Guardant Health, Inc. — Q3 2018 Form 10-Q
Business context and reporting period. Guardant Health develops and sells liquid-biopsy precision oncology tests, principally Guardant360 and GuardantOMNI, and provides biopharmaceutical development services. This unaudited report covers the quarter and nine months ended September 30, 2018; comparisons are to the same 2017 periods. Amounts below are in U.S. dollars.
Financial performance and liquidity
| Metric | Q3 2018 | Q3 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Revenue | $21.7m | $11.1m | $57.8m | $29.8m |
| Gross profit / margin | $11.6m / 53.7% | $2.5m / 22.2% | $28.5m / 49.3% | $7.4m / 24.7% |
| Operating loss | $24.2m | $28.7m | $65.6m | $61.0m |
| Net loss | $23.5m | $28.6m | $59.0m | $68.2m |
| Net loss per common share | $1.94 | $2.76 | $4.87 | $5.76 |
| Cash used in operating activities | — | $45.6m | $54.2m |
At September 30, cash and cash equivalents were $114.0m and marketable securities totaled $160.3m, or $274.3m combined. Total assets were $344.6m; accumulated deficit was $255.7m. The company had no outstanding term loan; liabilities included $0.2m of capital leases and a $7.4m royalty obligation. Nine-month capital expenditures were $17.3m.
Material changes versus prior periods
- Revenue rose 95% in Q3 and 94% year to date. Precision oncology testing revenue increased 78% and 80%, respectively; management attributed growth primarily to higher test volumes and greater biopharmaceutical customer activity. Development services revenue increased from new projects and completion of a laboratory installation project.
- Q3 testing volume included 7,027 clinical tests versus 6,147 in 2017 (excluding 459 tests for a customer that moved testing in-house) and 2,505 biopharmaceutical tests versus 1,502. Nine-month clinical and biopharmaceutical test volumes were 20,644 and 7,337, respectively.
- Gross margin improved substantially, while operating expenses increased overall as research and development and sales and marketing spending expanded. Q3 general and administrative expense declined largely because 2017 included $9.7m of compensation expense related to share repurchases.
- Operating cash use decreased year over year. Investing cash flow was $44.7m provided, mainly from marketable-security maturities; financing cash flow was $42.8m provided, mainly from SoftBank’s $41.0m investment in the joint venture.
Outlook, risks and unusual items
- Outlook: No numerical revenue or earnings guidance is provided. Management expects continued losses and increased operating expenses, sales and marketing investment, research and development spending, and capacity-related capital expenditures. Management states available funds, including subsequent IPO proceeds, are expected to cover the current plan for at least 12 months.
- Medicare and reimbursement: Guardant360 received a local Medicare coverage determination for qualifying non-small cell lung cancer patients; the stated rate was $3,500 per test. Claims began in September 2018 and Medicare payments began in October. Coverage is limited by clinical criteria, and commercial payer reimbursement remains variable, with risk of denials or retrospective offsets.
- IPO subsequent event: On October 3, 2018, the company sold 14.375m shares at $19.00 per share. The filing reports net proceeds of $249.5m in its notes, while the IPO use-of-proceeds section reports approximately $254.0m after underwriting discounts and commissions, before $4.5m of offering expenses. Preferred stock converted to common stock upon the IPO.
- Joint venture: Guardant consolidates its 50%-owned SoftBank joint venture. SoftBank’s interest was classified as redeemable noncontrolling interest, carried at approximately $42.0m, with a $0.95m fair-value adjustment recorded in Q3. Put-call rights may require a future purchase of SoftBank’s interest under specified circumstances.
- Unusual items and contingencies: Nine-month other income included a $4.25m commercial-dispute settlement receipt. The company paid $3.0m in July 2018 to settle Foundation Medicine’s earlier patent-infringement suit; separate company-filed patent suits against Foundation Medicine and Personal Genome Diagnostics remained pending. The filing also describes seven email-account security incidents affecting approximately 1,700 people, including approximately 1,100 whose accessed information included protected health information.
- Other risks: FDA premarket approval is not yet obtained; management planned to submit a Guardant360 PMA application in the first half of 2019. Clinical testing revenue recognition historically depended in part on cash collection; the company expected adoption of ASC 606 in 2019 to result in earlier recognition for certain arrangements, with the impact not yet quantified. Product adoption, payer coverage, customer concentration, competition, data security, regulatory requirements and patent disputes are significant risks.
Important facts for investors to verify
- Reconcile the reported IPO proceeds: $249.5m net in the notes versus approximately $254.0m after underwriting discounts and commissions, with $4.5m of offering expenses disclosed separately.
- Track Medicare claim approvals, actual collections and whether coverage expands beyond qualifying NSCLC patients; distinguish test volume from recognized revenue and cash receipts.
- Monitor revenue mix and concentration among biopharmaceutical customers and commercial payers, including the impact of any payer reimbursement changes or recoupments.
- Assess the joint venture’s operating progress, SoftBank put-call provisions and any resulting potential cash, equity or dilution requirements.
- Follow the Guardant360 FDA PMA timeline, ASC 606 adoption impact, patent proceedings and costs or consequences arising from the reported security incidents.