It’s been a long time since Guardant Health was a popular holding on this board, and if it wasn’t previously a holding here, it would probably be pretty OT, but I’ve still been holding onto a very small position and did a bit of a mini dive today so thought I would post a quick summary in case it’s of interest to anyone else here that is also still following the story
I actually started looking into it morning, after initially contemplating selling a small amount of my Alteryx from my IRA, potentially to buy some Fastly. It won’t make me popular here to say it, but I concluded that, even at much lower growth rates, given AYX’s valuation, I still think it is a better place for my money than FSLY, even plugging some pretty aggressive growth rates for FSLY (up to +90% over the next year) into my calculations. Take that for what it’s worth, as I’ve been very wrong about some of the highest growth companies on this board so far in 2020, and I’m the first to admit, I could well be proven wrong here too.
Although I said in my July review that GH is one of my lower conviction holdings, I do like the idea of shifting at least some of my portfolio into less tech/SaaS/cloud type companies which have had such an extraordinary run for an extended amount of time and may see a bit of a letdown as we come out of the pandemic’s impact on everyone working remotely.
Skipping to the conclusion, I did increase my GH holdings a bit today, although still small, from about 0.4% of my portfolio at the end of July, adding about 150% to my previous GH position, to just over 1% of my portfolio now. Most all of it is in Jan’22 call options (admittedly making an already high risk/high reward stock, even more so).
GH is releasing earnings this Thursday, along with many other companies we follow, so note that buying right before earnings certainly has added risk as well.
Guardant Health Background
I’ll keep it high level and I am certainly no expert in this field or business
GH basically has developed blood tests, liquid biopsies, to screen for cancers, which are much less invasive (and much less costly) than taking a tissue sample, as has historically been the process.
Their products/services are:
Guardant 360 and Guardant OMNI
360 and OMNI screen for late stage cancers, to help determine therapies, treatments etc. This is where their revenue currently comes from, although still considered pre-FDA approval, which limits the allowable uses (and sales). FDA approval for 360 is expected later this year, which would expand their opportunities to monetize, increase health insurance reimbursements for their tests, and could potentially lead to more medicare coverage, which when it comes to cancer testing, would be big. They currently estimate the TAM for these products to be $6 Billion in the U.S. alone.
Lunar-1 and Lunar-2
This is further out, but potentially where the big money may eventually lie. GH’s Lunar program is all about detecting early stage cancers. Think getting a standard Lunar blood test at every annual physical doctor visit check up, even if you have no reason to suspect that you might have cancer. Finding an early stage cancer with a routine, inexpensive, liquid biopsy, could tremendously reduce the costs to treat the patient, compared to if the cancer was not detected until it was much further along or had spread (and save lives). If this early detection leads to much lower costs, you can bet insurance companies would happily reimburse the costs of these tests, even in lower risk patients. The estimated TAM for Lunar-1 is $15 billion, and for Lunar-2 could be more than $30 billion (just in the U.S.)
A good simple summary in this Fool article:
https://www.fool.com/investing/2020/06/13/could-guardant-hea…
Guardant360’s sequencing method is 1,000 times more effective than standard sequencing methods and results in 99.9999% specificity (the ability of a test to detect a positive without it being a false positive). Nearly all false-positive cancers can be ruled out by Guardant360.
As a result, the test has become very popular among oncologists (doctors who specialize in cancer). Since its launch in 2014, between 7,000 to 8,000 oncologists have used Guardant’s tests. In the first quarter of 2020, the number of clinical tests distributed amounted to 15,257, representing a 60% growth from the same quarter last year.
Bad Blood – Theranos
When I first suggested GH as an investment to friends, I often received the response that it sounds like what Theranos was doing, which as we now know, was essentially a big fraud. I recently read the book, Bad Blood, about the story of Theranos and it’s founder Elizabeth Holmes (which is a really great read btw) and I am comfortable that GH is nothing like the deceptive, untested, practices of Theranos. This could be something that is holding back the stock price of GH a bit, as, until they get further FDA approvals and more widespread use, it’s easy to associate all companies in this realm with the one big high profile company that did something similar and ultimately turned out to be essentially worthless.
Revenue
Revenue in recent periods ($millions):
Quarter Revenue YOY% Sequential%
Q1’18 17
Q2’18 19
Q3’18 22
Q4’18 33
Q1’19 37 118% 12%
Q2’19 54 184% 46%
Q3’19 61 177% 13%
Q4’19 63 91% 3%
Q1’20 68 84% 8%
So note that these are all before they’ve received any real FDA approvals, and most all of their revenue so far has been from Guardant360 and Guardant OMNI (not from Lunar which is earlier in development).
COVID has definitely negatively impacted the company. Clinical patient visits (where their test are performed) were down significantly in recent months, believed to be -30% in March when the pandemic was just starting to close U.S. markets. They didn’t provide guidance last quarter. Some estimates for Q2’20 are -20% vs prior year, which would be about $45m, down from $54m. That being said, there could also be some pent up demand as markets open up, which could lead to outsized growth in the futre, which could lead to positive guidance in this week’s call, if management is willing to give any guidance at all yet.
So there is probably some pessimism already baked in to the stock price. I believe each earnings announcement in the past year has been viewed favorably and generally resulted in a jump in the stock price, followed by drifting back down. The stock price is actually lower today than where it was a year ago, despite the company making good progress, and potentially being much closer to FDA approval for Guardant360.
