There are Motley Fool organizational reasons that I chose not to write up Guardant Health’s first or second quarter results. The stock price’s action has convinced me that it’s time to set aside those reasons and take another close look at the business. GH peaked at ~$180 in mid-February but flirted with double-digit territory in recent weeks, although it’s rebounded some. In this write-up, I’ll present first and second quarter results and provide some analysis about them. Prior to the pandemic, owning Guardant was an easier proposition: the growth in revenue and in number of tests ordered was impressive. The pandemic put a serious dent in growth. As the economy opens more and more but Guardant’s growth seems slow to return, it is fair to question whether that’s a surface dent, or something more structural in nature. Much promise remains, in my opinion. Guardant has an impressive war chest and seems to be taking appropriate steps toward the future. Absent the numbers, though, it is increasingly a “story” stock. We’ll see how the story is unfolding and whether we still think it has a happy ending. Spoiler alert: I think the market is trying to weigh the enormity of the opportunity in front of Guardant against the enormity of the execution risk the company faces trying to fulfill its ambitions. Looking forward, Guardant will report third quarter results on November 4. I also expect to write-up third quarter earnings but, as I’ve noted in the past, The Motley Fool does not obligate me to do so.
Earnings Report Headline Items
First quarter: https://investors.guardanthealth.com/press-releases/press-re…. Motley Fool’s 1Q21 conference call transcript: https://www.fool.com/earnings/call-transcripts/2021/05/07/gu…. Second quarter: https://investors.guardanthealth.com/press-releases/press-re…. Motley Fool’s 2Q21 conference call transcript: https://www.fool.com/earnings/call-transcripts/2021/08/06/gu…. Unless stated otherwise, all italicized quotations are from the Fool transcripts.
[This paragraph is unchanged from last quarter. Please note: GAAP stands for Generally-Accepted Accounting Principles. U.S.-based companies must report GAAP figures. Some companies also report “adjusted” or “non-GAAP” results. Please also note: A “basis point” is one-hundredth of 1%. Language around comparing percentages can be confusing; if operating margin went from 10% to 11%, is that a 1% increase or a 10% increase? Saying that the operating margin increased 100 basis points, however, is unambiguous.]
1Q21 Revenue: $78.7 million; 2Q21 Revenue: $92.1 million These are both record quarterly results. Growth rates have declined since the pandemic hit, but the 2Q21 year-over-year growth rate is a significant improvement over the prior four quarters.
Revenue in $ millions 1Q 2Q 3Q 4Q FY Comments 2017 8.5 10.2 11.1 20.0 = 49.8 2018 16.7 19.4 21.7 32.9 = 90.6 Y-o-Y 96.1% 90.1% 94.9% 64.3% 81.9% 2019 36.7 54.0 60.8 62.9 = 214.4 Early 2Q NILE results published Y-o-Y 119.6% 178.5% 180.5% 91.3% 136.5% 2020 67.5 66.3 74.6 78.3 = 286.7 Pandemic hits U.S. late 1Q20 Y-o-Y 84.2% 22.8% 22.5% 24.5% 33.8% 2021 78.7 92.1 = Y-o-Y 16.6% 38.9% 27.7%
1Q21 Tests: 18,390 clinical; 3,522 biopharmaceutical; 21,912 total
2Q21 Tests: 20,830 clinical; 3,653 biopharmaceutical; 24,483 total
The clinical tests and total tests both set new quarterly records, although the growth rates are impacted by COVID-19. Biopharmaceutical tests, which are largely for patients in clinical trials, have been especially battered by COVID. In his 1Q21 prepared remarks, co-founder and co-Chief Executive Officer (CEO) Dr. AmirAli Talasaz noted that Guardant is involved in an increasing number of studies, but it is patient enrollment that is lagging.
