Guardant Health, Inc. — Q3 2019 Form 10-Q
Reporting period: Quarter ended September 30, 2019; comparisons are with Q3 and the first nine months of 2018. Amounts are in U.S. dollars. Interim financial statements are unaudited.
Business context
Guardant Health develops and commercializes liquid-biopsy tests and related services for precision oncology. Its main commercial tests are Guardant360 and GuardantOMNI; its LUNAR program targets earlier cancer detection. Revenue comes from precision oncology testing and biopharmaceutical development services.
Financial performance
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Total revenue | $60.8 million | $21.7 million | $151.5 million | $57.8 million |
| Precision oncology testing revenue | $52.1 million | $18.3 million | $123.0 million | $50.3 million |
| Development services revenue | $8.7 million | $3.4 million | $28.4 million | $7.5 million |
| Gross profit and margin | $42.3 million; 69.6% | $11.6 million; 53.7% | $102.6 million; 67.7% | $28.5 million; 49.2% |
| Loss from operations | $17.5 million | $24.2 million | $56.4 million | $65.6 million |
| Net loss | $13.1 million | $23.5 million | $45.7 million | $59.0 million |
| Net loss per share, basic and diluted | $0.14 | $1.94 | $0.56 | $4.87 |
Q3 net loss attributable to common stockholders was $12.8 million; nine-month loss attributable to common stockholders was $50.4 million. The difference from consolidated net loss reflects fair-value adjustments to the redeemable noncontrolling interest.
- Cash and liquidity: At September 30, cash and cash equivalents were $147.2 million and marketable securities were $678.4 million, totaling $825.6 million. Current assets were $583.1 million against current liabilities of $67.8 million.
- Cash flow: Nine-month operating cash use was $16.8 million, versus $45.6 million in 2018. Investing cash use was $340.9 million, primarily reflecting purchases of marketable securities; financing provided $364.2 million, largely from the May 2019 follow-on offering.
- Debt and obligations: Capital lease obligations totaled $137,000. The balance sheet also included a $6.8 million royalty obligation. The filing reports no off-balance-sheet arrangements.
- Other metrics: R&D expense was $60.4 million for the first nine months, sales and marketing was $56.0 million, and G&A was $42.5 million. Stock-based compensation was $11.9 million for the period.
Material changes versus the prior comparable period
- Revenue rose 181% in Q3 and 162% in the first nine months. Management attributed growth primarily to higher test volumes, expanded physician ordering, more biopharmaceutical projects, Medicare reimbursement for qualifying lung-cancer testing, and higher payments from some commercial payers.
- Q3 clinical tests increased to 13,259 from 7,027; biopharmaceutical tests increased to 5,280 from 2,505. For the first nine months, clinical tests rose to 34,655 from 20,996 and biopharmaceutical tests to 14,326 from 7,337.
- Operating expenses increased as the company expanded R&D, commercial operations and corporate infrastructure. Despite the higher expense base, operating and net losses narrowed, and gross margin improved.
- The company adopted ASC 606 in January 2019 without restating 2018 results. For the first nine months of 2019, reported revenue was $0.5 million lower than it would have been without the new standard; Q3 reported revenue was $1.2 million higher. The change affects period-to-period comparability.
- Revenue included $5.5 million in Q3 payments from successful appeals of reimbursement denials for samples processed in 2018; management cautioned that appeal revenue is not indicative of ordinary-course results. The 2018 comparison also included a $4.25 million commercial-dispute settlement gain in other income.
Outlook, commentary and risks
- Management said available cash, cash equivalents and marketable securities were expected to fund the current operating plan for at least 12 months. It also expects continued operating losses and higher spending on sales, R&D, clinical trials, LUNAR development and capacity. No numerical revenue or earnings guidance is provided.
- The company initiated the ECLIPSE colorectal-cancer screening study, expecting to recruit approximately 10,000 patients; the first patient was enrolled in Q4 2019. It also reported launching a CLIA-validated LUNAR assay for prospective clinical trials in Q4 2019.
- Guardant360’s proposed Medicare coverage expansion was not final: management said there was no assurance the draft local coverage determination would be finalized as written or implemented. Reimbursement levels, payer coverage, test pricing and customer mix remain important revenue uncertainties.
- Management reported submitting a pre-market approval application for Guardant360 as a companion diagnostic in Q4 2019 and intends to submit one for GuardantOMNI. FDA approval is uncertain and could affect coverage and reimbursement.
- Contingencies include patent litigation with Foundation Medicine and Personal Genome Diagnostics, a license arbitration with KeyGene, and an unresolved OCR inquiry concerning a separate security incident. The company said it could not estimate potential losses from that inquiry. An earlier OCR matter relating to a 2018 email-system incident was closed without further action.
- The Bellwether Bio acquisition carried preliminary purchase accounting, $1.1 million of contingent consideration and potential additional earn-out payments of up to $10 million; the company did not consider the earn-out probable at quarter-end. SoftBank’s joint-venture interest is redeemable under specified put-call circumstances and is carried outside permanent equity.
- The company expected to cease being an emerging growth company and become a large accelerated filer as of December 31, 2019, bringing additional compliance requirements. It reported disclosure controls effective at a reasonable-assurance level and no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- How much of reported growth and clinical-test economics are sustainable after excluding the $5.5 million of payer-appeal payments, and how does ASC 606 affect comparisons?
- Whether proposed or existing payer coverage, Medicare reimbursement and collections support management’s growth assumptions; note that two customers represented 21% and 19% of Q3 revenue.
- Whether test-volume growth can offset rising operating expenses and continued operating cash use, and whether the stated liquidity runway remains adequate.
- Progress and outcomes for Guardant360 and GuardantOMNI FDA submissions, the ECLIPSE study and LUNAR clinical development.
- Updates on the KeyGene arbitration, patent disputes and unresolved security inquiry, along with Bellwether Bio contingent payments and SoftBank joint-venture redemption terms.