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Edited Transcript of GH.OQ earnings conference call or presentation 7-Nov-19 9:30pm GMT

Q3 2019 Guardant Health Inc Earnings Call

REDWOOD CITY Nov 13, 2019 (Thomson StreetEvents) -- Edited Transcript of Guardant Health Inc earnings conference call or presentation Thursday, November 7, 2019 at 9:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* AmirAli Talasaz

Guardant Health, Inc. - President, COO & Chairman

* Derek A. Bertocci

Guardant Health, Inc. - CFO

* Helmy Eltoukhy

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

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Conference Call Participants

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* Andrew Frederick Brackmann

William Blair & Company L.L.C., Research Division - Associate

* Derik De Bruin

BofA Merrill Lynch, Research Division - MD of Equity Research

* Doug Schenkel

Cowen and Company, LLC, Research Division - MD & Senior Research Analyst

* 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

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Presentation

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Operator [1]

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Good afternoon, ladies and gentlemen, and welcome to the Guardant Health Q3 2019 Earnings Conference Call. (Operator Instructions) As a reminder, this conference is being recorded.

I will now turn the conference over to your host, Ms. Carrie Mendivil. Please go ahead.

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Carrie Mendivil, Gilmartin Group LLC - Principal [2]

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Thank you. Earlier today, Guardant Health released financial results for the quarter ended September 30, 2019. If you have not received the 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 its other filings with the Securities and Exchange Commission. Except as required by law, 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, November 7, 2019.

With that, I'd like to turn the call over to Helmy Eltoukhy, Guardant's Co-Founder and CEO. Helmy?

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

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Thanks, Carrie, and thank you, everyone, for joining us this afternoon. I'm pleased to welcome you to Guardant Health's third quarter 2019 earnings call. Joining me today is AmirAli Talasaz, our President and Co-Founder; and Derek Bertocci, our Chief Financial Officer.

Consistent with our value of putting patients first, I will start our call with a patient story. Over a decade ago, a 69-year-old physician was diagnosed with stage II prostate cancer. By 2018, his cancer had become metastatic and was progressing despite an androgen deprivation therapy. With a rising PSA score and unpleasant side effects from his therapy, he discontinued treatment, closed his private practice and began making end-of-life care decisions.

Looking for another option, his oncologist ordered a Guardant360 test, which quickly identified a somatic BRCA2 mutation. His doctor immediately started him on a PARP inhibitor therapy, which has demonstrated promising data in BRCA-mutated prostate cancer. 9 months later, this patient is alive, stable and back at work, once again caring for his patients.

We believe this story demonstrates the growing importance of the precision medicine paradigm in oncology, not just for lung cancer patients, but increasingly for patients across many cancer types. Establishing a new standard of care for patients, however, is not simple and requires generating evidence of superior clinical utility to support broad reimbursement and clinical adoption for such new approaches. At Guardant Health, we are committed to such investment, aimed at advancing clinical utility across the continuum of cancer care.

In the treatment selection market, for example, with Guardant360, we initially focused our efforts in non-small cell lung cancer, where we believe the limitations of tissue created a critical gap in comprehensive testing. Through investments in high-impact clinical studies, we are able to quickly establish clinical utility in lung cancer, which, in turn, has helped decrease time to reimbursement, approve physician conversion efficiency and lead to record clinical adoption. Our investments, along with our many collaborations with leading cancer centers and pharmaceutical partners, have led to over 130 peer-reviewed publications in over 400 scientific abstracts, detailing clinical evidence supporting our platform across dozens of cancer types.

For instance, at the recent European Society of Medical Oncology Conference in September, results from the TRIUMPH study demonstrated that patients with metastatic colorectal cancer with a HER2 amplification detected by the Guardant360 assay experienced clinical benefit from HER2-directed combination therapy. These results strongly suggested that Guardant360 can identify patients with HER2 amplified metastatic colorectal cancer, who could benefit from the dual HER2-targeted therapy.

As we have mentioned previously, in addition to strong clinical data, we believe FDA approval of Guardant360 will be an important catalyst for helping to establish a blood-first paradigm that will lead to continued clinical adoption of Guardant360.

Over the last 2 years, our team has been working diligently on analytical and clinical validity studies to support our premarket approval application for Guardant360 and what we believe would be the first of its kind submission. Today, I am happy to announce a very important milestone for the company and for the precision oncology space, and that we have recently submitted our PMA package for Guardant360 to the FDA.

