Guardant Health, Inc. (GH) Q4 2019 Earnings Report, Transcript and Summary

Ladies and gentlemen, thank you for standing by and welcome to the Guardant Health Q4 2019 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speaker presentation, there will be a question-and-answer session. [Operator Instructions] Please be advised that today's conference is being recorded. [Operator Instructions] I would now like to hand the conference over to your speaker today Carrie Mendivil, Investor Relations. Thank you. Please go ahead ma'am.

Thank you. Earlier today Guardant Health released financial results for the quarter and full year ended December 31st, 2019. If you've not received this news release or if you'd like to be added to the company's distribution list, please send an e-mail to investors@guardanthealth.com. Before I begin, I'd like to remind you that management will make statements during this call that are forward-looking statements within the meaning of federal securities laws. These statements involve material risks and uncertainties that could cause actual results or events to materially differ from those anticipated. Additional information regarding these risks and uncertainties appears in the section entitled Forward-Looking Statements in the press release Guardant issued today. For a more complete list and description please see the Risk Factors section of the company's annual report on Form 10-K for the year ended December 31st, 2019 and in its other filings with the Securities and Exchange Commission including when filed its annual report for the year ended December 31st, 2019. Except as required by law Guardant disclaims any intention or obligation to update or revise any financial projections or forward-looking statements whether because of new information future events or otherwise. This conference call contains time-sensitive information and is accurate only as of the live broadcast February 24th, 2020. With that, I'd like to turn the call over to Helmy Eltoukhy, Guardant's Co-Founder and Chief Executive Officer. Helmy?

Thanks Carrie and thank you everyone for joining us this afternoon. I am pleased to welcome you to Guardant Health's fourth quarter and year end 2019 earnings call. Joining me today is AmirAli Talasaz, our President and Co-Founder; and Derek Bertocci our Chief Financial Officer. Consistent with our values of putting patients first, I will start our call with a patient story. About 15 years ago, a 48-year old woman was diagnosed with hormone receptive HER2-negative Stage II breast cancer. Following a mastectomy, a number of rounds of adjuvant chemo therapy, and treatment with an aromatase inhibitor for five years, her cancer was in remission. She was monitored regularly by her physician. In 2017, she presented with pain in her joints and shoulders. Unfortunately, her cancer had returned. It was metastatic and progressing rapidly. After failing to respond to chemotherapy, oncologist ordered Guardant360 test which quickly identified a PIK3CA mutation. She was immediately started on a recently approved combination therapy for patients with her profile and had an immediate response. We believe this story demonstrates the growing importance of the precision-medicine paradigm in oncology for patients not just with lung cancer, but across many cancer types. It is our mission at Guardant to conquer cancer with data. To achieve that goal, we are developing products across the continuum of cancer care to inform treatment and interventional decisions and ultimately, transform patient outcomes. During 2019, we experienced incredible growth across our platform and ended the year with $214 million in revenue, up 137% from 2018. In the advanced cancer setting, we have been laser-focused on shifting the market to a blood-first paradigm for Genotyping which we believe will be key to further accelerating the adoption of liquid biopsies. Early on, we focused our efforts with Guardant360 in non-small cell lung cancer where we believe the limitations of tissue created a critical gap and comprehensive testing. Through investments in high-impact clinical studies, we're able to quickly establish clinical utility in lung cancer which in turn has helped decrease time to reimbursement, improve physician-conversion efficiency, and lead to record clinical adoption. Specifically, at the beginning of 2019, we published the results from our NILE study that demonstrated a high concordance to tissue testing and faster time to results. Following the publication of NILE, we saw a significant uplift in clinical volumes over the course of the year. Additionally, NILE along with our 50 outcome studies and 150 publications led to continued progress on the reimbursement front. Following our Medicare LCD for non-small cell lung cancer in August of 2018, we made significant headway with private payers and ended 2019 with more than 170 million covered lives for Guardant360. Heading into 2019, we also increased our commercial efforts and saw early gains from these investments over the course of the year. As a result of this progress, clinical volumes for Guardant360 grew 69% in 2019 to 49,926 clinical tests. At the same time, we also made important progress in our biopharma business. We ended the year with more than 50 biopharma partners with various collaboration projects spanning prospective screening, retrospective analysis, companion-diagnostic development and commercial collaboration opportunities. As a result of this progress, biopharmaceutical volume grew 99% during 2019 to 20,643 tests. During 2019, we also may made important progress with our LUNAR programs, initiating our ECLIPSE study and launching a clear version of our Lunar-1 assay. I'm very proud of the Guardant team for the tremendous headway made throughout the year. That said, there is still a great deal of work to be done and we believe we are still at the very beginning of this opportunity. The unfortunate reality is that for the 700,000 patients living with metastatic disease of solid tumors, the majority are not receiving guideline recommended genomic testing. For example, based on recent studies published in collaboration with COTA less than 8% of lung cancer patients and less than 40% of colorectal cancer patients are in compliance with NCCN Guidelines for biomarker testing. Heading into 2020, we are working to further shift the market towards a blood-first paradigm and increase the number of patients receiving guideline-recommended genotyping. We expect contributions from the recently finalized Pan-Cancer Medicare LCD, the expansion to progression testing and upcoming targeted therapy approvals to further drive demand for comprehensive genomic testing. Last December, we were happy to announce a critical milestone for liquid biopsy with the finalization of our Pan-Cancer Medicare LCD from Palmetto GBA. We believe this LCD makes Guardant360 the first and only liquid biopsy to be broadly covered for use across the vast majority of advanced solid tumors in the first-line setting. Similar to our experience following the first LCD for non-small cell lung cancer, we expect this expanded policy to result in a significant step-up in test ASP. Furthermore, we expect this milestone will usher in new tailwinds to further expand our current and future private payer coverage beyond lung cancer. Importantly, the Medicare MoIDX LCD decision also covers repeat testing for patients progressing in their disease after initial treatment to help identify new therapeutic treatment options based on newly-acquired tumor mutations. Finally, we also expect that upcoming targeted therapy approvals in lung prostate and colorectal cancers will further drive demand for comprehensive genomic testing. In the research setting, we are encouraged by the increasing demand for our products from our biopharma partners, especially GuardantOMNI, which has increasingly become the workhorse for many clinical stage programs. Overall, I have never been more excited about the opportunity ahead of us at Guardant. As we look to the year ahead, we expect revenue for 2020 to be in the range of $275 million to $285 million. Lastly as announced in our press release this afternoon, Derek is planning to retire in the second quarter of this year. A search for a new Chief Financial Officer is already underway. Derek plans to remain at Guardant until a successor is hired and support the company during this transition. I would like to take a moment to thank Derek for his leadership and contributions for over almost four years which have been instrumental to the company's growth. With that I will now turn the call over to AmirAli for more detail on our biopharma partnerships and LUNAR program.

