Guardant Health, Inc. Q1 FY2022 Earnings Call

Hello everyone. And welcome to the Guardant Health First Quarter Of 2022 Financial Results Call. My name is Charlie, and I'll be coordinating the call today. I'll now hand over to your host, Alex Kleban, Vice President of Investor Relations to begin. Alex, please go ahead.

Thank you. Earlier today, Guardant Health released financial results for the quarter ended March 31, 2022. Joining me today from Guardant are Helmy Eltoukhy, Co-CEO; AmirAli Talasaz, Co-CEO; and Mike Bell, Chief Financial Officer. Before we begin, I'd like to remind you that during this call management will make forward-looking statements within the meaning of federal security laws. These statements involve material risks and uncertainties that could cause actual results or events to differ materially 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 31, 2021, and in its other filings with the Securities and Exchange Commission. This call will also include a discussion of certain financial measures that are not calculated in accordance with GAAP. Reconciliation to the most directly comparable GAAP financial measure may be found in today’s earnings release submitted to the SEC. 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, May 05, 2022. With that, I’d like to turn the call over to Helmy.

Thanks, Alex. Good afternoon, and thank you for joining our first-quarter earnings call. I will begin the call today by providing an update on our progress across oncology. I will then turn the call over to AmirAli for an update on our screening program, and finally, Mike will provide a more detailed look at our financials. At Guardant, we are dedicated to helping patients across all stages of cancer live longer and healthier lives with the data provided from our powerful blood tests. In line with this commitment, I would like to start off with a patient story. In 2018, a 54-year-old man was diagnosed with rectal cancer and had a successful surgery to remove his cancer. About three and a half years after surgery, during a regular checkup, his oncologist ordered a Guardant Reveal test, which detected CTD signaling had a high likelihood of disease recurrence. Because of this result, his oncologist decided to monitor him more closely and within a few weeks, determined he had a clinical recurrence. His oncologist then ordered a Guardant360 test, which revealed he had a number of alterations, including HER2 amplification. Given this information, the patient had several potential first-line treatment options targeting the HER2 amplification. He was able to start treatment immediately, and I'm happy to report that he is doing well. This is a great illustration of how the Guardant portfolio of products is increasingly working hand in hand to help inform patient treatment across the continuum of care. Now turning to our performance on Slide 3, we ended the first quarter with revenue of $96 million, up 22% over the prior year quarter. Our team delivered strong clinical test volume, reaching 27,100 tests, an increase of 47% from the prior year quarter. This was composed of a somewhat slow start in January and February due to the Omicron surge, followed by a very solid finish to the quarter in March, setting us up very nicely for the second quarter and a strong growth trajectory for the rest of the year. Moving on to Slide 4, I am proud of our team's work to establish Guardant as the leader in liquid biopsy for high-performance test results and excellent customer service. Since the launch of our first product, Guardant360, we have been focused on building relationships with a growing number of oncologists. We now have more than 11,000 ordering oncologists, and within this group, we are seeing our core base of customers ordering more tests and using more Guardant products each quarter. This is evidence of the depth we are building into these accounts, which drives the adoption of CGP and unlocks more of the TAM over time. This, in turn, allows us to expand our portfolio, which positions us for long-term sustainable growth. We believe there is ample opportunity to continue growing both in terms of comprehensive genomic profiling and liquid biopsy share. Last month, we announced a partnership with Epic, a widely used comprehensive electronic health record system in the United States, to integrate our broad portfolio of cancer tests and enable our tests to be available to over 250 million individuals with a patient record. This integration will make it easier for health systems, community healthcare providers, and retail health clinics to make our blood tests a part of routine clinical care by providing direct ordering access and results delivery. We are proud of our team that is delivering on this initiative in a very condensed timeline, leveraging know-how and lessons learned from across the sector. This is just the first of a number of partnerships that we are exploring to better integrate our products into clinicians' workflows that will include additional EMR systems among other tools. We are also making progress on the reimbursement front. In early March, we received Medicare coverage for the Guardant360 TissueNext test under the MolDX program. We are already seeing that reimbursement of our tissue product accelerating the positive trends we have been seeing: increased depth of ordering per account, as more and more oncologists are ordering multiple products from Guardant, and as a result, this is deepening our touchpoints and amplifying our overall brand awareness in the market. Looking more closely at recurrence monitoring on Slide 5, we continue to be excited by the positive response to our Reveal assay, especially given where we are in the project cycle. The MRD space is still in the very early stages, and we continue to hold a uniquely compelling position as the only commercially available blood-only solution, despite a whole host of tissue-dependent entrants. We are very pleased so far with