Hello. I’m excited to start my deep dive into Guardant Health. These “First Impression” posts will present an in-depth overview of the company. A follow-up post will provide analysis of Guardant’s first quarter earnings report. Finally, on the TMF Premium boards, I will review the “5-and-3” analysis that Simon Erickson provided when the company was recommended, bringing it up to date with news from the current quarter.
Who is TMFDatabaseBob?
I’m a retired database engineer. I started subscribing to The Motley Fool in April 2005, drawn to the Rule Breakers and Hidden Gems newsletters. I recognized that the Foolish Community succeeds best when many members contribute, and I learned a lot of great stuff in those early days. I had some investing knowledge before I joined TMF. I had been interested in the stock market since my youth. My undergraduate degree featured a dual-major in Mathematics and Computer Science, but I also accumulated a fair number of Accounting and Business Law classes. I have an M.B.A. from a school that is noted for its Finance department; I did not major in Finance but took as many Finance elective classes as I could. Still, I feel as if my learning really accelerated as a Fool. Grateful, and eager to contribute, I ran “Member-Built Portfolios” for Rule Breakers and Hidden Gems for several years. I also performed “deep dives” into many of the Rule Breakers’ biotech recommendations. I have no background in biology or medicine, but I studied hard and learned fast. In 2007, The Motley Fool started an initiative where they chose Foolish subscribers who they felt could provide ongoing coverage of companies that the in-house analysts had already recommended, alleviating the analysts of their duties for ongoing coverage. I was honored to be among the inaugural group chosen for the “Community Analyst Team” and I’ve been analyzing and writing in that role since then, although the group has subsequently morphed into Coverage Fools and Ticker Guides. There’s a link in my signature block that provides more details. My posts tend to be very long and cover a lot of ground. I know that style won’t appeal to everyone, but I hope you’ll find my offerings rewarding.
Why Guardant Health?
I am a Baby Boomer, slightly younger than the middle of that group. I have always viewed healthcare as an important investment theme, recognizing that my generation would need more of it as we aged. The Rule Breaker in me is excited when it finds a disruptive technology where a major investing theme provides tailwinds. That is precisely what I see in Guardant. I’ve invested in it based on a high-level understanding of the business, and it has become a large enough family holding that a deeper dive is warranted. This post presents the beginning of the analysis that I’ve done toward that deeper dive.
I’m sure that some message board participants know the company better than I do, and I’m eager to hear your feedback, especially if I’ve gotten something wrong (it definitely happens, especially in “First Impressions” posts). I also recognize that some of you may be less familiar with Guardant, and I’ll try to treat that latter group as my primary audience, to help bring everyone up to speed with what I find to be an interesting company.
What is Guardant Health’s Business?
It has long been recognized that choosing the right drug to treat a patient’s cancer often depends on the biology of the cancer itself. Cancers are typically described in terms of the body part where the tumor is found, but there is a definite lack of uniformity among cancers, even those associated with a particular body part. Many cancer drugs are designed to address a particular cancer mutation, so matching the right drug with the right tumor mutation type is vitally important. Typically, the method for identifying the mutation(s) present in a tumor has been to remove a bit of the tumor (a tissue sample, removal of which is called a “biopsy”) and send it to a lab for analysis. This can be problematic on several levels. Sometimes the tumor is in a place that is difficult to access. Sometimes not enough tissue is removed to perform all the desired tests. Laboratory processing of tissue samples can be slow. Frequently, the collection of tissue samples and their processing in the laboratory can be expensive. Finally, the process of removing part of the tumor can be invasive – painful to the patient and posing a risk of infection or other complications, not to mention inconvenient. Guardant seeks to remove these impediments by running diagnostic tests against blood drawn from the patient (called a “liquid biopsy”). Historically, cancer mutation blood screening hasn’t been sensitive enough or accurate enough to become the standard of care. But Guardant has improved the process; it is now as accurate and sensitive as tissue biopsy. That has been proven in clinical trials. In addition, results typically arrive faster, the entire process is less expensive and provides a broader data set, and there is less burden on the patient.
When most cancer patients come to doctors, their cancer is advanced. Unfortunately for many, their prognosis is poor at that stage. Still, since this is “where the patients are”, Guardant has chosen to address this market first. But they have a grander vision for cancer treatment. They hope to enable early recurrence detection in otherwise-healthy cancer survivors through periodic testing. Even more ambitious, they hope their screening can become part of the routine lab blood work done as part of an annual physical. While the costs of frequent testing are noticeable, they are probably less than the costs associated with late-stage cancer treatments, and early detection generally yields a much better outcome for the patient. Imagine how healthcare costs might be different if late-stage cancer patients were rare! Guardant is developing products to address these other goals. If I’m not mistaken, results from a Guardant test are far more than a data dump, checking positive and negative boxes on a list of mutated genes – Guardant has AI (artificial intelligence) systems that work with Guardant’s vast database of historical results and outcomes to help guide treatment choices.