**Clinical** 1Q 2Q 3Q 4Q FY 2015 11,805 2016 18,643 Y-o-Y 57.9% 2017 25,754 Y-o-Y 38.1% 2018 7,027 8,596 29,592 Y-o-Y 14% 14.9% 2019 9,521 11,875 13,259 15,270 = 49,925 Y-o-Y 31% 77% 88.7% 77.6% 68.7% 2020 15,257 13,694 16,950 17,353 = 63,254 Y-o-Y 60.2% 15.3% 27.8% 13.6% 26.7% 2021 18,390 20,830 = Y-o-Y 20.5% 52.1% 35.5% **Biopharmaceutical** 1Q 2Q 3Q 4Q FY 2016 1,830 2017 6,286 Y-o-Y 243.5% 2018 2,505 3,009 10,370 Y-o-Y 67% 65.0% 2019 3,762 5,285 5,280 6,316 = 20,643 Y-o-Y 61% 112% 110.8% 109.9% 99.1% 2020 5,266 2,805 3,071 4,841 = 15,983 Y-o-Y 40.0% -46.9% -41.8% -23.4% -22.6% 2021 3,522 3,653 = Y-o-Y -33.1% 30.5% -11.1% **Total** 1Q 2Q 3Q 4Q FY 2015 11,805 2016 20,473 Y-o-Y 73.4% 2017 31,895 Y-o-Y 55.8% 2018 9,532 11,605 39,962 Y-o-Y 25.3% 2019 13,283 17,160 18,539 21,586 = 70,568 Y-o-Y 94.5% 86.0% 76.6% 2020 20,523 16,499 20,021 22,194 = 79,237 Y-o-Y 54.5% -3.9% 8.0% 2.8% 12.3% 2021 21,912 24,483 = Y-o-Y 6.8% 48.4% 25.3%
1Q21 Average Selling Price (ASP): $2710 clinical; $3944 biopharmaceutical; $2908 total
2Q21 Average Selling Price (ASP): ~$2600 clinical; $3163 biopharmaceutical; $2915 total
Chief Financial Officer (CFO) Michael Bell suggests that 2021 clinical selling price will only average ~$2600 for full-year 2021, which is disappointing given that G360 CDx gained ADLT status from Medicare (more later). New in the second quarter, CFO Bell seems to have stopped telling us the exact average selling price for clinical sales. The change was not clearly explained. For example, the language he used during the first quarter was “The clinical average selling price was $2710…”. In the second quarter, we hear, “… the average estimated ASP for the Guardant360 CDx and LDT tests was approximately $2,600 …”. It sounds as if revenue is recorded based on an expectation of what reimbursement will be. I believe there are four classes of payers. The first two will pay specific amounts: Medicare and contracted private insurers. Non-contracted private insurers and uninsured patients may or may not pay what they’re billed. If this latter group is adding uncertainty, CFO Bell’s current disclosure more accurately reflects the fuzziness embedded in the number and prior disclosures of the number as exact were an accounting illusion. CFO Bell gave an exact number for biopharmaceutical ASP because, presumably, the pharmaceutical companies and biotechs are paying the exact amount they’re billed. In the future, I am likely to stop presenting the tables below in this section, if the clinical and total prices are really just estimates.
**Clinical** 1Q 2Q 3Q 4Q 2019 $1800 $1839 $2319 $2049 2020 2489 2893 2852 2642 Y-o-Y 38.3% 57.3% 23.0% 28.9% 2021 2710 ~2600 Y-o-Y 8.9% ~-10% **Biopharmaceutical** 1Q 2Q 3Q 4Q 2018 $2966 $3286 $3491 $3571 2019 3109 3827 4052 4142 Y-o-Y 4.8% 16.5% 16.1% 109.9% 2020 4230 4054 3919 3892 Y-o-Y 36.1% 5.9% -3.3% -6.0% 2021 3944 3163 Y-o-Y -6.8% -22.0% **Total** 1Q 2Q 3Q 4Q 2018 $1920 $2421 2019 $2171 $2451 2812 2660 Y-o-Y 46.5% 9.9% 2020 2936 3090 3016 2915 Y-o-Y 35.2% 26.1% 7.3% 9.6% 2021 2908 ~2684 Y-o-Y -1.0% -13.1%
1Q21 and 2Q21 Development Services and other Revenue: $14.9 million and $19.5 million, respectively.
Development Services and other Revenue ($ millions) 1Q 2Q 3Q 4Q 2018 $2.5 $1.6 $3.4 $4.8 2019 7.8 11.9 8.7 5.5 2020 7.3 15.3 14.2 13.6 2021 14.9 19.5
1Q21 GAAP Gross Margin: 63.5%; 2Q21 GAAP Gross Margin: 67.5%: Gross Margins are likely to remain somewhat depressed until newer products both gain traction with customers and reimbursement terms are solidified. Strong development services revenues tend to depress gross margin, but 2Q21 margins benefitted from high-margin milestone payments embedded in development services revenue.