We also believe that a final Medicare Pan-Cancer LCD could be issued by the end of the year. As a reminder, this LCD could potentially expand Medicare coverage of the Guardant360 assay to over a dozen advanced solid tumor cancer types with guideline-recommended genomic targets. These tumor types represent the vast majority of all solid tumors. The draft LCD applies to advanced cancer patients who are covered by Medicare for next-generation sequencing of tumor tissue but have insufficient or unavailable tissue samples. This is an important step towards ensuring all Medicare beneficiaries with advanced cancer have timely access to guideline-recommended treatment options.

We are encouraged by the increasing demand for our products, and in particular, GuardantOMNI from our biopharma partners. GuardantOMNI offers our partners the opportunity to identify patients who may respond to immuno-oncology agents as well as targeted therapies. For example, an area of growing interest is the identification of patients with homologous repair deficiency gene signatures, who may be candidates for a class of targeted therapy known as PARP inhibitors. The continued robust progress across every segment of our business translated to another exceptionally strong quarter, with total revenue growing 181% year-over-year to $60.8 million.

Over the same period, clinical volumes grew 89% to 13,259 clinical tests and biopharmaceutical volumes grew 111% to 5,280 tests. As a result of this progress, we now expect revenue for 2019 to be in the range of $202 million to $207 million, reflecting growth of 123% to 128% over 2018.

Before I turn the call over to AmirAli to discuss the details of our LUNAR programs, I would like to mention that Aaref Hilaly has stepped down from our Board of Directors following his departure from Sequoia Capital. I want to take a moment to thank Aaref for his guidance and contributions to Guardant over the past 4 years.

With that, I will now turn the call over to AmirAli.

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

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Thanks, Helmy. Similar to our clinical development and commercial path with Guardant360 in starting with lung cancer as the lead indication, we are taking a similarly focused approach with our LUNAR programs. Starting first with our LUNAR-1 program, where we are developing an assay for adjuvant therapy decision-making and recurrence monitoring. We believe that establishing evidence for clinical utility is a critical component to drive sustained long-term adoption in the recurrence monitoring space. One of the challenges in this space will be the demonstration of clinical utility through prospective interventional trials. That is proving that earlier detection of residual disease or recurrence and lead-time improvement in patient outcomes. We believe this will be critical to changing clinical workflows and establishing reimbursement on a variety of payers.

To this end, I'm very pleased to announce that we have clinically validated our LUNAR-1 assay and have launched a clear version of this assay for prospective clinical trials. In addition, we are planning to initiate a prospective interventional study for adjuvant therapy selection in colorectal cancer in the near future.

Now moving on to LUNAR-2. We've been diligently advancing our colorectal cancer screening program forward, where we believe that blood-based assay could add tremendous value when looking at the existing rates of patient compliance with available screening tools. A few weeks ago, we announced the enrollment of the first patient in our ECLIPSE study, which is the prospective multi-site registrational study designed to support the introduction of our LUNAR-2 assay for using guidelines-recommend colorectal cancer screening in average risk adults.

This study's primary objective is to evaluate the performance of the LUNAR-2 assay to detect colorectal cancer and advanced neoplasia's specificity during screening. This study also includes secondary endpoints evaluating the assay sensitivity related to color detection.

Over the next 24 months, we plan to enroll about 10,000 individuals aged 45 to 84 or at average risk of colorectal cancer across about 100 sites in the United States. To our knowledge, this is the first blood-based screening trial of this magnitude. We are encouraged by our early discussions with both FDA and CMS. And believe that if successful, this regulatory grade study will pave the way for FDA approval of our LUNAR-2 assay and later CMS coverage. Both of which are critical for durable long-term clinical adoption.

We are very excited about our rapid progress as well as the positive reception we continue to receive from important stakeholders in this space. They agree there is a critical gap in the screening landscape for colorectal cancer, which is known to be effective in saving lives. In fact, the U.S. Prevention Services Task Force recommends screening average risk adults for colorectal cancer starting at age 50 and continuing to age 75. Yes, despite the guidelines and established clinical evidence, about 1/3 of adults in the United States, who should be screened, do not comply citing that the current screening methods are time-consuming, unpleasant and, in case of colonoscopy, invasive.

