GH - NASDAQ

Good afternoon. Thank you for attending the Guardant Health Q4 2024 Earnings Call. My name is Victoria and I'll be your moderator today. All lines will be muted during the presentation portion of the call with an opportunity for questions and answers at the end. I would now like to pass the conference over to the host, Carrie Mendivil. Thank you. You may proceed, Carrie.

Thank you. Earlier today, Guardant Health released financial results for the quarter and year ended December 31, 2023. Joining me today from Guardant are Helmy Eltoukhy, Co-CEO; AmirAli Talasaz, Co-CEO; and Mike Bell, Chief Financial Officer. Before we begin, I'd like to remind you that, during this call, management will make 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. This call will also include a discussion of non-GAAP financial measures, which are adjusted to exclude certain specified items. Additional information regarding material risks and uncertainties as well as the reconciliation to the most directly comparable GAAP financial measures are available in the press release Guardant issued today as well as in our Form 10-K and other filings with the SEC. Guardant disclaims any intention or obligation to update or revise financial projections and forward-looking statements whether because of new information, future events or otherwise. The information in this conference call is accurate only as of the live broadcast. With that, I'd like to turn the call over to Helmy.

Thanks, Carrie. Good afternoon and thank you for joining our fourth quarter and full year 2023 earnings call. I will start off our call today by providing an update on our progress over 2023 and go into more detail across Therapy Selection and MRD. I will then turn the call over to AmirAli for an update on screening. And finally, Mike will provide a more detailed look at our financials and outlook for 2024. Starting on slide 3. We made substantial progress in each area of our business throughout the year. Starting with Therapy Selection, after years of investing in our infrastructure, I'm very pleased that Therapy Selection reached cashflow breakeven at the end of the year, marking a major achievement for Guardant. This follows a series of pivotal reimbursement wins throughout 2023. We now have coverage from all major US commercial health insurers for Guardant360, surpassing 300 million covered lives. We also surpassed 200 million covered lives for TissueNext, received national reimbursement in Japan for Guardant360 and received Medicare reimbursement for Guardant Response. We also exceeded 475 EMR integrated accounts as of year-end, outpacing our prior targets. Moving on to MRD. I'm excited to share that we upgraded Reveal to the smart liquid biopsy platform at the end of the year, enabling even better performance. Reveal volumes came in strong with full year growth of over 90%. We also received additional commercial coverage for Reveal in CRC following Medicare reimbursement in 2022 and continued to produce compelling data across CRC and breast cancer for Reveal, demonstrating high clinical performance. And finally, with screening, we completed our PMA submission for Shield CRC, made steady progress with FDA review, and published the first paper for Shield, demonstrating improved adherence with a blood based CRC screening. While we continue to believe the performance of Shield meets the bar for FDA approval, we have already demonstrated improved clinical sensitivity with our upgraded platform Shield V2, when compared to Shield V1 with data presented at our Investor Day last year. I'm so proud of our team for pushing the boundaries of what's possible as we deliver on our bold mission to give everyone more time free from cancer. In line with admission, I'd like to share a story of the impact our Reveal test has had on patients. In early 2023, a woman was diagnosed with triple negative breast cancer and underwent surgery. Her physician then ordered a series of Reveal tests as part of her surveillance program, and the second test came back positive for ctDNA 30 weeks after surgery. The physician scheduled the patient for additional scans, which found a growing nodule in her lower left lung. With this discovery, she is now undergoing further treatment. This story highlights how Reveal can be used effectively in surveillance settings to identify the need for additional treatment and deliver better patient outcomes. Turning to top line performance on slide 4. We had a strong finish to the year with revenue growing 22% to $155 million in the fourth quarter and 25% to $564 million for the full year 2023, coming in slightly above our preannounced range provided in January. Turning to slide 5. Clinical test volume reached 46,400 tests in the fourth quarter and 172,900 tests for the full year 2023, up 29% and 39%, respectively, compared to the prior year periods. Guardant360 has been the primary driver