GRAL - NASDAQ

Good day, ladies and gentlemen, and welcome to the GRAIL Third Quarter 2024 Earnings Call. [Operator Instructions] Please be advised that this conference call is being recorded. GRAIL Investor Relations, please begin.

Thank you, and thank you all for joining us today. On the call are Bob Ragusa, our Chief Executive Officer; Aaron Freidin, our Chief Financial Officer; Dr. Joshua Ofman, our President; and Sir Harpal Kumar, our President, International Business and BioPharma. Before we get underway, I'd like to remind everyone that we'll be making forward-looking statements on this call based on current expectations. It's our intent that all statements other than statements of historical fact made during today's call, including statements regarding our anticipated financial results and commercial activity will be covered by the safe harbor provisions for forward-looking statements contained in Section 27A of the Securities Act of 1933, as amended, and Section 21 of the Securities Exchange Act of 1934, as amended. Forward-looking statements are subject to risks and uncertainties. Actual events or results may differ materially from those projected or discussed. All forward-looking statements are based upon currently available information, and GRAIL assumes no obligation to update these statements. To better understand the risks and uncertainties that could cause actual results to differ, we refer you to the documents that GRAIL files with the SEC, including the Risk Factors section in GRAIL's most recent quarterly report on Form 10-Q. This call will also include a discussion of GAAP results and certain non-GAAP financial measures, including adjusted gross profit or loss and adjusted EBITDA, which are adjusted to exclude certain specified items. Our non-GAAP financial measures are intended to supplement your understanding of GRAIL's financials. Reconciliations of the non-GAAP measures to most directly comparable GAAP financial measures are available in the press release issued today, which is posted to our website. And with that, I'll hand the call to Bob.

Good afternoon, everyone, and thank you for joining us to review results for the third quarter. We remain pleased with the demand for Galleri that we are seeing in the pre-reimbursement environment. Through September 30 of this year, more than 250,000 commercial Galleri tests have been prescribed by more than 12,000 health care providers since launch. GRAIL is an established market leader in the field, and we are proud of the demonstrated impact that Galleri is having on patients' lives. Galleri was designed for population scale and GRAIL continues to optimize our technology and laboratory infrastructure to enable future growth. At the end of this year, we will launch the next version of the Galleri test. With the new assay, we have integrated a significant level of automation, among other efficiencies to support volume at scale and enable reductions in costs over time. Additionally, our large laboratory facility of approximately 200,000 square feet in Research Triangle Park, North Carolina, enables us to scale laboratory capacity substantially from multiple years of growth. We continue to present evidence demonstrating Galleri's performance at renowned medical conferences and published the results in leading peer review publications. In September, JCO Precision Oncology published a sub analysis from our CCGA and PATHFINDER studies in prostate cancer. For prostate cancer, in general, over diagnosis of insulin cancer is a particular concern. The analysis demonstrated that when Galleri detected prostate cancer, most were high-grade and clinically significant and usually indicative of aggressive disease where additional diagnostic evaluation is necessary. These data previously shared at AACR in March build out earlier findings regarding Galleri's preferential detection of aggressive, deadly cancers. This is important because any screening paradigm when designed for population scale in addition to standard of care screening, should not exasperate overdiagnosis of indolent cancers. In October, GRAIL presented early results from the reflection real-world evidence study of Galleri at the early detection of Cancer Conference. In this study, a diverse population of approximately 2,800 veterans from the U.S. Department of Veteran Affairs sites with toxic exposure, but with no symptom suggested of cancer, were evaluated. Initial results showed that among study participants, the veteran cohort had a cancer signal detection rate of 1.3%, and a positive predictive value of 42.9%. More than half of the cases were identified at early stage of 1 to 3. To discuss our second quarter financial results, I'll turn it over to GRAIL's Chief Financial Officer, Aaron Freidin.

