U.S. Markets closed

Edited Transcript of GH.OQ earnings conference call or presentation 6-Aug-19 8:30pm GMT

Q2 2019 Guardant Health Inc Earnings Call

REDWOOD CITY Sep 16, 2019 (Thomson StreetEvents) -- Edited Transcript of Guardant Health Inc earnings conference call or presentation Tuesday, August 6, 2019 at 8:30:00pm GMT

TEXT version of Transcript

================================================================================

Corporate Participants

================================================================================

* AmirAli Talasaz

Guardant Health, Inc. - President, COO & Chairman

* Derek A. Bertocci

Guardant Health, Inc. - CFO

* Helmy Eltoukhy

Guardant Health, Inc. - Co-Founder, CEO & Director

================================================================================

Conference Call Participants

================================================================================

* Adam Joseph Wieschhaus

Cowen and Company, LLC, Research Division - Associate

* Brian David Weinstein

William Blair & Company L.L.C., Research Division - Partner & Healthcare Analyst

* Derik De Bruin

BofA Merrill Lynch, Research Division - MD of Equity Research

* Mark Anthony Massaro

Canaccord Genuity Corp., Research Division - Senior Analyst

* Puneet Souda

SVB Leerink LLC, Research Division - MD of Life Science Tools & Diagnostics and Senior Research Analyst

* Tycho W. Peterson

JP Morgan Chase & Co, Research Division - Senior Analyst

* Carrie Mendivil

Gilmartin Group LLC - Principal

================================================================================

Presentation

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

Good day, ladies and gentlemen, and welcome to the Guardant Health Q2 2019 Earnings Call. (Operator Instructions) As a reminder, this call is being recorded.

I would like to turn the call over to Carrie Mendivil. You may begin.

--------------------------------------------------------------------------------

Carrie Mendivil, Gilmartin Group LLC - Principal [2]

--------------------------------------------------------------------------------

Thank you. Earlier today, Guardant Health released financial results for the quarter ended June 30, 2019. If you have not received this news release or if you'd like to be added to the company's distribution list, please send an e-mail to investors@guardanthealth.com.

Before we begin, I'd like to remind you that management will make statements during this call that are forward-looking statements within the meaning of federal securities laws. These statements involve material risks and uncertainties that could cause actual results or events to materially differ from those anticipated. Additional information regarding these risks and uncertainties appears in the section entitled Forward-Looking Statements in the press release Guardant issued today. For a more complete list and description, please see the Risk Factors section of the company's annual report on Form 10-K for the year ended December 31, 2018, and in other filings with the Securities and Exchange Commission.

Guardant disclaims any intention or obligation to update or revise any financial projections or forward-looking statements, whether because of new information, future events or otherwise. This conference call contains time-sensitive information and is accurate only as of the live broadcast today, August 6, 2019.

With that, I will turn the call over to Helmy Eltoukhy, Guardant's Co-Founder and Chief Executive Officer. Helmy?

--------------------------------------------------------------------------------

Helmy Eltoukhy, Guardant Health, Inc. - Co-Founder, CEO & Director [3]

--------------------------------------------------------------------------------

Thanks, Carrie, and thank you, everyone, for joining us this afternoon. I am pleased to welcome you to Guardant Health's Second Quarter 2019 Earnings Call. Joining me today is AmirAli Talasaz, our President and Co-Founder; and Derek Bertocci, our Chief Financial Officer.

At Guardant Health, our mission is to conquer cancer with data. We are fueled by our commitment to patients and are developing products across the cancer care continuum. First, for advanced-stage patients; second, for early-stage patients and cancer survivors; and third, for asymptomatic individuals.

Consistent with our values of putting patients first, I will start our call with a patient story. A 60-year-old male presented with altered mental status, vertigo and gait instability. A CT scan and MRI indicated multiple lung nodules, brain metastases and numerous lesions in his spine and pelvic bones. A subsequent bone biopsy revealed these nodules and lesions to be non-small-cell lung cancer. Hotspot testing with tissue indicated the tumor was negative for EGFR, BRAF, ALK and ROS1 as well as PD-L1. The patient was then referred to another cancer center, where his oncologist there scheduled him for a second biopsy and whole-brain radiation therapy.

At the same time, his oncologist also ordered a Guardant360 test. Guardant360 quickly identified an uncommon EGFR deletion that is not picked up by most hotspot tests. The patient was immediately started on an anti-EGFR therapy, osimertinib. And just in the nick of time, his oncologist was able to cancel the lung biopsy and whole-brain radiation therapy. The patient had a dramatic response to the anti-EGFR therapy, and his symptoms improved enough for him to return to work.

This story is an example of how the majority of patients today still receive a standard of care that often falls short of national cancer guidelines; a standard of care that more often than not still fails to include comprehensive genomic profiling and largely relies on often incomplete hotspot testing. Indeed, the gap between clinical practice and clinical guidelines is wide.

Fortunately, this story also demonstrates that Guardant360 can nicely fill this gap by quickly and noninvasively unlocking critical genomic information that can dramatically impact outcomes for advanced-stage cancer patients.

We continue to make tremendous progress with our 2 commercial products in the advanced cancer setting, Guardant360 and GuardantOMNI. Adoption of both products continues to accelerate and outpace our expectations. To date, Guardant360 has been ordered by more than 6,000 oncologists, more than 100,000x for patients with advanced cancer to determine the appropriate therapy.