of clinical volume growth as we continue to enhance the customer experience, with increasing contributions from newer products such as TissueNext and Response. Moving on to biopharma on slide 6. Biopharma test volume reached 9,500 tests in the fourth quarter and 29,900 tests for the full year 2023, up 16% and 15%, respectively, compared to the prior year periods. A major driver of this growth has been the increasing interest in our GuardantINFINITY smart liquid biopsy platform, which now represents more than 30% of our biopharma testing volume and has become a major differentiator for our biopharma business. Looking forward, our robust companion diagnostic pipeline, coupled with a backlog of deals won, positions us for continued growth in 2024. We believe our active engagement with biopharma leaders for strategic partnerships, especially in exploring the potential of epigenomics, will drive even more demand for our products and services. Now looking more closely at some of the recent highlights within our Therapy Selection business on slide 7. We made great strides in improving ASPs for Guardant360 over the last few quarters. Specifically in November, Medicare finalized its proposal for the Guardant360 LBT price to be crosswalked to the price of Guardant360 CDx. This took effect on January 1 of this year, increasing the Medicare price for Guardant360 LBT from $3,500 to $5,000. We're also starting to see the positive impact on Guardant360 ASP from commercial payer coverage wins and believe that this is a tailwind that will continue to play out in the coming year. As a result, we expect that in the first quarter of 2024, the Guardant360 ASP will increase to be in the range of $2,850 to $2,900. Turning to slide 8. We're focused on streamlining the customer experience and investing in our commercial infrastructure. To that end, we continue to make excellent progress integrating with the three largest oncology EMR systems with rapid growth of digital adoption. We believe these integrations will serve as a catalyst for increasing ordering depth for accounts throughout the year. Another critical growth driver is not only increasing adoption of biomarker testing bottoms up at the physician level, but top down at the large group practice level, especially in the community setting where most patients reside. Accordingly, we recently announced a collaboration with the US Oncology Network and leading community oncology practices to increase the use of biomarker testing to identify patients who would benefit from therapies that target specific cancer pathways. Notably, the US Oncology Network has more than 2,500 providers across over 600 sites, creating 1.4 million patients annually. We continue to see strong momentum as we expand our testing offering globally. Last quarter, the Royal Marsden's Guardant powered laboratory was awarded an expression of interest by the NHS to test advanced non-small cell lung cancer patients, potentially making our technology accessible to patients across England. We also launched Guardant360 in China for biopharma use and have already generated a strong pipeline of over 30 partnerships. Lifetime global biopharma partnerships exceed 165, providing a solid foundation for future growth. Now shifting gears to Reveal on slide 9. As mentioned earlier, we hit a major milestone by upgrading Reveal to our smart liquid biopsy platform as of year-end. With this broad methylome-wide technology, we can achieve high performance by tracking hundreds to thousands of active alterations per patient, compared to 16 to 50 mutations from tumor-informed assays. Our low background methylation chemistry leads to ultra-high specificity, and we maximize overall accuracy by applying machine learning to thousands of clinical samples. Importantly, physicians will be able to use the tests to track and quantify tumor fraction in the MRD setting with high precision using our epigenomic space technology. Reveal is currently available for CRC breast and lung cancers and will be expanded to other tumor types over time. Moving on to slide 10. We have already generated some promising MRD data on our smart liquid biopsy platform for CRC and breast cancers. Starting with a previously shared data from our COSMOS colon study, looking at stage 2 and 3 patients, Reveal achieved 80% surveillance sensitivity with 99% specificity. This data was presented at the ASCO GI Symposium in January and will be included in our submission to Medicare for our surveillance indications. Moving on to breast where we have now assessed three clinical cohorts with a Reveal assay and smart liquid biopsy. We achieved a blended 82% surveillance sensitivity for distant recurrence with 97% specificity on this combined sizable cohort. This data is very exciting as the performance is in line and, if not, favorable to other approaches in this space. We look forward to sharing more details about this