Bull of the Day: Guardant Health (GH)

Guardant Health (GH) is an $8 billion provider of diagnostic tests for early detection of cancer in high-risk populations and recurrence monitoring in cancer survivors.

With sales expected to break above $270 million this year, representing over 30% annual growth, their commercially available tests provide information that helps advanced cancer patients get the right treatment and helps drug companies get new therapies to market faster.

Conquering Cancer with Data

Examining cancer reappearance is widely expected to be a $15 billion market in the United States in the near term, while detecting patients with the risk of cancer is poised to be an $18 billion annual market.

Using specialized blood tests and liquid biopsy (examination of tissue) to detect cancer, Guardant has grown fast after launching the LUNAR DNA test for early detection. Along the spectrum, the company’s Guardant360 and GuardantOMNI products have played a significant role in identifying late-stage cancer.

The LUNAR assay is also used for research and for use in prospective clinical trials, including initial studies related to screening and early detection in asymptomatic individuals.

In pursuing what the company calls "precision oncology," Guardant has made a name for itself in matching cancer patients with customized treatments.

Q3 Earnings Inspire Analysts to Raise Estimates

On November 7, Guardant reported a third-quarter 2019 revenue of $60.8 million, an increase of 181% over the prior year period. The company also surprised investors with a quarterly loss of only 14-cents when the Street consensus was looking for a loss of 39-cents, thus delivering a 64% positive surprise.

Here were some of the highlights of the quarter as reported by the company...

**Reported 13,259 tests to clinical customers and 5,280 tests to biopharmaceutical customers in Q3, representing year-over-year increases of 89% and 111%

**Initiated ECLIPSE, a large-scale registrational study designed to support the performance of the company’s LUNAR-2 blood test in colorectal cancer screening in average-risk adults

**Submitted Premarket Approval Application package for Guardant360 to the U.S. Food and Drug Administration

**Launched CLIA-version of the LUNAR Assay for use in prospective clinical trials

“During the quarter, the Guardant team continued to make significant progress across our business,” said Helmy Eltoukhy, PhD, Chief Executive Officer. “We are especially excited by the recent initiation of our ECLIPSE study. If successful, we believe this registrational study will pave the way for a blood-based test to address the significant unmet need of physicians and their patients who seek an alternative to the current tools for colorectal cancer screening.”

After the 25-cent EPS surprise, Wall Street analysts raised their full-year 2019 consensus by 39-cents from a loss of $1.27 to a loss of 88-cents.

They also boosted next year's outlook from a loss of $1.29 to a loss of $1.13. On the top line, Guardant is expected to grow revenues by 32% to $272 million.

Race to the Future of Preventive Medicine

Genetic diagnostics is an exciting field full of innovative companies providing everything from full genome sequencing to specialized cancer tests.

Not only are people everywhere becoming more curious about their genetic ancestry, they're also getting more proactive about their genetic predisposition for health issues.

Guardant reports its Q4 earnings next week on 2/24, after two of its top peers: Exact Sciences (EXAS), the $13 billion maker of the Cologuard test, and Invitae (NVTA), the young $2.5 billion upstart in medical-grade genetic testing who reports its Q4 today 2/19, after the market close.

On Feb 11, Exact Sciences announced Q4 2019 results with Screening revenues of $229.4 million, reflecting a year-over-year increase of 60%. Cologuard test volume was 477,000, up 63% year over year.

Precision Oncology -- the name of the new business segment after the completed acquisition of Genomic Health Diagnostics (apparently Guardant doesn't have a trademark on that) -- added revenue of $66 million for the period Nov. 8, 2019 through Dec. 31, 2019. Proforma revenue for the new unit was $119 million, an increase of 14% percent from proforma 2018 revenue when Genomic Health was a stand-alone entity, primarily driven by Oncotype DX test volume of 41,000.

Average Cologuard recognized revenue per test was $481. Moreover, average Cologuard cost per test of $123 reflected an improvement of $6 per test.

Exact Sciences gross profit (excluding the amortization of acquired intangibles) rose 114.1% to $225.2 million. Further, gross margin expanded 263 basis points (bps) to 76.2%.

The company anticipates revenues of $1.61-$1.65 billion for 2020. The projection includes Screening revenues and Precision Oncology revenues of $1.13-$1.15 billion and $485-$495 million, respectively.

Exact CEO Kevin Conroy made a presentation at the JPM Healthcare Conference in January which was very bullish in terms of their expansion into other leading cancer diagnostics. The next big test area will be for liver cancer for which they are partnered with Mayo Clinic.

Conroy, with a 32-slide presentation deck, also detailed the growth opportunities for Exact in other vital detection markets like pancreatic, esophageal, bladder, ovarian, cervical, stomach, lung, lymphoma, melanoma, kidney, and uterine cancers.

After earnings, Oppenheimer analysts, with the highest Street price target on EXAS of $130, commented on the company's financial guidance and disclosure of further M&A plans with "the first of what we believe could be a series of bolt-on acquisitions to leverage its newly acquired Precision Oncology sales channel. The acquisitions combined with more aggressive spending on the company’s liquid biopsy franchise results in 2020 R&D guidance coming in $60M above our forecast. We view the increased R&D intensity as a structural component of the merged Exact Sciences-Genomic Health infrastructure which offers potential for upside surprise to our revenue forecast beginning in 2021 while also pushing out time to profitability."

