A little background
Over the last two years I’ve been hearing more and more about Liquid Biopsy. A brief primer on what it is and why it is important and could be a MAJOR step forward in cancer diagnosis, treatment and monitoring. Currently a patient will have some symptoms or something will be incidentally found. They see their physician and then get referred to the appropriate person to get tissue so that the pathologists can tell the treating team if the patient has cancer, what type of cancer they have and from there more tests can be done to help determine which chemotherapeutic agents will be effective. The problem with the system is that biopsies are hard, like really hard. Depending on where they are they can require pretty major surgery and doing the surgery is no guarantee that you actually got the correct tissue. Imagine going in for brain surgery to get tissue from a brain mass. You think you may have cancer, you take time off of work, get all your preoperative testing done, go in early in the morning. You family waits in the waiting room for 4 or 5 hours and then you spend a night or two in the hospital. A week or two later the pathologist calls your doctor and says, “sorry” the tissue was “non-diagnostic”. Your only choice is to go back and do all that again. The problem is many tumors are heterogeneous which means they may have normal tissue or non-diagnostic tissue in it. So even though you are in the correct area by imaging…you haven’t found the correct part of the tumor that will give you a diagnosis. This process is hugely expensive, has high morbidity (side effects) and is very very time consuming. A few years ago I was talking to colleagues and the idea of Liquid Biopsies came up. The basic premise is that tumors shed traces of their DNA, RNA, and molecular markers in the blood stream, urine, CSF etc. If you can develop an assay that is sensitive enough and specific enough then you should theoretically be able to detect cancer with a blood/urine/csf test. There is a HUGE amount of interest, research dollars and companies looking into this. The implications for cancer care/ immunology /infectious disease are pretty staggering. This could totally changes how cancers are diagnosed, how treatments are monitored and chosen, and how remission is followed and how drugs are developed. I’ve been wanting to invest in the idea for a few years now but there weren’t any pure plays that seemed like anything but speculation/hype.
A Nascent Industry
This industry is littered with casualties that reached pretty stratospheric valuations based on their story but then cratered to nothing. On the other hand there is serious money and big companies all chasing this space. Bezos, Gates and Illumunia have teamed up to fund a company called Grail that is going after the liquid biopsy space. They have raised about a billion dollars and have big goals with big data and big money. I don’t know how close they are to a commercial product.
Qiagen which i think of as more of a pick and shovels company is getting into the liquid biopsy market, they have two tests, prostate and lung ca that they released a few months ago. I don’t know what kind of uptake they have gotten.
There are literally dozens of companies out there from big heavy weights like Johnson and Johnson, to little companies that really only have a hope of being acquired by the big companies.
The Investment
Enter in Guardant Health (GH). GH is a pure play liquid biopsy company that was established in 2011 and came out with their first commercial assay in 2014. They had some pretty big name investors such as sequoia capital, softbank, t. Rowe price. Their IPO was this October raising 249.5 million dollars. They IPOed for 19 and the stock pretty much immediately settled in the 32-40 range for a market cap around 3.5 billion. They have two products that are commercially available.
Guardant 360 360 profiles most important 73 genes that impact treatment decisions including all that are recommended to be tested by the NCCN (national comprehensive cancer network). GH expects 3 major growth drivers for 360.
1)Pan-cancer FDA approval in 2019.
2)Pan- cancer medicare coverage (currently coverage is for non small cell lung ca)
3)Results of their NILE study which is to demonstrate non-inferiority of guardant 360 in non small cell lung cancer. If they get favorable results this would mean those patients could have liquid biopsy tests instead of invasive lung biopsies/wedge resections.
Clinical volume showed a 17% increase in clinical volume from 2017. If the 3 things above happen then they expect strong clinical revenue growth.
Guardant 360 has benefits from some very good press lately. In october results from their SLLIP study (which is part 1 of 2, part 2 is the NILE study) were published in JAMA Oncology which was designed to show non-inferiority for first line treatment choice vs biopsy. They had a positive result. Some additional analysis showed a greater than 10k saving per patient if only 360 was used. 44% of patients that went with tissue biopsy had inadequate samples (Seems high to me, but I normally only see the ones that we know are inadequate in the operating room).