Thanks, Helmy. Just as tissue poses a challenge for genotyping in clinical care, it also posed a challenge to biomarker-driven clinical trial enrollment. We believe liquid biopsies can address this challenge and significantly accelerate the identification of eligible patients. In fact, recent data from our GOZILA study presented at ASCO GI, demonstrated Plasma Genotyping with Guardant360 was associated with a higher clinical trial enrollment rates in advanced GI cancer. In this 1103 patient umbrella-basket study, Guardant360 found the same proportion of patient with targetable alteration as tissue genotyping three times as quickly. Furthermore, by removing barriers associated with tissue biopsy, Guardant360 doubled the rate of enrollment. Crucially, patients enrolled with liquid biopsy demonstrated comparable overall response rate to those enrolled with tissue. Liquid biopsy testing can also identify more patients for whom there are approved therapies available. We believe that overcoming tissue limitations together with our rapid turnaround time and broad commercial reach is increasing interest in Guardant as a companion diagnostic partner. In early January, we announced this strategic collaboration with Amgen to develop companion diagnostic claims for Guardant360 for their KRAS inhibitor AMG 510 in non-small cell lung cancer. We believe that the development of Guardant360 CBX will ultimately increase the number of patients who are identified as eligible for AMG 510 as a targeted therapy thus improving access to this potentially life-changing treatment for the 13% of the lung cancer patients with this biomarker. We expect to work with Amgen to support filing in the United States, Europe and Japan. Now turning to our LUNAR program and starting with LUNAR-1 when -- where we are developing an assay for adjuvant therapy decision-making and recurrence monitoring we are committed to generating evidence based on interventional studies to establish clinical utility of residual-disease testing, which will be a critical component to drive sustained long-term adoption in this space. As for our clinical development and commercial path for Guardant360 where we started with lung cancer, we are taking a similarly focused approach with our LUNAR programs with CRC as the lead indication. In early January, we are very pleased to announce the initiation of COBRA study, which we launched in collaboration with NRG Oncology. We believe COBRA to be over first of its kind randomized control study aiming to establish clinical utility for the detection of ctDNA in adjuvant setting in colon cancer. This is a prospective study that will enroll over 1400 Stage II Colon Cancer patients to systematically determine if detection of ctDNA post-surgery followed by adjuvant treatment can lead to better outcomes and active surveillance alone. We are also excited to announce our collaboration with Stand Up To Cancer, MGH and the Dana-Farber Cancer Institute and the start of a prospective interventional study to manage adjuvant treatments in Stage III Colon Cancer patients based on detection of ctDNA post-surgery. If successful, we expect these studies will validate the clinical utility of residual disease based on ctDNA as a biomarker to manage adjuvant chemotherapy. We are excited to be partnering on these potentially groundbreaking LUNAR-1 studies. Now moving to LUNAR-2. We've been diligently advancing our colorectal cancer screening program and are continuing to make important progress in our ECLIPSE study with more than 70 sites already enrolling patients. ECLIPSE is a prospective multi-site registrational study designed to play a pivotal role in a potential FDA submission and support for coverage by CMS of our LUNAR-2 assay for use in colorectal cancer screening in average risk adults. I would like to welcome Kumud Kalia as Guardant's new Chief Information Officer. Among his responsibilities Kumud will lead our enterprise application and software development information, technology and security teams. I'm confident in Kumud's ability to lead our digital innovation and to scale up our data infrastructure as we prepare for the next phase of our growth. With that, I will now turn the call over to Derek Bertocci for more detail on our financials. Derek?

