Guardant Health, Inc. — Q2 2020 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2020. Guardant Health develops and commercializes precision-oncology liquid-biopsy tests and related biopharmaceutical development services. Financial statements are unaudited.
Key financial results
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Total revenue | $66.3 million | $54.0 million | $133.8 million | $90.6 million |
| Gross margin | 66% | 69% | 68% | 66% |
| Operating loss | $54.6 million | $15.3 million | $89.5 million | $38.9 million |
| Net loss attributable to common stockholders | $54.6 million | $11.6 million | $82.4 million | $37.7 million |
| Loss per share, basic and diluted | $0.57 | $0.13 | $0.87 | $0.43 |
| Cash used in operating activities | Not separately presented for Q2 | $36.6 million | $18.1 million |
Q2 precision-oncology testing revenue was $51.0 million, up 21%; development-services revenue was $15.3 million, up 29%. For the first half, precision-oncology testing revenue rose 57% to $111.2 million, while development-services revenue rose 15% to $22.6 million. Q2 clinical testing revenue increased, but biopharmaceutical test volume fell to 2,805 from 5,285, reflecting trial timing and pandemic impacts.
At June 30, cash and cash equivalents were $164.7 million and marketable securities were $919.3 million, totaling approximately $1.084 billion. Current assets were $1.010 billion versus current liabilities of $70.0 million. The company disclosed no material funded debt; long-term operating lease liabilities were $41.1 million, with total operating lease liabilities of $49.4 million. Management said available cash and securities were expected to fund the current operating plan for at least 12 months after issuance of the statements.
Material changes and notable items
- Revenue growth was accompanied by substantially higher operating expenses. Q2 R&D rose 86% to $36.3 million, sales and marketing rose 29% to $25.0 million, and general and administrative expense rose 177% to $37.2 million.
- Q2 gross margin declined to 66% from 69%, primarily due to higher costs for companion-diagnostic programs. First-half margin improved to 68% from 66%, reflecting higher average selling prices per test.
- Stock-based compensation was $25.8 million in Q2 versus $3.2 million a year earlier. This included $18.3 million of expense for market-based restricted stock units granted to the CEO and President/COO; the company expects further significant expense recognition.
- In June, the company sold 4.31 million shares at $84 per share and received $354.6 million net proceeds. Common shares outstanding rose to 99.3 million at June 30 from 94.3 million at year-end 2019.
- Six-month operating cash use increased to $36.6 million. Investing cash use was $304.7 million, largely reflecting purchases of marketable securities, property and equipment, and intangible assets; financing cash inflow was $362.8 million, primarily from the offering.
Outlook, risks and contingencies
- COVID-19: Management reported fewer daily samples beginning in the latter half of March, constrained sales and business-development activity, and expected adverse effects on revenue, gross margin, clinical-study recruitment and development timelines. The ultimate impact was described as uncertain. The company received $1.8 million from the HHS CARES Act relief fund in Q2.
- Operating outlook: No numerical revenue or earnings guidance was provided. Management expected continued losses and rising R&D and sales-and-marketing spending, and anticipated near-term G&A increases, particularly from founder equity awards. It said profitability depends on revenue reaching a level sufficient to support its cost structure.
- Reimbursement and concentration: Revenue depends on payer coverage and reimbursement; rates, denials, retrospective adjustments and coding changes could affect results. One biopharmaceutical customer represented 23% of Q2 revenue and 21% of first-half revenue.
- One-time and unusual items: A March patent-license settlement with KeyGene cost $18.5 million, including $8.5 million of in-process R&D expensed and $1.2 million recorded in G&A. It ended future royalty obligations to KeyGene.
- Leases: July 2020 agreements for additional office and laboratory space carried estimated aggregate base rent of $239.5 million over a weighted-average 11.5-year term. A separate Palo Alto sublease, disclosed as a subsequent event, is expected to commence in October 2021 and run through June 2033, with monthly base rent rising to $1.52 million by its third anniversary, before annual increases.
- Legal matters: The company is litigating patent disputes with Foundation Medicine and Personal Genome Diagnostics, including challenges to patent validity and related counterclaims. Management could not reasonably estimate potential losses for the described proceedings.
Important facts for investors to verify
- Whether clinical testing volumes and biopharmaceutical trial activity recover from pandemic disruption, and how that affects revenue and margins.
- Durability of Medicare and commercial-payer coverage, realized reimbursement, and the impact of retrospective payment adjustments.
- Future stock-based compensation expense and its effect on reported losses, alongside underlying operating cash use.
- Progress and funding needs for LUNAR programs and clinical studies, including delays or changes to trial plans.
- Commitments and accounting effects of the new leases, and potential exposure from patent litigation and the SoftBank joint-venture put/call provisions.