At $100 and nearly a $13 billion market cap, the $1.65 billion revenue projection for this year makes EXAS trade at a forward price-to-sales multiple of under 8X.

Guardant Shares Are Not Cheap and Here's Why

Meanwhile, Guardant Health looks very expensive trading at 29.5X sales ($8 billion market cap / $270 million sales). Why the big disparity in valuations?

Because Guardant, since its 2018 IPO, has been viewed in light of a more rapid growth phase by virtue of its 82% climb in 2018 sales and its likely 125% ascent to over $200 million in 2019.

But more so, Guardant is testing liquid biopsy as a detection modality that could offer an important alternative in the 100 million-patient colorectal cancer (CRC) screening market. Exact also has clinical trials ongoing in this area and the data readouts by middle of next year are highly anticipated.

According to SVB Leerink analysts who have a $130 price target on GH shares, they see data readouts by 2H21-1H22 from potentially 3 large 10,000+ patient prospective, registrational trials using liquid biopsy (LBx) in average risk CRC screening indication. This sets the stage for ultimately revealing whether LBx as a modality would succeed in the broader cancer screening market, challenging the longstanding role of colonoscopy as the standard of care in this market.

The analysts recently said "With the current commitments into these large blood-based 10,000+ patients trials costing $70M-$100M, we believe these companies see potential for liquid biopsy to hold a position in this large market ultimately."

They also noted two recent updates that confirm their conviction in GH. Guardant provided two product/pipeline updates around the JPM Healthcare Conference: 1) a collaboration with Amgen (AMGN) to develop a G360 companion diagnostic (CDx) for KRAS inhibitor AMG 510, and 2) Initiation of NRGI005 COBRA study aimed at validating the utility of Guardant's molecular residual disease (MRD) LUNAR-1 assay for selecting patients for adjuvant chemotherapy in stage II colorectal cancer (CRC). "We view these developments favorably and are pleased to see a continued global pharma partnership focus as GH pursues the $50B+ liquid biopsy market."

This Amgen partnership is obviously a big plus for Guardant. And it's possible that after the Exact buyout of Genomic Health that some investors look at GH as a potential acquisition target by a much larger player like Amgen or Biogen (BIIB).

After a big 2019 post-IPO rally, GH shares fell from above $110 to $60. Then Q3 earnings got investors interested again in the story at a better valuation. In fact, the fourth quarter of 2019 saw net accumulation by institutional investors, with one of my favorite stock-pickers, Andreas Halvorsen at Viking Global, adding 960K shares to bring his haul to 3,834,753.

Meet the Young Upstart: Invitae

Invitae, whose sales are also expected to eclipse $200 million for 2019 (we'll know when they report today), will be watched closely by investors and analysts who want to see and understand their 2020 game plan for 725,000 genetic test samples and $330 million in sales, which would represent more than 50% annual growth in both volume and revenue.

This full-year guidance was recently revised downward from their goal of 1 million tests and $500M in revenues.

Challenges for all of these companies include making money when the cost of testing is coming down so quickly and making sure that insurance reimbursement is available. Invitae has a head start in this arena after being selected by UnitedHealth (UNH) as one of only 7 key providers in their Preferred Lab Network, which includes the Mayo Clinic.

Plus, Invitae is creating a bigger brand footprint by offering many tests for free to those in need. In July, the company announced their Detect programs to provide no-charge genetic testing for conditions in which testing is underutilized and can improve diagnosis and treatment.

According to Invitae, research has shown no-charge testing programs result in earlier diagnosis and treatment. Enrollment was opened for Detect programs in four conditions: muscular dystrophy, prostate cancer, cardiomyopathy and arrhythmia and lysosomal storage diseases.

And in September, Invitae expanded the Detect program by announcing the availability of Detect Hereditary Pancreatic Cancer, a testing program that offers no-charge genetic testing and counseling to patients with pancreatic cancer. Genetic testing is recommended by clinicians for all pancreatic cancer patients to guide treatment choices and evaluate eligibility for clinical trials.

While the Detect no-charge programs are a net cost for the company, they create a wider data set for research in addition to fostering good will throughout public and medical communities.

In the neighborhood of innovation, Invitae announced in November the launch of Invitae Discover, a clinical research platform that leverages biometric data available through Apple Watch to provide better understanding of the genetic causes of disease. The first study on the platform will evaluate genetics in cardiovascular disease and was announced in conjunction with the American Heart Association's Scientific Sessions where researchers are presenting data on genetic screening in familial hypercholesterolemia.

Then in January, Invitae announced with BioMarin Pharmaceutical that Biogen, Encoded Therapeutics, Neurogene, Praxis Precision Medicines and PTC Therapeutics joined Behind the Seizure, an innovative, cross-company collaboration that aims to provide faster diagnosis for young children with epilepsy. The program will also be expanded to make no-charge testing available for healthcare providers to order for any child under the age of eight who has an unprovoked seizure.

While Guardant is expensive relative to EXAS and NVTA, it remains a unique leader in its specialties and I would recommend owning any two of these genetic diagnostics companies to remain at the forefront of the genomic revolution.

Disclosure: I own NVTA shares for the Zacks TAZR Trader portfolio, and EXAS and GH shares for the Zacks Healthcare Innovators portfolio.

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UnitedHealth Group Incorporated (UNH) : Free Stock Analysis Report
 
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