our progress since launch and the traction we are getting in the MRD space with our unique blood-only assay. We believe we are on track and have all of the products and commercial elements necessary to be the leader in MRD. Specifically, we continue to see strong quarter-over-quarter growth and are very pleased with our launch trajectory with respect to the competitive landscape and our previous product launches. We expect to have a series of future tailwinds, including indication expansion, reimbursement, and clinical utility data arriving that set us up well for long-term growth. Turning to Slide 6, outside of the United States, we are continuing to broaden our reach to deliver a new paradigm of cancer care to patients around the world. In mid-March, we were excited to announce that the Japanese Ministry of Health, Labor, and Welfare approved the use of Guardant360 CDX in patients with advanced solid cancers. The Guardant360 CDX test was also granted approval as a companion diagnostic to identify patients with microsatellite instability-high solid tumors who may benefit from Keytruda, and patients with MSI-high advanced colorectal cancer who may benefit from Opdivo. Its regulatory approval has taken on added significance as CRC is the most commonly diagnosed cancer in Japan, and this is globally the first liquid biopsy approval for immune-oncology therapy. This follows prior regulatory approval for Guardant360 CDX from the Ministry of Health, Labour and Welfare in December 2021 as a companion diagnostic for identifying patients with metastatic non-small cell lung cancer who may benefit from treatment. Following this approval, we are now working to secure public reimbursement by the end of 2022. Japan represents a very large market opportunity with about 400,000 late-stage patients compared to 700,000 in the United States and similar reimbursement rates for CGP. We are now in the process of building a commercial footprint to serve this enormous opportunity. We are also moving quickly to establish our footprint in the European market, as we are seeing early traction with hospitals and doctors with programs in the United Kingdom and Spain. In fact, this month, our laboratory in partnership with Vall d'Hebron in Spain will be officially operational. We look forward to providing local access to Guardant360 in the region, ensuring that no cancer patient globally is left behind. Moving on to biopharma on Slide 7, we delivered 5,100 tests in the first quarter representing growth of 45% year-over-year. We ended the quarter with more than 110 active partnerships, reflecting a growing and diverse set of customers. The breadth of our product offering, strong customer service, and our clinical market leadership make us an attractive partner. We have a healthy pipeline of discussions and expect the number of customers to continue to grow over the course of the year. We are also seeing growing interest in our Guardant Form offering, further driving our mission of being a partner of choice for biopharma. We have now signed several deals for Guardant Form spanning applications from translational oncology to clinical development and study planning and have seen strong growth in the number of partners and customers we are talking to with regard to this platform. Turning to Slide 8, earlier this year, I shared our vision for our smart liquid biopsy platform. We continue to make excellent progress toward this launch and are seeing strong initial interest from our biopharma partners. We are encouraged by their early feedback and excitement about its capabilities that are profoundly richer than any liquid biopsy oncology products on the market today. Diving a bit deeper into the platform, what defines all the diverse cell types in our body is not the genetic sequence information itself, but everything beyond that, such as epigenetics and other markers. We expect this product to redefine drug development, enabling for the first time greatly expanded views of the underlying tumor biology, to which the field has been largely blind due to the lack of available tools. It's still early days, but we are beginning to witness firsthand the power that deep multimodal interrogation of cancer pathways will have on the development of next-generation precision medicines and are very excited about the countless applications possible from this new platform. We look forward to sharing more about this next chapter of our smart liquid biopsy platform at Investor Day planned for the fall of this year. Before turning the call over to AmirAli, I would like to take a moment to talk about what drives us at Guardant. One of our most important values is to put the patient first; everything we do has to be led by that North Star. Another core value is to blaze a trail. With the momentous launch of our screening test Shield a few days ago, we've now spent almost a decade putting these values into practice to make blood-based cancer testing across the entire continuum of cancer care a reality. We've made countless difficult decisions along the way, all to develop the right technology and product-market fit to bring our vision to fruition. We learned along the way that as a company, when you blaze a trail, you have to constantly innovate and disrupt to deliver progress, often displacing incumbent technologies and companies like we did with Guardant360 eight years ago, Guardant Reveal last year, and this week with Shield. This generates excitement and attracts new investment to propel more innovation. We've seen this in the form of billions of dollars in capital invested by financial markets and competitors into blood-based testing. Disruption also triggers reactions at times. All of this is evidence that we are very much on the right track and leading the nascent industry. I am very proud of our team, our products, and this exciting next chapter of Guardant Health. I will now turn the call over to AmirAli to provide an update on our screening program.