At the same time, we are continuing to see strong growth in demand for both Guardant360 and GuardantOMNI by our more than 50 biopharma customers for their targeted therapy and immuno-oncology programs. This robust commercial progress translated to exceptionally strong Q2 performance. We finished the second quarter with revenue of $54 million, up 178% over the second quarter of 2018. Over the same period, clinical volumes grew 77% to 11,875 clinical tests, and biopharmaceutical volumes grew 112% to 5,285 tests.

Despite this tremendous growth, we believe we are still in the early innings of adoption in the advanced cancer market, a market with more than 700,000 patients in the United States, translating to a roughly $6 billion opportunity. Today, we estimate that clinical adoption of Guardant360 is still only in the mid-single digits, with fewer than 15% of patients receiving any kind of comprehensive genomic profiling, either by tissue or by liquid. This presents a massive opportunity to build and grow this market. We are also just getting started on the biopharma side, where there are more than 1,000 trials with a collective need to enroll over 100,000 patients annually and growing.

In the advanced-stage cancer setting, we continue to focus on shifting the market to a blood-first paradigm for genotyping, which we believe will be key to further accelerating the adoption of liquid biopsies. At the beginning of this year, we outlined 3 proof points that we believed were critical to such adoption. As a reminder, those were: first, the readout from our NILE study; second, FDA approval of Guardant360 with a pan-cancer tumor profiling label; and finally, pan-cancer Medicare coverage.

In the first half of 2019, we have made significant headway building out these proof points and have begun to see an important shift in the perception of a blood-first paradigm, as demonstrated by our commercial progress. This growing acceptance of blood-first was particularly evident at the American Society of Clinical Oncology meeting in early June, where there was palpable excitement around the use of Guardant360 in the first-line metastatic setting. We believe recent developments in the targeted therapy space, with the approval of the first PI3K inhibitor in breast cancer and the progress of KRAS-directed therapies in both lung and colorectal cancers, will only further accelerate the paradigm shift towards comprehensive genomic profiling across multiple cancer types. Additionally, our focus on high-impact clinical studies, now more than 120 peer-reviewed publications, including yesterday's MSI publication, has led to momentum in the reimbursement landscape with more than 160 million covered lives for Guardant360 in lung cancer.

We also continue to advance the other 2 components of our blood-first strategy. Our team continues to make very good progress in our FDA application for Guardant360, and we believe that a final Medicare pan-cancer LCD could be issued later this year.

Shifting gears, not only are we making great progress with our projects for advanced-stage cancer, but we continue to make excellent progress with our LUNAR programs. As a reminder, our LUNAR-1 program is focused on developing tools for early-stage cancer patients and cancer survivors, a potential market opportunity we estimate to be approximately $15 billion. Our LUNAR-2 program is focused on early cancer detection. Initially, the target population associated with LUNAR-2 included only high-risk individuals and encompassed a market opportunity of approximately $18 billion.

In recent months, we have identified average-risk colorectal cancer screening as a viable application of our technology, and we believe the addressable market opportunity for our products in this program has grown considerably. We now estimate that the total addressable market associated with our products from our LUNAR-2 program at over $30 billion. This brings the combined total addressable market for our current pipeline of products to over $50 billion.

Finally, we continue to be pleased by the progress that our joint venture with Softbank is making in accelerating adoption of our tests with both clinical and pharmaceutical customers in Japan and other parts of Asia.

In sum, we are very encouraged by the strong growth across our business. As a result of this progress, we now expect revenue for 2019 to be in the range of $180 million to $190 million, reflecting growth of 99% to 110% over 2018.

With that, I will now turn the call over to AmirAli for more details on our clinical developments and LUNAR program. AmirAli?

--------------------------------------------------------------------------------

AmirAli Talasaz, Guardant Health, Inc. - President, COO & Chairman [4]

--------------------------------------------------------------------------------

Thanks, Helmy. In addition to our market-leading technology, one of Guardant's key differentiators is our commitment to developing robust clinical evidence. As Helmy mentioned, we are continuing to deliver on this commitment as demonstrated by the growing number of peer-reviewed publications and scientific abstracts in support of our platform.

Along these lines, results reported yesterday in Clinical Cancer Research concluded Guardant360 can accurately detect microsatellite instability. In the largest published comparison of blood-based MSI testing to traditional tissue methods, researchers compared the result of 1,145 Guardant360 samples to MSI status determined using standard-of-care tissue testing results taken from medical records. The results from Guardant360 were the same as the standard-of-care tissue test in 98.4% of cases.

MSI is an important biomarker used to predict response to immunotherapy regardless of tumor type. Less than half of all advanced colon cancer patients are currently tested for this important biomarker. And across all solid tumors, we suspect the testing rate is far lower, in part due to challenges of working with tissue samples. By incorporating these results, we should be able to increase the number of patients who get this information and benefit from appropriate immunotherapy.

In addition to our progress in advanced cancer setting, we are building on our cell-free DNA expertise to address additional challenges in oncology such as screening for cancer and detecting recurrence or evidence of residual disease in early-stage cancer patients. Our LUNAR assay, launched in late 2018 for research use only, is currently being used for applications related to guiding new adjuvant or adjuvant decision-making and recurrence monitoring as part of our LUNAR-1 program.

Presentation early June at ASCO and early July at ESMO GI included an analytical validation of Guardant's LUNAR assay as well as a pilot study exploring LUNAR assay's ability to identify early-stage colorectal cancer patients who may benefit from adjuvant therapy after undergoing an intervention with curative intent. This is a particularly challenging clinical setting for the detection of circulating tumor DNA in blood because patients who have gone -- who have undergone curative intent interventions typically have little to no evidence of disease and very low residual tumor DNA shedding in circulation. We are encouraged by this progress and remain on track to release a CLIA-validated version of the assay for use in prospective clinical trials by the end of this year.