Our blood-based assay is intended to improve screening compliance by removing barriers associated with current testing methods. Because blood test already play an integral role in medicine, we believe our test could significantly increase adherence with screening guidelines and fill the compliance gap that exists today. We look forward to building the clinical evidence needed to ensure reduction of our assay commercially and drive clinical adoption.

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

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

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Thank you, AmirAli. Revenue for the third quarter of 2019 totaled $60.8 million, up 181% from $21.7 million in the prior year quarter. Third quarter revenue included $5.5 million due to payments received in the quarter from successful appeals of payers' denial of reimbursement for samples processed in 2018. Given the age of the samples associated with these successful appeals, the company does not believe this appeals revenue is indicative of ordinary course operations. Increases in both volume and ASP for clinical testing, plus higher volume for biopharma testing, were the prime drivers of the increase in revenue. Development services, primarily companion diagnostic programs also contributed to the increase in revenue. Total precision oncology revenue in the third quarter was $52.1 million, up 185% from $18.3 million in the prior year period.

Precision oncology revenue from clinical tests in the third quarter totaled $30.8 million, up 244% from $9.6 million in the prior year quarter due to increases in both volume and ASP. This included the $5.5 million of revenue from appeals to 2018 samples. Third quarter clinical precision oncology volume totaled 13,259 tests, up 89% from 7,027 tests in the prior year quarter. This increase was mainly due to reimbursement by Medicare for lung cancer patients starting in the fourth quarter of 2018, plus 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 third quarter totaled $21.4 million, up 145% from $8.7 million in the prior year quarter due to growth in the number of programs that biopharmaceutical customers brought to Guardant Health, particularly for use of GuardantOMNI. Third quarter biopharmaceutical precision oncology volume totaled 5,280 tests, up 111% from 2,505 tests in the prior year quarter. Average revenue recognized per biopharmaceutical test in the third quarter was $4,052, up 16% from $3,491 in the prior year quarter due to a greater number of GuardantOMNI tests, which has a higher selling price than Guardant360 test. Development services revenue in the third quarter totaled $8.7 million, up 156% from the prior year quarter due to an increase in projects from biopharmaceutical customers active in 2019, mainly for companion diagnostic development and regulatory-related services.

Gross profit is total revenue less cost of precision oncology testing and cost of development services. Gross profit for the third quarter of 2019 was $42.3 million compared to a gross profit of $11.6 million in the same period of the prior year. The gross margin in the third quarter was 70% as compared to 54% during the third quarter of 2018. These results are inclusive of the benefits of the $5.5 million of appeals revenue.

Gross margin improvement was primarily due to the increase in average revenue per clinical and biopharmaceutical tests. 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 to opening accumulated deficit as of January 1, 2019. The effect of the adoption of ASC 606 was to increase Q3 revenue by $1.1 million compared to the revenue that would have been reported without adoption of ASC 606. The effect of this change is disclosed in our Q3 results press release.

Total operating expense for the third quarter of 2019 was $59.8 million, a 67% increase from $35.9 million in the third quarter of 2018. R&D expenses for the third quarter of 2019 were $24.6 million compared to $14.3 million in the third quarter of 2018. The increase was primarily attributable to work to prepare the Guardant360 IVD submission to the FDA, development and clinical studies for the LUNAR program and additional clinical studies' improvements, processes and products.

Sales and marketing expenses for the third quarter of 2019 were $18.8 million compared to $13.5 million in the third quarter of 2018. The increase was due to expansion of our commercial organization to drive increases in revenue. General and administrative expenses for the third quarter were $16.4 million compared to $8.1 million in the third quarter of 2018. This increase was primarily due to increases in personnel, professional services, including legal and accounting, and costs required to support the transition to a public company.

Net loss attributable to Guardant Health's common stockholders was $12.8 million compared to $24.5 million in the third quarter of 2018. Net loss per share attributable to Guardant Health's common stockholders was $0.14 per share in the third quarter of 2019 as composed -- as compared to $1.94 per share in the corresponding period of the prior year. We ended the third quarter of 2019 with $825.6 million in cash, cash equivalents and marketable securities.