Thank you, AmirAli. Revenue for the fourth quarter of 2019 totaled $62.9 million, up 91% from $32.9 million in the prior year quarter. Fourth quarter revenue included $1.3 million of cash payments received from successful appeals of payers denials reimbursement for samples processed in 2018. Given the age of the samples associated with these successful appeals, we do not believe this appeal's revenue is indicative of our ordinary course of operations. Total precision oncology testing revenue for the fourth quarter was $57.4 million, up 104% from $28.1 million in the prior year period. Precision oncology revenue from clinical tests in the fourth quarter totaled $31.3 million, up 81% from $17.3 million for the prior year quarter due primarily to an increase in test volume. This included the $1.3 million of revenue from successful appeals for samples processed in 2018. Fourth quarter clinical precision oncology volume totaled 15,270 tests, up 78% from 8,596 tests in the prior year quarter. Precision oncology revenue from biopharmaceutical tests in the fourth quarter totaled $26.2 million, up 142% from $10.8 million for the prior year quarter due to an increase in test volume for both Guardant360 and GuardantOMNI. Fourth quarter biopharmaceutical precision oncology volume totaled 6,316 tests, up 108% from 3,033 tests in the prior year quarter. Average revenue recognized per biopharmaceutical tests in the fourth quarter was $4,142, up 16% from $3,571 in the prior year quarter. The increase was primarily driven by selling a greater proportion of GuardantOMNI tests, which has a higher selling price than Guardant360 tests compared to the same period of the prior year. Development services revenue in the fourth quarter totaled $5.5 million, up 15% from the prior year quarter. The increase was primarily driven by an increase in projects from biopharmaceutical customers active in 2019 mainly for companion diagnostic development and related regulatory services. Gross profit is total revenue less cost of precision oncology testing and cost of development services. Gross profit for the fourth quarter of 2019 was $41.1 million, compared to a gross profit of $18.9 million in the same period of the prior year. The gross margin in the fourth quarter was 65% as compared to 58% during the fourth quarter of 2018. These results are inclusive of the benefits of the $1.3 million of appeal's revenue. Gross margin improvement was primarily due to reductions in the cost of precision oncology testing driven by production efficiencies as well as the increase in average revenue per biopharmaceutical tests due to the greater proportion of GuardantOMNI tests. As a reminder, effective January 1, 2019, we adopted the new revenue accounting standard ASC 606 using the modified retrospective method, which means that revenue reported for 2018 is not restated in our 2019 financial statements. Instead the accumulated difference resulting from applying the new revenue standard to all contracts that were not completed as of adoption was recorded to opening accumulated deficit as of January 1 2019. The effect of the adoption of ASC 606 was to increase Q4 revenue by $1.3 million compared to the revenue that would have been reported without adoption of ASC 606. The effect of this change is disclosed in our Q4 results press release. Total operating expense for the fourth quarter of 2019 were $67 million, a 45% increase from $46.3 million in the fourth quarter of 2018. R&D expenses for the fourth quarter of 2019 were $25.9 million compared to $16.7 million in the fourth quarter of 2018. The increase was primarily attributable to work performed for preparing the Guardant360 IVD submission to the FDA, development and clinical studies for the LUNAR program and additional clinical studies and improvements to processes and products. Sales and marketing expenses for the fourth quarter of 2019 were $22.3 million compared to $17.1 million in the fourth quarter of 2018. The increase was due to increased personnel costs related to expansion of our commercial programs to drive increases in revenue. General and administrative expenses for the fourth quarter were $18.9 million compared to $12.5 million in the fourth quarter of 2018. This increase was primarily due to increases in personnel, professional services, including legal and accounting and additional compliance costs was required to support transition to a large accelerated filer. Net loss attributable to Guardant Health common stockholders was $25.2 million unchanged compared to the fourth quarter of 2018, includes a charge of $3.1 million in the fourth quarter of 2019 compared to a benefit of $0.1 million in the fourth quarter of 2018 for a change in the fair value of SoftBank's ownership in our joint venture. Net loss attributable to Guardant Health common stockholders was $0.27 in the fourth quarter of 2019 as compared to $0.30 in the corresponding period of the prior year. Turning to the full year 2019 revenues were $214.4 million, a 137% increase from $90.6 million in 2018. Precision oncology revenue increased 130%, $180.5 million. Clinical volume for the year grew to 49,926 tests, up 69% year-over-year from 29,592 tests. The average revenue recognized per test in 2019 rose 38% from the prior year as a result of revenue earned from tests reimbursed by Medicare for lung cancer patients starting in the fourth quarter of 2018, increases in commercial payer payments that were beneficially affected by the protecting access to Medicare Act of 2014 and $6.8 million of revenue from successful appeals for samples processed in 2018. Clinical testing revenue in 2019 totaled $101 million, which includes the $6.8 million of revenue from appeals of 2018 samples. Given the age of the samples associated with these successful appeals, we do not believe this appeal's revenue is indicative of our ordinary course of operations. Biopharmaceutical volume grew 99% year-over-year to 20,643 tests due to an increase in the number of biopharmaceutical customers and their contracted projects particularly for GuardantOMNI. Precision oncology testing revenue from biopharmaceutical customers increased 129% in 2019 to $79.5 million from $34.7 million in 2018, due to the increase in test volume plus the higher price charge for GuardantOMNI. Average revenue recognized per biopharmaceutical tests in 2019 was $3,850 up 15% from $3,347 in the prior year due to a greater proportion of tests being GuardantOMNI tests, which has a higher selling price than Guardant360 tests. Development services revenue grew 177% to $33.9 million in 2019, due mainly to new companion diagnostic development projects with biopharmaceutical companies. Gross profit for 2019 was $143.7 million compared to a gross profit of $47.4 million in the prior year. The gross margin in 2019 was 67% as compared to 52% during the prior year. Gross margin improvement was primarily due to the increase in average revenue per clinical and biopharmaceutical test plus reductions in the cost of precision oncology testing. Total operating expenses in 2019 were $226 million, a 61% increase from $140.4 million in 2018. The expense drivers are the same as noted earlier for the increase related to the fourth quarter. Net loss attributable to Guardant Health common stockholders was $75.7 million compared to $85.1 million in 2018. It includes charges of $7.8 million in 2019 and $0.8 million in 2018 for increases in the fair value of SoftBank's ownership in our joint venture. Net loss per share attributable to Guardant Health common stockholders was $0.84 in 2019 as compared to $2.80 in 2018. We ended the fourth quarter of 2019 with $791.6 million in cash, cash equivalents and marketable securities. Now turning to our outlook for the full year 2020. As Helmy mentioned, we expect revenue to be in the range of $275 million to $285 million, representing growth of approximately 31% over 2019 at the midpoint of the range. We expect clinical sample volume to be in the range of 65,000 to 67,000 tests, which represents growth of approximately 30% to 34% over 2019. We expect net loss for the full year 2020 to be in the range of $155 million to $160 million, as we increase investment in our LUNAR programs. Embedded in our outlook are a few key assumptions. First, during the fourth quarter of 2019 increased activity from a number of our biopharmaceutical programs resulted in our highest ever collective revenue recognition from development services and related biopharmaceutical tests in any given quarter so far. As we have discussed, peaks and troughs in activity can result in lumpy revenue from our biopharmaceutical customers. In 2020, we expect contributions from our biopharma business to be lighter in the first quarter. Demand from our biopharmaceutical customers remain strong and we continue to expect significant growth over the long term. The second assumption is that we expect revenue to benefit – to begin to benefit from the expanded Medicare LCD in the second quarter of 2020 with more full benefit in the third quarter and beyond. This timing is based on our forecast from Noridian the MAC that adjudicates our Medicare claims to timely finalize its expanded LCD and begin to pay reimbursement there under. At this point, I would like to turn the call back to Helmy for closing comments.

