Guardant Health, Inc. — Q1 2019 Form 10-Q
Reporting period: Three months ended March 31, 2019; comparisons are with Q1 2018 unless stated otherwise. Guardant Health develops and commercializes liquid-biopsy tests and related services for precision oncology, including Guardant360, GuardantOMNI and its LUNAR early-detection program.
Financial performance and liquidity
| Metric | Q1 2019 | Q1 2018 |
|---|---|---|
| Revenue | $36.7 million | $16.7 million |
| Precision oncology testing revenue | $28.8 million | $14.2 million |
| Development services revenue | $7.8 million | $2.5 million |
| Gross profit and gross margin | $23.1 million; 63.1% | $7.4 million; 44.6% |
| Operating loss | $23.7 million | $18.6 million |
| Net loss | $21.4 million | $13.8 million |
| Net loss attributable to common stockholders | $26.1 million; $0.30 per share | $13.8 million; $1.16 per share |
| Cash used in operating activities | $4.3 million | $6.6 million |
Revenue increased 120%. Testing revenue rose 103% and development services revenue 213%. Clinical tests processed increased to 9,521 from 7,246; biopharmaceutical tests increased to 3,762 from 2,334. Testing costs rose 37%, slower than testing revenue. Operating expenses totaled $60.3 million, up from $35.3 million, reflecting investment in research and development, commercial expansion and public-company costs.
At March 31, 2019, cash and cash equivalents were $153.8 million and marketable securities were $339.0 million, totaling $492.8 million. Current assets were $512.3 million and current liabilities $48.2 million. Total liabilities were $64.5 million, including a $7.1 million royalty obligation and $0.2 million of capital lease obligations; the filing reports no material interest-rate exposure from outstanding indebtedness. Management said available cash, securities and expected operating cash flows should fund the current plan for at least 12 months from the filing date, while noting that additional capital could be needed if results fall short of plan. Operating lease commitments totaled $62.6 million.
Material changes and accounting items
- ASC 606 adoption increased Q1 2019 reported testing revenue by $1.0 million versus the amount that would have been reported without adoption. It also raised opening accounts receivable and reduced opening accumulated deficit by $4.9 million. Prior-year results were not restated; management estimated clinical testing revenue under the prior cash-basis approach would have been about $18.2 million in Q1 2019.
- The $26.1 million loss attributable to common stockholders includes a $4.7 million fair-value adjustment to SoftBank’s redeemable noncontrolling interest in the consolidated joint venture. The adjustment reflects redemption-value accounting, not an equivalent operating cash outflow.
- Q1 2018 other income included a $4.25 million settlement payment from a commercial dispute; there was no comparable gain in Q1 2019. The year-over-year net-loss comparison is also affected by the 2018 pre-IPO share structure and weighted-average shares.
- The company completed its IPO in October 2018, raising $249.5 million net of underwriting discounts, commissions and offering expenses.
Outlook, commentary and risks
- Management expects operating losses and expenses to continue in the near term, with increased investment in sales and marketing, clinical studies, product development—particularly LUNAR—and laboratory capacity. No numerical revenue or earnings guidance was provided.
- Management reported exploratory LUNAR colorectal-screening results from 229 patients and matched controls: average sensitivity above 80% and specificity of 94% for stage I/II disease. A prospective screening study involving more than 10,000 patients was planned for the second half of 2019; these early results do not establish commercial performance.
- Reimbursement and payer coverage remain important uncertainties. Medicare coverage at the time applied to qualifying NSCLC patients; a broader proposed coverage determination was subject to review and could change. The company also described a proposed eviCore policy expected to take effect July 1, 2019, with coverage that could extend to more than 38 million additional Americans.
- In April 2019, after quarter-end, Guardant acquired Bellwether Bio for approximately $10.1 million upfront, with up to $20.0 million in additional contingent consideration. Purchase accounting was not complete when the filing was issued.
- Legal and contingency matters include patent litigation and related patent challenges, a licensing arbitration with KeyGene, and an unresolved HHS Office for Civil Rights inquiry following 2018 email-system security incidents. The company could not estimate potential losses from the security matter or determine the likely outcomes of the disputes.
- SoftBank’s joint-venture interest is classified as redeemable outside permanent equity. Its estimated fair value was $46.5 million at quarter-end, based on significant unobservable assumptions; the put right may become exercisable on specified dates and circumstances.
Important facts for investors to verify
- How much reported clinical-testing growth reflects higher volumes and payer collections versus ASC 606’s earlier recognition of estimated reimbursement, and whether those estimates convert to cash.
- Whether Medicare and commercial payer coverage expands, remains in force and produces sustainable reimbursement rates.
- Whether revenue growth and gross-margin improvement can keep pace with operating-expense growth, and how quickly cash is consumed as investment and capacity needs rise.
- The financial and governance implications of the SoftBank joint venture, including the assumptions behind its redemption valuation and potential put-right obligations.
- Progress and costs for LUNAR validation and the planned screening study; the Bellwether Bio milestone conditions and resulting consideration; and outcomes of the disclosed legal and cybersecurity matters.