Thanks, Helmy. Turning to Slide 9. At Guardant, we've always believed that a blood-based screening test during wellness checkups has the potential to shield patients from cancer. We've been on a 10-year journey to bring a high-performing blood-based screening test to market that can save millions of lives worldwide. For colorectal cancer, our core belief is that even the blood-based test, combined with a high level of early-stage detection, is the key to improving screening compliance and making our vision a reality. This has the potential to improve health equity and access to screening for underserved populations. I'm so excited to announce that we are now officially on the market with our LDT tests and only a short distance away from showing pivotal results in ECLIPSE and filing for FDA approval. Starting with our Shield LDT test, launched this past Monday on Slide 10. This is truly a seminal moment for Guardant, and the availability of the Shield test represents a major milestone in our commitment to transforming cancer screening. We have developed highly sensitive technology to detect early-stage cancers with a simple blood draw. We are pleased to report the following performance metrics: an overall sensitivity of CRC detection of 91% at specificity of 92%. The specificity of 94% in screen-negative normals, which excludes early adenomas. Early-stage sensitivity of 94%, Stage 1 sensitivity of 90%, and Stage 2 sensitivity of 97%. And advanced adenoma detection of 20%. The clinical performance of this assay was validated using a set of 309 patient samples, including 92 in CRC, 62 in advanced adenoma, and 166 normal cases. CRC patient samples were accrued across 6 unique cohorts collected in the U.S., Canada, and the EU. Samples with advanced adenomas and normal cases were collected in the U.S., mainly from the same colonoscopy sites participating in the ECLIPSE trial. Subjects were balanced by age, a mean of 64 years old, and gender. If the ECLIPSE readout is close to our LDT performance, we are confident that Shield will become the leading noninvasive CRC screening methodology. Turning to Slide 11, the recent LDT validation results are shown together with prior studies that we have reported in past conferences. This demonstrated reproducibility of overall sensitivity, early-stage performance, and specificity. Moving on to Slide 12, one notable item is the assay's performance in advanced adenoma detection. This is the result of a new R&D pipeline that was ramped up over the past year using a proteomics approach. It has yielded solid results in providing advanced adenoma detection and also has provided a slight boost to early-stage CRC sensitivity. Importantly, we were able to include this upgraded technology into the assay we are using for ECLIPSE. We believe our Shield blood test has the potential to be much more effective in reducing CRC mortality and adding more life years gained than any other stool-based screening test. Throughout the history of Guardant, we have dealt with several skeptics who claim that blood tests cannot add value in oncology. And every time they have been proven wrong, and liquid biopsy has shown it can, in fact, transform precision oncology. Current recommendations of USPSTF CRC screening strategies are based on models that have 100% adherence. However, we've seen studies with real-world evidence showing much lower adherence rates for stool-based tests versus blood-based tests. In a peer-reviewed publication shown in Slide 13 from Harvard Medical School in 2019, the effectiveness of different CRC screening tests was modeled under gas option. In a 100% adherence rate, FIT-DNA with a 3-year interval and FIT with a 1-year interval averted 42 to 45 CRC cases and 25 to 26 CRC deaths. Colonoscopy averted 46 cases and 26 tests, whereas SEPT9 with a 3-year interval averted 