Guardant Health, Inc. — Q2 2019 Form 10-Q
Business context and reporting period
Unaudited results cover the quarter and six months ended June 30, 2019; comparisons are with the corresponding 2018 periods. Guardant Health develops and commercializes liquid-biopsy precision oncology tests, including Guardant360 and GuardantOMNI, and is developing its LUNAR early-detection program. The company adopted ASC 606 on January 1, 2019; prior periods were not restated, so revenue comparisons are not fully like-for-like.
Financial and operating metrics
| Metric | Q2 2019 | Q2 2018 | Six months 2019 | Six months 2018 |
|---|---|---|---|---|
| Revenue | $54.0 million | $19.4 million | $90.6 million | $36.1 million |
| Precision oncology testing revenue | $42.1 million | $17.8 million | $70.9 million | $32.0 million |
| Development services revenue | $11.9 million | $1.6 million | $19.7 million | $4.1 million |
| Operating loss | $15.3 million | $22.7 million | $38.9 million | $41.4 million |
| Net loss | $11.3 million | $21.6 million | $32.7 million | $35.5 million |
| Net loss attributable to common stockholders | $11.6 million | $21.6 million | $37.7 million | $35.5 million |
| Net cash used in operating activities | Not presented quarterly | Not presented quarterly | $18.1 million | $23.6 million |
Q2 revenue increased 178% year over year; six-month revenue rose 151%. Q2 clinical tests increased to 11,875 from 6,723 and biopharmaceutical tests to 5,285 from 2,498. The company attributed growth to higher testing volumes, Medicare reimbursement for qualifying lung cancer tests, commercial payer payments, and new development projects. Direct testing and development costs imply gross profit of approximately $37.1 million in Q2 2019, or 68.8% of revenue, versus $9.4 million, or 48.6%, in Q2 2018; six-month gross profit was approximately $60.3 million (66.5%) versus $16.9 million (46.7%).
Operating expenses increased with investment and growth: Q2 R&D was $19.5 million, sales and marketing $19.4 million, and general and administrative $13.4 million. Q2 net loss attributable to common stockholders included a $0.3 million fair-value adjustment to redeemable noncontrolling interest; the six-month attributable loss included a $5.0 million adjustment.
At June 30, 2019, cash and cash equivalents were $174.7 million and marketable securities were $648.3 million, totaling $822.9 million. Total current assets were $604.2 million and current liabilities $57.0 million. Total liabilities were $77.7 million; capital lease obligations were approximately $0.2 million, and the balance sheet also included a $7.1 million royalty obligation. The May follow-on offering generated $349.7 million net proceeds. Cash from operations was negative $18.1 million for the first half; investing cash outflow was $305.2 million, largely reflecting purchases of marketable securities, and financing cash inflow was $357.4 million.
Material changes and notable items
- Revenue growth was accompanied by higher spending: first-half R&D increased 81%, sales and marketing 63%, and general and administrative expense 68% year over year.
- ASC 606 changed the timing of clinical testing revenue recognition and development milestone revenue. Management reported its effect on 2019 revenue as a $0.3 million decrease for Q2 and a $0.7 million increase for the first half, versus balances without adoption.
- The April acquisition of Bellwether Bio had preliminary consideration of $11.4 million, including $10.3 million paid at closing and $1.1 million of contingent consideration. Potential additional milestone and earn-out payments could reach $20 million; management did not consider the earn-out probable at quarter-end.
- SoftBank’s joint-venture interest is classified as redeemable noncontrolling interest. Its fair value was $46.8 million at June 30, 2019, with put-call provisions that could require a future purchase of some or all of SoftBank’s interest under specified conditions.
Outlook, risks and contingencies
Management said available cash, cash equivalents and marketable securities, together with anticipated operating cash flows, should fund the current plan for at least 12 months. It expects continued operating losses and higher operating expenses and capital needs as it expands commercialization, research, clinical trials and laboratory capacity. Management did not provide numerical revenue or earnings guidance.
The company planned to begin a prospective colorectal screening study of more than 10,000 patients in the second half of 2019, with first enrollment expected by Q4, and to release a CLIA-validated LUNAR assay for prospective clinical trials by year-end. These are forward-looking plans, not reported outcomes.
Key risks include payer coverage and reimbursement uncertainty, dependence on test volumes and biopharmaceutical customers, regulatory approval requirements, and the possibility that additional funding may be needed if results diverge from plan. A proposed Medicare coverage determination for broader Guardant360 use had not been finalized. The filing also describes an unresolved HHS Office for Civil Rights inquiry following 2018 email-system security incidents, patent litigation and counterclaims, and a license arbitration; the company could not estimate potential losses or predict outcomes. Future minimum operating lease payments were $61.7 million.
Important facts for investors to verify
- Whether test volumes, reimbursement and collections support continued revenue growth, particularly given the estimation judgments introduced by ASC 606.
- Progress and final terms of Medicare coverage decisions, commercial payer policies and any required FDA approvals.
- Cash consumption, investment in operating capacity, and whether liquidity remains sufficient as losses and spending continue.
- Development milestones and commercial prospects for LUNAR and the acquired Bellwether Bio program, including contingent payment exposure.
- Developments in the cybersecurity inquiry, patent disputes and license arbitration, and any resulting financial or operational impact.