Shares of Guardant Health (NASDAQ:GH) have been on quite a run since its IPO priced at $19 in October of last year. In fact, in just a few short months, the stock was a five bagger at one point in March.
The leader in liquid biopsy testing was identified by multiple ROTY members as an intriguing story worth paying attention to and potentially purchasing a stake in. However, when I looked a couple of months ago, I wasn't willing to consider Guardant for ROTY due to an exorbitant valuation (no matter how much I love a story, I need to get in at a valuation that makes sense).
Now that the stock has pulled back significantly, I'm willing to take a closer look to determine if there's a near to medium term opportunity for us to take advantage of.
Figure 1: GH daily advanced chart (Source: Finviz)
Figure 2: GH 15-minute chart (Source: Finviz)
When looking at charts, clarity often comes from taking a look at distinct time frames in order to determine important technical levels to get a feel for what's going on. In the first chart (daily advanced), we can see healthy price action from the get-go after IPO (consolidation in $30 range, run up to $100, pullback to mid-60s). It's worth noting the stock is still trading well above its 20-day moving average. In the second chart (15-minute), we can see stock continues to consolidate (remains to be seen whether near term there's further downside).
Guardant Health was formed in 2013 with the audacious goal of conquering cancer with data and being a leader in the space of liquid biopsy testing. Management believes that health care is "data starved" and that if this data could be unlocked the end result would be improving outcomes for patients.
Specifically, the company's platform allows them to noninvasively access molecular information of a tumor. Revenue streams are diversified across three main buckets of cancer care (therapy selection, recurrence monitoring, and early detection).
The company is far from a speculative bet, having already proven itself as possessing the market's leading comprehensive liquid biopsy (served over 60,000 oncologists and 50 biopharma companies with over 80,000 tests ordered).
A $35 billion market opportunity (in the US) is squarely in management's crosshairs (see their breakdown below).
Figure 3: Market opportunity across segments (source: corporate presentation)
Later on down the road the concept of treating high risk patients, especially those who don't yet have cancer but have a substantial chance of developing the disease, is highly interesting to me.
The company's digital sequencing platform has over 60 patents issued and over 100 pending, with key differentiators including high efficiency chemistry, higher sensitivity and lower error rates as compared to competition. The chemistry allows for conversion of 80% to 90% of DNA into something that can actually get sequenced, while the back end (bioinformatics engine) has achieved lowering of error rate by over 1,000 fold.
Guardant 360 was launched in 2014 as the first clinical comprehensive liquid biopsy and from a tube of blood is able to give the physician all the information they require (everything in current guidelines, all treatment options for the patient, etc.).
Guardant OMNI was launched in late 2017 and is ten times larger than Guardant 360, having been co-developed with several big pharmaceutical firms (including Merck, Pfizer, AstraZeneca, and Bristol-Myers Squibb). There is lots of demand for OMNI in the area of immuno-oncology as it can call out MSI, tumor mutational burden (TMB) and includes over 500 genes that comprise targets for most therapeutic options today.
Another significant differentiator is the sheer amount of clinical data supporting the company's technology, as management recognized early on the importance of investing in lengthy (and costly) studies. Guardant360 has already been the subject of over 40 clinical studies with over 100 peer-reviewed publications (and over 300 scientific abstracts).
Let's move on to certain recent events that may have affected the bullish thesis.
In October last year, the company presented new data demonstrating the high sensitivity and specificity of the blood-based Guardant360 and GuardantOMNI assays for reporting biomarkers relevant to immunotherapy treatment selection and drug development at the European Society of Medical Oncology Annual Meeting. The data come from internal validation studies for reporting tumor mutational burden (TMB) with GuardantOMNI and microsatellite instability (MSI) with Guardant360. In the poster, researchers demonstrated 95% analytical sensitivity for MSI-High status at variant levels below 0.4%, and a lower limit of detection of 0.1% using Guardant360. Clinical accuracy data for MSI-High status for samples above the limit of detection was presented from 277 advanced cancer patients samples with known MSI status using tumor tissue (showed 98.9% specificity and 92.3% sensitivity relative to standard tissue IHC, PCR or NGS-based MSI).
A couple months later the company announced a multi-year agreement with AstraZeneca to develop blood-based companion diagnostic tests supporting commercialization of the larger partner's oncology portfolio. Specifically, a Guardant360 CDx test for Tagrisso is being developed to pursue FDA approval in order to help identify patients that may respond to the treatment via minimally-invasive blood test. Tagrisso is thought capable of doing $3 billion or so in peak sales.
In January Guardant announced that its LUNAR assay (to detect early-stage cancer and recurrence of disease) is now available for research use by biopharmaceutical and academic researchers. The company designed the LUNAR assay to overcome several challenges inherent in prior approaches of detection for early-stage cancers, including biological noise and limited sensitivity. Launch of clinical version for IUO use in prospective studies is expected in the second half of 2019.