data this year. This data will be included in our submission to Medicare for our breast indication. Moving on to slide 11. As we have shared, we have a strong data pipeline with many clinical cohorts for establishing validity and utility for Reveal. We have almost 80,000 samples from 20,000 patients across a variety of solid tumors from our biobank and trials we are running. This rich steady pipeline will be instrumental in building compelling evidence that not only supports efforts to expand reimbursement, but also has the potential to influence changes in practice guidelines. This year, we anticipate publications that will support submission to Medicare for potential additional coverage. Next year, we have important clinical validity studies for additional cancers such as lung, pancreatic and gastric that will support the advancement of additional reimbursement. With that, I will now turn the call over to AmirAli to provide an update on our screening business

Thanks, Helmy. Turning to slide 12, 2024 will be a very exciting year for our screening business as we prepare to launch our Shield IVD tests for CRC pending FDA approval. After years of research and development, it's so exciting to prepare to make this test broadly available. There are a number of key milestones for Shield on the near term horizon. First, the data from our pivotal ECLIPSE study has been accepted in a top tier publication, validating the strength and quality of the clinical data. We expect to see it published in the coming months. Additionally, we are continuing to make steady progress with FDA review. Our interactive review process with FDA continues to be collaborative and positive. The advisory committee panel meeting will be the next milestone of the review process. In our recent discussions, FDA has informed us that the meeting date will now likely take place in late Q2 as they continue to work to fill the remaining vacant advisory seats on the panel. The date and details of the meeting are subject to confirmation by the FDA and publication in the Federal Register. That said, we continue to expect to receive FDA approval in 2024. Our team is working hard to prepare for this panel meeting and in parallel is preparing to scale out the commercial operations post the FDA approval. Turning to slide 13. While Shield has only been in market for a short time, we are highly encouraged by the overwhelming enthusiasm expressed by PCPs and health systems. We are witnessing real world evidence of its effectiveness and the potential to drive unparalleled compliance in completing cancer screening. In the first 20,000 ordered Shield tests, the adherence rate was 94%, which is much higher than the range of 38% to 65% with current modalities. As we shared at J.P. Morgan, in a health system setting, a randomized 2,000 patient study was conducted at Kaiser Permanente to evaluate the impact of introducing Shield as a new option to improve the overall screening rate. This study readout was positive. And the results were published in two papers, in PLOS ONE and Gut. This study demonstrated that when individuals who hadn't completed FIT were offered Shield, the rate of screening increased by more than 3 times. Notably, over 40% of those patients who took the Shield test for CRC screening had not been screened before. Additionally, 100% of surveyed patients and physicians were optimistic about the idea of a blood based CRC screening tests offering being incorporated into a routine health care visit. These publications highlight the significant impact of what Shield can do when this blood test is added as a new and accessible option for CRC screening. With that, I will now turn the call over to Mike for more detail on our financials.

Thanks, AmirAli. Starting with our financial results on slide 14. Total revenue for the fourth quarter of 2023 grew 22% to $155.1 million compared to $126.9 million in the prior year quarter. Total precision oncology testing revenue for the quarter was $142.2 million, increasing 25% compared to $113.8 million in the prior year quarter. This increase was predominantly driven by strong year-over-year growth in both clinical and biopharma volumes. Precision oncology revenue from clinical tests in the fourth quarter totaled $108.2 million, up 29% from $83.7 million for the prior year quarter. Fourth quarter clinical tests volume was 46,400, an increase of 29% from the same period of the prior year. Guardant360 continues to be the main revenue driver, with strong year-over-year volume growth across all cancers in the US, as well as volume contribution from Japan and the UK in the fourth quarter. We also saw a sequential rise in the Guardant360 ASP in the fourth quarter, which increased to approximately $2,750 from approximately $2,700 in Q3. This was driven by the continued pull-through from the expanded commercial coverage received earlier in the year and from the