Guardant Health, Inc. — Q2 2023 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2023. The company develops and commercializes precision oncology testing and related services, including tests for advanced cancer, residual disease and colorectal cancer screening.
Financial performance
| Metric | Q2 2023 | Q2 2022 | Six months 2023 | Six months 2022 |
|---|---|---|---|---|
| Revenue | $137.2 million | $109.1 million | $265.9 million | $205.2 million |
| Operating loss | $119.6 million | $130.3 million | $253.7 million | $253.7 million |
| Net loss | $72.8 million | $229.4 million | $206.3 million | $352.7 million |
| Net loss per share | $0.67 | $2.25 | $1.95 | $3.46 |
| Cash used in operations | — | — | $168.5 million | $140.6 million |
- Q2 revenue increased 26%; precision oncology testing revenue rose 36% to $125.2 million, while development services and other revenue declined 30% to $11.9 million.
- Clinical testing revenue was $100.2 million in Q2, up 42%; clinical test volume rose to approximately 43,500 from 29,300. Biopharma testing revenue was $25.0 million, with volume increasing to approximately 6,700 from 6,000.
- Q2 total cost of revenue increased 47% to $53.8 million, faster than revenue growth. Gross profit was approximately $83.3 million, or 60.7% of revenue, versus approximately $72.4 million, or 66.4%, a year earlier. Six-month gross margin was approximately 59.8%, compared with 66.5%.
- Q2 R&D expense was $90.4 million, sales and marketing $71.0 million, and G&A $41.5 million. Six-month R&D and sales and marketing increased 10% and 7%, respectively; G&A decreased 4%, partly reflecting lower stock compensation, offset in part by $7.5 million of severance costs.
- Net loss improved substantially year over year, but comparisons include unusual items: Q2 2022 included a $99.8 million noncontrolling-interest fair-value charge, while Q2 2023 included $64.0 million of unrealized gains on Lunit shares and impairment charges. The company recorded $23.6 million of investment-related impairment in Q2 and $29.1 million for the first half.
- At June 30, cash and cash equivalents were $271.1 million and short-term marketable debt securities were $953.8 million. Total current assets were $1.398 billion versus current liabilities of $200.9 million.
- Operating cash outflow was $168.5 million for the first half, compared with $140.6 million in 2022. A May follow-on offering generated $381.4 million net proceeds; financing cash flow was $383.0 million.
- Convertible notes had $1.15 billion principal, bear 0% interest, and mature in 2027. Their net carrying value was $1.139 billion. Long-term operating lease liabilities were $198.2 million.
Changes, outlook and risks
- Management said cash, cash equivalents, marketable debt securities and anticipated operating cash flows should fund anticipated needs for more than 12 months from the filing date. The company also expects further operating losses and continued investment in clinical studies, product development, sales and marketing; no quantified revenue or earnings guidance is provided in the supplied filing text.
- Management expects R&D and sales and marketing expenses to increase in absolute dollars. It also expects testing costs to rise with volume, while cost per test may decrease modestly over time through scale and efficiency.
- Shield’s ECLIPSE study met co-primary endpoints; management reported 83% sensitivity for colorectal cancer, 90% specificity, and 13% sensitivity for advanced adenomas. A premarket approval application was submitted to the FDA in March 2023. Japan granted national reimbursement approval for Guardant360 CDx in July 2023, after quarter-end.
- Reimbursement remains uncertain: the company says it generally operated as an out-of-network provider for U.S. clinical testing. Changes in payer coverage, coding or reimbursement could affect revenue and cause adjustments or reversals. Medicare represented about 43% of Q2 clinical-customer precision oncology revenue.
- Customer concentration is notable: one customer accounted for 32% of revenue in both Q2 2023 and the first half of 2023. The filing also describes supply-chain, international expansion and China-related geopolitical risks.
- Legal matters include TwinStrand patent litigation and Natera false-advertising litigation, with trials scheduled for November 2023, and a U.S. Attorney investigation concerning Guardant360 billing to government programs. The company could not estimate potential losses. On August 1, 2023, after quarter-end, Guardant announced a collaboration and settlement agreement with Illumina and dismissal with prejudice of Illumina’s lawsuit.
- Management reported effective disclosure controls and no material change in internal control over financial reporting during the quarter. No material changes to previously disclosed risk factors were reported.
Important facts for investors to verify
- Whether clinical test volume growth can translate into revenue and margins as cost of testing rises faster than revenue.
- Cash burn trajectory and the assumptions supporting management’s stated liquidity runway of more than 12 months.
- Shield FDA review, reimbursement prospects and commercial adoption; verify the status of the July 2023 Japan reimbursement approval.
- Durability of the reported net-loss improvement after excluding Lunit fair-value gains, investment impairments and the prior-year joint-venture charge.
- Customer concentration, payer reimbursement exposure, and outcomes or developments in the disclosed legal proceedings and government investigation.
- Potential dilution following the 14.375 million-share offering and from outstanding equity awards; common shares outstanding were 117.7 million at June 30, 2023.