Guardant Health, Inc. — Q3 2020 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2020; comparisons are with the corresponding 2019 periods. Unaudited results. Dollar amounts below are USD millions unless otherwise noted.
Business context
Guardant Health develops and commercializes liquid-biopsy tests and related services for precision oncology. Its products include Guardant360 and GuardantOMNI; its LUNAR program targets earlier-stage cancer applications. In September 2020, Guardant launched Guardant360 CDx and Guardant360 LDT. The FDA approved Guardant360 CDx as a comprehensive liquid-biopsy tumor-profiling test and companion diagnostic for one therapeutic product.
Financial results and liquidity
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Revenue | $74.6 | $60.8 | $208.4 | $151.5 |
| Gross profit / margin | $53.4 / 72% | $42.3 / 70% | $144.3 / 69% | $102.6 / 68% |
| Operating loss | $(74.3) | $(17.5) | $(163.8) | $(56.4) |
| Net loss | $(71.7) | $(13.1) | $(153.2) | $(45.7) |
| Net loss attributable to common stockholders per share | $(0.78) | $(0.14) | $(1.66) | $(0.56) |
| Adjusted EBITDA (non-GAAP) | $(14.6) | $(9.0) | $(55.4) | $(36.1) |
- Q3 revenue rose 23% year over year. Precision oncology testing revenue increased 16% to $60.4 million; development services and other revenue increased 63% to $14.2 million.
- For the first nine months, revenue grew 38%. Testing revenue rose 39% to $171.6 million and development services and other rose 29% to $36.8 million.
- Gross margin improved by two percentage points in Q3 and one point year to date. Management attributed improvement primarily to higher clinical sample volumes, pricing and cost efficiencies.
- Operating expenses grew sharply: Q3 research and development rose 48%, sales and marketing 33%, and general and administrative 303%. G&A included $50.1 million of stock-based compensation in Q3, mainly tied to market-based awards granted to the CEO and President/COO. Total stock-based compensation was $55.2 million for Q3 and $87.4 million year to date.
- Cash and cash equivalents were $142.9 million and marketable securities were $921.9 million at September 30, 2020, totaling approximately $1.065 billion. Current assets were $1.087 billion versus current liabilities of $72.0 million. The company reported no conventional borrowings in the provided statements; recognized operating lease liabilities totaled $47.1 million.
- Nine-month cash used in operations was $44.7 million, compared with $16.8 million in 2019. Investing cash use was $319.4 million, primarily reflecting net purchases of marketable securities, capital expenditures and intangible assets. Financing provided $363.6 million, principally from a June public offering that generated $354.6 million net proceeds.
Material changes, outlook and risks
- Clinical test revenue benefited from higher sample volumes, expanded coverage and reimbursement, and collections for tests processed in earlier periods. Clinical tests performed were 16,950 in Q3 versus 13,259 a year earlier. By contrast, biopharmaceutical test volumes fell to 3,071 from 5,280, reflecting trial timing and progression.
- COVID-19 disrupted operations and reduced daily sample receipts beginning in the latter half of March. Management warned that the pandemic could continue to affect testing volumes, clinical trials, development-services arrangements and margins; the ultimate impact was uncertain.
- Medicare reimbursement and payer coverage remain important uncertainties. Guardant said Medicare instructed it not to submit claims for Guardant360 CDx until a new Z-Code and corresponding pricing are established; future pricing could differ from that for the LDT test. Changes in coding or payer policies could reduce, delay or eliminate reimbursement.
- Management expects continued operating losses and increased spending on research and development, clinical trials, sales and marketing, and capacity. It stated that cash, cash equivalents, marketable securities and anticipated operating cash flows should cover anticipated needs for more than 12 months from the report date; additional capital may be sought if plans or cash flows fall short. No quantified revenue or earnings guidance is provided in the supplied filing text.
- The company signed two facility leases in July, with $239.5 million of future minimum payments not yet commenced at quarter-end; possession was anticipated in Q1 2021. This is in addition to recognized lease liabilities.
- A March patent-license settlement and acquisition cost $18.5 million plus transaction costs: $8.5 million of acquired in-process R&D was expensed, and $1.2 million was recorded in G&A. An $8.0 million patent-dispute settlement receivable payable over six years was fully reserved for credit losses.
- The Foundation Medicine patent litigation remained pending, with trial continued pending pre-trial motions; the company said it could not reasonably estimate potential loss. A separate patent dispute with Personal Genome Diagnostics was settled in August 2020.
- On November 4, 2020, the compensation committee approved additional performance- and time-based stock awards with approximately $62 million grant-date fair value, expected to be expensed over about four years, subject to applicable conditions.
Most important facts for investors to verify
- Whether clinical test volumes, reimbursement coverage and collections sustain growth, particularly after the Guardant360 CDx launch and the pending Medicare code and pricing process.
- How much of reported revenue growth reflects current-period testing versus prior-period collections, and how biopharmaceutical customer volumes recover from trial-related and COVID-19 disruption.
- The ongoing expense and dilution effects of market-based awards and other stock-based compensation, including the new November awards.
- Cash burn, capital spending and the financial commitments associated with the uncommenced leases, alongside the company’s stated liquidity runway.
- Developments and potential financial exposure in the Foundation Medicine litigation, and collectability of the fully reserved settlement receivable.