As Helmy mentioned, we are updating our revenue guidance. For the full year 2019, we expect revenue to be in the range of $202 million to $207 million, representing growth of 123% to 128% over 2018. Our previous revenue expectation was $180 million to $190 million. We now expect clinical sample volume for 2019 to be approximately 48,000 tests compared to our previous expectations of 44,000 to 46,000 clinical samples. We now expect net loss in the range of $75 million to $80 million compared to our previous expectations of $112 million to $115 million. This estimate includes costs associated with the start of our ECLIPSE clinical trial in the fourth quarter of 2019.

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

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question comes from the line of Brian Weinstein with William Blair.

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Andrew Frederick Brackmann, William Blair & Company L.L.C., Research Division - Associate [2]

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This is actually Andrew Brackmann on for Brian. Maybe we can just first start off with a high-level question around adoption of G360, what you're seeing there, what sort of institutions from a high level are sort of the ones where you're getting the deepest sort of penetration? Is that in academic hospitals, large IDNs or community hospitals? And how does that compare to what you had thought before in the year?

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

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Yes. Good question, Andrew. So we're actually seeing a pretty similar trend to what we've been seeing for the last few quarters, with NILE, with the expanded sales force and with, I think, some of the clinical data that is giving more confidence to use of liquid biopsy for biomarker selection, we're seeing really a shift from our penetration on the academic centers to really robust growth on the community side. And so historically, years ago, we have been weighted on the academic side. And now I think just about 60% of our volume is in the community, and that's where we're seeing, I would say, the fastest growth right now of adoption, which is where you want to be because about 80% of oncology expect us in the community setting.

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Andrew Frederick Brackmann, William Blair & Company L.L.C., Research Division - Associate [4]

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Got it. And then just one on guidance. As we sort of think about the last sort of several quarters, you've obviously blown away sort of the consensus expectations, how should we think about you guys, what are sort of the puts and takes in order to get to that low end of the range? And then one, Derek, are there any other additional onetime payments associated in that guidance?

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

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So in the guidance, there are not expectations of any onetime, but you should be thinking about the revenue in Q3, excluding that as you think about looking forward. In terms of the guidance, we think that this is a prudent guidance relative to what our expectations are. We had indicated at the outset of the year, and we've reminded the analysts that our pharma business would be heavier in the first half, and we're seeing that exactly in the results. We still see that our pharma business in terms of programs that pharma customers are bringing to us is very robust. We just had a bit more of their activity happened in Q3 than we're -- than we originally anticipated.

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Operator [6]

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And your next question comes from the line of Tycho Peterson with JPMorgan.

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Tycho W. Peterson, JP Morgan Chase & Co, Research Division - Senior Analyst [7]

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A question, I guess, with the Palmetto LCD getting finalized into year-end, but then you've got the NCD coming in the first quarter. I mean is the Palmetto LCD effectively moved once the NCD rolls in? Or what's the importance of actually getting that in place?

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Helmy Eltoukhy, Guardant Health, Inc. - Co-Founder, CEO & Director [8]

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Yes. So we look at the 2 as really a parallel kind of pathways in terms of securing Pan-Cancer Medicare coverage. And so I think it's nice to have the optionality of both pathways in terms of being able to secure what we believe is going to be the largest step function in ASP increase for our clinical volume. And so we believe the LCD should get finalized later this year. The NCD, we believe that will be kicking in, essentially, probably a quarter after our FDA approval of Guardant360. And so -- and the review cycle is, I think, formally 6 months from submission. So we certainly think that the LCD would be something we can draw on well before the NCD.

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Tycho W. Peterson, JP Morgan Chase & Co, Research Division - Senior Analyst [9]

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And then, Helmy, are you able to talk on progress with the Japan JV, are there kind of milestones we should be paying attention to over the coming quarters there?

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Helmy Eltoukhy, Guardant Health, Inc. - Co-Founder, CEO & Director [10]

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We continue to make excellent progress there. We're seeing now thousands of samples that we're processing in Japan as well as in Southeast Asia. And so our joint venture with SoftBank continues to make good progress. We believe our FDA package is important, not just in the U.S., but internationally, since it's that data that will be used in our submissions to other regulatory bodies such as the PMDA. And so the team is working diligently on some of those activities of translating that work into the form factor required for the PMDA in Japan. So I think probably nothing specific to update at this time, but we're very pleased with the progress there.

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Tycho W. Peterson, JP Morgan Chase & Co, Research Division - Senior Analyst [11]

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And then on CGP, comprehensive genomic profiling, that's been stuck at around 15%. Can you just talk to what it takes to move the needle there?

