was targeting a yield of 20% annual RoI - short of turning it into a crack house I can’t think of many ways to generate these returns from residential real estate that is already at the peak of its particular cycle if not a full on bubble.

My understanding is that Exact Sciences has become the de facto leader in colon testing. Guardant liquid biopsy has its work cut out (no pun intended) to meet Exact’s clinical performance and apparently Guardant’s success in the colon space lags a couple of emerging competitors. Still GH seem to be able to be very successful at turning trial data into regulatory standard submissions.

Ant

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My doc said that 1/3 of people have polyps at age 50. He said that colon cancer is preventable and he told my that all polyps will eventually become cancerous (I read somewhere else that not all polyps become cancerous so one of these sources is incorrect).

It’s kind of semantics. A polyp is an abnormal growth of cells. Somewhere up the line a cell sustained a mutation that allowed it to grow when it wasn’t supposed to grow – hence the polyp forming. If that happens, and a cell keeps dividing, it will eventually sustain a second mutation that allows it to invade other tissue and become cancer. But that assumes the polyp continues to live indefinitely. The vast majority of polyps do not become cancerous because its host dies before it has a chance.

Your doctor could have said “theoretically all polyps will become cancerous but more likely you’ll die before it does” that doesn’t exactly get you to come back for your follow up, doesn’t validate the colonoscopy procedure, nor is it particularly comforting to the patient.

Which test (colonoscopy or blood test) will detect the pre-cancerous polyps sooner?

There isn’t really a reason to detect a pre-cancerous polyp. Theoretically, if one could detect all cancers with 100% sensitivity, there’d be no reason for a screening colonoscopy. A pre-cancerous polyp is irrelevant. It’s only the cancerous ones that matter. But it’s highly unlikely that any test will be 100% sensitive, so more likely we’ll just waste a bunch of money on two tests (blood and routine colonoscopy) rather than just one.

Exact Sciences is growing very well because its test is perfectly aligned with the interests of the ordering doctors. It gives patients who are otherwise hesitant about colonoscopy a push to actually go through with the procedure, so gastroenterologists would love to have everyone do it. If used as indicated, it only increases the number of procedures for those doctors, and that’s where a lot of the money is made.

So a blood test can be just as successful since it allows even patients who don’t want to collect their own feces a potential reason to get a colonoscopy. I’m sure we’ll see studies that show a slightly increased benefit to doing blood and fecal testing in addition to routine screening colonoscopies.

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I’ll leave all the work on the health questions to the experts.

For me, the key takeaways are that the Guardant test platform has optionality. It shows promise in several different screening and treatment markets, CRC is just one such market. But this one is the one that will likely be a commercial product in the nearer term.

And then the next and the next. No end in sight.

Again GH platform is not (only) about early detection or screening. It’s a companion to treatment. Analyzing the tumors for specific markers and characteristics to determine the best line of treatment. And then further testing to determine the effectiveness of the treatment. Known as precision oncology which grew even faster than over all at 185%.

So they have optionality in the types of cancers and the types of detection and treatment. It’s why they are just seeing a huge amount of treatment companies entering into huge deals with them for development services from bio pharmaceutical partners. This revenue also increased 156%. This is a lumpier business as they usually get larger lump some payments from the companies and then after certain performance metrics are met they get more. Biopharma uses GH platform development services for “companion diagnostic development and regulatory approval”. Treatments and drugs are being developed specifically with GH platform involved in the treatment process. And also help the companies prove the effectiveness of the treatment for FDA approval. And when those drugs and treatments go to market they do so with a dependence on GH in the diagnosis, treatment, and follow up. That’s powerful stuff.

So guardant has a business to patient business and a business to business business. And a pipeline of dependency on their platform.

Darth

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BTW, I felt no discomfort from the procedure; the worst part of the 100% liquid diet (essentially no food for a day) the day before the procedure.

