2023-04-20 19:57:09 ET
Summary
- Shares of liquid biopsy genetic profiling test developer Guardant Health, Inc. have cratered 85% since achieving their all-time high of $181.07 in February 2021.
- Slowing top line growth, a very long timeline to profitability that includes a significant cash burn, and disappointing (versus expectations) data regarding its Shield colorectal test are to blame.
- With a very optimistic long-range FY2032 revenue estimate of $5 billion for Shield and large addressable markets for other offerings, the recent Guardant Health, Inc. insider buying merited a deeper dive.
- A full investment analysis follows in the paragraphs below.
"The forest reveals what is in the seed .”? Matshona Dhliwayo.
Today, we take a deeper look at a diagnostic firm that debuted on the market at under $20.00 and quickly quintupled past $100.00 a share. However, the stock is currently down some 85% from its all-time highs. Slowing growth and a lack of profitability to date are to blame. However, the company is targeting a large market and the shares have seen some recent insider buying. An analysis/ recommendation follows below.
Company Overview
Guardant Health, Inc. ( GH ) is a Palo Alto, California-based provider of liquid biopsy-based comprehensive genetic profiling tests, as well as data sets and analytics for precision oncology. The company has eight commercial blood, tissue, and biopsy tests of which one has received FDA premarket approval. Guardant was founded in 2011 and went public in 2018, raising net proceeds of $254.0 million at $19 per share. The stock currently trades just under $25.00 a share, translating to an approximate market cap of $2.6 billion.
Products
Guardant360 . The company was the pioneer in the development of comprehensive liquid (consisting of two 10-milliliter blood samples) biopsy tests with the introduction of Guardant360 in 2014. It was initially launched as a 73-gene test that supported treatment selection for advanced stage cancer patients with solid tumors. There are now four commercial Guardant360 products. Guardant360 CDx is an FDA-approved 55-gene test that provides tumor mutation profiling but is also used as a companion diagnostic to identify non-small cell lung cancer patients who would benefit specifically from one of four approved therapies, as well as breast cancer patients who would benefit from Menarini’s Orserdu (elacestrant). Medicare agreed to cover the cost of this test earlier this week.
The balance of the company’s Guardant360 (and all other) patient offerings are laboratory developed tests (LTDs), which are in vitro diagnostic tests that are designed, manufactured, and used within a single laboratory. Furthermore, they can only be obtained via a healthcare provider’s prescription. Guardant360 LDT measures over 80 cancer-related genes to direct physicians whose patients have failed on standard of care treatments.
Guardant360 Response Test can detect changes in circulating tumor DNA (ctDNA) levels to determine patient response to treatment, with the ability to predict the response eight weeks earlier than radiological and imaging scans. Finally, as a complement to these assays, Guardant360 TissueNext Test is designed to provide tissue genotyping for patients who may benefit from biomarker-informed treatment.
With ~700,000 metastatic cancer patients, the company places the domestic market opportunity for its Guardant360 product line at ~$10 billion.
Guardant Reveal Test . To detect residual and recurring disease in early-stage colorectal, breast, and lung cancer patients, the company developed Guardant Reveal Test, which was launched as an LDT in 2021. Management believes the domestic opportunity for molecular residual disease tests for cancer recurrence monitoring is ~$20 billion.
Shield Test . That said, Guardant views its largest market opportunity – placed at ~$100 billion – in cancer screening, into which its initial foray is colorectal cancer detection via its Shield Test. Launched as an LTD in May 2022, it detects both ctDNA and epigenomic signatures such as methylation to increase test sensitivity from a simple blood draw. Given the invasive unpleasantness associated with current colorectal screenings and Exact Sciences Corporation’s ( EXAS ) non-invasive Cologuard test that involves mailing one’s poop to a lab, an FDA approval of Guardant’s Shield Test could be a game changer for detection of this cancer type.
To that end, the company announced the results of a 20,000+ patient registrational study ((ECLIPSE)) that evaluated the performance of Shield for detecting colorectal cancer in average-risk adults in December 2022. Although the data – 83% sensitivity (measuring positives) in detecting colorectal cancer with 90% specificity (measuring negatives) – were above thresholds for reimbursement from the Centers for Medicare and Medicaid Services and likely worthy of an FDA premarket approval, the market did not react kindly to this news – more on that development below.
Guardant’s next target for its Shield Test is lung cancer, with a prospective study (NCIRE-LUNG) expected to readout in late 2023 to mid-2024.
Management is extremely bullish on Shield, optimistically designating it as a $5 billion diagnostic brand by 2032.
