GH - Guardant Health: Vast Market Opportunity Challenging Valuation

2023-12-21 07:05:33 ET

Summary

• Guardant Health is a leader in liquid biopsy testing for advanced cancer patients.
• The company's growth is decelerating, and it is burning a significant amount of cash.
• The current valuation may be difficult to justify unless growth reaccelerates and cash burn comes under control.

Investment Thesis

Guardant Health (GH) is a leader in liquid biopsy testing for advanced cancer patients. While the addressable market for Guardant is huge and the company has strong top-line momentum, growth is decelerating from previously higher levels and the company is burning an ungodly amount of cash. Q3 revenue grew 22% year-over-year, down from 26% growth last quarter. Guidance implies 23-24% growth for the full year, below historical trends. Meanwhile, GAAP losses and cash burn continue to widen and the path to profitability remains long. I believe cash incineration and slowing growth coupled with an expensive valuation present challenges. Unless growth reaccelerates meaningfully, the current ~6x Fwd price/sales multiple will be difficult to justify. I rate the stock a Hold for now.

Company Deep Dive

Guardant Health is seeking to transform cancer care through blood-based genomic and epigenomic testing across all stages of the disease. The company started by establishing market leadership in therapy selection for advanced cancer, and is now leveraging this position to expand into recurrence monitoring and early detection screening.

Flagship Offering: Guardant360Guardant's flagship offering is Guardant360, a comprehensive liquid biopsy test that sequences cell-free tumor DNA from cancer patients to detect genomic alterations and guide therapy selection. Over 500,000 Guardant360 tests have been ordered by more than 12,000 oncologists to help optimize treatment planning for their advanced cancer patients.

The test has a turnaround time of just 7 days and a >99% assay success rate, providing a faster, more reliable, and less invasive alternative versus traditional tissue biopsy. Guardant360 testing has demonstrated concordance of over 90% with tissue-based testing in multiple tumor types while avoiding the disadvantages with tissue such as sampling errors and insufficient samples.

Expansion into New Areas

Buoyed by the success of Guardant360 in the therapy selection market, the company is leveraging its technology leadership to expand its portfolio. Two key areas it is focused on are recurrence monitoring and early cancer screening.

In recurrence monitoring, Guardant recently launched the Guardant Reveal liquid biopsy test to detect residual disease and cancer recurrence in early-stage patients. Reveal offers significantly higher sensitivity versus other methods for identifying patients at high risk of recurrence. The company has revealed plans to upgrade Reveal to a "Smart Liquid Biopsy" platform by year-end to early next year.

Meanwhile in early detection, Guardant launched the Shield liquid biopsy test in May 2022 to address the colorectal cancer ((CRC)) screening market. CRC screening adherence remains low for recommended stool and endoscopic tests, presenting an opportunity for a simple and patient-friendly blood test. Guardant recently published positive Shield performance data and anticipates regulatory approval in 2024. The company believes a blood-based test can significantly increase screening compliance rates and lifeyears gained. Beyond CRC, Guardant plans to expand Shield into lung and additional cancer types over time.

By leveraging its core business in therapy selection to fund growth in recurrence monitoring and early detection, Guardant aims to improve patient outcomes across the entire cancer care continuum with blood-based insights.

Financial Profile and Recent Results

Guardant Health has seen its cash levels decline in recent periods despite access to capital markets. As of last quarter, the company held ~$1.1 billion in cash and investments, down from ~$1.8 billion three years ago. Over the last twelve months, operational cash burn has averaged approximately $100 million per quarter. At this rate, Guardant has just over 3 years of runway based on current reserves.

The cash burn is a result of consistent operating losses driven by Guardant's growth investments across R&D, commercial expansion, and clinical evidence generation. For context, the company carries no debt on its balance sheet. Total liabilities of $1.5 billion consist primarily of operating lease commitments and noncontrolling interest liability.

In terms of recent results, Guardant posted Q3 revenue of $143 million, up 22% year-over-year. While representing a deceleration from 26% growth last quarter, it exceeded management's guidance range of $125-130 million. Precision oncology revenue rose 31% but development services dropped 37%. Despite 60% gross margins, heavy operating spend led to a $114 million operating loss and -$0.73 EPS.

For the full year 2023, management raised guidance to $553-556 million in revenue, equating to 23-24% growth. This suggests slowing momentum versus the 31% expansion achieved last year. Guardant expects to lower operating expenses and reduce cash burn to around $350 million. It expects to reach break-even by 2028, which warrants a longer cash runway at the current burn rate. Given the ongoing cash consumption, incremental capital raises remain likely absent a meaningful improvement in profitability.

Valuation

With a recent share price of $25 and 118 million shares outstanding, Guardant Health has a market capitalization of ~$3 billion. The stock currently trades at approximately 6x Wall Street's 2023 revenue estimates of $550 million. This represents a premium to diagnostic testing peers which trade closer to 4x sales on average. Given Guardant's decelerating growth trajectory, mounting losses, and long path to profitability, the premium 6x multiple appears difficult to justify.

Absent a meaningful reacceleration in growth or profitability, Guardant's premium valuation seems likely to face pressure. The current level implies investors are pricing in a growth and margin profile significantly better than industry comps. Unless that materializes, the risk-reward appears balanced at best based on a price-to-sales comparative.

Growth Catalysts

Guardant does have potential catalysts that could reignite growth:

- FDA approval and launch of the Shield CRC screening test in 2024 - Publication of additional supportive clinical data for Guardant Reveal - Benefit from EMR integration lifting ordering volumes - Faster than expected traction of products like Guardant Response

Key Risks

Key risks include slower commercial adoption of new products, intense competition from players like Exact Sciences (EXAS) and Freenome as well as potential for additional stock dilution to fund cash burn.

Conclusion

Guardant Health is a leader in precision oncology testing but has lost momentum with decelerating growth and persistent losses. While the company is investing for the future and has promising tests in development, the premium 6x price/sales multiple leaves not a lot of room for error absent an acceleration in growth. I rate Guardant Health a Hold and await signs of rebounding growth rates or a better entry price to consider going long in this name.

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