35 cases and 23 deaths per 1,000 individuals. Now on the right-hand side, assuming reported real-world adherence, SEPT9 averted more than 30 CRC cases and 19 CRC deaths. Colonoscopy averted 34 cases and 20 deaths, whereas FIT-DNA and FIT averted 16 to 25 cases and 10 to 16 deaths per 1,000 individuals. It's interesting to note that SEPT9 demonstrated superiority in adherence-adjusted effectiveness despite its low performance of 68% CRC sensitivity, 22% advanced adenoma sensitivity, with only 80% specificity. The key takeaway here is that with real-world adherence levels, stool-based testing would require almost perfect performance to achieve similar effectiveness or clinical benefit to blood-based tests. Therefore, we believe our Shield blood test has the potential to receive a higher benefit assessment from USPSTF than any other stool-based screening tests. Turning to our ECLIPSE trial on Slide 14, the patient journey in ECLIPSE is broken into multiple stage gates. In our last earnings call, we shared our progress with patient enrollment and collecting colonoscopy and pathology reports to reach our target number of confirmed CRCs. We have designed this study to receive a certain level of positive CRC reports, and we are still waiting on a number of those to come in. At this point, the delivery of pathology reports from the centralized pathology review board has been slower than we expected. We are doing everything we possibly can to accelerate these as quickly as possible. We now expect the readout for ECLIPSE to be in the second half of the year, with the September or October timeframe as a likely case. We have already started our modular submission to the FDA and are planning to submit our PMA application by the end of the year, pending successful ECLIPSE readout. We believe we will be the first to have a blood-based cancer screening test with Medicare coverage and FDA approval. Post-approval, we have the opportunity to secure ADLT status for this test. With PAMA, we are confident that we will be able to secure Medicare pricing of over $500. We are clearly operating in a very different environment than 8 years ago, and I'm confident about our pricing strategy. We expect this test to reach favorable long-term gross margins of around 60%. Through sales and marketing efficiencies powered by higher adherence and patient preference for blood testing, we believe we can be a profitable company within a couple of years following USPSTF guideline inclusion. Moving on to Slide 15, colorectal cancer screening is just the start of this journey. We will soon expand into multi-cancer screening, including lung, pancreas, and others, where we believe cancer screening can save lives. Recently, at the American Association for Cancer Research Annual Meeting, we presented new data demonstrating the ability of our next-generation Shield multi-cancer assay to accurately detect early-stage cancers. This assay is designed to analyze approximately 20,000 epigenomic biomarkers that are informative for detecting a wide range of solid tumors in a single blood test. The data for 4 cancer tests were demonstrated as examples for rectal, lung, pancreatic, and bladder cancers. In addition, the blood test identified the tumor tissue origin with high accuracy. By adding new indications to our blood test, the test benefit and the resulting life-year gain should further improve. Once commercially available, this indication expansion will be a major catalyst for our Shield assay. We believe Shield will be the preferred CRC screening method at launch, as that indication expansion will even further accelerate its adoption relative to stool-based tests, completely transforming the screening market from what it is today. With that, I will now turn the call over to Mike for more details on our financials and outlook for 2022.