Our LUNAR assay is also being used for applications related to early detection as part of our LUNAR-2 program. To recap, our LUNAR assay not only is able to detect somatic genomic alteration at extremely low levels approaching single-molecule detection but simultaneously combines detection of 2 separate dimensions of epigenomic signals, methylation and fragmentomics, into a single assay.

At Guardant, we are committed to commercializing tests that will offer superior clinical utility, meaning something that's relevant and useful for patient care. So similar to our approach with Guardant360, we are using a focused strategy for early detection in spite of the broad applicability of our platform technology in multiple cancer types. We are selecting colorectal cancer in this case.

In selecting colorectal cancer as our initial indication for early detection, we considered a number of factors, including technical performance, cost, reimbursement and unmet need. We believe colorectal cancer presents an ideal target for integrated epigenomic and somatic detection because this cancer presents a relatively homogeneous yet broad landscape of aberrant epigenomics patterns. Moreover, colorectal cancer has a reasonable level of tumor shedding in circulation. In fact, at AACR, we presented exploratory data around the use of our LUNAR assay for detecting cancer in patients recently diagnosed with colorectal cancer. We believe this initial data represents some of the most compelling clinical performance shared to date for blood-based approach for early colorectal cancer detection.

Beyond these factors, we also assess other parameters such as compliance of the existing screening methodologies. For colorectal screening, about 1/3 of average-risk patient who should get screened based on USPSTF guidelines do not comply or fully follow through with the available stool-based tests. This means that even with available technologies that can detect colorectal cancer with high degrees of sensitivity and/or specificity, tens of millions of individuals are still not getting screened.

Our early conversations with providers suggest that the logistical ease of a blood-based test would have significant impact to reach the 1/3 of individuals who are not compliant. A high-performance blood-based screening test could be added to a regular menu of tests that a patient gets during an office visit. Therefore, we believe that blood-based tests can pave the way to improve screening compliance and add significant value to the market.

On our last earnings call, we announced our plan to start a prospective colorectal screening study of over 10,000 patients. This study, named ECLIPSE, is an observational study that will collect blood samples from average-risk individuals between the ages of 50 to 84 prior to screening colonoscopy. We expect the first patient to be enrolled in Q4 of this year, and the duration of the trial will be in line with that of previous screening trials.

We currently expect the costs directly and indirectly associated with this trial to total between $70 million to $100 million, including the build-outs of a high-throughput laboratory facility to process trial samples. We believe that if successful, ECLIPSE will be a critical component of our approval package with the FDA. And accordingly, in parallel, we are preparing the assay as an in vitro diagnostic product. We are very excited by the rapid progress the team is making as well as the positive reception we continue to receive from important stakeholders in the space.

With that, I will now turn the call over to Derek Bertocci for more details on our financials. Derek?

--------------------------------------------------------------------------------

Derek A. Bertocci, Guardant Health, Inc. - CFO [5]

--------------------------------------------------------------------------------

Thank you, AmirAli. Revenue for the second quarter of 2019 totaled $54 million, up 178% from $19.4 million in the prior year quarter. Growth in the volume of tests performed for both clinical and pharmaceutical customers was the prime driver of the increase in revenue. Higher average revenue per test also contributed to the increase in revenue.

Precision oncology revenue from clinical tests in the second quarter totaled $21.8 million, up 127% from $9.6 million in the prior year quarter due to increased demand and higher overall ASP. Second quarter clinical precision oncology volume totaled 11,875 tests, up 77% from 6,723 tests in the prior year quarter. Average revenue recognized per clinical test in the second quarter was $1,839, up 29% from $1,430 in the prior year quarter. This increase was due to revenue earned from tests reimbursed by Medicare for lung cancer patients starting in Q4 of 2018 and increases in commercial payer payments that were beneficially affected by the Protecting Access to Medicare Act of 2014.

Precision oncology revenue from biopharmaceutical tests in the second quarter totaled $20.2 million, up 146% from $8.2 million in the prior year quarter due to increased demand associated with companion diagnostic studies and higher overall ASP. Second quarter biopharmaceutical precision oncology volume totaled 5,285 tests, up 112% from 2,498 tests in the prior year quarter. Average revenue recognized per biopharmaceutical test in the second quarter was $3,827, up 17% from $3,286 in the prior year quarter due to increased demand for the higher-priced GuardantOMNI test.

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.

Back in March, we communicated that biopharma revenue was likely to be more heavily weighted to the first half of the year. In line with this prior guidance, biopharma volumes were particularly strong in the second quarter. While we expect our biopharma business to grow over the long term, the nature of these biopharma programs can result in lumpy revenue quarter-to-quarter. In the second half of the year, we expect revenue earned from biopharmaceutical customers to continue to vary on a quarterly basis and for clinical testing revenue to grow sequentially.

Gross profit is total revenue less cost of precision oncology testing and cost of development services. Gross profit for the second quarter of 2019 was $37.1 million compared to a gross profit of $9.4 million in the same period of the prior year. The gross margin in the second quarter was 68.8% as compared to 48.6% during the second quarter of 2018. Gross margin improvement was primarily due to higher ASP and growth in development services revenue.

