Before I dive into my analysis, I wanted to thank TMFfuma102 for his thoughtful response to my previous Guardant post. I respect your industry insights. But I didn’t want to clutter the board with a “Thank you” post.
This wasn’t a bad earnings report from Guardant Health, but it fell short of my expectations – I was hoping to see growth in both clinical tests and revenue come in north of 40%. As is often the case with Guardant, their plans for the future are more interesting than what is occurring at present, and this quarter certainly delivered in that regard. Please read on for more details.
Earnings Report Headline Items
Press release: https://investors.guardanthealth.com/press-releases/press-re…. Motley Fool’s 3Q21 conference call transcript: https://www.fool.com/premium/coverage/earnings/call-transcri… (sadly, this is an awful transcription). Unless stated otherwise, all italicized quotations are from the Fool transcript.
[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.]
3Q21 Revenue: $94.8 million While this is a record result, and the second-best year-over-year growth rate since the pandemic began, it is a frustrating step backward from last quarter’s growth. The two-year growth CAGR (compound annual growth rate) is an unsatisfying 22.8%. Wall Street expected $94.0 million.
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 94.8 = Y-o-Y 16.6% 38.9% 27.1% 27.4%
3Q21 Tests: 22,806 clinical; 4,839 biopharmaceutical; 27,645 total
The gain in clinical tests was also somewhat disappointing. The gain in biopharmaceutical tests was great, but from a depressed base and still below pre-pandemic levels.
**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 22,806 = Y-o-Y 20.5% 52.1% 34.5% 35.1% **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 4,839 = Y-o-Y -33.1% 30.5% 57.6% 7.8% **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 27,645 = Y-o-Y 6.8% 48.4% 38.1% 29.8%
3Q21 Average Selling Price (ASP): $2689 clinical; ~$3700 biopharmaceutical
Clinical ASP was higher than Chief Financial Officer (CFO) Michael Bell’s guidance and he credited the educational work done by the Guardant team helping claims to be processed efficiently using the new ADLT (advanced diagnostic laboratory test) code. The biopharma ASP is a decline from a year ago, but a nice jump from last quarter. CFO Bell suggested that analysts should NOT try to identify a trend here – it really is just product mix and that fluctuates depending on which clinical trials are using GuardantOMNI and which aren’t. He also noted that near-term volatility should be expected as several projects are ending. Others will follow, and co-founder and co-Chief Executive Officer (CEO) Dr. Helmy Eltoukhy indicated that they are increasing the number of biopharma partners. It should be noted that newer products that don’t have approved reimbursement schemes yet can drag down average selling price. Guardant’s philosophy seems to be to make the test available, accept whatever payments arise, and then appeal prior decisions once reimbursement protocols are in place.
3Q21 Development Services and other Revenue: $15.5 million.
Development Services and other Revenue ($ 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 15.5
3Q21 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.
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% 67.5%
3Q21 GAAP Earnings: $-107.6 million ($-1.06 per diluted share); 3Q21 non-GAAP Earnings: $-70.5 million ($-0.70 per diluted share) : Starting 1Q21, Guardant is offering non-GAAP earnings in addition to GAAP earnings. We’ll learn the 4Q20 non-GAAP results when 4Q21 results are posted. Typically, when Wall Street analysts post their expectations, they offer non-GAAP numbers. Since Guardant only recently started offering non-GAAP numbers, it is tough to infer whether this quarter’s expectations of $-0.96 reflect GAAP or non-GAAP estimates, or a mix. I would guess we saw a “miss”.
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 $-0.15 2021 -1.09 -0.96 -1.06 -0.49 -0.61 -0.70
3Q21 Cash Flow From Operations (CFFO): $-53.6 million; Free Cash Flow (FCF): $-75.3 million
For the last few quarters, I’ve been saying “Guardant … can easily withstand operating outflows of this magnitude.” This quarter, I’m less confident. More later.
Revenue Growth, Expense Growth, and Stock-Based Compensation
During 3Q21, revenue grew 27.1% over 3Q20. Let’s compare growth in each operating expense category, with and without stock-based compensation (SBC).
Research & Development Expense: GAAP R&D for 3Q21 was $71.0 million, up 95.8%. Excluding SBC, R&D was $66.3 million, up 96.5%. Increased headcount was the largest factor. An increase in materials costs also (so to speak) materially contributed.
Sales & Marketing Expense: GAAP S&M for 3Q21 was $50.2 million, up 100.2%. Excluding SBC, S&M was $46.1 million, up 102.9%. More than half of the rise in expenses was due to increased headcount.