interim Medicare gap fill rate for Guardant360 LDT, which increased from $3,500 to $3,967 on October 1. As a reminder, the Guardant360 LDT Medicare rate increased again on January 1, 2024 to the new rate of $5,000, which we expect will increase the Guardant360 ASP to be in the range $2,850 to $2,900 in the first quarter of 2024. Blended clinical ASP was approximately $2,330 for the fourth quarter, which was similar to the blended clinical ASP of $2,320 in Q4 2022, with the increasing Guardant360 ASP offsetting the mix impact of different products and geographies. Precision oncology revenue from biopharma tests in the fourth quarter totaled $34.0 million, up 13% from $30.1 million for the prior year quarter. Biopharma test volume was strong in the fourth quarter, totaling approximately 9,500 tests, up 16% from the prior year quarter. Biopharma ASP was approximately $3,600 in the fourth quarter of 2024. Development services and other revenue in the fourth quarter totaled $12.9 million compared to $13.1 million in the prior year quarter. Total gross margin was 60% compared to 63% in the prior quarter. For precision oncology, gross margin was 60% in the fourth quarter of 2023 compared to 62% in the fourth quarter of 2022. While we saw improvements in the gross margin for clinical Guardant360 tests due to the increase in ASP, the overall precision oncology gross margin declined slightly due to changes in the mix of clinical and biopharma tests, the mix of Guardant360, TissueNext and Reveal tests, and the mix of US and international tests. Development services and other gross margin was 60% in the fourth quarter of 2023 compared to 74% in Q4 2022. The change in margin was primarily due to the cost of processing shield LDT samples, which increased in volume year-over-year and for which we are currently bucking minimum revenue. Total research and development, sales and marketing and G&A operating expenses for the fourth quarter of 2023 were $206.6 million, a reduction of $19.2 million compared to Q4 2022. In Q4 2023, we also recorded a liability and a resulting non-recurring charge to other operating expense of $83.4 million related to the recent jury verdict in a patent infringement lawsuit. Notwithstanding this one time charge, we plan to file motions to overturn the jury's verdict, seek a new trial and/or amend the judgment. Net loss was $187.0 million or $1.58 per share for the fourth quarter of 2023 compared to $139.9 million or $1.36 per share in the fourth quarter of 2022. Turning to the full year, total revenue was $563.9 million, up 25% from $449.5 million in the prior year. Precision oncology revenue increased 31% to $514.2 million. Clinical testing revenue was $403.9 million, which grew 35% year-over-year, driven by a 39% increase in clinical testing volume. The strong volume growth was driven by Guardant360, with growth across all cancer types, TissueNext which grew more than 80% and Reveal which grew over 90%. Biopharma testing revenue was $110.4 million, which increased 17% year-over-year. Biopharma volume increased 15% year-over-year, primarily driven by the uptake of GuardantINFINITY, which also led to an improved biopharma ASP in 2023 of approximately $3,700 compared to $3,610 in 2022. Development services and other revenue declined 14% to $49.7 million in 2023. This reduction was in line with our guidance at the start of 2023 and primarily due to the variable timing, progress and milestones related to projects with third parties, as well as the year-over-year reduction in royalty revenue. Total gross margin was 60% compared to 65% in 2022. For precision oncology, gross margin was 60% in 2023 compared to 62% in 2022. The slight year-over-year decline is consistent with the change we saw in the fourth quarter where increases in ASP have been more than offset by changes in product mix. Development services and other gross margins of 57% in 2023 compared to 86% in 2022. The change in margin was primarily due to the cost of processing Shield LDT samples, which was booked as a sales and marketing expense until the end of Q3 2022 and which was booked to development services and other costs from Q4 2020 onwards. In both 2022 and 2023, Shield LDT revenue was not material. Total research and development, sales and marketing and G&A operating expenses for the full year 2023 were $818.2 million, a decrease of $19.4 million compared to 2022. Net loss was $479.4 million in 2023 compared to $654.6 million in 2022. Net loss per share was $4.28 in 2023 as compared to $6.41 in 2022. Moving on to non-GAAP financial measures on slide 15. From this quarter onwards, we will report non-GAAP gross margin measures to provide better clarity on the performance of the business. Most importantly, we will provide a non-GAAP gross margin measure, which excludes the costs related to performing screening tests in our lab, which currently generate minimal revenue. As a