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

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You mean in terms of penetration into...

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Tycho W. Peterson, JP Morgan Chase & Co, Research Division - Senior Analyst [13]

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Correct. Correct, yes.

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Helmy Eltoukhy, Guardant Health, Inc. - Co-Founder, CEO & Director [14]

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Yes. It's -- from what we can estimate, it's in the 15% to 20% range in terms of tissue or liquid comprehensive genomic profiling penetration. I think we are seeing as more targeted therapies become available, obviously the NCCN guidelines have been updated from just a few markers to now 8 biomarkers for NCCN and lung cancer. We saw PIK3CA recently added as an option for breast cancer patients. And so it's going to take this multifactorial effort to, I think, move the needle to really ensure that the comprehensive genomic profiling is done for newly diagnosed metastatic patients at the first-line setting.

And so the good news there is I think we are seeing that move, and we're seeing that needle move. And it's not just us that is putting the effort, and it's really the whole space and all the pharmaceutical companies that are selling into that market are helping as well. So yes, we're very confident that that's going to continue moving in the right direction.

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Tycho W. Peterson, JP Morgan Chase & Co, Research Division - Senior Analyst [15]

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Okay. And then one follow-up before I hop off. You've mentioned SoftBank before. Obviously, a lot of people are focused on their ownership. Are you able to talk to your dialogue with them in your interactions? Obviously, there's a fear they'll come back to market.

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

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I can tell you at the Board level, I think everyone is very positive about Guardant and our future prospects in this space. But we can't comment on any individual investors holdings in general.

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Operator [17]

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And your next question comes from the line of Doug Schenkel with Cowen.

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Doug Schenkel, Cowen and Company, LLC, Research Division - MD & Senior Research Analyst [18]

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Maybe just a quick follow-up to one of Tycho's questions on the submission to the FDA, the PMA package. It sounds like the answer to both of these is yes, but just to confirm, are you officially pursuing the dual-path process? And based on what you submitted to the FDA, is the expectation that this will support a pan-cancer label without any requirement for insufficient tissue?

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

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So I can't really hear. So what we believe based on the interaction that we had with regulatory agencies on CMS is we don't need to go through a separate parallel review cycle for Guardant360 in order to benefit from NGS NCD. We just need to get the FDA approval and have the FDA label, which matches the coverage criteria of the current NGS NCD. There's been some recent changes there that didn't really impact our tests.

And regarding like tissue insufficiency or not, that's the current language in our draft coverage policy by Palmetto, and for NCD, it really believes on the final label that we can get from FDA post-approval. So it's really squarely to comment around the impact of NCD on tissue.

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Doug Schenkel, Cowen and Company, LLC, Research Division - MD & Senior Research Analyst [20]

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Okay. Okay, that's helpful. So this was clearly another great quarter on multiple fronts, I would say, especially on the clinical side, where you had great sequential and year-over-year growth. Anything special to call out there? Or is this really just continued execution and follow-through on Nike (sic) [NILE] and the more efficiency with the expanded sales force?

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Helmy Eltoukhy, Guardant Health, Inc. - Co-Founder, CEO & Director [21]

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Yes. I think we're continuing to see some benefits from NILE from the sales force expansion and so on. But I think as we've communicated in the past, to so really get to catalysis of the market, it's really going to require the 3 pieces. Not only do we have under our belt with this FDA submission, hopefully, we'll have soon FDA approval. And then with the LCD, we should have that pan-cancer reimbursement. And so I think we have been -- we've seen probably better-than-expected uplift in advance of some of those factors. But I think the good news is we're kind of swimming in where the river is flowing, so to speak, clinical comprehensive genomic profiling is becoming more and more something that is a requirement for advanced cancer patients.

Our test, Guardant360, is really the simplest way for physicians to get the information in the quickest way. And so I think what you're seeing is some of the, obviously, investments we have made, but the fact that we're in the early innings of a large market opportunity here.

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Doug Schenkel, Cowen and Company, LLC, Research Division - MD & Senior Research Analyst [22]

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Okay. That's great. One last one. I may have missed this in the prepared remarks, but I don't think I heard any update on covered lives. Again, I apologize if I missed it. I think you guys were around 160 million last quarter. Any update at this point?

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Helmy Eltoukhy, Guardant Health, Inc. - Co-Founder, CEO & Director [23]

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We continue to add plans, small plans here and there. But I would say no substance update at this time.