Thanks, AmirAli. Turning to Slide 16. Total revenue for the first quarter of 2022 was $96.1 million, up 22% from $78.7 million in the prior year quarter. Total precision oncology testing revenue for the first quarter was $84.1 million, with growth of 32% compared to $63.7 million in the prior year quarter. This increase was driven by strong year-over-year growth in both clinical and biopharma central volumes. Precision oncology revenue from clinical tests was $66.0 million, up 32% from $49.8 million for the prior year quarter. First-quarter clinical test volume was $27,100, which is an increase of 47% from the same period of the prior year. After the COVID peak at the start of 2022, we finished the first quarter with good momentum. We also continue to see strong uptake for our new clinical products, REVEAL, TissueNext, and Response, and we expect volume from these products to continue to increase as we progress throughout the year. For the first quarter of 2022, the ASP for Guardant360 was in the $2,600 to $2,700 range, which is consistent with the last few quarters, and the blended clinical ASP was approximately $2,450. While we expect Guardant360 ASP to be stable in 2022, the blended clinical ASP will continue to be impacted as reimbursement of new products will take time to ramp up. We were very pleased to receive Medicare reimbursement for TissueNext at $2,920 in the first quarter. As a reminder, we don't expect our new products to start to significantly contribute to revenue until they receive Medicare and private payer reimbursement. Precision oncology revenue from biopharma tests in the first quarter totaled $18.1 million, up 30% from $13.9 million for the prior year quarter. Biopharma volume was strong, with first-quarter samples totaling 5,100, which was up 45% from the prior year quarter. Note that the volume was 23% lower than the fourth quarter of 2021 due to the positive seasonality in the biopharma business that we encounter toward the end of each calendar year. Biopharma sample ASP in the first quarter was approximately $3,600, down 10% from the prior year period, which was in line with the fourth quarter of 2021 due to a similar product mix. Development services and other revenue in the first quarter totaled $12.0 million, down 20% from the prior year quarter. Compared to the fourth quarter of 2021, development services and other revenue was down 38%, primarily because fourth quarter 2021 revenue included royalties for the 8-month period from May to December, whereas first quarter 2022 revenue included royalties for the 3-month period January to March 2022. For the remainder of 2022, we will continue to recognize royalties on a quarterly basis. As we've previously highlighted, while we continue to see strong demand for our development services, several companion diagnostic projects were successfully completed in the second half of 2021. As such, we expect that our quarterly development services revenue will be lower than the prior year for the next few quarters as new projects take time to ramp up. Gross profit for the first quarter of 2022 was $64.1 million compared to a gross profit of $49.9 million in the same period of the prior year. Gross margin in the first quarter was 67%, compared to 63% in the prior year quarter. The change in gross margins was primarily due to development services and other revenue, where the gross margin improved from 65% in the prior year quarter to 89% in the first quarter of 2022. Operating expenses for the first quarter of 2022 were $187.5 million, an increase of 19% compared to $157.8 million in the first quarter of 2021. Non-GAAP operating expenses exclude stock-based compensation and related payroll tax payments, acquisition-related expenses, amortization of intangible assets, and contingent consideration. Non-GAAP operating expenses for the first quarter of 2022 were $158.7 million, a 58% increase from the $100.7 million in the prior year quarter. This increase was driven by the significant investments made over the past 12 months in our commercial infrastructure and in the continued development of our product pipeline and clinical data across both oncology and screening. Throughout 2022, we will continue to invest in progressing our strong pipeline of oncology products, as well as in generating clinical data to support their reimbursement. The screening investment in 2022 will be focused on the commercial launch of our Shield LDT test, completing the data readout from ECLIPSE, the PMA submission for our CRC device, and the continued development of our multi-cancer screening test. Net loss attributable to Guardant Health common stockholders was $123.2 million, or $1.21 per share, for the first quarter of 2022, compared to a net loss of $109.7 million, or $1.09 per share, in the first quarter of 2021. Non-GAAP net loss was $93.2 million, or $0.91 per share, for the first quarter of 2022, compared to a non-GAAP net loss of $49.4 million, or $0.49 per share, for the first quarter of 2021. Adjusted EBITDA was a loss of $86.6 million in the first quarter of 2022 compared to a loss of $45.4 million in the first quarter of 2021. We define adjusted EBITDA as non-GAAP net loss attributable to Guardant Health adjusted for interest, income tax, depreciation, amortization, and other income and expense. We ended the first quarter of 2022 with approximately $1.6 billion in cash, cash equivalents, and marketable securities. We feel we have a strong cash balance that can support our ongoing operations for the foreseeable future, providing us with flexibility to continue investing in our business to drive robust future growth. As a reminder, we previously shared our decision to exercise our call line to purchase the 50% of the Guardant Health EMEA joint venture shares that we do not currently own. We still expect to complete this transaction before the end of the second quarter of 2022. Now turning to our revenue outlook for the full year 2022 on Slide 17. We continue to expect revenue to be between $460 million and $470 million, representing growth of approximately 24% over 2021 at the midpoint. As a reminder, embedded in this guidance range are a few key assumptions. First, we expect clinical oncology sample volume for the full year 2022 to grow by more than 50% compared to 2021 and biopharma volume to grow by at least 30%. As a result, we expect precision oncology testing revenue to grow more than 35% over the prior year, with higher growth expectations for the second half of the year versus the first half due to the reduced impact from COVID and improved reimbursement for new clinical products. Second, we expect development services and other revenue to be approximately $50 million for 2022. Finally, while we are excited about the launch of our Shield LDT test, we are not expecting significant revenue contributions from it this year. We are continuing to make great strides across our business, broadening our product portfolio with our Shield LDT test and expanding our reach into the cancer screening market. We are aggressively pursuing the best opportunities ahead, and we are confident that we will be a leader in cancer across the continuum of care. At this point, we will now open it up to questions.

