GH-A marker in the results

Something from the call I found quite extraordinary about their Omni product and a business segment I hadn’t put too much thought into.

Development services revenue in the second quarter totaled $11.9 million, up 660% from the prior-year quarter due to a ramp-up of companion diagnostic development activities to support CDx programs including those related to AstraZeneca, which were announced in December 2018.

In looking initially at GH, I glossed over the development services revenue because, well, it was a small part of the overall story at that time. But last December they announced a much missed multi year partnership with AstraZenaca. Here’s that announcement.…

REDWOOD CITY, Calif., Dec. 13, 2018 (GLOBE NEWSWIRE) – Guardant Health (Nasdaq: GH) announced a multi-year agreement with AstraZeneca (NYSE: AZN) to develop blood-based companion diagnostic (CDx) tests supporting the commercialization of AstraZeneca’s oncology portfolio based on Guardant’s industry-leading comprehensive liquid biopsy platform.

Under the terms of the agreement, Guardant Health will develop and pursue FDA approval for a Guardant360® CDx test for Tagrisso® (osimertinib), AstraZeneca’s best-in-class, third-generation EGFR inhibitor in advanced non small cell lung cancer (NSCLC). Use of this assay will help identify patients that may respond to Tagrisso via a minimally-invasive blood test.

Here’s what GH says about development services revenue from Annual Report.

“Development services revenue represents services, other than precision oncology testing, that we provide to biopharmaceutical companies and large medical institutions. It includes companion diagnostic development and regulatory approval services, clinical trial referrals and liquid biopsy testing development and support. We collaborate with biopharmaceutical companies in the development and clinical trials of new drugs. As part of these collaborations, we provide services related to regulatory filings with the FDA to support companion diagnostic device submissions for our liquid biopsy panels. Under these arrangements, we generate revenue from progression of our collaboration efforts, as well as from provision of on-going support. Development services revenue can vary over time as different projects start and complete.”

The revenue for development services in Q2 2018 was $1.5M. And this Q2 it increased 660% to $11.9M or 22% of total revenues. There is some more color to this from the Q&A. The majority of this business is for the OMNI product.

Yeah. Hi, Helmy, AmirAli, congrats on the quarter, first of all and thanks for the question. So, first one, if I could ask about the guide, you have a significant step-up in guide here, significantly higher than what we had and what consensus estimates were. So I was hoping if you could first parse out some of the major components of that guide. And then I mean, should we expect a stronger growth here in OMNI to continue or is it just more OMNI ASP-driven?

Helmy Eltoukhy – Chief Executive Officer

Maybe I’ll start and then let Derek chime in. We see very strong fundamentals to our business all across the board. I think you can see that clinical volume is growing very nicely, pharmaceutical volumes, I think a champion by OMNI specifically are also growing. And so, we see a very robust pipeline going forward in terms of our business. I think, it’s fairly equally distributed among the two sides of the business.

Derek Bertocci – Chief Financial Officer

Yes, Puneet. So we – as Helmy said, we think it’s equally distributed. We did see a very strong as we have mentioned earlier, very strong companion diagnostic development services revenue. And while we are pleased with that, we expect to continue working with a number of customers. We were cautioning that that level of growth won’t continue. We do see though that the base pharma business will continue strong and it’s driven by both OMNI and G360, but OMNI is obviously a significant element with its higher price level…

Adam Wieschhaus – Cowen – Analyst

Okay, great. Maybe a guidance question for Derek. I just wanted to clarify, it seems like your increased revenue guidance did not reflect any increase in your full year development services revenue, is that correct?

Derek Bertocci – Chief Financial Officer

Correct. We had indicated that the development services would be more first half weighted. So we are trying to caution that you’d not get carry away and look at the slope from Q1 to Q2 and just extrapolate from that…

Derik De Bruin – Bank of America – Analyst

Hey, just curiosity, the gross margin was like 500 basis points better than we expected on the quarter. Can you walk us through sort of like what you’re expecting on the gross margin for the rest of the year and particularly as you add in this higher throughput facility for the study, just and sort of thinking about pacing on this for the rest of the year?

AmirAli Talasaz – President and Chief Operating Officer

Right, so the gross margin was really benefited this quarter. But as I said, the very high amount of development services revenue that we recorded this quarter. And as you can see in the financials this quarter, the margin on that was very high, so it pushed up the overall gross profit margin. Also the increase in ASP in the pharma business is reflective of the increase in OMNI as a percentage. So we’re trying to indicate that while the – we expect the pharmaceutical business to continue both of those trends were extremely stronger this quarter and you should not expect that level of growth or even that level of revenue on the development services to continue in the second half. So we would expect at least that the gross profit margin would moderate a bit in the second half. So longer-term we obviously are looking to have it be high gross margin, but not this high in this quarter.

I think the takeaways from that are OMNI has higher ASP and gross margins and higher development services revenue helps the business gross margins. This development services business is strong and helped along by AstraZenica, but there are other customers here. But we should not expect the growth rates or even the revenue level ($11.9M) to be as strong the next few quarters. Maybe. And maybe this goes to show one element of why it’s so hard to nail down Guardant and guidance. Will there be other partners that will pop up?

The rest of the business is growing alongside OMNI too, with Clinical Oncology test revenue up 127% and Biopharma test revenue up 146%(not same as development services).

Clinical Test - $21.8M +127%
Biopharma Test- $20.2M +146%
Dev Services - $11.9M +660%
Total Revenue - $54M +178%