Thank you, Derek. I'm very proud of our team for such an incredible year. During 2019 we made rapid progress across our platform. In 2020, we believe we are well positioned to make great strides against our ambitious goals and look forward to updating you on our progress. With that we will now open it up to questions. Operator?

Thank you, Sir. [Operator Instructions] Our first question comes from Puneet Souda from SVB Leerink. Please go ahead.

Hi. Thanks. Derek, first of all great working with you and good luck with the retirement and Kumud welcome in the CIO role. Wanted to first ask you Hemly in terms of the guide – I recognize the guide implies a 31% growth at midpoint. You grew 137% last year. I mean I appreciate 2019 was the first impactful year for lung with Medicare and biopharma was also strong but when we look at 2020 you have Pan-cancer LCD, you have FDA approval potentially for G360 biopharma adoption ramping and LUNAR-1. So just trying to understand what's implied in the guide here at 31% growth? And then if you could also touch on the net loss number. Is that – where are some of those investments growing? Is it in LUNAR-2 or LUNAR-1? I'd appreciate some details on that? Thank you.

Yes. Thanks, Puneet. I'll start off and then let others chime in here. So in terms of thinking about 2019 and the incredible year we had last year, there are a number of components to that. Obviously, we were beneficiaries of the large ASP increase, we had from the added reimbursement that we got both from Medicare and the private payers there. And so we really saw this kind of double whammy of both ASP growth on the clinical side, obviously very good clinical volume growth. And on the biopharma side, we had significant ASP growth as well because that was really the major swing in terms of uptake and shift to OMNI from Guardant360, which has a much higher ASP. And so those inflection points are behind us in terms of major ASP growth on the clinical and then biopharma side. And so what we see in 2020 is much more of the organic growth in our businesses. And so we're -- I think still very excited about the year ahead of us. We're very much in the early innings in terms of adoption in this space. And so we see continued robust growth for many years to come. In terms of the spend side of things, a lot of the investments we're making around our LUNAR programs in terms of the acceleration of those investments. If you remember, we said that we would dedicate about $70 million to $100 million in terms of our ECLIPSE trial and some of the surrounding infrastructure that we're building. Obviously it's not inexpensive to be doing some of these interventional studies that we're doing on the LUNAR-1 side of things with COBRA and Stand Up to Cancer. And so we're significantly investing in that space. But it's because whether we're going to open up significant market opportunities as a result over the medium to longer-term.