Gross Margin (GAAP) 1Q 2Q 3Q 4Q 2017 25.1% 27.1% 22.2% 54.3% 2018 44.6% 48.6% 53.7% 57.6% 2019 63.1% 68.8% 69.6% 65.3% 2020 69.6% 66.2% 71.6% 63.7% 2021 63.5% 67.5%
1Q21 GAAP Earnings: $-109.7 million ($-1.09 per diluted share); 1Q21 non-GAAP Earnings: $-49.4 million ($-0.49 per diluted share)
2Q21 GAAP Earnings: $-97.6 million ($-0.96 per diluted share); 2Q21 non-GAAP Earnings: $-61.4 million ($-0.61 per diluted share) :
Starting 1Q21, Guardant is offering non-GAAP earnings in addition to GAAP earnings. Several items are excluded, but the “money” item is, unsurprisingly, stock-based compensation (SBC). More on SBC later.
Earnings per Share (GAAP) (non-GAAP) 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 2019 $-0.30 $-0.13 $-0.14 $-0.84 2020 -0.29 -0.57 -0.78 -0.94 $-0.16 $-0.25 2021 -1.09 -0.96 -0.49 -0.61
1Q21 Cash Flow From Operations (CFFO): $-16.3 million; Free Cash Flow (FCF): $-25.9 million
2Q21 Cash Flow From Operations (CFFO): $-62.6 million; Free Cash Flow (FCF): $-81.3 million
First quarter outflows were pretty light. Second quarter outflows were a record, including a high capital expenditures number (FCF is CFFO minus CapEx). This is not entirely surprising, as Guardant is moving expeditiously to bring several ambitions toward fruition. For context, Guardant has over $1.8 billion in cash and securities, and its debt is convertible, so it can easily withstand operating outflows of this magnitude. Guardant has had only one quarter of positive operating cash flow in its history as a public company (3Q19).
Revenue Growth, Expense Growth, and Stock-Based Compensation
During the first half of 2021, revenue grew 27.7% over the first half of 2020. Let’s compare growth in each operating expense category, with and without stock-based compensation (SBC).
Research & Development Expense: GAAP R&D for 1H21 was $119.2 million, up 62.6%. Excluding SBC, R&D was $110.2 million, up 61.3%. Increased headcount was the largest factor.
Sales & Marketing Expense: GAAP S&M for 1H21 was $82.1 million, up 63.7%. Excluding SBC, S&M was $75.6 million, up 63.9%. More than half of the rise in expenses was due to increased headcount.
General & Administrative Expense: GAAP G&A for 1H21 was $116.3, up 104.6%. Excluding SBC, G&A was $41.2 million, up 19.7%. Growth in G&A without SBC is lower than revenue growth.
Shortly, I will talk about new product introductions, and it will be clear why R&D expenses rose so much. When I talk about ECLIPSE, which will be fully-enrolled soon, you’ll see where Guardant stands regarding the screening market. Guardant currently sells to oncologists. To fully enter the screening market, Guardant will be selling to primary care physicians (PCPs). The count of PCPs is an order of magnitude above the oncologist count, and I suspect that the sales proposition will be very different. Guardant is already starting to hire an executive team to build and manage this sales force. Assuming a positive ECLIPSE outcome, I expect S&M growth exceeding revenue growth will be a feature of Guardant’s income statement for many quarters to come.
Regarding SBC, I am pretty sure that many people within the organization receive some, and it is probably used as a hiring incentive for many. SBC is a component of every expense item except “Cost of development services and other”. That said, the largest recipients of SBC at present are the two co-founders, and their SBC appears under G&A expense, if I’m interpreting things correctly. You may recall that in May 2020, the co-founders both agreed to a package that would cut their salary to zero but they would receive a fairly large set of restricted stock units (RSUs) which would vest in three tranches based on the GH share price exceeding certain thresholds for thirty days. Mekong22 offered an excellent tutorial on the accounting behind this award here: https://discussion.fool.com/thanks-bob-this-is-really-a-great-po… To quickly recap, although these RSUs vest (i.e., are awarded to management) based on the GH stock price reaching and maintaining thresholds, expenses hit the income statement every quarter according to a predetermined schedule (unless a particular tranche vests early, in which case unaccrued expenses for that tranche would accelerate into the quarter when the vesting occurred). The $100 tranche vested during the quarter (1Q21) when vesting was expected, so that tranche is fully-expensed now, and won’t affect future quarters. The second tranche ($150) has not vested yet, and continues to be expensed, along with the final $200 tranche. All three tranches are expected to be fully-expensed by 2Q22, based on disclosures presented in SEC 10-Qs and 10-Ks, although vesting may occur until 2027. Not coincidentally, the co-founders are not eligible for another grant until 2027. This means that SBC will likely be significantly reduced at Guardant from the second half of 2022 through 2026, at least. The way the SEC disclosure is worded, we do not know the schedule for expensing the second tranche of RSUs, but I’m sure it will be noticeable in the results. For example, SBC in the G&A line went from $49.4 million in 1Q21 to $25.7 million in 2Q21 after the first tranche was fully-expensed.