Thanks, Bob, and good afternoon, everyone. I'm pleased to present our results for the third quarter. Third quarter results were strong with revenue of $28.7 million, up $7.9 million or 38% as compared to Q3 2023. Total revenue for the quarter is comprised of $25.4 million of screening revenue and $3.3 million of development services revenue. Development services revenue includes services we provide to biopharmaceutical and clinical customers, including support of clinical studies, pilot testing, research and therapy development. We see continued demand for our Galleri test and sold approximately 32,600 tests in the third quarter, which historically has been our slowest quarter of the calendar due to summer holidays. Screening revenue of $25.4 million in the third quarter was up 52% as compared with the third quarter of 2023, primarily based on an increase in sales volume in Q3 2024 as compared to the same quarter last year. Net loss for the quarter was $125.7 million, an improvement of 86% as compared to Q2 2023, which was impacted by a large goodwill and intangible asset impairment. We additionally report non-GAAP financial measures to enhance investors' understanding of our business. These measures include adjusted gross profit or loss and adjusted EBITDA, and exclude accounting impacts related to Illumina's acquisition of GRAIL. We encourage investors to carefully consider results under GAAP in conjunction with our supplemental non-GAAP information and the reconciliation between these presentations available in our third quarter earnings press release. Non-GAAP adjusted gross profit for the second quarter of 2024 was $11.8 million, an increase of $4.8 million or 68% as compared with Q3 2023. Primary drivers of the increased margin were revenue mix and the efficiencies of scale related to increased Galleri volume. Adjusted EBITDA for the second quarter of 2024 was a negative $108.2 million, representing an improvement of $17.9 million or 14% as compared to Q3 2023, and we ended the quarter with a cash position of $853.6 million. We continue to expect reductions in our cash burn in line with the guidance we provided last quarter. In August, we lowered our second half cash burn guidance from $250 million to $220 million. Additionally, we guided full year burn for 2025, expected to be approximately $325 million. Given our experience through the first 9 months, we are narrowing our guidance for Galleri sales for 2024 to be between 40% and 50% growth, when compared to 2023. As a reminder of the expected impact of the restructuring we announced in the last quarter, we plan for Galleri revenue to grow more moderately after 2024, until we receive broad reimbursement. With our reduced spending profile, our cash balance provides runway into 2028. I will turn it back to Bob for concluding remarks.

Thank you, Aaron. We are a mission-driven company, and we are focused on improving cancer care and enabling broad use of Galleri. We are focused on our strategic goals, seeking FDA approval of Galleri and pursuing broad reimbursement for Galleri. In terms of upcoming milestones, this year, we expect to continue enrollment in the Galleri-Medicare or REACH study, drive access to Galleri and advance our commercial and research partnerships. We also anticipate transitioning to a new version of Galleri, which will enable us to scale efficiently as Galleri demand increases. We are looking forward to the expected readouts of our registrational studies and anticipate results from the first 25,000 participants in the PATHFINDER 2 study in the second half of 2025, and the full results from the NHS-Galleri study in 2026. With that, we'll turn the call over to Q&A. Operator, please go ahead.

[Operator Instructions] Our first question will come from Subbu Nambi with Guggenheim.

Hey guys, it's Thomas [ph] on for Subbu. Thanks for taking the questions. A decade into the GRAIL journey, can you walk through some of the progress that's been made and give a little bit more color on the outlook for Galleri reimbursement, the test FDA regulatory pathway? And then just your commercial strategy in general, especially if it comes to new test. What comes next? And specifically, when do you expect to be in front of the FDA regulatory pathway? And how long after would you envision CMS reimbursement?

Thanks for the question. A fair amount to unpack there. So I guess, maybe focusing first on the FDA pathway. So we're now in July, completed the study visits for our two key registrational studies. So PATHFINDER 2, where we've enrolled 35,000 people, and the NHS-Galleri study were enrolled 140,000 people in that. That's the clinical data across that 175,000 people, where we will use to submit for our PMA and the submission time is the first half -- first half of 2026. And so from that, we do expect an advisory committee at the FDA. And so we expect about a 1-year time line from that, which would drive us into first half 2027 for FDA approval, is the tentative time line that we're working towards. As mentioned in the question, the next version of the assay, so one of the things we recognize is that the Galleri test has always been built for population scale. And with the next version of the assay, we really looked to two things: one, nearly fully automate the assay itself till it gets great scalability. And with that also comes cost reduction. So we expect near-term variable cost reduction from the assay. And then longer term, as we get volume, we expect fixed cost leverage from the assay. So we're looking to transition to that new assay at the end of this year. And then on the reimbursement pathway, clearly, CMS is an important element of that. There is the MSE law in going through Congress right now. In the summer, it had a markup in the House Ways and Means Committee, where we had a rather rare and unusual unanimous vote for it, 38 to 0, and so we're very encouraged by that. We're encouraged by the large stakeholder groups that are advocating for the bill. One of the things that's very clear is that cancer is not a partisan issue. So we have bipartisan, bicameral support for the bill. And so we're really highly encouraged by that plus just the support networks that are -- and sponsors for the bill. But given the nature of our Congress and any of the lack of productivity in Congress in the last year or so, it's difficult to predict timing on that. But we're hopeful that before we get FDA approval, we will have the bill pass, and that would give CMS the authority to be able to cover an FDA-approved MCED test. So maybe I'll stop there and see if there's any follow-on.