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Operator [24]

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And your next question comes from the line of Derik De Bruin with Bank of America.

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Derik De Bruin, BofA Merrill Lynch, Research Division - MD of Equity Research [25]

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A couple of questions. One, great to hear that you submitted Guardant360 FDA. Can you give us a sense of timing on how long that will take it to PMA, so I'm assuming it's in the 6- to 9-month range?

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AmirAli Talasaz, Guardant Health, Inc. - President, COO & Chairman [26]

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So we have breakthrough device designation for Guardant360 from the agency and it's a 2-quarter review process, it's going to be like 6 months instead of 9 months.

Having said that, like you have to go through this review cycle and see how that review cycle goes in terms of back and forth with the FDA and may be different questions that they kind of have for us. As we make more progress there, it would become more obvious for us what would be the time line for FDA approval. But as I mentioned, typically for breakthrough device designation, a typical time line is about 6 months.

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Derik De Bruin, BofA Merrill Lynch, Research Division - MD of Equity Research [27]

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Great. And on the ECLIPSE study, enrolling now 24 months' time. I guess any sense from when you would have first -- the first sort of bucket of data coming out? And just a couple of questions on -- have you already locked down the assay and is everything ready to go and started analyzing as of now?

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AmirAli Talasaz, Guardant Health, Inc. - President, COO & Chairman [28]

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Yes. So the plan is actually the enrollment could take up to 24 months, maybe a little bit shorter than that. And once we have the samples, we are going to run them with the PMA package and submit the evidence that we have for FDA review with the hope of getting PMA approval since the ECLIPSE study is really designed to be a regulatory grade study for us.

In terms of assays, we mentioned earlier, like the technology that we presented in our pilot data is basically the same thing, the assay is the same thing. We are in the middle of IVD product development of that assay, which means just making a IVD version of that assay. Similar process at Guardant360, once we get Guardant360 technology for lifetime and then we made the IVD version of it, you have to go through some kind of process and tie some of the loose ends in order to have the IVD version. So we are in that process, we're doing it. And we have a lot of time till the last patient in. And we believe we can -- easy to meet those time lines, but the IVD version of the assay ready to run the ECLIPSE samples.

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Derik De Bruin, BofA Merrill Lynch, Research Division - MD of Equity Research [29]

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Great. And then just one final question for Derek. My -- this quarter, my R&D was way too high. And my -- I say, actually, my SG&A was way too high, my R&D was way too low this quarter when I was modeling. Can you give us some sort of guidance on the trajectory for both of those sort of OpEx lines?

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

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So as you can see with our guidance, we're assuming that we continue to grow our activity. So I think if you use Q3 as a baseline, there would be increases in R&D as we continue to pursue the LUNAR program, both development and the clinical trial, which has now started enrolling. So that should go up. We would expect to see some modest increases also on sales and marketing as we are continuing to try and increase our efforts there, and we will be adding some reps to increase our efforts there. I think the bigger increase would be in R&D.

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Operator [31]

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And your next question comes from the line of Mark Massaro with Canaccord Genuity.

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Mark Anthony Massaro, Canaccord Genuity Corp., Research Division - Senior Analyst [32]

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Congrats on a great quarter. A lot of my questions have already been answered, but one subtle nuance of CRC screening. Exact Sciences is enrolling patients beginning at the age of 40 and up, and I believe ECLIPSE is looking for 45 to 85. I recognize this is a subtle nuance, given the size of the market. But do you have any commentary around just that age cutoff whether it's age 50, 45 or 40? And how you may address potentially a lower age market in the future?

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AmirAli Talasaz, Guardant Health, Inc. - President, COO & Chairman [33]

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So actually, the solid details of the stay that we've put together was after consultation with FDA, and we believe actually the -- this study that we are doing would be a very reasonable study for FDA to start looking at the evidence with the goal of paving the path for getting PMA applicable for it. 40 to 45 is something which is not on the scope for ECLIPSE study at the moment. Yes, so we cannot comment on the [additional] design of it, other companies and why they're trying to do that.

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Helmy Eltoukhy, Guardant Health, Inc. - Co-Founder, CEO & Director [34]

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No. It's also -- it's a moving target. You see many of the different kind of agencies and so on and groups have different age recommendations in terms of what they believe is, I think, viable and beneficial from a population health point of view. And so I think that's probably something that's going to continue to be a moving target. I think as the space evolves and something that we're going to continue to track.