Guardant resumed offering guidance (full-year only) during the 4Q20 earnings conference call, and CFO Bell hasn’t changed 2021 guidance since then. Clinical test volumes are expected to exceed 90,000 in 2021, which would set a baseline of 42% growth for that metric. Full-year 2021 revenue is expected to be in a $360-370 million range, implying growth of only 26-29%. I’ll comment that 90,000+ does not sound like a stretch goal to me at this point – they already have almost 40,000 clinical tests on the books in the first half. If clinical ASP is indeed coming down from last year, I can understand why revenue growth might lag test volume growth. But I hope they’re sandbagging.
GH 1Q21 earnings day share price: $135.39 +0.57% (vs. S&P 500 +0.74%)
GH 2Q21 earnings day share price: $114.06 -1.15% (vs. S&P 500 +0.17%)
As noted earlier, the GH stock price has come down significantly since mid-February. These earnings reports were not the immediate cause.
Product News, Pipeline, and Clinical Trials
As a reminder, there are now two versions of G360. G360 CDx is FDA approved and will be slow to change. G360 LDT will be more flexible, allowing for the analysis of new targets as new therapies are approved. The Centers for Medicare and Medicaid Services (CMS) confirmed that Guardant360 CDx has been awarded advanced diagnostic laboratory test status – I guess this means Guardant can now sit at the ADLT table! More importantly, it also means that G360 CDx will be reimbursed at $5000 for Medicare patients, effective April 1, 2021. During the 3Q20 earnings conference call, co-founder and co-CEO Dr. Helmy Eltoukhy mentioned that the standard Medicare reimbursement amount was $3500. ADLT status merits a ~43% price increase! This higher reimbursement rate will only persist through year-end though, before moving to a reimbursement scheme based on median private payer rates. CFO Bell seemed sanguine about likely Medicare reimbursement rates in 2022 and beyond. That said, CFO Bell notes that the billing code change associated with the separation of G360 CDx and G360 LDT may lead to refusals and reduced payments from non-contracted private payers, at least at first. Over the past three years, the Medicare portion of G360 revenues has hovered at 37-38%.
On the companion diagnostic front, the FDA approved G360 CDx for Janssen’s (a division of Johnson & Johnson) RYBREVANT™(amivantamab) and Amgen’s LUMAKRAS™ (sotorasib). With FDA approval as the trigger, Guardant received milestone payments from these pharmaceutical companies, augmenting “Development services and other” revenue, and providing some benefit to gross margin. AstraZeneca’s Tagrisso® (osimertinib) received FDA companion diagnostic approval in a previous quarter. Guardant is also partnered with Radius Health and Daiichi Sankyo as a companion diagnostic provider. Radius’ elacestrant (RAD1901) is a selective estrogen receptor modulator/degrader in trials to treat HER2+ metastatic breast cancer. Approximately 20% of breast cancer patients are HER2+. RAD1901 is in a Phase 3 trial. Daiichi Sankyo’s Enhertu® (fam-trastuzumab deruxtecan-nxki), a HER2-directed antibody-drug conjugate (ADC), is in clinical trials for non-small cell lung cancer (NSCLC), as mentioned in Guardant’s press release. However, Enhertu® is also FDA-approved for HER2+ breast and stomach cancers. [HER2 is human epidermal growth factor receptor 2.] HER2 overexpression occurs in stomach cancers at a similar rate to breast cancer, but is much more rare in NSCLC, occurring only 1-2% of the time, making a companion diagnostic for HER2+ in NSCLC more attractive.