Okay. Thanks. And on ASP question that I have here that I have been getting from investors. Just help us understand what are you baking in for the ASP improvement? If you could remind us first of all the Pan-Cancer -- with the Pan-Cancer LCD in place what is the Medicare rate? And should we expect what the size volume that should we expect to get reimbursed now versus before? And my understanding is the LCD was effective on February 3rd. So how much of that contribution should we expect in the first quarter here?

Yeah. So I think if you remember under our current LCD, we're currently reimbursed for about one-third of our Medicare volume. We expect conservatively that it would at least double under this Pan-Cancer LCD to at least two-thirds of the volume being reimbursed. Our list -- our reimbursement price is $3,500 in terms of Medicare. And there are still some I think administrative procedures that are required before we start actually getting paid on these claims. We're very confident it will happen, but it will likely be into the third quarter before we fully are paid on most of the claims or at least most of the covered claims.

Okay. Thank you. Last one if I could squeeze in on G360. When -- what's been the feedback or any questions from FDA? And what's your timeline or expectation for G360 approval? Thank you.

Yeah, I'll turn it over to AmirAli who will answer that.

Yeah, sure. So actually we've been in active discussion and conversation with FDA most surrounds the back half for us. And as we expected this is a first of its kind submission. So the process is a bit unpredictable. We recently actually submitted some additional data package and information based on the questions and requests that we had from the agency and those active discussions with agencies continuing. So we feel very confident that the conversations are going in the right direction now in terms of timing stage. You're dealing with first of its kind submission and a breakthrough device that we are developing some framework how these kind of devices needs to get reviewed and then go through approval process.

Okay, great. Thank you.

Thank you. Our next question comes from Doug Schenkel from Cowen. Please go ahead.

Hey, good afternoon and thank you for taking my questions. First off Derek congrats on your retirement. Thanks for all your help over the past couple of years. So maybe just starting on Noridian and following up on Puneet's question. So the expanded LCD for our understanding hasn't been finalized like you just described. The comment period ended last July. So I think it's fair to say that it's taking a little bit longer than expected. Based on your -- what you've embedded into guidance for the year the assumption that this becomes effective in Q2. I just want to make sure that there is no concern at all regarding the outlook for this getting completed at some point this year. And in your guidance are you assuming that there are any catch-up payments for tests that are done in line with the expanded LCD before this becomes effective?

Yes. So, maybe I'll start. We're very confident that in terms of the eventual -- being able to collect payments under this LCD. There is -- this year is a little bit different than prior years because of the 21st Century's Cure Act and there are a few administrative kind of logistics that are acquired on behalf of Noridian as a result. But we have full confidence that this will be finalized and we'll be able to collect under this LCD.

And then the second part about catch-up payments?

Yes, that's always something that I think is -- it remains to be seen. I think it depends on the specifics, but I'll let Derek maybe trying to-?

Yes. Doug. The catch-up payments to the extent that there are any would be something we can't predict at this thing. And it's ultimately something that Noridian will have to make a decision when they finalize their LCD as to whether or not there our catch-up payments. We've -- as you saw we've had some, but it's not predictable for us. So, from a guidance standpoint, we're assuming that there are not any.

Okay. That's super helpful and all sounds good. If you need to also ask the question about guidance philosophy. I mean simply put as we look back at 2019, you bumped up guidance every quarter. And ultimately, I think you beat your initial revenue guidance for the year by over $82 million if I'm doing the math right? I know there were some series of things that went your way last year. But just at a high level it doesn't sound like there's really any major change in guidance philosophy entering this year? No effort to get more aggressive than you were heading into last year?

Yes Doug. I mean we're -- we continue to try and provide -- what we believe to be accurate and reliable guidance. And that's our goal. We've continued to do that.

Okay got it. And then last one. Given the pending expanded LCD how do you think about the importance of the FDA approval and NCD? And maybe very specifically, do you believe that moving forward successfully with the FDA would lead to expanding coverage in commercial payers beyond the 170 million lives you already have covered. And then even within that 170 that move beyond just long in some of those coverage decisions.

Yes. So, Doug I would say that the Pan-Cancer LCD itself will give us some tailwinds in terms of potential expansion from just lung to Pan-Cancer on the private payer side of things. In terms of FDA and being able to leverage the NCD as a result, we think that will give us maybe a marginal improvement in terms of ASP and reimbursement over this Pan-Cancer LCD. So, we're really getting the bolus of upside from an ASP point of view and reimbursement point of view from this Pan-Cancer LCD. We think over the medium to longer term though FDA I think it will it will certainly help in terms of conversations with private payers and especially some of the laggers that are there. But I think even more so it will help with the middle majority and late majority in the market in terms of really being that stamp of quality where they can essentially see that this is a test that they can order and has been validated and so on. So, we see FDA approval really as a kind of catalyst for kind of the middle to latter stage of market adoption.