Exact Sciences Corp (EXAS) also provides less invasive cancer screenings and they announced Q2 earnings last week. Their products are much further along and specifically focus on colon cancer, they had increased revenues in Q2 (possibly becomes some of their tests use a stool sample which can be collected by the customer at home without needing to visit a clinic), but the stock went down about -6% after reporting. They say April screenings were about one-third of what they had previously been, trending back up through June. I suspect GH saw at least a similar decline in April, likely trending better recently too.
Customer Concentration
In 2019, two of GH’s customers were responsible for 40% of total revenue (one at 26% and one at 14%). In Q1 2020, they said they had two big customers that each made up exactly 20% of revenue (40% combined), which I assume are the same companies. Losing one or both of them would obviously be a huge negative, especially if they switched to a competitor’s product, although my understanding is that GH is still ahead of anyone else trying to do liquid blood biopsies, overall right now.
Balance Sheet and Cash Flows
GH made some smart moves recently to shore up their balance sheet. At the end of March 2020, they had more than $750 million in cash and marketable securities.
Their operating cash bleed has only been:
-$72m FY 2017
-$72m FY 2018
-$47m FY 2019
-$13m Q1 2020 (-$52m annualized)
So only losing -$50m or so, even with all of the research and development costs you would expect from this type of company, would allow that $750m to last a very long time. They also just raised another $360 million in June, so they will likely have over $1 billion of cash and marketable securities at the end of Q2 2020.
They have no debt.
Could they be acquisitive? Do they need the funds to gear up for FDA approval leading to buildup of inventory for expected subsequent rapid growth? Are the development costs for the big ticket Lunar programs going to require much more spending than they have required in the past few years? I don’t know, but it doesn’t seem like running out of money is a concern for this company anytime soon.
Although their accounts receivable is not a huge number or exposure, as of 12/31/19, they had no reserve for allowance for doubtful accounts, meaning they expected to get paid 100% from essentially every single customer billing that was owed to them, rare for any company in any industry. At 3/31/20, they did reserve $150k as an estimate for credit risk on receivables. I presume the pandemic caused them to want to be slightly more conservative here. But assuming, over the long term, much of their billings come from insurance or medicare, I wouldn’t place credit risks as a huge factor in looking at GH as an investment, although I imagine the costs comply with and navigate those billings are more expensive to support than other businesses.
Softbank and WeWork effect
Guardant Health was surprisingly impacted by WeWork’s woes because GH’s biggest investor, previously owning more than 30% of the company was a Softbank fund. Softbank was also a big investor in WeWork and when WeWork imploded, Softbank suddenly had to raise cash and liquidity quickly and they sold quite of a bit of their GH holdings. That excess supply of GH shares for sale in the market has probably been one of the drags on its stock price over the past nine moths or so.
Further details for those interested:
https://www.bloomberg.com/news/articles/2019-09-11/guardant-…
Other Random Thoughts
Any medical tech company like GH is going to be highly dilutive. That just comes with the territory as they need to reward employees, investor, and insiders with options. If it’s a winner like I hope it will be, although a lot of the spoils will go to those insiders, other investors should fare very well too.
After we have a COVID vaccine, will the pandemic bring more attention to preventative / early detection opportunities, especially where spending a little more money early can result in big treatment savings (and life or death savings) in the long run? Or will attention continue to be focused on preventing or limiting new future viral pandemics for a while, potentially taking attention away from technologies that favor other diseases like the cancers that GH scrrens for?
The large majority of Seeking Alpha articles related to GH seem to be very positive, which strikes me as unusual and strange. Or am I overthinking it and should I take that as a reassurance that a company like GH that has the ability to shoot up suddenly (e.g. on FDA approval or takeover rumor) would be less of a target of a short seller that might want to spread hit pieces online?
In Conclusion
Buying GH today is buying into the belief that their tests will get approval, get insurance/medicare reimbursement, become either the leader or one of the most commonly accepted liquid biopsy tests and get widespread use, leading to many periods of multi-hundred percent growth. Or at least a couple years of progress and approvals leading to a buyout by a much larger pharma company, maybe for 3x to 4x today’s market cap.
The rewards of the company being a success would be so great that you don’t need to allocate a big amount of a portfolio to a company like this in order to have nice rewards, but there is also a very real chance that the value of the company could contract quickly if they don’t demonstrate consistent results and steps towards becoming the kind of disrupter that they aspire to be. To me, it’s the type of investment that you might need to buy when the opportunity is there, but before big announcements come, as waiting for more news or updates is likely to cost you much more to buy in later than a typical (e.g. tech) company, which this board has consistently demonstrated that having a handful of really smart motivated people can often interpret results fast enough to still buy (or sell) at favorable prices before the rest of the market catches on to, or reflects, the new data.
Hopefully this was of some interest to some of you. It will be very interesting to see their results and possible guidance on Thursday. If anyone else has continued to follow this story, please do share, or feel free to poke holes in anything and everything that you believe I am wrong about. Given that it has always been a small holding for me, I haven’t spent as much time poring over Guardant’s filings or reports yet, but it’s an interesting story with a huge potential if they get it right.
-mekong