Guardant Health, Inc. — Q3 2021 Form 10-Q
Reporting period: Three and nine months ended September 30, 2021. The filing is unaudited. Unless otherwise noted, amounts below are in U.S. dollars; financial statement amounts are rounded to millions.
Business context
Guardant Health develops and provides precision oncology testing, including liquid-biopsy tests for advanced cancer, and related biopharmaceutical development services. During 2021 it launched Guardant Reveal for residual and recurring cancer, Guardant360 TissueNext, and Guardant360 Response. It is also developing tests under its LUNAR program, including through the ECLIPSE colorectal-cancer screening study.
Financial results
| Metric | Q3 2021 | Q3 2020 | Nine months 2021 | Nine months 2020 |
|---|---|---|---|---|
| Total revenue | $94.8m | $74.6m | $265.5m | $208.4m |
| Gross profit | $64.0m | $53.4m | $176.1m | $144.3m |
| Gross margin | 67% | 72% | 66% | 69% |
| Operating loss | $107.3m | $74.3m | $312.8m | $163.8m |
| Net loss | $107.5m | $71.7m | $312.5m | $153.2m |
| Net loss per share, basic and diluted | $1.06 | $0.78 | $3.11 | $1.66 |
- Q3 precision oncology testing revenue was $79.3m, up 31%; development services and other revenue was $15.5m, up 9%. For the nine-month period, the respective amounts were $215.6m, up 26%, and $49.9m, up 36%.
- Q3 clinical-customer tests increased to 22,806 from 16,950; biopharmaceutical-customer tests increased to 4,839 from 3,071. Nine-month clinical tests rose to 62,026 from 45,901, while biopharmaceutical tests rose to 12,014 from 11,142.
- Q3 cost of revenue increased 45% to $30.8m, faster than revenue growth, and gross margin fell five percentage points. Management attributed the margin decline primarily to higher average test costs from product mix. For the nine months, cost of revenue rose 40% and margin declined three percentage points.
- Operating expenses increased substantially: Q3 R&D rose 96% to $71.0m and sales and marketing rose 100% to $50.2m. Nine-month R&D rose 74% to $190.2m and sales and marketing rose 76% to $132.3m. Q3 G&A declined 24% to $50.1m, partly because of lower stock compensation after a tranche of executive market-based awards vested; nine-month G&A increased 35% to $166.4m.
- Stock-based compensation was $35.0m in Q3 and $124.6m for the nine months, versus $55.2m and $87.4m, respectively, in the prior-year periods. Nine-month 2021 net loss also reflects higher operating investment; 2020 included an $8.5m charge for acquired in-process R&D.
Cash, debt and liquidity
- At September 30, 2021, cash and cash equivalents were $832.4m and marketable securities totaled $903.8m, for approximately $1.736bn combined. Current assets were $1.593bn and current liabilities were $102.3m.
- Convertible senior notes had $1.15bn principal outstanding, carried at $1.134bn net, and bear 0% stated interest; they mature in November 2027. The notes include conversion and repurchase provisions. The company adopted ASU 2020-06 early in 2021, changing the balance-sheet classification of the conversion feature.
- For the nine months, operating cash use was $132.0m, versus $44.7m in 2020. Investing activities provided $203.5m, largely from marketable-security maturities, while financing activities used $70.6m, mainly due to $82.2m of taxes paid on net share settlement of restricted stock units. Capital expenditures were $50.4m.
- Management stated that cash, cash equivalents and marketable securities, together with anticipated cash flows, were expected to fund the current plan for more than 12 months. The company reported a $916.9m accumulated deficit and expects further losses.
Outlook, risks and unusual items
- No specific revenue, earnings, or margin guidance is provided in the filing. Management expects operating expenses to rise as it invests in R&D, clinical studies, sales capacity and marketing; capital needs may also increase if additional laboratory capacity is required.
- Revenue depends on test volumes, customer mix, payer coverage and reimbursement. Guardant360 CDx received Medicare advanced diagnostic laboratory test status, allowing billing at the lowest available commercial rate for the first three quarters from April 1, 2021; subsequent billing is based on the median rate of commercial claims paid. Reimbursement for newer tests was still being negotiated.
- Management cited COVID-19-related risks to demand, clinical-trial recruitment and supplies, including sequencers, reagents and blood tubes. It also noted that payer reimbursement and retrospective collection estimates are uncertain and could lead to revenue adjustments or reversals.
- On November 1, 2021, after quarter-end, the company exercised its call right to acquire SoftBank’s interest in the consolidated AMEA joint venture. Price remains to be negotiated or determined by a third-party valuation, subject to a minimum return provision for SoftBank; settlement may be in cash, shares or both. The company expected completion by the end of Q2 2022. No resulting valuation change was reflected at September 30.
- Legal matters include patent litigation with Foundation Medicine, for which a binding term sheet contemplated settlement subject to a definitive agreement; a patent-infringement action brought by TwinStrand Biosciences and the University of Washington; and false-advertising litigation with Natera. The filing says outcomes and potential losses in the described matters generally cannot be reasonably estimated.
Most important facts for investors to verify
- Whether testing growth and payer reimbursement support revenue without further deterioration in gross margin or cash burn.
- How operating expenses, particularly R&D and sales and marketing, develop relative to revenue growth.
- The final price, form of consideration and timing for the SoftBank joint-venture buyout, including the minimum-return provision.
- Progress on Medicare and commercial coverage for Guardant360 CDx and reimbursement for Guardant Reveal, Response and TissueNext.
- Developments and potential financial effects of the identified patent and advertising disputes, and any changes in supply or COVID-19 risks.