Okay, super helpful. Thanks guys.

Thank you.

Thank you. Our next question comes from Brian Weinstein from William Blair. Please go ahead.

Hey guys. Thanks for taking the question. I just wanted to go through catalysts for 2020. And a follow-up to an earlier question is your expectation still for FDA approval to be some time in the next few months here? I think you had talked about a six-month approval timeframe and you had submitted that I believe in late October early November. So, can you just talk more specifically about the timing expectations? And if that is still your expectation? And then other catalysts for 2020 on the pipeline in particular anything else that we should be looking forward to in terms of data releases or other pieces of information to give us some incremental information on how some of these pipeline projects are progressing?

So maybe I start. So on the FDA side based on all the conversations that we had with agency and back and forth. We don't see any reason the time frames that you mentioned would not work still. But as we are going through this process, we are going to know more and there is still some unpredictability aspects of it. But the time frame that you mentioned are realistic. You haven't heard anything, which would guide us against those time lines. In terms of additional data like, there are a bunch of other clinical studies for the advanced cancer safeguard and G360 that's continuously they're getting read out applications are coming out as Helmy mentioned during the script. We have 150 peers of good publication and you could expect more pops are kind of added in 2020. More importantly, around maybe on LUNAR programs and in major conferences, especially the conferences around GI and cancer-related conferences, you're going to see some data contribution by Guardant I think those conferences as you've seen before. So this year, we would be the same.

Okay. And then I'm hoping to get just some information from you on the ordering patterns that you guys are seeing kind of like cohorts of clinicians, what you typically see as far as progression of ordering for G360? Any kind of either qualitative or quantitative information that can give us some idea about how things are progressing on a utilization basis? And any information that you can provide as far as the number of clinicians that are now ordering it today versus maybe a year ago? Just anything that can help us dig into some of those utilization metrics?

Yeah. So the data continues to look very robust in terms of the types of metrics that we monitor and would like to see moving in the right direction. For instance, not only are we expanding the number of oncologists that have ordered the test, where now in the vast majority of the 10,000 oncologists have ordered Guardant360. But more importantly, we're going much deeper and so we're seeing, almost a doubling from a year ago of the number of clinicians that are regularly ordering Guardant360 and ordering it on a pretty continuous basis and so we're really seeing those same-store sales and depth of penetration grow in the right direction. And we're also seeing increased utilization not just in lung cancer, but in breast cancer and prostate cancer and colorectal cancers as well. And so we're seeing very robust growth across almost every metric. And I think we think that the Pan-Cancer Medicare LCD will help with the broadening of usage and really remove some of the financial barriers to adoption of 360.

Thank you, guys.

Thank you. Our next question comes from Derik De Bruin from Bank of America. Please go ahead.

This is Xiaoxiao Ma on for Derik today. Thank you for taking my question. So first of all, I wanted to focus on LUNAR-1. Wanted to see as the cancer monitoring – cancer recurrent monitoring market getting more competitive, I wanted to see, if we can get an updated view on the time line of LUNAR-1 key time lines for clinical adoption and other key time lines as well as updated view for a competitive landscape at this point? Thanks.

So this is for recurrence monitoring or digital disease detection?

Yes.

Yeah. So I think as you see we're really focused on trying to establish clinical utility and trying to really show that those type of testing can make a difference in patient outcomes. I think that's why we've announced these fairly significant undertakings with COBRA in terms of working with NRG oncology and obviously Stand Up To Cancer or working with MGH and Dana-Farber, and so those are just a handful of some of the investments we're making in terms of really establishing that clinical utility. And then we're also working with biopharmaceutical companies on their adjuvant studies in terms of using the big technology. We see as you've seen with the Guardant360 in the therapy selection space, it takes a significant amount of clinical evidence clinical utility data to really support broad reimbursement in that space. And so a lot of the studies right now are focused on the kind of the study space and then biopharmaceutical space right now. But I think we feel very confident in terms of where the technology is the fact that it has both genomic and epigenomic biomarkers in terms of our approach is extremely unique. We really haven't seen anyone kind of take that specific approach. And so we think we have a lot of advantages in terms of how we can really hit unmet need in that market.

Maybe just add one more statement. The clear validated assays that we have for LUNAR-1 and it's been used in these studies as Helmy mentioned, that assays is blood only assay. So no prior information of tissue is needed. And based on the way that we are looking at adjuvant setting and logistical challenges of getting access to tissue timely that you can provide the information to the treating physician at the right time, so you could make an impact really in the adjuvant setting, we believe there is a significant value in offering a blood only based assay and that's what we are saying we are doing with our LUNAR-1 product.