Besides these clinical uses, Guardant also does a fair amount of business directly with biopharmaceutical customers. Often this will take the form of running Guardant’s diagnostic tests against patients entering a clinical trial to thoroughly understand the profile of the patients in the trial population. Sometimes, though, drug companies will work with Guardant so that Guardant tests will be able to accurately determine which patient populations will best respond to a particular drug. This is referred to as a “companion diagnostic” test and is a growing part of Guardant’s business.
Who are Guardant Health’s Leaders?
Drs. Helmy Eltoukhy and AmirAli Talasaz are described as the co-founders of Guardant. Both are Stanford-educated. Guardant’s web site and SEC filings are unusually quiet regarding the company’s early history. I am speculating here, but my guess is that they don’t want to draw Illumina’s ire. The SEC S-1 filing (IPO registration) indicates that Guardant was incorporated in 2011. Michael Wiley, who was recently the Chief Legal Officer, joined Guardant as the company’s President in July 2012 (then moved to become Chief Financial Officer (CFO) in 2013). AmirAli Talasaz took on the President and Chief Operating Officer roles in January 2013. His biography lists him as having been employed by Illumina until June 2012. Dr. Talasaz founded Auriphex Biosciences in 2008, which was bought by Illumina in 2009. Dr. Eltoukhy founded Avantome Inc. in 2007, which was purchased by Illumina in 2008, where he was employed until December 2012. Dr. Eltoukhy became Chief Executive Officer (CEO) of Guardant in January 2013. Perhaps one reason that Illumina doesn’t seem to bear hard feelings is that they are an important supplier for Guardant. It is also possible that the two co-founders pitched the idea for Guardant to Illumina and were rejected – I’ve heard stories like that before. It just seems odd that, when Guardant was incorporated, the two people listed as co-founders were employed elsewhere. Reading the conference call transcripts, I get the strong sense that these co-founders are extremely intelligent people. If you’re wondering about their names, Dr. Talasaz was born in Iran and it not clear when he moved to the U.S., except he is, as I said, Stanford-educated. Dr. Eltoukhy was born in the San Francisco Bay Area and had an entrepreneurial father. All three of these executives are young, in their early-40s. Derek Bertocci has been the CFO since 2016, leading Guardant through the IPO process. Recently, CFO Bertocci announced his intention to retire in mid-2020 (he is in his mid-60s) but will remain the CFO to ensure a smooth transition. This seems to be an amicable departure. Unfortunately, Mr. Bertocci isn’t the only defection. In addition to everyone I’ve mentioned, last year’s proxy statement had two other “named executive officers”: Drs. Lanman and Das-Young. Both have departed. Mr. Lanman was the Chief Medical Officer until he retired at age 65. Ms. Das-Young was the head of the LUNAR project (more later) and she left for “personal reasons”. Speculation about these things is fraught with peril, but I would guess that this is a case of “cultural mismatch” – prior to Guardant, she had been at Pfizer for 15 years. Experience at large (likely) bureaucratic companies doesn’t always translate well to smaller (likely) entrepreneurial ones. That said, to the extent that we have visibility, it would be good to monitor future turnover at high levels of Guardant’s medical staff. I should also note that the first quarter earnings press release touted the hiring of John Saia as the General Counsel. I thought that odd, given Mr. Wiley’s position as Chief Legal Officer. Buried on page 51 of the 1Q20 SEC Form 10-Q filing is this note: “On May 6, 2020, Michael Wiley resigned as our Chief Legal Officer in order to assume a new role as Head of Corporate Affairs where he will advance our efforts across strategic initiatives and public policy advocacy.” Mr. Saia assumed General Counsel responsibilities that same day. This seems like a planned transition and “public policy advocacy” seems like a very important role for Guardant at this juncture. CEO Eltoukhy did praise Mr. Wiley at the end of his prepared remarks during the 1Q20 earnings conference call.
What are Guardant Health’s Current Products and Who are the Customers?