I don’t think pain or discomfort of the procedure has ever been a big issue. Contemplation of the procedure in advance, possibly. And, as you note, the preparation for the procedure is far from pleasant. The main thing in favor of Cologuard is that people will actually do it instead of avoiding it.

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Exact Sciences is growing very well because its test is perfectly aligned with the interests of the ordering doctors. It gives patients who are otherwise hesitant about colonoscopy a push to actually go through with the procedure, so gastroenterologists would love to have everyone do it. If used as indicated, it only increases the number of procedures for those doctors, and that’s where a lot of the money is made.

About a year ago I declined to do a colonoscopy (not cancer or polyp related). I read one opinion to the effect that colonoscopies kill about as many patients as they save. That being the case, a blood test is the wiser procedure.

Denny Schlesinger

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BTW, I felt no discomfort from the colonoscopy procedure; the worst part of the 100% liquid diet (essentially no food for a day) the day before the procedure.

I don’t think pain or discomfort of the procedure has ever been a big issue. Contemplation of the procedure in advance, possibly. And, as you note, the preparation for the procedure is far from pleasant. The main thing in favor of Cologuard is that people will actually do it instead of avoiding it.

Hi tamhas,

My personal experience is contrary to that. I’ve had colonoscopies every five years for many years. No hesitation. They shoot the rapid and short acting anesthetic in your arm and the nurse says “Count backward from 10.” …I get to 7 and then I open my eyes and ask when are they going to do it. They say, “Oh it’s all finished, you are in the recovery room.”

On the other hand the Cologuard wants you to collect your feces and mail them to the company. Both my wife and I ordered it but then refused to do it. Too yucky.

Granted the prep isn’t fun, but weighing the two procedures, I’d take the colonoscopy any time.

Saul

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HI, Saul-

“Both my wife and I ordered it but then refused to do it. Too yucky”
Agreed. I did the same in 2018 and had my first colonoscopy done a couple of months ago. Another concern I had was that I was dealing with little bleeding from external hemorrhoids at that time, and I was afraid that it may trigger false alarm from the colorguard screening.

If successful, GH will offer a solution superior to both. That will be a huge driver for future growth.

You bought into and exited GH a couple of times. Have the two recent blowout ERs convinced you to consider it again? Do you have any concern on the future of GH, other that it is not a SaaS company?
I could be wrong, I remember you are a retired medical doctor. Correct?

Thanks a lot!

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On the other hand the Cologuard wants you to collect your feces and mail them to the company. Both my wife and I ordered it but then refused to do it. Too yucky.

I’ve used the test and found it anything but yucky. Indeed, I found myself admiring the design of the whole unit for being slick and unobtrusive.

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If successful, GH will offer a solution superior to both. That will be a huge driver for future growth.

I don’t believe there’s any way GH would market its product as superior to colonoscopy. They need gastroenterologists to be on board, and the doctors would not support a test that replaces colonoscopy. Maybe one could argue that it’s better that Cologuard but there’s no reason to compete. Just show they pick up more cancers than with Cologuard and/or colonoscopy alone. It takes many years to study whether early detection makes any difference in clinical outcomes, and by then the money will have been made.

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You bought into and exited GH a couple of times. Have the two recent blowout ERs convinced you to consider it again? Do you have any concern on the future of GH, other that it is not a SaaS company?
I could be wrong, I remember you are a retired medical doctor. Correct?

Hi Klay,
I have decided to read this entire thread through as well as the earnings release and conference call and review my old notes about why I sold out, and think about whether I should reconsider. By the way, even with that 11% or 12% bounce after earnings, it just brought them up to about flat for the week ($71.9 up from $71.4 at the close the week before), and still way, way, way, down from its highs. As far as medicine, I’ve been retired for 23 years and my specialty gave me no knowledge or expertise into what GH is doing anyway. :grinning:
Saul

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I don’t believe there’s any way GH would market its product as superior to colonoscopy. They need gastroenterologists to be on board, and the doctors would not support a test that replaces colonoscopy. Maybe one could argue that it’s better that Cologuard but there’s no reason to compete. Just show they pick up more cancers than with Cologuard and/or colonoscopy alone. It takes many years to study whether early detection makes any difference in clinical outcomes, and by then the money will have been made.