Great. That's helpful. Second one more on G360. With the virus situation going on can we get an updated view on the international adoption opportunities in broader OUS regions Japan, China, EU and LatAm? Thank you.

Yeah, I think it's probably minimal in terms of the impact given the significant amount of our revenue comes from the U.S. right now. Obviously, I think it remains to be seen in terms of how broad this pandemic becomes. And obviously, if it starts really increasing pace globally, obviously, we'll have to take a look at how that affects our global business.

Great. Thank you.

Thank you. Our next question comes from Tycho Peterson from JPMorgan. Please go ahead.

Hi. This is Eleni on for Tycho. Thanks for taking my questions. So you've noted that the pan-cancer LCD will increase your payment rates for Medicare test volumes to around 60% and then a bit higher to 80% following the NCD. Just wondering whether you're anticipating that sort of for the LCD as of 2Q or whether there will be sort of a buildup to get there? And the same with NCD.

Yes. So I would say in the first kind of statement you made, we think the pan-cancer LCD by itself could get us to doubling to about 66% of claims covered, but potentially even higher. So, on its own and then the NCD might give us an additional marginal improvement there. In terms of the kind of modeling the ramp-up, maybe I'll let Derek chime in there in terms of that piece.

Yeah. So the ramp-up we were trying to make clear that given the steps that it takes for Noridian to finalize their LCD that we didn't expect that to occur until Q2. And at that point we would be able to begin submitting claims. There's also our doctors have to begin providing new information that is not yet required in our submittals. So there's usually some period of time for our doctors to begin to do a good job of submitting that information. The first LCD that process of them becoming consistently good at supplying that was over a six-month period. So we're assuming that there will be some ramp in that this year in -- during the second quarter and third quarter. And that's why we indicated that it would be towards the latter part of the third quarter that we sort of reach full running stride.

Okay. That's helpful. And then to follow up on the topic of commercial payers following suit to Medicare coverage policy and some tailwind from that dynamic. Just wondering given recent progress whether you could talk about your expectations on the commercial side for proportion of volumes set to be reimbursed by year-end and associated ASPs?

I think as I've said it's the Medicare component that's probably going to be the most significant step-up. The commercial component is going to be I think a longer ramp and is frankly difficult to predict in terms of exact timing of that. So I would say that most of the focus is really in terms of the ASP contribution that the Medicare piece would provide.

Okay. That's helpful. And then lastly in terms of LUNAR-2. Can you talk about your initial expectations for enrollment rates and associated time lines for the COBRA 1400-patient CRT trial? And could you also maybe provide a sense I don't know if I missed this but when we can expect the readout?

Maybe starting from LUNAR-2 ECLIPSE study when we started the study with the guidance for enrollment guidance that it's going to take us 18 to 24 months to enroll basically all the patients to that study. And we are very happy with the way ECLIPSE started and ramps up to over 70 sites. We are very excited about that. And the study is enrolled. Still we believe that the previous guidance is that accurate one and we believe the last patient in would be within the time frame that I mentioned earlier. And in terms of the end of this study, it's a study that basically we are comparing lot data with colonoscopy reports and we expect very quick basically phase after the last patient until we have a database lock up. Regarding COBRA, we just started actually that trial, so we have to see how it's going to go and it's a major program in collaboration with major network and CRO. So we have we still need a little bit more time before putting some specific time lines out there like when the study would end.

Okay. Thank you.

Thank you. Our next question comes from Patrick Donnelly from Citi. Please go ahead.

Thanks guys. Maybe just one on the clinical volume side. Can you just talk about how you're thinking about potential FDA approval as a catalyst to drive volumes higher? Helmy I think you touched on it a little bit earlier but how impactful could this be? How much do you hear from users that if a hang-up the FDA approval isn't there. Just kind of wondering what a gating factor that is right now.

Yes. So I think we had mentioned over a year ago that we saw three catalysts to this space. It was really the NILE study had that comparison in terms of tissue versus liquid pan-cancer Medicare approval and then FDA approval. And obviously the first two are almost behind us now. And I think we're seeing that indeed those have catalyzed adoption of the space. I think more to do in terms of really realizing all the benefits and gains from those first two. FDA approval we see as a longer term -- medium to longer-term catalyst really. We're still very much in the early innings of adoption right now. And when you look at comprehensive genomic testing rates, they're fairly low. They're still in the below kind of 25% of the market and -- whether it's tissue or liquid. And so there's still a lot more work to do to get into that middle majority. And then finally late majority and laggards and it's in that time frame that we believe that FDA approval will really make a difference because clearly it's a stamp of quality, a stamp of recognition that I think every clinician understands. And so I think we -- it's important, but we think over the medium to longer term.

Okay. And then maybe just one on the sales force. I know you guys are very focused on revenue per rep kind of driving that salesforce additions. Obviously we saw a significant ramp in revs in 2019 due partially at least or the expansion of the sales force how are you guys thinking about that going into 2020?