During his 2Q21 prepared remarks, co-CEO Dr. Eltoukhy said, “We have signed more than a dozen biopharma collaborations for GuardantINFORM since its launch just over a year ago.” This sounds good, as I suspect GuardantINFORM™ is a high-margin product. I found it odd that the contracts were described as “collaborations”, from which I would infer that the collaborator is bringing something non-monetary to the table. Guardant’s web site doesn’t make it sound like that: “The GuardantINFORM™ platform enables biopharma companies to accelerate research and development of the next generation of cancer therapeutics by offering an in-silico resource that combines de-identified longitudinal clinical information and genomic data collected from our Guardant360 liquid biopsy test. With data from over 135,000 patients, our real-world clinical-genomic dataset of advanced cancer patients is one of the largest of its kind.” I should mention that the 2Q20 earnings conference call snippet I used to explain GuardantINFORM included a transcription error. What originally read: “GuardantINFORM combines this robust genomic data with the identified clinical information for each patient.” As you can see from Guardant’s description above, that should read “GuardantINFORM combines this robust genomic data with de-identified clinical information for each patient.”
GuardantREVEAL is Guardant’s initial foray into the minimal residual disease (MRD) detection and recurrence monitoring market; Guardant estimates the Total Addressable Market (TAM) at $15 billion in the U.S. For now, the test is specifically targeted to colorectal cancer (CRC) survivors and is based on liquid biopsy. An estimated 10-30% of early-stage CRC patients recur, according to the American Cancer Society. The current standard of care is CEA (carcinoembryonic antigen) testing, which has sensitivity of 69% and specificity of 64%. [Sensitivity is the ability to correctly identify a person as having a disease. Specificity is the ability to correctly identify a person as disease-free.] GuardantREVEAL claims 91% sensitivity and 100% specificity, so it is a strong improvement over the standard of care, in terms of accuracy. Both CEA and GuardantREVEAL are blood tests, so the switch is not disruptive to oncologists’ workflows. In April 2021, GuardantREVEAL was approved by the New York State Department of Health Clinical Laboratory Evaluation Program – this is important because all states typically follow New York’s lead and it is a critical component in reimbursement discussions. Co-CEO Dr. Eltoukhy indicated that he expects Medicare reimbursement for this product by year-end.
In my Q4 earnings report analysis, I mentioned that Guardant proposed a new use case for G360: to see whether a patient is responding to a new treatment regimen, also known as “molecular response”. Many studies support this use case, and Guardant now seems to be increasing its efforts toward improving adoption rates by launching a specific product, Guardant360RESPONSE. I could be wrong, but I’d guess that this is the G360 CDx assay, perhaps with a different medical code for reimbursement. In fact, during his 2Q21 prepared remarks, co-CEO Dr. Talasaz mentioned a study presented at ASCO (the American Society of Clinical Oncologists’ annual conference) that G360 was used to identify responders and non-responders to Pfizer’s lorlatinib. In this molecular response use case, the prescribing oncologist would be looking for a more binary result than the broad result set offered by G360. For uninsured patients at least, the price point seems to be the same as G360 CDx ($5000). An astute analyst asked during the 2Q21 earnings conference call whether GuardantResponse cannibalizes G360 revenue. Co-CEO Dr. Eltoukhy downplayed cannibalization which further leads me to believe they are one and the same diagnostic test, just for different use cases and perhaps a different results presentation.
EXPLORE COMPANION Connect
Huh? Who? What? Is that a dating service? Free to browse and explore? In my efforts to learn more about how GuardantINFORM might involve “collaboration”, I found three products on Guardant’s web site that – to the best of my knowledge – have never been mentioned in an earnings conference call or in an investor presentation.
“Our retrospective banked sample analysis service, GuardantEXPLORE, lets you look back to move forward. We have processed more than 30,000 samples for 50+ companies to date. Join us in a creative collaboration and benefit from:
? Earlier insights: Find the genomic profile of your early responders and differentiate between molecular response and pseudo-progression.
? Comprehensive analysis: Work with our Bioinformatics and Medical Affairs teams to define optimal biomarkers, prepare data for scientific conferences and publications, and build scientific consensus among KOLs.
? Identify what’s next: Chart a path forward to the next phase of development.”
“The GuardantCOMPANION set of services is for prospective sample screening for clinical trial enrollment and companion diagnostic development. We can help you find more patients faster and de-risk your FDA path.”
“GuardantConnect lets you accelerate patient identification for precision oncology clinical trials with an infrastructure that allows real-time connectivity with treating oncologists. The program leverages the vast commercial reach of Guardant360 within the United States to drive awareness of ongoing studies at the point-of-care, to overcome historical challenges associated with biomarker screening.