General & Administrative Expense: GAAP G&A for 3Q21 was $50.1, down 24.5%. Excluding SBC, G&A was $24.0 million, up 51.0%. The GAAP decline is due to the end of expensing of the first tranche of the co-founders’ stock price performance-based RSU grants. The growth in non-GAAP is mostly attributed to professional services – I wonder how much it cost to assess the acquisition of NeoGenomics.
Guidance is slightly changed. 4Q21 clinical test volumes are expected to grow approximately 40% year-over-year or to ~24,300. That would result in ~86,300 clinical tests for the year, falling short of the original “exceed 90,000 in 2021” guidance. In my eyes, this is another disappointment. Full-year 2021 revenue is still expected to be in a $360-370 million range, implying growth of only 26-29%. This would imply $100 million of revenue in 4Q21 to hit the mid-point. That would be a record, but it seems attainable.
GH 3Q21 earnings day share price: $110.19 -4.02% (vs. S&P 500 +0.37%)
As I mentioned earlier, the numbers for 3Q clinical tests and 4Q clinical test guidance were disappointing, and losses were probably greater than expected. Guardant also telegraphed increases in future spending. More on the three major spending initiatives later.
Product News, Pipeline, and Clinical Trials
The only news on the G360 front is that favorable results from a couple of investigator-sponsored trials were presented at conferences. There were no new announcements of drugs for which G360 will be a companion diagnostic.
No new news on GuardantINFORM.
Co-CEO Dr. Eltoukhy reiterated that he expects Medicare reimbursement for GuardantREVEAL in colorectal cancer by year-end, which is encouraging. Also encouraging is this snippet from his prepared remarks: “We are seeing growing interest with our biopharma partners for using REVEAL in the adjuvant setting with non-CRC indications such as lung, bladder and breast.” I am pretty sure that the biopharma partners pay what they are billed, although it is possible they negotiate volume discounts.
I mentioned three spending initiatives earlier. The first is associated with GuardantREVEAL. In October, Guardant initiated a clinical trial called ORACLE. Here is a link to the U.S. government’s online clinical trials database for this trial. https://clinicaltrials.gov/ct2/show/NCT05059444 Fifteen different solid tumor cancers are organized into eleven cohorts. In each case, the patient will have been treated for cancer and will have blood drawn several weeks after initial treatment, and at regular intervals based on the standard of care for oncologist visits for the patient’s particular cancer. The study is expected to run for six years, ending in 2027. There was no estimate given for when enrollment would complete. If successful, ORACLE data should pave the way for reimbursement across nearly 80% of solid tumor cancer types. This trial expects to enroll 1,000 patients, so this is not a huge spending initiative, but it will affect results for many years.
No new news on Guardant360RESPONSE.
No new news on Guardant360TissueNext.
LUNAR-1 and COBRA
No mention of the COBRA study (detecting minimal residual disease in colon cancer). https://clinicaltrials.gov/ct2/show/NCT04068103
LUNAR-2 and ECLIPSE
The only news about ECLIPSE (colon cancer prediction vs. colonoscopy) is that Guardant still expects to complete (expanded) enrollment during November 2021. https://clinicaltrials.gov/ct2/show/NCT04136002 Trial read-out is expected in mid-2022. Guardant is still operating with expectations of a successful read-out and plans to launch the LDT version of the LUNAR-2 assay in mid-2022 and, pending FDA approval, the IVD version in 2023. One analyst asked if expansion to 13,000 patients was enough, citing other similar trials that had expanded to 20,000 patients. Based on the data they already have, they do think 13,000 patients will be enough, and pointed to potential differences in the sites chosen to participate in the studies as one potential differentiating factor (what I heard: “We grabbed the good sites first.”)
The second spending initiative is a clinical trial called SHIELD. It seems very similar in structure to ECLIPSE, except the disease being screened for is lung cancer. The standard of care protocol for patients at high risk of lung cancer is periodic low-dose CT scans. Patients in the trial will undergo that scan and will concurrently have blood drawn for the LUNAR-2 assay. The trial is expected to start in December 2021. The enrollment size is expected to be around 10,000 patients and full enrollment is expected to take three years. There does not appear to be an entry yet in the clinical trials database. If ECLIPSE is successful, Guardant will seek FDA approval and work toward gaining reimbursement for the LUNAR-2 assay in colon cancer. Should SHIELD similarly succeed, approval should expand to lung cancer.
Guardant has announced a partnership with The Royal Mardsen NHS Foundation Trust in London as a site for a second Guardant laboratory in Europe. As you may recall, the first was Vall d’Hebron in Barcelona.