reminder, from Q4 2022, we have recorded the cost of providing shield LDT screen test in the development services and other line in our income statement. During both the fourth quarter and full year 2023, the non-GAAP gross margin was 61% and the non-GAAP gross margin excluding screening was 63%. Again, we're continuing to report this important metric going forwards. Non-GAAP operating expenses, which exclude the non-recurring charge mentioned earlier, were $183.1 million for the fourth quarter of 2023, a reduction of $18.1 million compared to the prior year quarter. For the full year, we achieved our previously stated guidance that we would reduce non-GAAP operating expenses in 2023 compared to 2022. Accordingly, full year 2023, non-GAAP operating expenses were $729.2 million compared to $736.6 million in 2022. Non-GAAP net loss was $75.9 million or $0.64 per share for the fourth quarter of 2023 compared to $119.6 million or $1.17 per share for the fourth quarter of 2022. For the full year 2023, non-GAAP net loss was $352.3 million or $3.15 per share compared to $435.4 million or $4.26 per share for 2022. Adjusted EBITDA was a loss of $78.4 million in the fourth quarter of 2023 compared to a $109.8 million loss in the fourth quarter of 2022. For the full year 2023, adjusted EBITDA was a loss of $344.2 million in 2023, which represents a $59.2 million reduction compared to a loss of $403.4 million in 2022. Free cash flow for the fourth quarter of 2023 was negative $82.8 million compared to a negative $100.8 million in Q4 2022. For the full year 2023, we achieved our previously stated guidance that we would reduce our cash burn from a high of negative $387 million in 2022 to below negative $250 million in 2023. Accordingly, free cash flow was negative $345 million for the full year of 2023. Looking more closely at our cash position on slide 16. We ended the fourth quarter of 2023 with cash, cash equivalents and short term marketable debt securities of approximately $1.2 billion and successfully lowered our cash burn to our target of less than $350 million, while continuing to grow our Therapy Selection business and make significant investments in both MRD and screening. As Helmy mentioned, we achieved our target of reaching cash flow breakeven in Therapy Selection as of the end of 2023. As we look ahead to the next five years, we are confident that, by starting to generate positive cash flow from Therapy Selection, driving MRD to profitability, and carefully managing the spending in our screening business to approximately $200 million annually for the next five years, we can continue to lower our cash burn each year, so that by the time we reach 2028, we'll be cash flow breakeven which is achievable with our current cash balance of $1.2 billion. Now turning to our outlook and assumptions for the full year 2023 on slide 17. We expect full year 2024 revenue to be in the range of $655 million to $670 million, representing growth of approximately 16% to 19% compared to 2023. This guidance does not include any revenue contribution from screening, which are dependent on the timing of Shield FDA approval and Medicare reimbursement coverage. We will update our revenue guidance to include screening revenue when appropriate. For 2024, we're also providing guidance on our non-GAAP gross margin excluding screening, which we expect to be in the range of 60% to 62%. We expect non-GAAP operating expenses to be in the range of $740 million to $750 million, representing a 1% to 3% increase year-over-year. This guidance includes screening operating expenses, which will be primarily focused on the launch and commercialization of Shield, following expected FDA approval, as well as continued screening research and development efforts. Finally, we expect free cash flow to be in the range of negative $320 million to $330 million in 2023. This guidance assumes a maximum $200 million net cash outflow for screening, which could adjust downwards during the year depending on the timing and outcome of the FDA approval process. To provide some additional color on our cash burn for 2024, we expect cash used in operating activities to reduce by approximately $40 million compared to 2023. This reduction will be partially offset by a planned increase of approximately $20 million for the purchase of capital equipment as we ramp up lab capacity in preparation for the launch of Shield. Finally, turning to slide 18 to review our catalysts. As we look ahead to 2024 and beyond, we have a number of upcoming catalysts in each of our business areas, including smart liquid biopsy upgrade for Guardant360 and volume expansion across Therapy Selection, data publication for MRD and Shield FDA approval and launch. With that, we will now open the call to questions.

[Operator Instructions]. Our first question comes from line of Mark Massaro with BTIG.

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