Awesome. Thanks for that color. And then just one more building off of that. You mentioned cash balance. How do you manage your commercial efforts given everything that you just said and that spend?

Yes. So I think one of the things we did in the restructuring in August is we looked at our spend across the organization and really focused on our North Star of getting Galleri FDA approved and reimbursed. Within that, we've recognized that as an early-stage unreimbursed test that the -- it's really an investment in commercial. And as you can see, from this quarter's results. We know that if we invest in commercial, we can drive sales and drive sales rapidly. In August, we looked at moderating that, the amount of investment in there in order to extend our cash runway out into 2028. And so right now, we're prioritizing that cash runway. And on the commercial side, what we're really looking to do is to drive that to be more cost neutral so that the margin generated by the tests that they're selling can cover the -- at least cover the commercial expenses. So -- so it's a more moderate approach. We were -- we've learned a lot about what works and doesn't work. So we've been able to concentrate our commercial efforts on the most productive areas and pull back from some of the other areas. And so we think we’ll continue to learn as we go even at a more moderated pace but that is the expectation.

Our next question will come from Tejas Savant with Morgan Stanley. Please go ahead.

Hi, this is Jason [ph] on for Tejas. Thank you for taking our questions. So GRAIL is going to be the first mover in the MCED market. Obviously, the market right now is very nascent, and you have to build awareness for a technology for both physicians and patients. So with potential FDA approval in establishing reimbursement two years away, give or take, can you talk about any plans you have to build the MCED market in the next year or two before reimbursement? Thank you.

Sure. So over -- both over the last couple of years, while it's going into the near future, we're going to look to -- we've looked to really build out how the ecosystem works. And so what we want -- part of wanting to drive the commercial experience here is to get providers, health systems, very comfortable with the test, know how to how to operate with the test and really integrate it into their standard practices. And so we've been very successful at that aspect of it. And so we will continue to push on that and understand what resonates with providers, what resonates with patients in terms of how we describe the test. And then from a very practical standpoint, making sure our laboratory is able to deliver high-quality tests in a very timely manner. So just kind of exercising the whole ecosystem is very important. Because, again, this is a population scale test that's been designed and so we expect to operate at very high volumes. And so while we're already upgrading at reasonably high volumes, when we get to the next stage of broad reimbursement, the volumes will go up exponentially, and we'll need to be prepared for that.

Got it. Thank you for that. And then as a follow-up on version 2 of Galleri, you've mentioned that the main goals produce a scalable version of the test. Can you confirm if you anticipate any major performance differences for a version 2 compared to the current version? And additionally, can you confirm what [Indiscernible] studies you might do with respect to the studies you're submitting as part of PMAs submission? Thank you.

Yes. So we -- while we expect some minor improvements in the performance from our end-user perspective, we would not expect a significant difference in the actual performance of the test. The main drivers here are, as we mentioned, scalability and cost. On the -- both studies in terms of from an FDA perspective, we're in discussions with them on the appropriate bridging studies for the next version of the assay from the current version. And as we go later on, we'll have similar discussions with the NHS, if they want to move forward in the full-scale deployment.

Great. Appreciate the time.

Our last question comes from Vijay Kumar with Evercore ISI. Please go ahead.

Hi guys, this is Mackenzie [ph] on for Vijay. Just another question on cash burn. How should we be thinking about phasing of that through 2025? I know you gave us a number, but is this something that's going to be spread evenly across the quarters? Or do you expect that to improve sequentially throughout the year?

Aaron, do you want to?

Yes. Great question. So we'd expect cash burn to decrease in subsequent years as we continue to grow revenues and investments in some of the programs that we've been talking about, getting to PMA submission, getting to the next version of the test roll off.

Okay. Great. That's helpful. And then I know you talked about in the new version of Galleri, this is supposed to reduce your COGS, but it sounds like it's going to take a little bit of time for that to ramp. So how should we be thinking about how long that ramp to sort of a normalized COGS run rate will take? And what can we expect on the margin front there?

Yes. So hard to predict right now from a timing perspective. But it's going to be a -- there'll be an impact to begin with on the variable front. Part of the main driver for that program was to bring down the cost of the test and then increase the throughput. So there'll be some pickup to begin with, but we won't realize the entire benefits of that test, the cost of that test until we get into significantly more volume than we're at today. That's something as we transition to that test at the end of this year, run it for the following quarters, we'll be able to give more line of sight to that.

Got it. Thank you.

There are no further questions at this time. I will now turn the call back to GRAIL for closing remarks.

I want to thank everyone for joining today's call.