As a reminder, effective January 1, 2019, we adopted the new revenue accounting standard, ASC 606, using the modified retrospective method, which means that revenue reported for 2018 is not restated in our 2019 financial statements. Instead, the accumulated difference resulting from applying the new revenue standard to all contracts that were not completed as of adoption was recorded opening accumulated deficit as of January 1, 2019. The effect of the adoption of ASC 606 was to increase 2Q revenue by $339,000 compared to the revenue that would have been reported without adoption of ASC 606. The effect of this change is disclosed in our Q2 results press release.

Total operating expenses for the second quarter of 2019 was $52.4 million, a 63% increase from $32.1 million in the second quarter of 2018. R&D expenses for the second quarter of 2019 were $19.5 million compared to $11.6 million in the second quarter of 2018. The increase was primarily attributable to work required to support our submissions to the FDA for PMA, or premarket approval, for Guardant360 and development and testing of assays under our LUNAR program.

Sales and marketing expenses for the second quarter of 2019 were $19.4 million compared to $11.6 million in the second quarter of 2018. The increase was due to expansion of our clinical U.S. sales force and increased clinical U.S. promotional activities, additions to our biopharmaceutical commercial team to support growth in customers and programs, and the expansion of teams focused on markets outside the U.S.

General and administrative expenses for the second quarter were $13.4 million compared to $9.0 million in the second quarter of 2018. The increase was primarily due to incremental costs related to being a public company as well as legal expenses. Net loss was $11.3 million compared to a net loss of $21.6 million in the second quarter of 2018.

A charge of $0.3 million was incurred in the second quarter of 2019 due to an increase in the fair value of the redeemable noncontrolling interest in our joint venture with Softbank, bringing net loss for the period attributable to Guardant Health common stockholders to $11.6 million. Net loss per share attributable to Guardant Health common stockholders was $0.13 per share in the second quarter of 2019 as compared to $1.75 per share in the corresponding period of the prior year.

We ended the second quarter of 2019 with $822.9 million in cash, cash equivalents and marketable securities. This includes approximately $349.7 million of net proceeds from our follow-on offering, which closed in late May. With a robust cash position, we believe we are well capitalized to commence the ECLIPSE study for CRC screening in the back half of this year.

As Helmy mentioned, we are updating our revenue guidance for the full year 2019 to the range of $180 million to $190 million, representing growth of 99% to 110% over 2018. This compares to our previous revenue expectations of $145 million to $150 million. We now expect clinical sample volume for 2019 to be in the range of 44,000 to 46,000 tests compared to our previous expectations of 39,000 to 41,000. Even accounting for the impact of investment in the planned large prospective clinical trial for our LUNAR program, we now expect net loss in the range of $112 million to $115 million compared to our previous expectations of $126 million to $129 million.

At this point, I'd like to turn the call back to Helmy for closing comments.

--------------------------------------------------------------------------------

Helmy Eltoukhy, Guardant Health, Inc. - Co-Founder, CEO & Director [6]

--------------------------------------------------------------------------------

Thank you, Derek. In closing, we believe we have a unique opportunity at Guardant to expand unprecedented access to cancer's molecular information throughout all stages of the disease. We continue to make great strides against our ambitious goals and look forward to updating you on our progress.

With that, we will now open it up to questions. Operator?

================================================================================

Questions and Answers

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

(Operator Instructions) Our first question comes from Puneet Souda of SVB Leerink.

--------------------------------------------------------------------------------

Puneet Souda, SVB Leerink LLC, Research Division - MD of Life Science Tools & Diagnostics and Senior Research Analyst [2]

--------------------------------------------------------------------------------

Helmy, AmirAli, congrats on the quarter, first of all. 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 I mean, should we expect a stronger growth here in OMNI to continue, or is it just more OMNI ASP-driven? And also, if you could elaborate a bit on the clinical G360 testing volumes to continue to grow. I know you, Derek, gave the guide on that. But just help us understand some of those parts as well as if there's any contribution from LUNAR and adjuvant setting in the guide as well?

--------------------------------------------------------------------------------

Helmy Eltoukhy, Guardant Health, Inc. - Co-Founder, CEO & Director [3]

--------------------------------------------------------------------------------

Maybe I'll start, and then let Derek chime in. We should see very strong fundamentals to our business across the board. I think you can see that clinical volume is growing very nicely. Pharmaceutical volumes, I think championed 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 2 sides of the business.

--------------------------------------------------------------------------------

Derek A. Bertocci, Guardant Health, Inc. - CFO [4]

--------------------------------------------------------------------------------

Yes, Puneet. So we -- as Helmy said, we think it's equally distributed. We did see a very strong -- as we had 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.

--------------------------------------------------------------------------------

Puneet Souda, SVB Leerink LLC, Research Division - MD of Life Science Tools & Diagnostics and Senior Research Analyst [5]

--------------------------------------------------------------------------------

Okay, great. And then my questions on LUNAR, the CRC study, the ECLIPSE study. I know you had highlighted last quarter that the study was starting in second half, but I just want to understand some of the key activities that you need to perform over the next quarter or so for the trial to start in 4Q '19. I know one is completion of the high-throughput facility, but wondering if there's room for further improvement in assay beyond what we saw at AACR and ASCO. Or if you could provide details around if the assay is locked. And lastly, I know you provided the time line, which is -- I assume is in line with DeeP-C. When is the earliest we can see the data here from ECLIPSE?

--------------------------------------------------------------------------------

Helmy Eltoukhy, Guardant Health, Inc. - Co-Founder, CEO & Director [6]

--------------------------------------------------------------------------------

AmirAli, do you want to...

