Guardant Health, Inc. — FY 2018 Form 10-K
Reporting period: Fiscal year ended December 31, 2018. This is an annual filing; fourth-quarter figures below are unaudited. Amounts are in U.S. dollars unless stated otherwise.
Business context and financial performance
Guardant Health develops and sells blood-based precision oncology tests and related services. Its commercial products included Guardant360, a 73-gene test, and GuardantOMNI, a 500-gene research-use-only test. LUNAR programs for recurrence monitoring and early cancer detection remained in development; the LUNAR assay launched for research use in late 2018.
| Metric | FY 2018 | FY 2017 | Change |
|---|---|---|---|
| Total revenue | $90.6 million | $49.8 million | Up 82% |
| Precision oncology testing revenue | $78.4 million | $42.1 million | Up 86% |
| Development services revenue | $12.2 million | $7.8 million | Up 58% |
| Gross profit | $47.4 million | $18.2 million | Increased |
| Gross margin | Approximately 52.3% | Approximately 36.6% | Improved |
| Operating loss | $(92.9) million | $(76.6) million | Loss widened |
| Net loss | $(84.3) million | $(83.2) million | Loss widened slightly |
| Operating cash flow | $(72.2) million | $(72.2) million | Approximately unchanged |
Gross profit and margins are calculated from reported revenue and cost of revenue. Basic and diluted net loss per share was $(2.80), versus $(7.07) in 2017; the comparison is affected by the IPO and the resulting increase in weighted-average shares.
Liquidity, cash flow and debt
- At year-end, cash and cash equivalents were $140.5 million and marketable securities were $356.0 million, totaling $496.5 million. Working capital was $422.0 million.
- Cash used in investing activities was $153.0 million, primarily reflecting purchases of marketable securities and $20.2 million of property and equipment. Cash provided by financing activities was $293.2 million.
- The October 2018 IPO generated approximately $249.5 million in net proceeds. The SoftBank joint venture contributed $41.0 million; Guardant contributed $9.0 million.
- The company repaid its term loan in 2017. At December 31, 2018, reported capital lease obligations were $0.2 million and the present value of minimum royalty obligations was $7.3 million. Total contractual obligations shown in the filing were $55.9 million, including operating leases and royalty commitments.
- Management stated that available cash, cash equivalents, marketable securities and anticipated operating cash flow were expected to fund requirements for at least 12 months from the filing date. The company expected further operating losses and higher spending.
Material changes and operating developments
- Clinical and biopharmaceutical test volumes grew: 29,238 clinical tests (excluding tests for a customer that moved testing in-house) and 10,370 biopharmaceutical tests were reported for 2018, compared with 23,759 and 6,286, respectively, in 2017. Growth in volume drove testing revenue; GuardantOMNI contributed to higher biopharmaceutical test pricing.
- Research and development expense rose 98% to $50.7 million, and sales and marketing expense rose 65% to $53.5 million, reflecting expanded development and commercial investment. General and administrative expense was $36.2 million, down 2%, partly because 2017 included substantial employee and executive stock repurchase compensation expense.
- Guardant360 received FDA breakthrough device designation in January 2018; GuardantOMNI received the designation in December. The company intended to pursue FDA premarket approval for both tests. These designations do not constitute FDA approval.
- Medicare local coverage for Guardant360 in qualifying non-small cell lung cancer cases began in 2018; the stated reimbursement rate was $3,500 per test. The company began submitting claims in September and reported receiving Medicare payments in October. Coverage remained indication- and criteria-dependent.
- In November 2018, Guardant entered into companion-diagnostic development collaborations with AstraZeneca for Guardant360/Tagrisso and GuardantOMNI/Imfinzi. AstraZeneca represented 18.0% of total 2018 revenue.
Outlook, risks and unusual items
- Outlook: No quantified revenue or earnings guidance is provided in the filing. Management expected continued losses, increased research and development, commercial and public-company costs, and additional capacity investment as testing demand grew.
- Revenue recognition: For many clinical tests, Guardant recognized revenue when cash was received because payer amounts and collectability were uncertain. It planned to adopt the new revenue standard in 2019, which management expected to result in earlier recognition of estimated variable consideration; the impact was still being quantified.
- Reimbursement and customer concentration: Coverage was limited, and several large national commercial payers treated comprehensive genomic profiling as experimental or investigational. The largest commercial payer contributed 9.4% of 2018 revenue; the top five biopharmaceutical customers contributed 36.1%.
- Cybersecurity: July 2018 email-system incidents exposed information relating to approximately 1,700 individuals, including PHI for approximately 1,100. The company reported no material financial impact for 2018, but an HHS Office for Civil Rights inquiry was pending and potential losses could not be estimated.
- Legal matters: Guardant settled Foundation Medicine’s 2016 patent suit in July 2018 with a $3.0 million payment, accrued in 2017. Guardant’s separate patent infringement cases against Foundation Medicine and Personal Genome Diagnostics continued, with patent challenges pending. A KeyGene license arbitration, including counterclaims, was in preliminary stages; outcome and potential loss were unclear. Guardant also received $4.25 million from settlement of a commercial dispute, recorded as other income in 2018.
- Joint venture: SoftBank’s 50% interest in the consolidated joint venture was classified as redeemable noncontrolling interest ($41.8 million at year-end). Put-call provisions may require a future purchase of SoftBank’s interest and could involve significant cash or equity consideration.
- Other risks: The business depended substantially on Guardant360, a single California laboratory and key suppliers, including Illumina for sequencing equipment and materials. FDA/LDT regulation, clinical validation, product performance, intellectual property disputes, privacy requirements and payer reimbursement could materially affect results.
Important facts for investors to verify
- Whether rapid revenue and test-volume growth continues and translates into improved operating leverage, given the widening operating loss.
- How much clinical-test revenue is ultimately collectible, and how payer coverage, denials, retroactive offsets and the 2019 revenue-standard adoption affect reported revenue and cash conversion.
- Progress, timing, cost and outcome of FDA submissions and broader Medicare and commercial coverage; breakthrough designation is not approval or guaranteed reimbursement.
- Whether Guardant can diversify revenue and manage exposure to major biopharmaceutical customers, including AstraZeneca.
- Developments and potential financial consequences from the cyber incident/OCR inquiry, patent proceedings and KeyGene arbitration.
- Liquidity and contractual commitments, including the joint venture put-call terms, operating leases, royalty obligations and continuing cash burn.