The third spending initiative relates to Guardant’s joint venture with SoftBank for Guardant testing primarily in Asia, Africa, and the Middle East. Back in May 2020, in part 2 of my “First Impressions” write-up on Guardant, I explained that the joint venture was never meant to be enduring and that Guardant would eventually own it. As part of the joint venture’s structure, SoftBank had option rights to “put” the business to Guardant, and Guardant had corresponding option rights to “call” the business away from SoftBank. Guardant has chosen to exercise its “call”. Studying the structure of the joint venture as described in Guardant’s most recent SEC Form 10-Q, the minimum purchase price for the business would give SoftBank a 20% internal rate of return on its investment(s). SoftBank made a $41 million investment initially, in mid-2018. The deal is expected to close in mid-2022. To me, this implies a floor for the purchase price of ~$85 million.
Other Random Musings
We Are Scientists
Co-founder and co-CEO Dr. AmirAli Talasaz started his opening remarks with an odd observation for someone running a cancer screening organization: early detection does not always lead to better outcomes. He pointed to a couple of different cancer types where early detection leads to expensive diagnostic tests and emotional distress for the patient but there is no effective treatment regimen. Co-CEO Dr. Talasaz assured investors that the Guardant screening test will be targeting cancers where early detection leads to positive outcomes. This is similar to the philosophy driving Guardant360 where they don’t test for anything that wouldn’t lead to an actionable treatment decision.
I have a couple of takeaways here. My initial one is that these guys are scientists first. Many of their press releases have footnotes as if it were a scientific treatise and not a press release. Actually, that is something I like about these guys. But I am cognizant that it could be a drawback eventually. The second takeaway is kind of a “chicken or egg” observation. I am certain that Guardant will modify their tests if new treatments became available where patients would benefit from early detection, just as they modify G360 LDT to detect new biomarkers when drugs with novel targets become available. Could early detection drive better treatment regimens for early-stage disease? Answering that question is far beyond my pay grade, but I hope the folks at Guardant are contemplating it. Treatment for late-stage disease is prevalent because most cancers are detected when patients are already symptomatic. If more cancers are detected early, will new treatment regimens not follow? Guardant’s mission is to “conquer cancer using data”. Why restrict the data that is gathered based on current treatment technology? Again, I’m asking questions I’m not qualified to answer. Speaking of data gathering…
Better Artificial Intelligence
A Wall Street analyst asked an interesting question. He observed that the sensitivity readings seem to be improving from one data presentation at a conference to the next, and asked about the source of the improvement. Co-CEO Dr. Talasaz (misattributed in the transcript) replied that the assay is unchanged, but the learning-based systems are improving as their data set grows.
Guardant’s Financial Health
I’ve mentioned previously that Guardant has a very strong balance sheet. They ended the third quarter with almost $1.74 billion in cash and investments. When asked about mergers and acquisitions, co-CEO Dr. Eltoukhy’s response included, “We … obviously have a lot of cash in the bank.” But I am less sanguine about the balance sheet than I had been. The pace at which they are drawing down cash and investments leads me to believe that we’ll see some form of cash raise within the next year or two. Basically, I’m seeing cash and investments drop by ~$0.1 billion each quarter. I know they’re still building separate sales organizations for both screening and oncology, so the burn rate is likely in increase. Expenses associated with the ECLIPSE trial should disappear over the next few quarters, but they’ll be replaced by ORACLE and SHIELD trial expenses. Buying SoftBank’s half of the joint venture will claim another $0.1 billion, give or take. At that pace, they only have four years of cash, and of course they won’t let balances approach zero. Guardant hasn’t announced anything, but it is my opinion that the writing is on the wall.
Now, raising cash is not the end of the world. Arguably, it staves off “the end of the world”! But it is rare to see cash raises warmly greeted by the stock market, especially if there’s a hint of equity dilution. Maybe I’m late in realizing how imminent this is, and that is part of the reason for the GH stock price decline since February. I really hope that a cash raise is already at least partially baked into the stock price. I just want to be sure that we’re all aware of the possibility.
Just as Guardant360 started out with reimbursement for only non-small cell lung cancer and is now approved for almost all cancers, it is encouraging to see clinical trials that would expand the market for their follow-on products: GuardantREVEAL and LUNAR-2. I hoped for better revenue and clinical test growth than what Guardant delivered. As I mentioned last quarter, I am concerned that 4Q21 and 1Q22 results will reflect another pandemic winter. Also, as I’ve indicated, I’m a bit (short-term) concerned about the effects of a cash raise. That said, my time horizon for Guardant’s success is longer than the next few quarters, so I will continue to maintain my position.
I hope this was useful for you. If you have any questions or comments, please post them. I may not be up-to-date on every board where this is posted. If you want me to see your response quickly, please reply to my post rather than just a post in the same thread. Please also note that I have no agreement with The Motley Fool to provide ongoing coverage for Guardant Health.
Thanks and best wishes,
TMFDatabaseBob (long: GH; NEO is on my Watch List)
Advanced Research Fool (formerly called “Coverage Fool”)
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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.