Guardant Health, Inc. — Q1 2021 Form 10-Q
Reporting period: Three months ended March 31, 2021; comparisons are with Q1 2020 unless noted. Guardant Health develops and commercializes liquid-biopsy oncology tests and related biopharmaceutical services. The company launched Guardant Reveal in February 2021 for residual and recurring cancer, initially targeting Stage II–III colorectal cancer.
Financial performance and liquidity
| Metric | Q1 2021 | Q1 2020 / prior date |
|---|---|---|
| Total revenue | $78.7 million | $67.5 million; up 17% |
| Precision oncology testing revenue | $63.7 million | $60.2 million; up 6% |
| Development services and other revenue | $14.9 million | $7.3 million; up 106% |
| Gross profit / gross margin | $49.9 million / 63% | $47.0 million / 70% |
| Operating loss | $107.9 million | $34.9 million |
| Net loss | $107.4 million | $31.8 million |
| Net loss attributable to common stockholders / diluted EPS | $109.7 million / $(1.09) | $27.7 million / $(0.29) |
| Cash used in operating activities | $16.3 million | $13.3 million |
| Cash, cash equivalents and marketable securities | $1.94 billion at March 31, 2021 | $2.04 billion at December 31, 2020 |
| Convertible senior notes | $1.15 billion principal; $1.133 billion net carrying amount | Notes due 2027 |
At March 31, 2021, current assets were $2.03 billion and current liabilities were $95.5 million. The company reported an accumulated deficit of $711.8 million. Its $1.15 billion 2027 notes bear 0% interest; they are convertible under specified conditions and mature November 15, 2027. Management said available cash and marketable securities were expected to fund the current operating plan for more than 12 months.
Material changes and management commentary
- Clinical testing revenue increased to $49.8 million from $38.0 million, with clinical tests rising to 18,390 from 15,257. Biopharmaceutical testing revenue fell to $13.9 million from $22.3 million, and test volume declined to 3,522 from 5,266, primarily reflecting timing and progression of clinical trials.
- Development-services growth reflected new companion-diagnostic development and regulatory-support projects. Revenue includes variable reimbursement estimates and milestone-based consideration, both requiring judgment.
- Gross margin fell to 63% from 70%, which management attributed mainly to higher average cost per test from product mix and lower average selling price.
- Operating expenses rose substantially. General and administrative expense increased 243% to $67.9 million, including $47.1 million of stock-based compensation. Total stock-based compensation was $55.1 million, versus $6.3 million a year earlier; $43.9 million related to market-based restricted stock units.
- Research and development expense increased 50% to $55.5 million. Management expects R&D, sales and marketing expenses to increase in absolute dollars as it invests in product development, clinical trials, sales capacity and market expansion.
- Operating cash use was partly offset in the period by working-capital movements and noncash charges. Investing cash inflow of $123.9 million primarily reflected marketable-security maturities; financing cash outflow of $70.0 million primarily reflected $73.6 million in taxes paid on net share settlement of restricted stock units.
- The company early adopted ASU 2020-06 in Q1 2021. Adoption reclassified the notes’ conversion-feature balance from equity to debt and reduced reported equity; it is an accounting change, not a new issuance of principal.
Outlook, risks and unusual items
The filing provides no specific quarterly or annual revenue or earnings guidance. Management expects continued operating losses and increased investment in research, clinical trials, commercial expansion and potentially laboratory capacity. It cautioned that profitability depends on achieving revenue sufficient to support the cost structure and that additional capital could be needed if performance falls short of plan.
- Reimbursement: Clinical-test revenue depends on payer coverage, coding and collections. The company uses estimates for variable consideration and recorded $5.1 million of revenue in Q1 2021 from collections on prior-period samples exceeding earlier estimates. Guardant360 CDx received Medicare ADLT status in March 2021; Guardant Reveal reimbursement negotiations were ongoing.
- COVID-19: Management said the pandemic could continue to disrupt clinical testing demand, customer trials and studies, and revenue. The extent and duration of effects remained uncertain.
- Litigation: Patent disputes with Foundation Medicine remain pending in U.S. and German courts. The company said outcomes and potential losses could not be reasonably estimated; adverse outcomes could require substantial payments, injunctions or operational changes.
- Joint venture exposure: SoftBank holds a redeemable noncontrolling interest in the consolidated AMEA joint venture. Put-call provisions may require a purchase of SoftBank’s interest in specified circumstances; valuation is subject to significant assumptions.
- Facilities and leases: New Palo Alto and San Diego leases contributed to the increase in right-of-use assets and long-term lease liabilities. Total future operating lease payments were $299.5 million before imputed interest and incentives.
- Controls: Management concluded disclosure controls were effective as of March 31, 2021 and reported no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether clinical-test volumes, reimbursement rates and collections support reported revenue estimates, especially as payer coding and coverage evolve.
- Whether biopharmaceutical testing and development-services revenue can offset fluctuations in trial activity and customer mix.
- How much of the elevated loss and G&A expense reflects recurring operations versus stock-based compensation, particularly market-based awards.
- Whether gross margin improves as test volume, product mix and laboratory efficiency change.
- Cash burn, planned investment and capital needs relative to the stated liquidity runway; also review the terms and potential dilution or settlement effects of the 2027 convertible notes.
- Developments in the Foundation Medicine litigation and any potential financial or operational consequences.
- Progress toward Guardant Reveal reimbursement and evidence supporting adoption of newer tests, including clinical-study results.