Business context and reporting period
Guardant Health, Inc. is a precision oncology company providing liquid- and tissue-biopsy tests and biopharmaceutical development and data services. This unaudited Form 10-Q covers the quarter and six months ended June 30, 2021, compared with the corresponding 2020 periods.
During 2021, Guardant launched Guardant Reveal for residual and recurring cancer, initially targeting Stage II–III colorectal cancer, and introduced Guardant360 TissueNext and Guardant360 Response in June. Its Guardant360 CDx had FDA approval and CMS advanced diagnostic laboratory test status.
Financial performance and position
Amounts are in millions of U.S. dollars, except per-share data and percentages.
| Metric | Q2 2021 | Q2 2020 | Six months 2021 | Six months 2020 |
|---|---|---|---|---|
| Revenue | $92.1 | $66.3 | $170.8 | $133.8 |
| Gross profit | $62.2 | $43.9 | $112.1 | $90.9 |
| Gross margin | 68% | 66% | 66% | 68% |
| Operating loss | $(97.6) | $(54.6) | $(205.5) | $(89.5) |
| Net loss | $(97.6) | $(49.7) | $(204.9) | $(81.6) |
| Net loss per share, basic and diluted | $(0.96) | $(0.57) | $(2.05) | $(0.87) |
- Q2 revenue increased 39%; precision oncology testing revenue rose 42% to $72.6 million, while development services and other revenue rose 27% to $19.5 million.
- For the first half, revenue grew 28%. Clinical testing revenue increased, but biopharmaceutical testing revenue declined amid trial timing and project mix. Higher average cost per test contributed to the gross-margin decline for the six-month period.
- Operating expenses rose substantially: first-half R&D increased 63% to $119.2 million, sales and marketing increased 64% to $82.1 million, and G&A increased 104% to $116.3 million. G&A included $72.8 million of stock-based compensation; total stock-based compensation was $89.6 million.
- Cash used in operating activities was $78.9 million for the first half, versus $36.6 million a year earlier. Investing activities provided $250.9 million, mainly from marketable-security maturities; financing activities used $65.0 million, including $75.0 million of taxes paid on net share settlement of restricted stock units. Cash flow from investments should not be read as operating cash generation.
- At June 30, cash and cash equivalents were $938.6 million and marketable securities were $908.4 million. Current assets were $1.891 billion versus current liabilities of $96.6 million. Accumulated deficit was $809.4 million.
- The company had $1.15 billion principal amount of 0% convertible senior notes due 2027, with a $1.134 billion net carrying amount. Long-term operating lease liabilities were $211.8 million. The filing states the notes were not convertible at quarter-end.
Material changes versus the prior comparable period
- Growth was led by clinical customer testing volume: Q2 clinical tests rose to 20,830 from 13,694; first-half clinical tests rose to 39,220 from 28,951. First-half biopharmaceutical tests fell to 7,175 from 8,071.
- Q2 gross margin improved to 68% from 66%, attributed mainly to higher biopharmaceutical revenue following regulatory approvals for two companion diagnostic programs. First-half gross margin fell to 66% from 68%, primarily due to product mix and higher average cost per test.
- Higher operating costs and losses reflected expanded R&D, commercial staffing and marketing, as well as elevated stock-based compensation. First-half G&A included a $50.3 million year-over-year increase in stock-based compensation, primarily related to executive market-based awards.
- Early adoption of ASU 2020-06 in Q1 reclassified the convertible notes’ equity component to liabilities and reduced opening stockholders’ equity by approximately $326.0 million; this was an accounting change, not a new borrowing.
Outlook, risks and unusual items
- No quantitative revenue, earnings or cash-flow guidance is provided in the filing. Management expects continued operating losses in the near term and higher spending on research, clinical trials, sales, marketing and product development. It expects existing cash, cash equivalents and marketable securities, together with anticipated operating cash flows, to fund the current plan for more than 12 months from the report date.
- Management identifies payer coverage and reimbursement, test pricing and customer mix, clinical adoption, biopharmaceutical project timing, and COVID-19-related disruption to demand and clinical trials as uncertainties. Revenue estimates for clinical tests rely on variable-consideration estimates and may be adjusted as collections occur.
- Customer concentration is notable: Customer B represented 29% of Q2 revenue and 27% of first-half revenue. The filing reports no single non-U.S. country above 10% of revenue.
- Legal matters include ongoing patent litigation with Foundation Medicine; a May 2021 binding term sheet contemplated a global settlement subject to a definitive agreement. Guardant also sued Natera over alleged misleading statements about Guardant Reveal, with counterclaims. A TwinStrand Biosciences/University of Washington patent suit was filed in August 2021, after quarter-end. The company says it cannot reasonably estimate possible losses for the described matters unless otherwise stated.
- Other notable items include a $75.0 million first-half cash outflow for taxes on net share settlement of restricted stock units and a $13.3 million non-marketable investment balance at quarter-end. The company subsequently acquired $26 million of additional non-marketable securities in July 2021.
- Management reported disclosure controls and procedures were effective as of June 30, 2021, with no material change in internal control over financial reporting identified during the quarter.
Important facts for investors to verify
- Whether clinical test volume growth and reimbursement collections sustain revenue growth, and how payer coverage changes affect realized revenue.
- Whether operating expense growth—particularly R&D, commercial spending and stock-based compensation—can moderate relative to revenue, given the widening losses and operating cash use.
- The cash runway under actual operating performance, capital expenditure needs, and any potential financing or dilution.
- The status and potential consequences of the Foundation Medicine, Natera and TwinStrand disputes, including any settlements, injunctions or financial exposure.
- The extent to which new product launches, companion diagnostic programs and clinical studies translate into adoption, reimbursement and recurring revenue.