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Mark Anthony Massaro, Canaccord Genuity Corp., Research Division - Senior Analyst [35]

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Great. And then on LUNAR-1, obviously, you've talked about the clinical validation for research use. You also talked about initiating a prospective adjuvant study for colorectal cancer. I guess what I'm really trying to get at is when do you expect to launch LUNAR-1 for the clinical monitoring? And do you intend to initiate the monitoring in the clinic with colorectal cancer initially?

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AmirAli Talasaz, Guardant Health, Inc. - President, COO & Chairman [36]

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So as we mentioned in the remarks, we believe there are some work that needed to be done in this field (inaudible) additional clinical utility data to show that's really looking at the minimum residual disease in different cancer types would generate patient outcome benefit. We decided to have a clinical version of the assay, which we are very excited with this development on the progress our team made and initiated a major prospective interventional study that's based on what we find in the blood, do something differently on the patients and show what would be the outcome benefit for patients. We believe this is the right next step in terms of giving access to our clinical-grade tests for clinical testing market. Still, it's early to comment.

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Mark Anthony Massaro, Canaccord Genuity Corp., Research Division - Senior Analyst [37]

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Great. And maybe on the commercial side, I know you've made a significant spend in your sales force this year. But as we think about a really large market, only roughly 15% penetrated, I think there is at least one other CGP lab company out there with one or 2 with larger sales forces. It's obvious your existing sales force is extremely efficient. But can you maybe just give us an update on the size of your U.S. sales force today? And do you see an opportunity to make some additions in 2020?

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Helmy Eltoukhy, Guardant Health, Inc. - Co-Founder, CEO & Director [38]

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Yes. I think -- and I'll maybe take a step back and kind of just tell you the philosophy we have. It's all about efficiency and continuing to see the right number in terms of revenue per rep. And so I think the way we think about it is, as long as we continue to see productivity gains, as we expand the sales force in multiple waves, we're going to continue to be doing that. And we essentially want to see marginal contribution per rep, that's close to the $2 million range in terms of ASPs and basically sought to around that as we add additional waves.

So I think we're going to continue to be aggressive, not just in terms of adding account executives to our team, but really thinking about all of the different channels in terms of sales and marketing whether it's digital marketing, whether it's co-promotions with other organizations. I think we're evaluating all of those different -- and investing in all those different avenues and aggressively growing them where they can be accretive.

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Mark Anthony Massaro, Canaccord Genuity Corp., Research Division - Senior Analyst [39]

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Great. And the last one for me. Your pharma volumes were outstanding, triple-digit growth. Can you talk about maybe your funnel for companion diagnostics? As we think about 2020, can you give us a sense of the interest to do similar deals like what you have with AstraZeneca, for instance?

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Helmy Eltoukhy, Guardant Health, Inc. - Co-Founder, CEO & Director [40]

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So the pipeline looks extremely strong. We're seeing a lot of interest in really being able to leverage Guardant360 and the fact that it's out there today, it's already being used for patient care, that gives our partners a running start when they -- when they're thinking about their drugs and being able to get patients tested for those drugs as quickly as possible. We think certainly having FDA approval behind us is only going to accelerate interest and adoption of the G360 platform for companion diagnostic work. So we are really seeing, I think, a pipeline that is very robust and just continues to grow every month.

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Operator [41]

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And your final question comes from the line of Puneet Souda with SVB Leerink.

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Puneet Souda, SVB Leerink LLC, Research Division - MD of Life Science Tools & Diagnostics and Senior Research Analyst [42]

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Helmy, AmirAli, congrats on the quarter, first of all. My first question is on LUNAR-1 adjuvant trial that you highlighted here, when should we expect a readout? And if you can give us some metrics around what the potential for reduction in times of these adjuvant trials and where the adjuvant -- reduction in the trial size as well? And is this only one biopharma partnership here, just can you -- if you can give us sort of what's your expectation here in the near term? And on that point, also, if you could remind us what's unique about the LUNAR assay as a tumor naive assay versus the tumor-informed approaches that we are seeing in the market, where could a tumor naive be most beneficial?