Yes. And, I think, as we've mentioned before, we really do think about the economics -- unit economics in terms of selling the test. We have a certain revenue target per rep and I think the philosophy is, as long as we continue to see gains from incremental additions and not just in the sales force, but in terms of many of the other channels that we invest in, whether its digital marketing or other areas, we'll continue to invest in those channels. When we start seeing saturation, obviously, we won't incrementally invest and we'll invest in other areas. And so, right now, I think, we're seeing still a lot of opportunity for continued growth and we are investing in multiple facets of our commercial channel.

Okay. And maybe just one last one, circling back to the FDA approval. Your companion diagnostics side is definitely encouraging to see the Amgen agreement. Are you seeing more interest on this front, as we approach FDA approval? I think, in the past you've talked about some of the discussions with pharma companies circled around. You feel like there could be an inflection post-FDA approval. Is that still the case you see it kind of a funnel there, shaping up after the FDA approval? Just curious on the volume there.

Yes, sure. So as we mentioned in script actually, we are seeing a lot of interest from multiple pharma companies to work with Guardant as a partner of choice for -- as a CDx partner and there's been multiple factors to it. One is, Guardant360 CDx and the route that we have with our PMA, but also as important to that is basically the commercial reach of Guardant360 test in the market and the fact that it's been used by many, many physicians in many centers. That has been also a significant contributor in our conversation with pharma companies, when they're thinking about picking a companion diagnostic partner for their drug assets.

Okay. Thank you.

Thank you. Our last question comes from Max Masucci from Canaccord Genuity. Please go ahead.

Hi. Good afternoon. First, Derek, it's been a pleasure working with you. Congratulations. So, I guess, staying on CDx agreements, are there specific biopharmas that have been explicitly waiting for an FDA approval before pursuing a collaboration? And then, what's your approach to forecasting the pharma development services revenues, which will likely have less visibility versus your higher-visibility product revenue segment?

So maybe I start and I give it to Derek. So in terms of the CDx conversation with pharma companies, just the fact that Guardant is acting as an IVD company, the upgrade of our quality system, reagent manufacturing, all the IVD infrastructure has been the enabling factor for us to really be on the table and talking about being a partner of choice for companion diagnostics agreements. These conversations are very lengthy and takes a long time to really develop these partnerships. So our pipeline is very exciting. But these are a conversation that would take a long period of time before it becomes to some kind of a fruit. In terms of forecasting maybe I ask Derek to add additional comments here.

So, Max, in terms of forecasting, we essentially look at these as individual projects, because they tend to be fairly large. And unlike the clinical business where we have well over 10,000 samples and we're looking at a lot large numbers. Here it's individual. And so, we look at each one and we essentially try and assess the state or stage, if you will, of each program. And from that we have developed an estimate of the probability of something moving forward to a signed contract based on the stage that the project is at. Not only though do we have to forecast whether or not it will reach a signature, we also have to forecast when we think the activity will occur. So for that we look at the program itself assuming, the award is successful and how long it will take us to do the work, how long the biopharma company will need to do work and try and take into account that there may be unexpected hurdles in either any of our work or even in requests from the FDA. So putting those all together that has been how we have forecast our biopharma business. And so far it has been reasonably good in terms of forecasting, it's always difficult when you have a relatively small number of programs compared to the clinical volume which is tens of thousands of individual samples.

Great. And then just sticking on forecasting. Just on gross margins, key drivers in 2020 and then opportunities for the expansion versus what we saw in 2019.

So I mean, gross margin, the biggest driver of gross margin improvement has been our increase in ASP both in the clinical side as well as on the biopharmaceutical side. The biopharmaceutical side has really simply been the increase in the proportion of our business that's only not necessarily a change in price with any of our products. On the clinical side, the big increase was of course the full year of Medicare reimbursement for lung. Plus we found that the first year of PMA had an impact. It was hard for us to specifically indicate on a payer-by-payer basis. But overall the private payer reimbursements grew substantially. Looking ahead, obviously the Pan-Cancer LCD is another major inflection point in terms of ASP. That's something that will ramp over the year. It's not something that we expect any benefit in Q1. We expect to start to see the benefit in Q2. And then as I said earlier reach our full stride by the end of Q3, so you need to have a sort of a projection of that increasing across the year. Longer term as Helmy mentioned, after the lung LCD, we gradually saw private payers, begin to adopt that standard. And that would be something we would expect with private payers for the Pan-Cancer, although likely that takes longer and goes actually into 2021 and beyond.

Great. And then one final broad question on the TAM. So repeat testing included in the final LCD regarding 360 was this previously baked into your TAM estimate? Or would this mark some upside maybe to that original estimate?

In terms of the TAM that's baked in the TAM of $6 billion is $2 billion for one test and then another $2 billion for repeat testing assuming an average of two per patient for a lifetime. And then $2 billion on the pharma side. We think obviously as more longitudinal testing becomes more standards that there could be some upside to that TAM. But that's how the initial assumption was set up.

Great. Thanks.

Thank you. This concludes our Q&A session. At this time I would like to turn the call over to the CEO, AmirAli Talasaz for closing remarks. Please go ahead.

Yes thank you everyone for a great 2019 and for all your questions and we look forward to another good year. Thank you.

Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.