Guardant has four products either on the market or under development:
• LUNAR-1, and
Guardant360 tests for 74 different genes associated with various forms of cancer and it was Guardant’s first product to market. The typical sale is to an oncologist trying to understand the biology of a patient’s cancer, so an appropriate treatment regimen can be initiated. These are described as “clinical” tests. A recent SEC filing noted over 100,000 tests prescribed by over 7,000 oncologists. When I publish my first quarter earnings analysis, I intend to track the growth of the number of tests, and “clinical” will be one category. The other category of sales is called “biopharmaceutical”. In this case, pharmaceutical companies (perhaps biotechs) are the customers, and the count is above 50 at this point. An example here might be a drug company running a clinical trial and wanting a thorough understanding of trial participants. Perhaps the test could be part of the trial inclusion/exclusion process, or the results might be held in reserve for future study. Sometimes, even if a drug fails a clinical trial, “subgroup analysis” may find that one particular group with a certain disease profile was reliably helped by the drug. Guardant’s tests could be extremely useful in organizing patients into subgroups. Another clinical trial might be initiated to focus on the subgroup showing benefit. If eventually approved, the drug’s “label” (i.e., the uses for which regulators allow the drug to be marketed) may have fewer allowed-use criteria than the drug company had originally hoped, but a limited success is usually better than a failure. Guardant recently announced a collaboration with Amgen, which is in clinical trials with a drug hoping to help patients with a KRAS G12C mutation (which affects 13% of non-small-cell lung cancer (NSCLC) patients). http://investors.guardanthealth.com/news-releases/news-relea…
Although tests like Guardant360 need certain regulatory approval for use and for reimbursement, they don’t require the approval of the Food and Drug Administration (FDA), which has different rules for diagnostic tests than for drugs. Initially, Guardant received approvals that allowed it to be used and be reimbursed for lung cancer in roughly one-third of Medicare cases. Since 2019, Guardant has benefitted from the positive outcome of their clinical trial called “NILE” (Non-invasive vs. Invasive Lung Evaluation). The NILE study found that Guardant’s liquid biopsy testing identified roughly the same set of mutations as tissue biopsy, frequently offered a more complete set of test results than tissue biopsy, and returned results more quickly. http://investors.guardanthealth.com/news-releases/news-relea… As time has progressed and studies have matured, reimbursed use of Guardant360 has expanded. Guardant is working with the FDA toward an approval. Such an approval might entice hesitant organizations to approve use of the test and improve reimbursement rates in some arenas where use is already approved. Management exudes confidence regarding FDA approval but, frankly, to me this stands in stark contrast to most biotechs which would be completely reticent to opine how the FDA may or may not rule. It’s a different industry with different norms, I guess. In a parallel path toward increasing test acceptance and reimbursement rates, Guardant continues work with various healthcare organizations.
Guardant360 was launched in 2014. I should note that last year’s SEC filings indicated that Guardant360 identified 73 genes and now it’s 74, so the test is evolving, probably in some cases through collaborations like the one I mentioned with Amgen. It is also conceivable that Guardant would act on their own if new treatments became available targeting a previously untreatable mutation. Guardant’s tests have always been treatment-oriented. Why test for something when no specific actions would be guided by the test result?
Guardant touts statistics that only 18% of patients who get tissue biopsy get the complete genotype profiling suggested by standard of care guidelines, where Guardant360 patients are 95% in compliance with those guidelines. In my opinion, this fact alone should give pause to those oncologists who still favor tissue biopsy.
GuardantOMNI, launched in 2017, is a much broader (and more expensive) test designed to identify 500 genes, including some that would suggest immuno-oncology treatments or treatment with PARP inhibitors (PARP is the enzyme “poly ADP ribose polymerase”). It is ordered in a biopharmaceutical setting. Quarterly, Guardant reveals “average selling price” (ASP) for all its tests sold, and often it notes that increases in ASP are partially due to a shift in product mix toward GuardantOMNI. However, sales in the biopharmaceutical space tend to be lumpier than sales in the clinical setting, so the gains aren’t consistent. In the near-term, we shouldn’t expect any clinical use of GuardantOMNI as it is only approved for “RUO/IUO” – acronyms for “research use only” and “investigational use only”.
Guardant doesn’t break out revenue by product, so it is difficult to know how each product is doing. That said, Guardant estimates the Total Addressable Market (TAM) for Guardant360 and OMNI together as $6 billion, split roughly evenly between clinical tests for new patients, clinical tests to confirm remission, and biopharmaceutical sales. Current revenues are nowhere near that.
Guardant intends to seek FDA approval for OMNI, which would presumably remove the RUO/IUO designation. There has been no announcement to date of an FDA filing.