Our first question comes from Puneet Souda of SVB Securities.

The performance of the Shield CRC screening in Stage 1 and 2, reaching 90% and 97%, was impressive and exceeded expectations. Investors are curious about whether you believe this data will remain consistent in the ECLIPSE trial. While it's difficult to predict, you've mentioned various aspects regarding the validation study in cohorts and some samples from the ECLIPSE side. Do you feel confident that the sensitivity performance will be maintained?

Obviously, we are very excited with the Shield LDT launch, and the fact that performance across independent cohorts, some of the samples actually we are running for the first time. Especially for the sample sets, CRC side, the samples came from the United States, Canada, and Europe. That data is holding up under early stage. We continue to see reproducibility on the assay over time across different reagent batches, all the things that could contribute to technical variation of the assay. We are very pleased with that. On the specificity side, the samples are much, much closer to what we actually expect in ECLIPSE. As I mentioned in the prepared remark, how the samples came, in fact, all the examples came from many sites who are contributing in fact, in the ECLIPSE trial. So in terms of expectations, we still have the same. I think so far, what we've seen on the early-stage side is high 80s to low 90s. And now we'll see what ECLIPSE is going to bring for us. On the specificity side, we have a very good understanding of specificity at this time.

Okay. That's great. And just a follow-up on that. Thanks for really clarifying the modeling and the questions that have been raised around sort of the USPSTF and potential coverage after USPSTF. But just to boil that down that modeling study that you showed. I mean, is it safe to say if the sensitivity of liquid biopsy is strong? Obviously, the ease of use of a simple blood draw is strong, and the performance that you're seeing at sort of the 90% and 30% specificity that even with the advanced adenoma data, I appreciate that, that had some larger confidence interval around it. But even with the large confidence interval, as long as USPSTF is modeling and including the adherence adjusted, that you have no doubt that this would be covered by commercial payers. I just want to be clear on that point.

Our current understanding is that there is awareness about adherence being an important factor, although it's not always factored into FIT and Cologuard models. While one might assume adherence is at 100%, real-world experiences indicate otherwise. If adherence were perfect, we wouldn't be facing the issues we currently face, and blood tests might not even exist due to concerns about patient preferences and adherence. It's important for us to continue publishing research that emphasizes the significance of adherence in our field. This is vital for saving lives and ensuring that patients consistently participate in these tests every three years. If adherence is lacking, the potential benefits in terms of life-years gained decrease. It's also important that our models reflect the necessity of adherence to demonstrate positive outcomes. As we analyze these tests over time, we'll present our findings at upcoming conferences. We believe that when adherence is incorporated, the results will show meaningful impacts. Stool-based tests have to be comprehensive to compensate for the challenges of non-compliance, ensuring that they deliver similar health benefits to the patient population. This is our understanding at the moment.

Our next question comes from Dan Arias of Stifel.

AmirAli, just to maybe follow up on that. Can you just kind of recrystallize what you said and clarify whether you think that real-world adherence will be considered as the USPSTF guideline consideration? And that you think that that is what will drive a 3-year interval for the test rather than a 1 year.

Yes, sure. The time spent on these models is based on public information, and you can actually solve them to see what's included. Adherence is one of the parameters, and it has been observed that stool-based tests face similar adherence issues across the board. This is likely why those tests haven't been examined in depth here. Currently, everything is modeled simply as 100% adherence, but when it comes to the new screening approach, the main advantage is that this blood-based test is preferred by patients and has the potential for much higher adherence and compliance. While that is certainly a factor and included in the models, it has mostly been treated as a placeholder with the assumption of 100% adherence. Furthermore, according to 2021 write-offs, even renal adherence is not at 100% based on real-world evidence. However, in the modeling exercises conducted, that simple assumption has been used.

Yes. Okay. And then can you maybe expand a little bit on cost and the COGS associated with Shield? And then how that aligns with the economics of testing, either on an annual basis or a 3-year basis? And then along those lines, the extent to which you just think you achieve price competitiveness with some of the other tests that are on the market.

Yes, we are confident in our pricing strategy, which is evident from the expansion of the 3-year pricing based on ADLT. After receiving FDA approval, we anticipate being classified as ADLT. The pricing benefits associated with ADLT present significant opportunities for us. Historically, manager pricing has been an important factor in discussions with private players regarding software pricing. There have been several instances where Medicare pricing has influenced these negotiations. Some private payers facing pricing challenges have had to navigate similar situations. We believe that the favorable PMA rates resulting from ADLT for this test, after a successful FDA approval, will positively impact our top line. Assuming our longer average selling price is $500, we are developing this assay to achieve over 60% gross margin at that price point. We know this is feasible. The chemistry, process engineering, and the investments we've made so far indicate that we can reach those cost of goods sold targets at scale, and we aim for a 60% margin on our P&L, even with a price of $500.