In March Guardant acquired Bellwether Bio, a smaller concern focused on improving oncology patient care through pioneering research into the epigenomic content of cell free DNA.
In April the company announced that Guardant360 will be a covered benefit for members of health plans associated with eviCore (considered medically necessary to assist in selecting therapy for advanced lung cancer patients). In effect, this will lead to over 38 million lives for which coverage is added and brings total lung cancer coverage to over 150 million lives.
Also, in April, the company announced positive results from the NILE study (head to head comparison of Guardant360 to standard-of-care tissue testing for the identification of guideline-recommended biomarkers in first-line advanced non-small cell lung cancer patients) were published in Clinical Cancer Research. Aside from meeting the primary endpoint, Guardant360 use resulted in guideline-recommended testing for three times as many patients as tissue testing and median time to results of 9 days compared favorably to 15 days for standard of care.
For full year 2018, the company reported cash and equivalents of $496.5 million as compared to annual net loss of $85.1 million. Revenue rose 82% to $90.6 million, while gross profit increased $29.2 million to $47.4 million with gross margin rising to 52.3% from 36.6% in 2017. Management is guiding for full year 2019 revenue to grow 43% to 49%, equating to $130 million to $135 million (with net loss of $126 million to $129 million).
Using that 2019 revenue number, the company is valued at over 40 times revenue which seems very rich to my eyes, although I do acknowledge that a premium valuation is deserved given improving fundamentals.
In management's presentation at Cowen, I appreciated as the step by step plan for unlocking a $35 billion opportunity in the US. Management was optimistic but also grounded in realism, stating that making inroads on this opportunity is easier said than done as clinical data and evidence is needed to show how information provided when married up with the right intervention leads to the right clinical outcome (these types of studies take much time as gold standard metrics like overall survival are pursued). The discussion on preventative medicine (preventing birth of certain cancers before they even arise) was highly interesting to me. Aside from the Tagrisso deal with AstraZeneca, Guardant OMNI was also selected as companion diagnostic for their immuno-oncology program centered around Imfinzi (exploratory analysis from MYSTIC study showed challenges of finding the right patients for therapies and OMNI found twice as many TMB patients for trial as compared to traditional testing). LUNAR and LUNAR 2 efforts will lead to long term growth, and management highlighted improving margins and tailwinds from Medicare lung coverage and strong coverage from commercial payers (volume grows and costs continue to fall). Lastly, the joint venture with Softbank outside the US including increasing activity to capitalize on lucrative opportunities in Japan were touched on.
As for institutional investors of note, SB Investment Advisors owns over 25 million shares. Orbimed has a decent stake as well. Softbank owns over 30% of the company as well and Sequoia Capital owns a 9% stake.
As for leadership, I'd like to point out that CEO Dr. Helmy Eltoukhy co-founded Avantome which was acquired by Illumina in 2008. Several members of top brass hail from such well-regarded diagnostic firms as Illumina and Veracyte.
To conclude, this special diagnostics firm has a highly important mission that will ultimately lead to the saving of many cancer patients' lives via early diagnosis and disease detection through its less-invasive, rapid and reliable technology. Several tailwinds should aid this impressive growth and I'm led to believe that longer term investors will do well here.
On the other hand, in the marketplace service ROTY (Runners of the Year), I typically only introduce companies and initiate positions where valuation is cheap to reasonable, such as when we purchased ArQule (ARQL) in the mid 3's due to its BTK program not being included in the valuation at the time.
In the case of Guardant Health, a premium valuation is certainly merited given impressive execution by management and current projections of growth. While I can recommend a purchase of initial pilot position for patient investors with multiyear time frame, for my purposes I'm rooting for further pullback in the share price in order to gain entry at a more reasonable valuation.
The risk in waiting is that the stock rebounds significantly with several catalysts on the horizon that we've touched on above. FDA approval of Guardant360 would likely spur even more orders from oncologists that haven't yet incorporated the technology into their practices and continued adoption as clinical data rolls in should spur more interest.
As for risks here, dilution in the next year or so via secondary offering would not be unexpected (while not necessary, management wouldn't be faulted for buffering up cash reserves for more strategic acquisitions and to extend runway). If sales slow or competition gains some ground that would also weigh on the stock, considering this is widely known as a growth story.
Competitors in the liquid biopsy space to keep tabs on include Foundation Medicine (acquired by Roche), Thermo Fisher, Illumina, Personal Genome Diagnostics, Qiagen, Natera, GRAIL, and others.
As for derisking and downside cushion, even with negative news, I'd expect the $40 range to serve as support given current growth and future prospects.
Author's Note: I greatly appreciate you taking the time out of your day to read my material and hope you found it to be helpful in some form or fashion. If you're willing, I look forward to interacting with you in the Comments Section. Whether bull, bear or simply a skeptic, we all typically have something worth saying and feedback (plus community-driven due diligence) is one of the reasons I enjoy writing. Have a good one!
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Disclosure: I am/we are long ARQL. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
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