--------------------------------------------------------------------------------

AmirAli Talasaz, Guardant Health, Inc. - President, COO & Chairman [7]

--------------------------------------------------------------------------------

Yes, sure. So maybe, first starting from a technical performance standpoint. We are very excited. I'm pleased with where the assay is and with the evidence that we generate, and some of that was shared at AACR. So we are very happy with the technical performance. Now as we mentioned, we are running the ECLIPSE trial with the ultimate goal of getting at the end an FDA-approved test, if the ECLIPSE study is successful. And as part of that, we need to basically have an IVD-grade version of the assay to be used in running those samples.

The good thing for us is, obviously, the ECLIPSE study is an observational study, so we are going to collect the samples, and we can now basically store that until we have the IVD-grade assay to run those samples with. And that would generate some kind of time line for us to build that IVD-grade assay, build a high-throughput operation to run those samples. But in terms of technical standpoint of the performance of the assay, we feel the assay that we have is in a very good position, as we mentioned before, too.

In terms of the time line, we expect the study -- the first patient to be in Q4 of 2019. In other kind of screening studies, when you look at it, and based on the way that we mapped out this study, it could take like typically around maybe about just shy of maybe 24 months to finish the enrollment of this study. And then it takes us some time to put the data together and publish the data after the enrollment finishes.

--------------------------------------------------------------------------------

Puneet Souda, SVB Leerink LLC, Research Division - MD of Life Science Tools & Diagnostics and Senior Research Analyst [8]

--------------------------------------------------------------------------------

Okay. That's great. And if I could squeeze in one last one. On LUNAR and adjuvant setting, when should we expect to see some data there from -- or maybe early investigators or PI-led studies, when should we start to see some data that could potentially give us a view into what the CLIA-approved assay could look like longer term?

--------------------------------------------------------------------------------

AmirAli Talasaz, Guardant Health, Inc. - President, COO & Chairman [9]

--------------------------------------------------------------------------------

So I assume actually your question is maybe around the LUNAR assay for LUNAR-1 kind of applications that we have. There are already some abstracts that we have in that setting in colorectal cancer and lung cancer. You could expect that in the upcoming congresses and conferences, collaborators that we have they would start actually showing their experiences using that device in even other cancer types beyond lung and colorectal cancer. And as we mentioned during the call, we are on track to release the CLIA version, the clinical version, of the assay later this year. And there are some prospective studies that are already designed, and they are waiting for this assay to get online for those studies to start.

--------------------------------------------------------------------------------

Operator [10]

--------------------------------------------------------------------------------

Our next question comes from Brian Weinstein of William Blair.

--------------------------------------------------------------------------------

Brian David Weinstein, William Blair & Company L.L.C., Research Division - Partner & Healthcare Analyst [11]

--------------------------------------------------------------------------------

Just to go back on the CRC stuff for a second here. I just want to be very clear about the assay as well as the trial itself. So first of all, on the assay, am I to understand that you guys are not doing anything materially to change the -- what we saw previously? Or should we expect that there is going to be some changes to the assay and what you guys think you'll need to get to in terms of sensitivity and specificity in order to have a commercial-grade product?

--------------------------------------------------------------------------------

Helmy Eltoukhy, Guardant Health, Inc. - Co-Founder, CEO & Director [12]

--------------------------------------------------------------------------------

So I think in terms of the technical performance of the assay, the results we shared at AACR are something we believe are very compelling for a product in this space. In terms of what we are doing around further refining the assay, the nature of that work is largely around upgrading the assay to the requirements of in vitro diagnostics given that this would be an FDA-approved device or is intended to be.

--------------------------------------------------------------------------------

Brian David Weinstein, William Blair & Company L.L.C., Research Division - Partner & Healthcare Analyst [13]

--------------------------------------------------------------------------------

Are you planning to go down the parallel path review? I don't think you mentioned anything about that. But I just wanted to understand if that was something that you guys are thinking about here as well.

--------------------------------------------------------------------------------

AmirAli Talasaz, Guardant Health, Inc. - President, COO & Chairman [14]

--------------------------------------------------------------------------------

So we've been in conversations actually with both the FDA agencies and CMS. But dual track is definitely an interesting option that exists, but we haven't provided comments about our exact path forward here.

--------------------------------------------------------------------------------

Brian David Weinstein, William Blair & Company L.L.C., Research Division - Partner & Healthcare Analyst [15]

--------------------------------------------------------------------------------

Okay. And then switching to clinical testing for a second here. Obviously, there was a surge in volume this quarter. Are you able to kind of put a finger as to really what's driving that? Is it really -- is it the sales force that you're adding? And what are the plans for additional sales force additions later on this year? Is it the NILE study? If you can just give us a little insight into what you think is really driving this massive inflection that we're seeing.

--------------------------------------------------------------------------------

Helmy Eltoukhy, Guardant Health, Inc. - Co-Founder, CEO & Director [16]

--------------------------------------------------------------------------------

Yes. Thanks, Brian. It's a combination of various factors. Certainly, NILE has been very positive for us. We're seeing some early uplift. And I think it really resonates with some of the realities of clinical practice. I think there were a lot of physicians who were on the sidelines wondering if liquid biopsy could be something that could fit in their standard of care. But I would say that, along with some early traction with the sales force expansion we made -- if you remember, we were primarily at 20 to 30 reps for quite a while, and then we expanded to just below 60. So we're, I think, seeing some of the benefits of those sales reps coming in. I would say that a lot of this uplift we're seeing is probably earlier than we anticipated. We think for it to be really sustained, some of the other proof points need to come into place. And it's why we're working diligently on the pan-cancer reimbursement and the FDA process as well.