Our next question comes from Jack Meehan of Nephron Research.

Wanted to move over to the oncology side of the business, start with Guardant Reveal. I was wondering if you could provide an update just how the discussions are going with MolDX around potential reimbursement for that test?

Yes, I mean we've effectively submitted everything that they've requested, and we're just waiting right now on their feedback on that information. So there’s nothing new to report at this time.

Okay. And if I look at the 27,100 clinical tests in the quarter, I just kind of triangulate based on the ASP commentary Mike laid out. It seems like you had about 2,000 or so all other tests beyond Guardant360 in the quarter. Is there any way you can just provide a little bit of color around like what's the largest within there between Reveal, TissueNext, or Response? And then off that, how does the reimbursement work for TissueNext, did you start getting paid for that yet?

Yes. I think, firstly, on TissueNext reimbursement, we received positive coverage in Q1. So we expect to be able to recognize revenue from the Medicare side of things in Q2 going forward. And then for the volume, I think your numbers are probably a little bit short on the new products. I think we've seen really good traction across the board. Without breaking them out, I think it's fair to say that Guardant Reveal is really ahead of those new products, and that's because it's been on the market for just over a year now; the products were launched in the middle of last year. But again, we've seen really solid traction. We're really pleased with the volume, both on the core Guardant360 business, but also with the new products, and so a really strong year-over-year growth that we've seen on the volume.

Our next question comes from Tejas Savant of Morgan Stanley.

This is Edmund on for Tejas. The first question on the new version of the Shield test, it requires less depth of sequencing, and obviously, the price of sequencing per GB has gone down with the emerging players and Illumina's new chemistry. So I was wondering to what degree were these 2 factors, the less depth of sequencing and the lower price of sequencing or GB. To what degree will that provide an offset to the margins for this product?

In terms of our roadmap to get to that $200 barrier that I mentioned, we had scale. In fact, that's based on the current economics of sequencing dollars. The sequencing part is a material part of our deal, but not it before our COGS impact. That's why we need to deliver on that. It's not a future activity; a bunch of stuff has already happened, but we need to continue making progress in fact, on process engineering and automation versus reliance on new chemistry that would be top sequencing pricing to get to that cost. If you know what you're doing in the field of NGS and you have some level of good experience, I’m happy with the caliber of talent we have at Guardant. Sequencing can be run very efficiently in terms of the total COGS planning. So imagine that in fact, the future surviving screening tests would be mainly done with heavy reliance on NGS, and in fact, they could keep their COGS really under their control in this market. So in short, definitely, any single dollar savings for further sequencing cost reduction would be welcomed in terms of gross margin improvement. But it's not that we needed in order to get to 60% margin at scale.

Our next question comes from the Epic agreement question.

Yes, we're very excited about this partnership. We think it's going to be a big boost to certainly our oncology portfolio, as well as Shield down the line. Increasingly, as these tests become the standard of care, being able to integrate into Epic and really have that ease of ordering will remove certain barriers and friction in terms of that process. It is going to be a big boost and a big catalyst for volume for years to come. Epic is one of a number of partnerships that we're exploring right now. We foresee a future where all of our products are highly accessible across the electronic health record ecosystem.

Yes, defensively, we are very excited about all the advantages in terms of workflow advantages when you're dealing with EHR. EMR has such a high penetration in our installed base. And on the screening side, definitely, we are heavy on electronic ordering even today based on LDT launch that we have a bunch of operations, which we are excited and very optimistic about, that this EHR connection will make our customers happy in terms of ease of ordering. In terms of revenue contribution, I just refer back to what Mike mentioned: that mainly because of low ASPs before FDA approval, we don't expect material revenue contribution from Shield this year. But we are just very few days post LDT launch, and we are pleased with what’s happening just in the last few days.

Our next question comes from Derik De Bruin of Bank of America.

Could you provide an update on your commercialization plans and how you intend to implement them? Additionally, how do your plans compare to another multi-cancer detection test currently available as an LDT? Specifically, can you discuss your approach to commercialization, what the costs will be, and the size of the sales force you will require? Many investors are curious about how you plan to transition from data to the commercial rollout and the associated costs.