Using our real-time database of patients receiving Guardant360 liquid biopsy assays, identify patients who may be eligible for a clinical trial, including those who may be progressing on standard of care therapy, as well as the up to 50% of patients who fail tissue-based testing…”
Guardant has mentioned a study indicating that its products can help clinical trials enroll faster, which seems to be the purpose of Guardant COMPANION. I would suspect that it is the same assay used for either G360 or GuardantOMNI. Are they pricing it differently? Again, this isn’t something that management has talked about.
GuardantEXPLORE sounds like an extension of what Guardant OMNI would do if it were included as part of a clinical trial, but the trial’s sponsor and lead investigator left the analysis work to Guardant’s personnel and artificial intelligence (AI). I’ve speculated in the past that Guardant has AI capabilities, since almost all companies backed by SoftBank do. The August 5, 2021 Guardant Investor Presentation (https://investors.guardanthealth.com/events-and-presentation…) explicitly mentions AI, although not in conjunction with the EXPLORE product (which isn’t mentioned).
GuardantConnect seems to be more data-based, like GuardantINFORM. This seems to be a logical extension of G360 as a companion diagnostic, recommending a specific treatment for the cancer mutations discovered by the diagnostic. In this case, clinical trials will be suggested to the oncologist instead of FDA-approved treatments.
Since none of these three are marketed to patients, there is no pricing information on the Guardant web site.
During the 4Q20, earnings conference call, co-CEO Dr. Eltoukhy talked about an upcoming launch of a tissue product. In 2Q21, it was officially announced. It is cleverly named Guardant360TissueNext which dovetails nicely with Guardant’s longtime marketing of transitioning oncologists toward a “Blood first” paradigm regarding biopsies. If TissueNext is ordered in conjunction with G360 CDx, a tissue sample is taken in conjunction with the blood draw and analyzed if the blood results are inconclusive. Co-CEO Dr. Eltoukhy cited some statistics from ECLIPSE (interesting, since the study isn’t complete), indicating that blood alone found more patients than tissue alone, but that blood and tissue together found a more complete set of patients. Guardant360TissueNext, at least for uninsured patients, will cost $5000.
LUNAR-1 and COBRA
Although GuardantREVEAL has been launched into the market, this section will talk about the clinical trials associated with recurrence monitoring and minimal residual disease (MRD) detection, which Guardant sees as a $15 billion opportunity in the U.S. The investor presentation linked above mentions three clinical trials: COBRA; ACT-3; and PEGASUS.
ACT-3 is the trial that was initiated by Stand Up to Cancer, Massachusetts General Hospital, and the Dana Farber Cancer Institute, which I’ve mentioned in a previous post. The official title is: “Early Identification and Treatment of Occult Metastatic Disease in Stage III Colon Cancer”. The estimated primary completion date is February 1, 2022 and the estimated study completion date is February 1, 2023. The study completion date seems odd, as the trial started in January 2020 and one of the primary outcomes – disease-free survival – has a five-year time horizon. The study has three treatment arms for patients who show ctDNA (circulating tumor DNA) and an active surveillance arm for patients who are ctDNA-negative. This implies to me that a Guardant assay is used at enrollment for all patients. Patients are retested using the Guardant assay at periodic intervals in the active surveillance arm. I finally found the official government listing for that trial: https://clinicaltrials.gov/ct2/show/NCT03803553
I am also pretty sure I’ve found the right PEGASUS trial in the clinical trials database: https://clinicaltrials.gov/ct2/show/NCT04259944 Although it is a single-arm study, patient treatment will vary based on periodic testing with the LUNAR-1 test (which was mentioned by name in the trial description). The official title is: “Post-surgical Liquid Biopsy-guided Treatment of Stage III and High-risk Stage II Colon Cancer Patients: the PEGASUS Trial”. The estimated primary completion date is April 30, 2024 and the estimated study completion date is July 15, 2024.