--------------------------------------------------------------------------------

Operator [17]

--------------------------------------------------------------------------------

Our next question comes from Tycho Peterson of JPMorgan.

--------------------------------------------------------------------------------

Tycho W. Peterson, JP Morgan Chase & Co, Research Division - Senior Analyst [18]

--------------------------------------------------------------------------------

A couple of clarifications. So based on your comments on ECLIPSE, should we not expect any data readout until 2022? Or can we get something in the interim?

--------------------------------------------------------------------------------

AmirAli Talasaz, Guardant Health, Inc. - President, COO & Chairman [19]

--------------------------------------------------------------------------------

So the current plan actually is to finish the enrollment and then publish --- put the whole data package together at the end of this study. We have not planned an intermediate readout in the clinical study to share that information.

--------------------------------------------------------------------------------

Tycho W. Peterson, JP Morgan Chase & Co, Research Division - Senior Analyst [20]

--------------------------------------------------------------------------------

Okay. And then -- go ahead.

--------------------------------------------------------------------------------

AmirAli Talasaz, Guardant Health, Inc. - President, COO & Chairman [21]

--------------------------------------------------------------------------------

As you may know, like, you need to enroll 10,000 patients in order to get like a few dozen, maybe 60 to 100 colorectal cancer patients identified. So the cohorts of colorectal cancer patients is going to be too small to even figure out very early what the performance of the test would be. The confidence interval would be too wide to really assess the performance of the test. That's why we need to wait for the data to get mature.

--------------------------------------------------------------------------------

Tycho W. Peterson, JP Morgan Chase & Co, Research Division - Senior Analyst [22]

--------------------------------------------------------------------------------

And then on the guidance for the remainder of the year, is the Palmetto LCD included or excluded? And can you just talk to how you're thinking about that, in particular, around repeat testing...

--------------------------------------------------------------------------------

Derek A. Bertocci, Guardant Health, Inc. - CFO [23]

--------------------------------------------------------------------------------

So we are expecting that the pan-cancer Palmetto LCD would be issued in the fourth quarter, and that it would have some benefit to us in the fourth quarter.

--------------------------------------------------------------------------------

Tycho W. Peterson, JP Morgan Chase & Co, Research Division - Senior Analyst [24]

--------------------------------------------------------------------------------

Okay. And then lastly, on the MSI study, just curious how we should interpret the results here. I mean is this something that could be offered as a stand-alone, stripped-down version of the assay at a lower price point? Or is that not the right way to think about it?

--------------------------------------------------------------------------------

Helmy Eltoukhy, Guardant Health, Inc. - Co-Founder, CEO & Director [25]

--------------------------------------------------------------------------------

It's something that's included as part of Guardant360 today. So it's something that is benefiting patients, has benefited patients for the last couple of quarters. And certainly, something that, I think, paves the way for these tumor-agnostic biomarkers that are becoming more and more common as the drug pipeline advances. So we think that this is something that is going to continue to drive clinical adoption of these comprehensive genomic profiling technologies and one that is not something that is straightforward to do in blood. And so there was a lot of work that the team did to be able to provide data this robust in this setting.

--------------------------------------------------------------------------------

Operator [26]

--------------------------------------------------------------------------------

Our next question comes from Doug Schenkel of Cowen.

--------------------------------------------------------------------------------

Adam Joseph Wieschhaus, Cowen and Company, LLC, Research Division - Associate [27]

--------------------------------------------------------------------------------

This is Adam Wieschhaus on for Doug. Maybe I missed it, but did you provide a payer coverage update? I believe you had over 150 million covered lives by the end of last quarter. Just trying to assess your progress there.

--------------------------------------------------------------------------------

Helmy Eltoukhy, Guardant Health, Inc. - Co-Founder, CEO & Director [28]

--------------------------------------------------------------------------------

Yes, we're now at a little over 160 million now. So we continue to make progress with payers. And I think we're very pleased with where we are and what we see ahead of us.

--------------------------------------------------------------------------------

Adam Joseph Wieschhaus, Cowen and Company, LLC, Research Division - Associate [29]

--------------------------------------------------------------------------------

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 A. Bertocci, Guardant Health, Inc. - CFO [30]

--------------------------------------------------------------------------------

Correct. We had indicated that the development services would be more first half-weighted, so we're trying to caution that you not get carried away and look at the slope from Q1 to Q2 and just extrapolate from that.

--------------------------------------------------------------------------------

Adam Joseph Wieschhaus, Cowen and Company, LLC, Research Division - Associate [31]

--------------------------------------------------------------------------------

Okay. And then last, on the ECLIPSE study, it sounds like you expect the study to begin in Q4 and take about 24 months to complete. What does that contemplate in terms of when it could be reviewed by the USPSTF considering that the committee seemingly meets only every 6 years or so?

--------------------------------------------------------------------------------

Helmy Eltoukhy, Guardant Health, Inc. - Co-Founder, CEO & Director [32]

--------------------------------------------------------------------------------

I think it's too early to comment on that at this time.

--------------------------------------------------------------------------------

Operator [33]

--------------------------------------------------------------------------------

Our next question comes from Derik De Bruin of Bank of America.

--------------------------------------------------------------------------------

Derik De Bruin, BofA Merrill Lynch, Research Division - MD of Equity Research [34]

--------------------------------------------------------------------------------

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 sort of thinking about pacing on this for the rest of the year.