Like GuardantOMNI, LUNAR-1 is only available on a RUO/IUO basis. Guardant envisions three main use cases here. The first is for aiding in neoadjuvant and adjuvant therapy decisions. Perhaps I’m missing some subtleties, but I view “adjuvant” as a fancy-pants word for “additional”. Naw… The medical community would NEVER choose a fancy-pants word when a simple one would do, right? Let’s say that surgery is the primary method for treating a certain patient’s cancer. A neoadjuvant therapy is one that is used pre-surgery, perhaps to shrink the tumor beforehand. An adjuvant therapy is one that would be employed post-surgery, perhaps a chemotherapy to eradicate any remaining cancer cells. LUNAR-1 tests would be used to guide choices for pre- and or post-surgery therapies. Second, after adjuvant therapy, a LUNAR-1 test could be run to verify that all remaining traces of the cancer are gone. Third, occasional tests could be run on patients deemed at high risk of cancer recurrence. As I mentioned before, the earlier a cancer is caught, the better the outcome. Why wait until a high-risk patient is symptomatic?
Guardant views the TAM for LUNAR-1 as being $15 billion, much larger than that for Guardant360 and OMNI.
During their 4Q19 earnings conference call, Guardant announced two clinical trials for the LUNAR-1 program. The “COBRA” study, announced in January 2020 and run by Guardant in conjunction with NRG Oncology, will follow 1408 stage II colorectal cancer patients whose tumors have been surgically-removed, but who meet their physician’s criteria for active surveillance. Patients will be randomized to receive either the standard of care for active surveillance or LUNAR-1 monitoring and they will receive adjuvant treatments based on the results suggested by their surveillance method. Here are the trial details from the official government website: https://clinicaltrials.gov/ct2/show/NCT04068103 The trial is actively recruiting patients. The trial’s estimated primary completion date is listed as July 1, 2022 and the estimated study completion date is July 1, 2024. This is better information than no information, but I’ve learned over time not to place too much trust in these dates, especially since enrollment is not complete. The second trial is being run by a collaboration of Stand Up to Cancer, MGH, and the Dana-Farber Cancer Institute. [MGH probably refers to Massachusetts General Hospital.] Since Guardant is not running this trial, merely supporting it, the flow of information we get about this second trial could be limited. Like COBRA, it follows up on patients with colorectal cancer, but in this case the trial population is stage III patients. A quick search of the clinical trials web site failed to help me find this trial.
LUNAR-2 is listed as still being in development. The TAM is about the same as LUNAR-1 at about $15 billion, but that is for “screening-eligible” individuals. If you expand the scope to high-risk individuals, the TAM grows. If Guardant can prove that periodic use of their tests in all individuals reduces total healthcare costs, the increase in TAM would be tremendous. Currently, the main focus of LUNAR-2 is on colorectal cancer and there is an ongoing clinical trial called ECLIPSE. ECLIPSE will study 10,000 patients aged 45-84 at average risk for colorectal cancer. Patients will first have the LUNAR-2 data collected and then undergo colonoscopy. Results will be compared, including at one year afterwards and two years afterwards. Details of the trial design can be found here: https://clinicaltrials.gov/ct2/show/NCT04136002 The estimated primary completion date is January 1, 2022 and the estimated study completion date is January 1, 2024, but, as I intimated earlier, please place extra emphasis on the word “estimated”. The study is still actively recruiting patients as of the middle of last month.
It is Guardant’s intention to file for FDA approval based on the data from ECLIPSE, but there is a hurdle that needs to be cleared. The testing process as it stands today would not meet the FDA’s “in vitro diagnostic” (IVD) requirements. Maybe I’ll understand better over time exactly what that means, but, as of today, my understanding is that the assay has all the technical performance desired by Guardant, but the techniques for processing the assay need some fine-tuning to pass FDA muster. The good news is that this will not hold up the clinical trial. Patient samples can be obtained and placed in storage until the test is IVD-compliant. Then the tests will be run against the blood samples, and the data gathered. Guardant feels it is making good progress on IVD-compliance.
My impression is that the LUNAR tests will need to be far more sensitive than 360 or OMNI since the patients are asymptomatic, and the amount of ctDNA (circulating tumor DNA) in the blood is greatly reduced.
As alluded to earlier, Guardant does have services revenue in addition to its product revenue. Products predominate, so I won’t talk much about services.
To give your eyes a break (and not run afoul of TMF post size limits), I’ll end “Part 1” here.
Thanks and best wishes,
TMFDatabaseBob (long: GH, AMGN, CI, ILMN)
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