Hey IR:

We did throughly evaluate EXACT colon test on the previous NPI board and the conclusions were that it was clearly inferior to colonoscopy, by both cancer detection rates and precancerous polyp detection rates (especially the latter).

So why has it grown so quickly??? marketing to primary care and gynecologists according to their web site…not gastroenterology doctors. It also must be administered every 3 years vs colonoscopy of every 5-10 years.

So as you say, the GH blood test will likely compete against the EXACT stool test…if even similar detection rates to the stool test…blood test wins…by matter of convenience.

But there are others working on this also:

https://cellmaxlife.com/publications/

If their larger study holds true, it will be an EXACT killer IMO.

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Interesting discussion but how about a “deep dive” of another sort.

Liquid biopsy for early detection is considered the holy grail of sorts for oncology genomics. Which is why Illumina spinoff Grail is so named. GH has the Lunar and Lunar-2 studies in development. If successful those will obviously be huge for them. It’s a real “who knows” right now. It is promising, but entirely speculative, and expensive, for the investment thesis.

Circling back around to something I talked about before here:

https://discussion.fool.com/gh-a-marker-in-the-results-34269315…

This is about companion diagnostic services, CDx.

A little background on companion diagnostic devices, which GH is providing services for on a number of biopharma products in development. The most notable one is the recent deal with AstraZenecs and two of their drugs in pipeline. But there are others as well.

CDx has revenue generating implications for GH at multiple levels. The first is in the development services provided to identify candidates for the treatment development while it is in development. The biopharma conducts liquid biopsy tests to screen potential candidates with GH services, including with 360 and OMNI products. Further tests are required to determine treatment. Further test are required to determine patient progression and to continually tailor treatment. If the treatment is a success further tests are required to detect relapses. And so on. This is still just in the development phase, these treatments haven’t been approved yet.

As we’ll see the story doesn’t end here. These treatments are developed with a dependency on the CDx so that when they are (if they are) approved and put into commercial use, that approval and commercial use are dependent on the CDx used in development of the treatment. Meaning that there is long term commercial revenue potential for these pipelines. GH makes money off the development process and then makes money on any treatments that succeed. They get paid for the R&D of other companies’ products where their products are needed in the final product.

Here is how the FDA defines In Vitro Companion Diagnostic Devices in their regulatory guidelines.

An IVD companion diagnostic device is an in vitro diagnostic device that provides information that is essential for the safe and effective use of a corresponding therapeutic product. The use of an IVD companion diagnostic device with a therapeutic product is stipulated in the instructions for use in the labeling of both the diagnostic device and the corresponding therapeutic product, including the labeling of any generic equivalents of the therapeutic product.
An IVD companion diagnostic device could be essential for the safe and effective use of a corresponding therapeutic product to:
? Identify patients who are most likely to benefit from the therapeutic product
? Identify patients likely to be at increased risk for serious adverse reactions as a result of treatment with the therapeutic product
? Monitor response to treatment with the therapeutic product for the purpose of adjusting treatment (e.g., schedule, dose, discontinuation) to achieve improved safety or effectiveness
? Identify patients in the population for whom the therapeutic product has been adequately studied, and found safe and effective, i.e., there is insufficient information about the safety and effectiveness of the therapeutic product in any other population

https://www.fda.gov/media/81309/download

Some notes from Guardant on Companion Diagnostic Services.