During the 1Q20 earnings conference call, an analyst asked about COBRA, citing the “estimated primary completion date” of summer of ’22, and asking if interim findings would be published. He was admonished that this was the date expected for completion of enrollment, and that results might be presented years later. Here is the clinical trials database link for COBRA: https://clinicaltrials.gov/ct2/show/NCT04068103
LUNAR-2 and ECLIPSE
LUNAR-2 is Guardant’s initial offering in the “early cancer detection” market, and the current focus is on colorectal cancer (CRC). Guardant sees early CRC detection as a $20 billion opportunity in the U.S. but plans to expand to multicancer screening over time, which they see as a $50 billion U.S. opportunity. The ECLIPSE clinical trial compares the LUNAR-2 assay against colonoscopy in patients with average-risk of colorectal cancer. During the 1Q21 earnings call, Guardant expected to complete trial enrollment (~10,000 patients) by year-end, instead of the original target of November 2021. An update during the 2Q21 call indicated that they were increasing enrollment to 13,000 patients but reverted to November 2021 completion. The increase in enrollment is designed to improve the likelihood that a statistically significant number of enrollees prove cancerous over time. Here is the clinical trials link for ECLIPSE: https://clinicaltrials.gov/ct2/show/NCT04136002
At this point, Guardant is making plans that assume a positive ECLIPSE read-out and they’re looking at a two-phased approach. In the first half of 2022, they hope to have an LDT version of the LUNAR-2 assay. They would bring this version to market but would not seek FDA approval. In 2023, they hope to have an IVD version of the assay, for which they would seek FDA approval. Given their G360 experience, they feel as if they can gain some traction in the marketplace with the LDT version. In answer to an analyst question, though, Dr. Talasaz said, “… we don’t expect … major adoption before FDA approval.”. As I understand it, LDTs (laboratory developed tests) are similar to IVDs (in vitro diagnostics), but there is less of a regulatory burden surrounding them (CLIA approval vs. FDA approval). I get the impression that the FDA requires a higher grade (for lack of a better word) assay, hence the extra development time. Hopefully this gives a sense of the pace at which Guardant will need to scale their screening salesforce.
Future Clinical Trials
Co-CEO Dr. Talasaz ended his 1Q21 prepared remarks with this gem: “We are starting to plan our next screening clinical trial in other cancer types and expect to share more updates about this in [the] latter part of 2021.” Pressed for more details during the Q&A, he reminded the analyst that prior discussions had mentioned lung, breast, and ovarian cancers in addition to the CRC focus that was ultimately chosen for ECLIPSE. On the one hand, broadening screening toward multicancer is extremely exciting. On the other hand, clinical trials are expensive.
During the 2Q21 earnings conference call Q&A, co-CEO Dr. Eltoukhy offered an update: “We have data that we’ve presented at ASCO that shows … the progress … and … excellent results … beyond CRC, presented data in bladder and lung … [and] … breast … So we expect to see them in the coming quarters.” ASCO was in early June.
While successful early cancer screening has the potential to radically change the world’s healthcare spending profile, making that transition will be extremely disruptive for companies that charge large amounts for extending a late-stage patient’s lifespan by months or a few years. It is not clear to me that drug dosages appropriate for late-stage cancers are proper for cancer caught earlier. As diagnostics improve, treatment regimens will also likely need to change. There will be expensive shifts as the whole healthcare industry adjusts to working with cancer in earlier stages. But imagine the benefits to our healthcare system, and humanity in general, if late-stage cancer becomes increasingly rare!
In Europe, G360 CDx is CE Marked, ISO-13485 Certified and ISO-15189 Accredited. A public-private partnership with the Vall d’Hebron Institute of Oncology in Spain will allow for testing of European blood samples in Europe. Guardant has submitted a PMDA in Japan and expects its laboratory there to be operational in 2021 (this is probably through the SoftBank joint venture).
Other Random Musings
Management and Director Hires and Role Changes
In the past six months, Guardant has made many high-level personnel decisions, but I’ll save the most intriguing for the end.
In May, Dr. Craig Eagle was hired as Guardant’s Chief Medical Officer. His main background is in drug development, which strikes me as a bit odd. Perhaps Guardant is focusing more on his medical affairs and clinical trial experience, or perhaps having someone with a drug development background better supports Guardant’s companion diagnostic initiatives. It wouldn’t surprise me if it was Dr. Eagle who was responsible for expanding the enrollment of the ECLIPSE trial.
In June, Guardant hired Chris Freeman as Chief Commercial Officer for Oncology. Mr. Freeman had been at Gilead where he led their HIV business unit and, during the pandemic, led the effort to get Emergency Use Authorization for remdesivir. This seems like a high-powered hire!
