Guardant Health, Inc. — Q3 2023 Form 10-Q
Reporting period: Three and nine months ended September 30, 2023; filed November 6, 2023. Guardant Health develops and sells precision oncology tests and related services, including early cancer detection products. Financial amounts below are in U.S. dollars; millions unless stated otherwise.
Financial results and liquidity
| Metric | Q3 2023 | Q3 2022 | Nine months 2023 | Nine months 2022 |
|---|---|---|---|---|
| Total revenue | $143.0 | $117.4 | $408.9 | $322.6 |
| Precision oncology testing revenue | $133.4 | $102.1 | $372.1 | $278.3 |
| Development services and other revenue | $9.6 | $15.4 | $36.8 | $44.4 |
| Gross profit, calculated | $85.4 | $76.9 | $244.4 | $213.4 |
| Gross margin, calculated | 59.7% | 65.5% | 59.8% | 66.1% |
| Operating loss | $(113.5) | $(144.6) | $(367.2) | $(398.3) |
| Net loss | $(86.1) | $(162.0) | $(292.4) | $(514.7) |
| Net loss per share, basic and diluted | $(0.73) | $(1.58) | $(2.66) | $(5.04) |
- Cash flow: Nine-month operating cash use was $246.2 million, versus $218.7 million in 2022. Investing activities provided $176.8 million, mainly reflecting net maturities of marketable debt securities. Financing activities provided $386.8 million, primarily from the May 2023 stock offering.
- Liquidity: At September 30, cash and cash equivalents were $457.3 million and short-term marketable debt securities were $697.5 million, or approximately $1.15 billion combined. Current assets were $1.35 billion and current liabilities $226.8 million.
- Debt: The company had $1.15 billion principal amount of 0% convertible senior notes due 2027, carried at $1.139 billion net. The notes were not convertible as of September 30, 2023.
- Balance sheet: Accumulated deficit was $2.0 billion; stockholders’ equity was $228.3 million. The May follow-on offering issued 14.375 million shares at $28 per share and generated $381.4 million net proceeds.
Material changes versus comparable periods
- Q3 revenue rose 22%; nine-month revenue rose 27%. Precision oncology testing was the growth driver: clinical testing revenue increased 34% in Q3 and 38% over nine months, primarily on higher test volumes. Clinical tests rose to about 43,900 in Q3 from 32,400, and to about 126,500 for nine months from 88,800.
- Biopharmaceutical testing revenue increased 22% in Q3 and 20% for nine months. Development services and other revenue declined 37% and 17%, respectively, reflecting milestone timing and lower royalty revenue.
- Gross margin declined as cost of revenue grew faster than revenue: 42% in Q3 and 51% for nine months, driven mainly by higher testing volume, materials, labor and overhead, as well as screening and partnership-related costs.
- Operating expenses totaled $256.6 million in Q3, down 2% year over year; nine-month expenses rose 8% to $776.1 million. Q3 R&D, sales and marketing, and G&A expenses all declined; nine-month R&D increased 4%, while sales and marketing and G&A decreased.
- Net losses narrowed, but comparisons include significant non-operating and noncash items. 2023 other income included Lunit investment unrealized gains of $16.6 million in Q3 and $84.5 million for nine months, partly offset by $29.1 million of non-marketable investment impairments for nine months. The 2022 nine-month comparison included a $99.8 million noncontrolling-interest fair-value charge related to the Joint Venture acquisition.
- Q3 clinical revenue included a $3.6 million Medicare payment following an appeal for claims from 2018–2020. This is a period-specific item, not necessarily indicative of recurring revenue.
Outlook, commentary and risks
- Management expects operating losses to continue in the near term and anticipates increased spending on clinical studies, product development, sales and marketing. Capital spending could rise if additional laboratory capacity is needed.
- Management stated that cash, cash equivalents, marketable debt securities and anticipated operating cash flows should be sufficient for anticipated needs for more than 12 months from the filing date. It may seek additional capital; equity or convertible financing could dilute shareholders, while debt or collaborations could impose restrictions or require concessions.
- Shield colorectal screening: the ECLIPSE study met co-primary endpoints; management reported 83% sensitivity for colorectal cancer and 90% specificity, and submitted a premarket approval application to the FDA in March 2023. Approval and commercialization timing remain uncertain.
- Key business risks include uncertain payer coverage and reimbursement, the company’s largely out-of-network clinical testing model, reimbursement estimation and potential revenue reversals, customer concentration, execution of international expansion, and dependence on continued test adoption and biopharma relationships. One biopharma customer accounted for 33% of Q3 revenue and 32% of nine-month revenue.
- Legal matters include TwinStrand patent litigation, with certain claims dismissed in October 2023 and trial scheduled for November 2023; Natera false-advertising litigation, with trial scheduled for March 2024; and a U.S. Attorney investigation concerning billing of government-funded programs for Guardant360 tests. The company said it could not predict the investigation’s outcome or reasonably estimate losses for the described matters.
- The filing reported no material changes to previously disclosed risk factors. Management concluded disclosure controls were effective and reported no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether clinical test volume growth translates into sustainable reimbursement, collections and improving gross margins; assess the impact of the one-time $3.6 million Medicare appeal payment.
- How much future revenue and cash generation depends on the concentrated biopharma customer and on development milestones and royalties.
- The status and financial impact of Shield’s FDA review, Medicare coverage and commercial adoption plans.
- The cash-burn trajectory against management’s stated greater-than-12-month liquidity outlook, including planned R&D, commercial investment and laboratory capacity needs.
- Potential volatility from Lunit’s publicly traded investment, including the lock-up and the effect of unrealized gains or losses on reported earnings.
- Developments, possible costs or operational effects from the TwinStrand and Natera cases and the government investigation.
- Potential dilution from outstanding equity awards and the 2023 inducement plan; common shares outstanding were 117.85 million at September 30, 2023.