From S-1:

Biopharmaceutical commercial efforts
Our business development team is focused on enterprise selling to biopharmaceutical companies in the United States and internationally. Our strategy with each biopharmaceutical customer is to demonstrate the value proposition of the Guardant Health Oncology Platform and expand its utilization across the organization from early stage research through clinical development to commercialization. Given the broad and differentiated utility of our platform, we believe we can support our biopharmaceutical customers across many applications, including:
• discovery of new targets and mechanisms of acquired resistance;
• retrospective sample analysis to rapidly identify biomarkers associated with response and lack of response;
• prospective screening and referral services to accelerate clinical trial enrollment; and
• companion diagnostic development to support the approval and commercialization of therapeutics.

And from Q1 call:

In terms of a companion diagnostic work, it’s something that I think we’re very encouraged by, obviously, the partnership we have with AstraZeneca around Guardant360, GuardantOMNI. Those are both products that we believe can be really workhorses in terms of finding patients very broadly and universally, both in the clinical development setting, clinical trials setting, as well as in the commercial setting when those drugs are approved. And so we’re having, I would say very many conversations. Our pipeline looks excellent in terms of continuing to add other companion diagnostic markers on to those assays. But – so we do think that will be a continuing, I think, driving force in terms of the – both those assays.

How is the diagnostic pipeline coming along? For starters, and management is clear in this, that due to timing of deals the growth of the development services will be lumpy. But longer term is indicative of the size and number of trials in development on the GH platform.

From Q2 SEC form.

Development services revenue increased to $11.9 million for the three months ended June 30, 2019 from $1.6 million for the three months ended June 30, 2018, an increase of $10.4 million, or 664%. This increase in development services revenue was due to new projects in 2019 and was mainly received from biopharmaceutical customers for companion diagnostic development and regulatory approval services.

Now from Q3:

Development services revenue increased to $8.7 million for the three months ended September 30, 2019 from $3.4 million for the three months ended September 30, 2018, an increase of $5.3 million, or 156%. This increase in development services revenue was due to new projects in 2019 and was mainly received from biopharmaceutical customers for companion diagnostic development and regulatory approval services.

Development services revenue increased to $28.4 million for the nine months ended September 30, 2019 from $7.5 million for the nine months ended September 30, 2018, an increase of $21.0 million, or 281%. This increase in development services revenue was due to new projects in 2019 and was mainly received from biopharmaceutical customers for companion diagnostic development and regulatory approval services.

The point here is that they are seeing explosive growth in this segment, but due to its relative size and timing of deals, will see very lumpy and unpredictable growth. Management said that development services would be heavily weighted to first half due to AstaZeneca deal but that strong growth continued into Q3 due to new biopharma projects entering pipeline.

More importantly is I’d like to know the long term effects for GH if and when some of these therapies go into commercial production. I’d like to know what treatments, if any, have been approved and are currently in commercial use. What kind of revenue on those products does GH see. How far along and what are the prospects of current treatments in development. Is this just more of a speculation play?

But if treatments are developed and enter into commercial application, that is a huge moat. Those products’ regulatory approval and commercial use are dependent on the companion diagnostic GH platform. That would be a huge moat advantage with a pipeline of dependency.

Darth

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Last quarter GH grew revenue 178%. This quarter quarter 180.3%.

Hi Darth,

I thought I should let you know that this is incorrect, and you probably should correct it in your own notes.

They made it clear that Total Revenue included $5.5 million of payments received from successful appeals of payers’ denials of reimbursement for samples processed in 2018. They said that given how long ago the dates of service were, this $5.5 million should not be considered as indicating the level of current revenue (even though GAAP sticks it in this quarter). Adjusting for that, current total revenue was up roughly 152%.

Best,

Saul

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181% was the headline number, so whattdya gunna do? Thanks for pointing that out, Found that buried in the call transcript.

Last Q also had a larger contribution than normal from the AstraZeneca deal. So adjusting for that growth was probably also more like in the 150s. They didn’t specify how much for that one.

They are going to continue to have lumpy quarterly results but full year should come in well North of 120% which will be a 50% acceleration to the 82% they put up for 2018.

Darth

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