In August, Guardant added Meghan Joyce to their Board of Directors. Her background is diverse. She is currently the Chief Operating Officer (COO) at Oscar Health. Prior to that, she held leadership roles at Uber, was a Senior Policy Advisor at the Treasury Department, and a Bain consultant. In October, Guardant added Myrtle Potter to their Board of Directors. She is currently the CEO of Sumitovant Biopharma. Ms. Potter was an independent consultant for many years, guiding biopharma product launches and was the COO at Genentech prior to that. Both women are additions to the Board of Directors; it wasn’t announced that they were replacing anyone. That said, I seem to recall that Guardant lost two directors last year who were associated with Guardant’s early investors.
As promised, I saved the most intriguing for last. Those among you who are both observant and have good memories will note that this is my first write-up where I refer to both Drs. Eltoukhy and Talasaz as co-CEOs. Prior to August, Dr. Eltoukhy was the sole CEO, while Dr. Talasaz was the COO and Chairman of the Board of Directors. It is generally my preference that the CEO and Chairman roles are held by different people, but I make an exception for company founders. Dr. Talasaz is handing the Chairman role to Dr. Eltoukhy. Both co-founders will remain on the Board of Directors. Although there was no mention of separate reporting segments within Guardant, Dr. Eltoukhy’s focus will be on oncology while Dr. Talasaz’ role will focus on screening. Pressed hard by an analyst during the Q&A, management insisted that this change doesn’t portend anything – it is more a reaction to Guardant’s growth and allowing each leader to focus his attention more narrowly. I could be wrong, but I don’t believe this will fundamentally change how Guardant is being run. The two co-founders have long worked as a team, and I see that continuing. Guardant is growing rapidly and they need to focus on building an organization that can scale up rapidly. It will be interesting to watch.
Management keeps tossing out teasers that their aspirations go beyond oncology. This seems entirely reasonable, given how quickly they were able to create a COVID-19 test in 2020. We’ll just have to “stay tuned”, since management is offering us nothing beyond teasers.
At the beginning of October, rumors leaked that Guardant might be interested in buying peer NeoGenomics (NEO). Shares of GH dropped 14% that day, and news got out quickly that such a deal was no longer on the table. NeoGenomics has been on my watch list for a while as I think they’re another solid company in this emerging space. That said, looking at market cap alone, NeoGenomics is half the size of Guardant, so that would have been a large acquisition to digest – both financially as well as organizationally. Given the enormity of Guardant’s aspirations, I think integrating an acquisition would have been more distracting than helpful in moving toward those goals, so I’m mostly happy that nothing came of the rumor. The GH share price has not recovered much from the beating it took that day, suggesting that the market doesn’t fully believe that M&A is off the table.
Management made great strides in the first half of 2021 in terms of expanding their product line and beefing up headcount in both sales and R&D. Based on the ambitions management has articulated and ones they’ve only hinted at, this expansion is only the beginning. If revenue growth can approach rates that we saw pre-pandemic, Guardant’s drawdown of its considerable hoard of cash and investments could slow with new product roll-outs starting to balance growth in expenses. I have long said that I think the two co-founders are both extremely bright people – and I’ve pointed out that they are serial entrepreneurs – but it is difficult to know whether they will be the right people to drive Guardant as it grows much bigger. So far, they seem up to the task, but this should always be a concern when a founder-led company starts growing very quickly, and the founder(s) have no experience running an enterprise at scale. Currently, the pandemic is masking Guardant’s growth potential. Frail patients are hesitant to visit their doctors or to enroll in clinical trials. I am hopeful that coming quarters – including the third quarter earnings report due out in a week or so – will show progress toward greater revenue growth, but I’m not confident the next quarter or three will show great progress as we enter another winter of pandemic. If growth remains limited once our nation is beyond the pandemic, then the “dent” I referred to earlier should be considered structural. If tests can grow at a 40% clip or better, my comfort level that the investment thesis is intact will improve. Although I find current prices attractive given the opportunity in front of Guardant, my position is large enough and the uncertainties great enough that I personally can’t see buying any today. But I think it is a great company with a lot of promise, and I’m happy to happy to have some shares in my portfolio.
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Thanks and best wishes,
TMFDatabaseBob (long: GH, AMGN; a family member is long JNJ; NEO is on my Watch List)
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Peace on Earth
Please note: I am not a member of any newsletter team. My opinions are my own and do not necessarily reflect those of the TMF advisers. I am not an investment professional, merely an investor.