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AmirAli Talasaz, Guardant Health, Inc. - President, COO & Chairman [43]

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Yes, sure. So actually, we are very excited about this clinical validation of LUNAR-1 and this prospective study that we are going through with some of our partners. Please stay tuned very soon, hopefully, you're going to have a lot more information about the study, although I wish I could have told you more details of our other partners enrolled, but we cannot tell you more right now. But please stay tune and very soon you're going to hear some interesting announcements about LUNAR-1.

In terms of why we think our product is better. In our LUNAR assays, in general, we are looking at somatic mutation and epigenomic variation altogether. And for LUNAR-1, we are specifically looking at somatic mutation and methylation signatures in blood with no prior information about the tumor. But just the fact that we are adding somatic mutation and epigenomic mutation gives you a lot of opportunities in terms of having a much better test in terms of performance. And now if you add the logistical challenges of finding an old tumor and personalizing an assay based on what you find on that tumor tissue, I think I could imagine, which generates a lot of kind of logistical challenges, at least from our perspective. We are very excited about what we are doing, the performances that we've seen so far when we are mixing genomic and epigenomic signals together.

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Puneet Souda, SVB Leerink LLC, Research Division - MD of Life Science Tools & Diagnostics and Senior Research Analyst [44]

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Okay. And if I could ask on the clinical growth, obviously very strong growth here. Can you elaborate on the mix of tests that you're getting from newer oncologists or more of a community setting versus new centers or versus prior centers that you've had? And in terms of the expectations of newer centers add and the sales force, where you stand currently, can you continue to drive that with the existing sales and commercial force you have?

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Helmy Eltoukhy, Guardant Health, Inc. - Co-Founder, CEO & Director [45]

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Yes. So I think as we commented earlier, we've certainly seen tremendous growth in the community setting. We're now about 60% communities in terms of our volume. We also have seen, I think, a fairly good growth in terms of same physician sales. And so we are seeing repeat use of Guardant360 grow, but we're also continuing despite us being 4 or 5 years post-commercialization and many thousands of oncologists that have ordered the test, we're still adding new oncologists per month really at a record pace. And so we're seeing, I think, robust signals of growth across really those 3 metrics, which are the signs you want to see in terms of continued penetration into the clinical market, at least clinical oncology market.

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Puneet Souda, SVB Leerink LLC, Research Division - MD of Life Science Tools & Diagnostics and Senior Research Analyst [46]

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Okay. And if I could ask on OMNI, what's been the feedback from biopharma overall? Are they really utilizing the broad menu of genes here, 500 or so and the features, if you could talk about -- are you seeing demand for those features? And specifically, sort of TMB, and my question mainly on TMB is, there seems to be more sort of questions and -- around it rather than conclusions among the biopharma data that we have seen so far. You have a unique vantage point. What's your view on TMB overall?

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Helmy Eltoukhy, Guardant Health, Inc. - Co-Founder, CEO & Director [47]

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Yes. So I think there's certainly been an ebb and flow around tumor mutational burden. We see TMB as one step along a continuum and a paradigm shift to using a lot more genomic information to segment patients than using single biomarkers or using single proteins and so on to do that. So regardless of where TMB, I think, shakes out, that approach is something that is certainly -- the precision medicine-informed approach or genomic-informed approach is certainly where the puck is heading.

And so I think as we mentioned in our prepared remarks, you need pretty complex genomic information for things like homologous repair deficiencies, for PARP inhibitors. We're seeing a lot of markers of interest that are outside of what Guardant360 happens to offer now becoming in vogue, and we're really seeing the pendulum, I think, swing backs from immuno-oncology to targeted therapy development as well, which is a nice sweet spot, really seeing both sides of the -- kind of the drug development picture really kind of move aggressively forward. We're seeing a lot more competition in the space. And so a lot of our biopharma partners really want to understand as much as they can about their drugs and their assets so that they can be as competitive as possible. And that's really where GuardantOMNI, I think, fits in terms of being able to provide that information that can be useful.

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Operator [48]

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And I'm showing no further questions at this time. I would now like to turn the conference back to Helmy Eltoukhy for closing remarks.

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Helmy Eltoukhy, Guardant Health, Inc. - Co-Founder, CEO & Director [49]

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Well, thank you, again, and we look forward to talking again at our next earnings call. Thank you.

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Operator [50]

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Ladies and gentlemen, this concludes today's conference. Thank you for your participation, and have a wonderful day. You may all disconnect.