Biopharmaceutical Offerings . In addition to the above tests, Guardant has assays for research-use only, including GuardantOMNI Test, which covers a broader range of genes (500) than Guardant 360 CDx with biomarker detection for immunonocology applications. The next generation version of OMNI is GuardantINFINITY, which was launched in September 2022. It covers over 800 genes with epigenomic and tumor fraction scoring for a broad range of applications. It boasts 100x the genomic breadth of Guardant360 and 50x higher sensitivity. Further supporting the biopharma industry’s acceleration of its precision oncology drug development is the company’s in-silico GuardantINFORM platform that provides insights into tumor evolution and treatment resistance in multiple cancers.
Share Price Performance
Already a hot IPO out of the gate (priced at $19, opened at $27.75), Guardant’s stock briefly raced to over $100 (intraday) less than six months after its October 2018 debut on the back of a bullish FY19 outlook, which it eventually blew the top off of. After hitting a pandemic-selloff low of $55.90 in March 2020, shares of GH continued their climb to an all-time high of $181.07 in February 2021, at which point represented 48.7 times Guidant’s eventual FY21 revenue, a year in which it lost $2.48 a share (non-GAAP).
Shortly thereafter in the same month, the company provided FY21 guidance of $365 million – which it eventually bested by $8.7 million – that somewhat underwhelmed the market. Combined with concerns about its continued unprofitability, Guardant’s stock began a protracted decline, closing at $41.26 on December 15, 2022.
The company then released results from ECLIPSE that were perceived as approvable, but with 83% sensitivity below the 92% achieved by Cologuard, it meant that Guardant (assuming approval) would have to rely more on doctors’ determinations that the adherence benefit of Shield (90% vs Cologuard’s 65%) would outweigh the better sensitivity of Cologuard to drive adoption. Disappointed by this result, the market sold shares of GH off 27% to $30.06 in the subsequent trading session, and they have yet to recover.
4Q22 and FY22 Financial Performance
If the bulls were hoping to receive a shot in the arm from the company’s 4Q22 and FY22 financial reports on February 23, 2023, they were mistaken. Guardant reported a 4Q22 loss of $1.17 a share (non-GAAP) and negative Adj. EBITDA of $107.8 million on revenue of $126.9 million versus a loss of $0.69 a share (non-GAAP) and negative Adj. EBITDA of $64.6 million on revenue of $108.1 million in 4Q21, representing 17% growth at the top line while losses at the bottom line grew 70%. These results were mixed, with the top line hurdling expectations by $3.0 million and the bottom line a penny worse.
For FY22, Guardant lost $4.26 a share (non-GAAP) and generated negative Adj. EBITDA of $403.4 million on revenue of $449.5 million as compared to a loss of $2.48 a share (non-GAAP) and negative Ad. EBITDA of $231.5 million on revenue of $373.7 million in FY21, reflecting 20% improvement at the top line.
For FY23, management forecasted revenue in a range of $525 million to $540 million (or 17% to 20% growth over FY22) with free cash outflow expected at $350 million. This outlook did little to raise prospects considering the Street was forecasting the company’s top line at $554 million for FY23.
Balance Sheet & Analyst Commentary:
Although a $50 million improvement over FY22, Guardant’s projected outflow of $350 million introduces the specter of it needing financing sometime in FY25 or FY26. It held cash and investments of $1.01 billion at YE22, but the current cash flow trajectory is not heartening, with the company not likely to breakeven until FY27 (or thereabouts).
That said, Street analysts are still extremely optimistic on Guardant’s prospects, with only Citigroup throwing in the towel after the 4Q22 report, downgrading shares of GH from a buy to a hold and lowering its price objective from $60 to $33, citing its slowing growth and “longer line of sight” to profitability. Of the other 13 analysts making commentary in the past 12 months, only Piper is skeptical with a hold rating and a recently lowered price target ($50 to $35). On average, analysts expect the company to lose $4.59 a share (non-GAAP) on revenue of $533.5 million in FY23, followed by a loss of $3.91 a share (non-GAAP) on revenue of $666.2 million in FY24. Their median twelve month price objective is a very optimistic $60.
Also upbeat are Guardant’s co-CEOs, who between them purchased 190,052 shares on March 13th-15th.
Verdict:
Besides for results from the prospective NCIRE-LUNG study for Shield expected anytime between late 2023 and mid-2024, the only real catalyst is Shield’s potential approval for colorectal cancer in early FY24, which is highly expected to occur.
There are also some reimbursement decisions, but not much else on the horizon. As such, the market will focus on Guardant’s financials, and they aren’t particularly good. Net of cash, shares of Guardant Health, Inc. are trading at 3.2 times FY23E revenue that kicks off gross margins in the mid-60s, but with nearly zero prospects for profitability until FY26-FY27 owing to its substantial R&D and sales efforts, they don’t deserve a higher valuation. There is significant potential upside to Guardant stock, but not right now. As such, sitting on the sidelines for Guardant Health, Inc. until the FDA decision regarding Shield becomes imminent is recommended.
"No matter the strength of their wings, most never leave their cages .”? Jason Versey.
For further details see:
Guardant Health: On Hold For Now