Guardant omni. Omni is basically the same thing as guardant360 but tests an additional 400 plus genes used in biopharmaceutical and academic research. Pharmaceutical volume was up 67%. I doubt we will continue to see such huge increase in pharmaceutical volume however we should see genes from the OMNI test make its way into the 360 tests as treatment options because clinically relevant.
GH has two major products in development.
Lunar 1 - recurrence detection and residual disease detection,
Lunar 2- Early Detection. They anticipate about 20x numbers of patients for lunar-1 and lunar 2. Lunar 1 should have an early product sometime in 2019.
Financials
Financials are going to be pretty thin as I’m mostly just concerned they have enough money to keep chugging along and they have only one quarter has a public company. I’m basically just regurgitating their conference call / press release.
Q3 Revenue 2018 21.8 million vs 11.1 million Q3 2017, and increase of 95%
This was driving by increased average selling price (ASP) as well as increased volume as I mentioned above.
Gross profit up to 11.6 vs 2.5
Gross Margin 53.7% vs 22.2%
Operating expenses up 15% to 35.8 million. This isn’t an apples to apples comparison because in q3 2017 they spent 9.1 million to buy back stock from some officers. If you account for that then expenses are up 57% mostly in R&D and S&M to develop LUNAR, OMNI, and FDA approval for 360. The truth probably lies somewhere closer to the 57% number.
Net loss of 24.7million q3 2018 vs 28.7 million q3 2017.
270 million dollars in the bank.
No major debt but convertible preferred stock
Conference call notes
Demand for omni and 360 has exceeded their expectations
“ In terms of pricing, we mentioned our Medicare pricing based on LCD which is $3,500 for Guardant360 and pricing under NCD I think still is to be determined after we get FDA approval.
Helmy Eltoukhy
Maybe if I can add. I believe we are the only Company that liquid biopsy with formal Medicare coverage. Secondly, we also have very good progress with the private payers for our product test……, because as you remember, the pricing is set by essentially the median of the private payer rates. And so, we believe we’ve really done a lot of the groundwork that’s required to achieve good pricing in the future once you we do get FDA approval.
Questions about hospitals doing the testing in their lab vs sending to guardant
“we’re fairly agnostic to the question of centralization or decentralization. What’s important for us is that essentially our testing platform is ubiquitous.”
In regards to Omni
“biopharma business in this – especially in the clinical development area is prone to wider ups and downs business, lumpiness of those programs and the fact that some of the revenue is recognized on milestones achieved. So, while we are gratified, we don’t want you to get too carried away in terms of thinking that it’s an upward slope of that rate every quarter into the future.”
My take
First the bad. This is an incredibly competitive industry with some serious heavy weights competing to develop a commercially viable liquid biopsy product. GH is a young company that hasn’t proven they can be the next great thing. They aren’t profitable, they are losing money at a pretty rapid rate and will probably continue to do so for a while. The company has a market cap of 3.5 billion with a projected revenue 82 -84 million. That gives them a pretty astounding EV/S of 38!!! Even if they smash their estimates they will still have an EV/S in the 30 range.
Now the good. They are the major player right now. Grail is well funded but doesn’t have a commercial product, other companies have a foot in the door but for very specific tests. Many have gone down in flames. GH is doing it and getting money for it. If they get a pan-cancer FDA approval that means that they will see a massive surge in testing. If the FDA approval goes through then medicare will pay for the test which will also massively increase their testing. What they have been doing will seem like peanuts. If their NILE test also shows non-inferiority then GH will be off to the races to show non-inferiority in other cancers. LUNAR 1 and 2 have the potential to be huge. I imagine this is a hard problem though because nobody knows what to do with super early cancer detection but GH is going to have SOOOO much data.
On the financial side, they have plenty of money to run this company for a few years. Margins are going the right way, expenses aren’t climbing as fast as revenue despite GH having many irons in the fire. I wouldn’t be surprised to see the company get hammered at some point, but if the above stuff goes their way then a 3.5 billion market cap will be small. GH figures they have a 35 billion market to go after. At the moment the only thing that matters is they have enough cash to run the business. What matters is that they get FDA approval, good study data, then we start worrying about the financials. I opened a 3% position.
P.S. I’m sure we have some oncologists around, would love to have you folks weigh in.
Thanks to the Fool for the idea on GH.
-E
Perhaps you guys could take your polyps to an offline conversation.