--------------------------------------------------------------------------------

Derek A. Bertocci, Guardant Health, Inc. - CFO [35]

--------------------------------------------------------------------------------

Right. So the gross margin was really benefited this quarter by, 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 strong growth 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.

--------------------------------------------------------------------------------

Derik De Bruin, BofA Merrill Lynch, Research Division - MD of Equity Research [36]

--------------------------------------------------------------------------------

Great. That's what I was thinking. Just want to clarify that. So you mentioned the ASP in the pharma business. So you're pushing up against $4,000, I believe, is what you said there -- $3,800, I believe. Where does that sort of peak out? And I'm just wondering, are there incremental increases on that we should look for?

--------------------------------------------------------------------------------

Derek A. Bertocci, Guardant Health, Inc. - CFO [37]

--------------------------------------------------------------------------------

So the -- it depends on how much of our business is driven by OMNI versus how much of our business is driven by G360. We are seeing very good and strong demand from a number of pharmaceutical customers for OMNI. So I would expect we could get to, certainly, 50% of our volume coming from OMNI, at least in the near term. And we're getting close to that level this the past quarter.

--------------------------------------------------------------------------------

Derik De Bruin, BofA Merrill Lynch, Research Division - MD of Equity Research [38]

--------------------------------------------------------------------------------

Great. On G360, as you approach the FDA approval and looking for that, I guess, how can you think about that changing the utilization in terms of moving more to using the blood-first approach that you're talking about? I guess have you had conversations where -- is there a big pent-up demand for people just waiting for the FDA approval to sort of go out and become more aggressive in terms of using this as first line? Just sort of thinking about what the -- how the approval sort of changes the equation.

--------------------------------------------------------------------------------

Helmy Eltoukhy, Guardant Health, Inc. - Co-Founder, CEO & Director [39]

--------------------------------------------------------------------------------

I would say that -- that's a good question. I would say they're kind of separate questions. If you think about how the test is used clinically, that's where I think studies like NILE, I think, really address that clinical question of, if I use this test in this setting, am I going to compromise patient care? Am I going to compromise the biomarker detection rate? What are the logistical challenges of being able to get that information in a timely fashion?

And so a lot of that is the work we're doing with stakeholders and clinicians and so on in terms of educating on the merits of what a blood-first paradigm really means in terms of clinical care. As you know, we have this LCD that's in draft form, and we're hopeful it will be finalized later this year. That has decoupled a lot of the reimbursement kind of issues that were initially coupled with FDA approval. And so it gives us another path forward, an independent path. And so what FDA now provides is that stamp of quality.

I think -- if you think about the market in kind of the traditional setting and think about some of the late majority and the laggards in the market that really want to use something that meets a certain standard, they don't really want to take any risks, that's where FDA approval, I think, will be helpful in terms of the kind of final stages of adoption in terms of getting some of the more intransigent segments on board to a blood-first paradigm.

--------------------------------------------------------------------------------

Derik De Bruin, BofA Merrill Lynch, Research Division - MD of Equity Research [40]

--------------------------------------------------------------------------------

Great. And I'll ask one final question. Can you give us a sense on your OUS revenues and just how that's ramping, and when we can expect some news on the front internationally?

--------------------------------------------------------------------------------

Derek A. Bertocci, Guardant Health, Inc. - CFO [41]

--------------------------------------------------------------------------------

So the OUS revenue is still relatively small. The ramp will be driven by, probably in the near term, the progress we make in the Japan market. As you know, the joint venture is pursuing both 2 clinical trials in the Japan market, which we hope, over time, will lead to approvals, and ultimately reimbursement in the Japan market, which we think would be necessary to have substantial growth.

--------------------------------------------------------------------------------

Operator [42]

--------------------------------------------------------------------------------

Our next question comes from Mark Massaro of Canaccord Genuity.

--------------------------------------------------------------------------------

Mark Anthony Massaro, Canaccord Genuity Corp., Research Division - Senior Analyst [43]

--------------------------------------------------------------------------------

Congratulations for a great quarter. My first question is, I think it's roughly 45% to 50% of Guardant360 tests are ordered for lung cancer. So for the remaining, call it, 50% ordered for additional cancers, can you just walk us through what percentage of those are getting paid close to 0? And so really what I'm trying to get at is, how should we think about the pan-cancer coverage decision being additive to revenue in 2020 and beyond?

--------------------------------------------------------------------------------

Derek A. Bertocci, Guardant Health, Inc. - CFO [44]

--------------------------------------------------------------------------------

So the pan-cancer LCD, remember, will be different perhaps than the pan-cancer NCD. So under the pan-cancer LCD, the current wording that exists in the draft indicates that it is where tissue testing is infeasible or at progression. And that's not the same as the national coverage decision, which we estimate would cover 85% of our volume. So I think you can look at -- from a Medicare patient standpoint, currently, approximately 1/3 of our patients are covered with the current lung Local Coverage Determination.

With the pan-cancer, it would be up. We don't know exactly what it would be, but it would probably be up significantly. And then the National Coverage Determination, which would be a result of the pan-cancer FDA approval, would move us to about 85% of Medicare patients. And Medicare patients represent approximately 38% of our total volume. As far as the private payers, it will take time. They tend to lag a bit in terms of adopting new technology. So that is probably a slower evolution over an extended period of time.

--------------------------------------------------------------------------------

Mark Anthony Massaro, Canaccord Genuity Corp., Research Division - Senior Analyst [45]

--------------------------------------------------------------------------------

Great. I also wanted to ask for housekeeping. Have you submitted Guardant360 to the FDA? And is it your expectation to get approval by the end of this year or is it more like early 2020?

--------------------------------------------------------------------------------

AmirAli Talasaz, Guardant Health, Inc. - President, COO & Chairman [46]

--------------------------------------------------------------------------------

So actually, we are continuing to make good progress -- particularly good progress on our FDA application. And as we mentioned in our previous earning call, we are planning to submit in Q3. So hopefully, in the next earnings call, we would have some additional updates about this.

--------------------------------------------------------------------------------

Mark Anthony Massaro, Canaccord Genuity Corp., Research Division - Senior Analyst [47]

--------------------------------------------------------------------------------

Okay. And just to clarify, as it relates to your CRC assay, have you locked down the assay yet? And is it your expectation that with the combination of markers that you've acquired, that it's your hope that your sensitivity and specificity that you read out at AACR would be better in the locked down version?

--------------------------------------------------------------------------------

AmirAli Talasaz, Guardant Health, Inc. - President, COO & Chairman [48]

--------------------------------------------------------------------------------

So maybe let me try to answer this question a little bit differently to see if it would help or not. And I give that analogy of the [transfer] on the Guardant360 side. We have Guardant360 LDT, and the technology performance, we are very happy with. And then we have to generate Guardant360 CDx as an IVD product. We had to go and make some kind of changes and develop documentation and different kind of reagents that we have to manufacture to have the IVD-grade version of the same assay, but the technical performance was really the same. But we had to go through that process in order to have the IVD version of that device.

So LUNAR, we are very happy with the performance. And where the technology stands with some of the data that we showed in AACR, some additional data that we have internally, we are happy with where the assay is. But since we are going to actually submit the ECLIPSE readout as a clinical validation of our LUNAR assay for -- as an FDA -- basically, application for FDA approval, potential approval, we need to generate the IVD-grade version of the LUNAR assay. So we are in that process of, basically, IVD-ization of the assay that we have. And we have time since the ECLIPSE study is observational. We can collect the samples, store them. And when we have the IVD grade, we can run the assay using that device.

--------------------------------------------------------------------------------

Mark Anthony Massaro, Canaccord Genuity Corp., Research Division - Senior Analyst [49]

--------------------------------------------------------------------------------

Okay, that's helpful. Your net loss came in about $20 million better than our model. And obviously, the commentary about your strong gross margins has been made. Obviously, if you were to strip out the cost of the CRC screening program, we could potentially be talking about achieving profitability in the not-too-distant future. But anyways, when we do layer in the cost of the ECLIPSE study, can you just give us a sense on should we take the $70 million to $100 million and sort of lay that on top of where consensus is now and spread it out over a couple of years? Derek, can you just help us a little bit as we think about spending in the next couple of years?

--------------------------------------------------------------------------------

Derek A. Bertocci, Guardant Health, Inc. - CFO [50]

--------------------------------------------------------------------------------

Yes. So we've estimated the cost of the trial in the $70 million to $100 million range. And trials of that type often take 2 years to run. So if you were to spread that money over that 2-year period, that's probably as good of an estimate as we can give. There is -- obviously, the upfront is lower because we're just starting the trial. But we do have a lot of costs that we're working on actually to get the trial going. It's the enrollment that will take time over that 2-year period. So I would put in the cost over that 2-year period recognized as upfront start-up costs. And then enrollment will grow probably as most trials do across the trial.

--------------------------------------------------------------------------------

Mark Anthony Massaro, Canaccord Genuity Corp., Research Division - Senior Analyst [51]

--------------------------------------------------------------------------------

Okay. And if I can ask one more. Obviously, LUNAR-1 is a promising initiative. It's really a research pharma-type program at the moment. Can you give us an update as to when you expect to launch this for cancer patients? I know Natera is out, they launched at ASCO. So can you just give us a sense of when you think this will be launched into the clinic?

--------------------------------------------------------------------------------

Helmy Eltoukhy, Guardant Health, Inc. - Co-Founder, CEO & Director [52]

--------------------------------------------------------------------------------

Yes. I think that's not something that we've given any kind of update on or guidance. We're taking a very systematic approach to our program around LUNAR-1. We believe working with biopharmaceutical customers as well as many of the other activities we're conducting with academic centers and other researchers are going to be kind of the most expedient way to get to something that is ultimately broadly reimbursed in the adjuvant setting. I think the large kind of hurdle is thinking about providing and acquiring the right clinical outcome data so that these types of assays can show that they provide value to the health care system and convince payers that it's something they should be paying for. And so we believe the strategy that we're taking by, right now, working retrospectively, and then either next -- second half of this year, working on prospective clinical utility trials, as I said, is going to be the most efficient way to ultimately -- to get to a product that is widely reimbursed in a variety of clinical indications.

--------------------------------------------------------------------------------

Operator [53]

--------------------------------------------------------------------------------

There are no further questions. I'd like to turn the call back over to Helmy Eltoukhy for any closing remarks.

--------------------------------------------------------------------------------

Helmy Eltoukhy, Guardant Health, Inc. - Co-Founder, CEO & Director [54]

--------------------------------------------------------------------------------

Okay. Yes, thank you, everyone. We look forward to connecting with everyone next quarter.

--------------------------------------------------------------------------------

Operator [55]

--------------------------------------------------------------------------------

Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program, and you may all disconnect. Everyone have a great day.