Yes, sure. At Guardant, our commitment is to ensure patients of all classes get access to our Shield product. The business impact of it is we are after unlocking this $20 billion CRC screening market opportunity. As I mentioned, the multi-cancer indication would add to that. In order to really unlock that $20 billion opportunity and go after the $110 million to $120 million patient population who are eligible for CRC screening, you need to have a path for reimbursement guideline inclusion. And that's the path that we are taking. As a result, our commercial plan is very different from some players who are just generating access for their test for a highly privileged individual who can just do self-pay. We have issues with that, and we don't believe that's the path to the $20 billion opportunity. The number of patients who fall into that category is obviously a manufacture of the $110 million. Now in terms of commercial strategy behind this is, obviously, we are heavily engaging primary care physicians, key hospital systems, and employers. We are in an LDT launch phase with a commercial team of about 100 people. Over time, we would expand it at scale to about 700 people as we get closer to USPSTF guideline inclusion. So you can expect over time in a systemic and thoughtful way, we would scale based on additional information that we get that brings us closer to the FDA approval and USPSTF guideline inclusion. Our plan is to have that in-house 700 people commercial team. The P&L derived from this would differ from what some stool-based P&L look like: the patient preferences for blood testing and adherence we expect to be much higher than stool-based testing. As a result, S&M efficiency per sample would be much, much higher. Now combined with gross margins at 60% at least and even with an ASP of $500, we think we would have a profitable guidance a year or two right after USPSTF guideline inclusion.

Great. Can you clarify why you delayed the readout for ECLIPSE? Is it due to a backlog in pathology or because there haven't been enough CRC cases, requiring more patient enrollment? Could you please clarify that?

Thank you for your question. We are eagerly anticipating the ECLIPSE readout, which we believe will be a pivotal moment for both patients and our industry. This has been in the works for several years, and we are committed to reaching this milestone. Regarding the main factors contributing to the timeline, the complexities of the trial operations are a challenge. A central pathology review is underway to assess all disease cases identified during the colonoscopy procedures. There is a backlog of several thousand cases that are still awaiting review. Considering the number of colorectal cancers we have detected, the reports we've received, and the backlog of the centralized pathology, we are also implementing various strategies to boost productivity. However, due to the nature of this regulated study, the single large centralized pathology review is crucial. We anticipate the readout will be in the latter half of the year, with our best estimate being around September or October. We are doing everything we can to prepare for it.

Our next question comes from Kyle Mikson of Canaccord.

Congrats on the quarter. So just similar to the question before. I just wanted to know if you could kind of walk through your confidence level that the AA sensitivity, the 20% from the sample sale on Monday. Is that reproducible, just given the other screening products have seen degradation of over 15 percentage points. And so it's obviously going to be a big swing factor for FDA and so forth. And so I just wanted to get your sense there.

Yes, sure. The nature of advanced adenoma is the reason we have a much lower number of samples for training and validation; much lower number of samples need to come from colonoscopy sessions. The people who go for colonoscopy, in fact, are a fraction of these advanced adenomas. We are getting blood samples from their colonoscopy. So in terms of clinical indication, I mean, it cannot be closer than this in terms of ECLIPSE. In terms of variation, I think it's just statistical variation around the 20%. We have 51 advanced adenoma data, and we see about 20% sensitivity. When you look at the confidence interval around it, that is just a statistical variation. ECLIPSE will quantify the exact sensitivity since we have already identified over 1,000+ advanced adenomas. We are going to have a fine-tuned estimate. So that confidence interval, we showed it in our LDT press release; I'm hoping I am not misquoting, but that confidence interval is from, I think, 12% to 32% when going from 20% out of 51%. So, but that's the issue of low end. We just need higher-end advanced adenoma to find out more. In terms of degradation, I mean, these are coming from screening sites effectively. They share the same kind of advanced adenomas to a large extent.

Perfect. Our next question comes from Mark Massaro of BTIG.

There seems to be enough confusion in the marketplace, so I wanted to get back to the basics. In January 2021, there was a CMS memo that stated CMS would cover any blood-based test with sensitivity and specificity of 74 and 90, and it also mentioned a test interval of every 3 years. I know this is a CMS question, but do you have any doubts or significant concerns about being able to obtain a test every 3 years from CMS?

We do not doubt it based on everything we know. So I think NCD is NCD. The bar of changing NCDs is very high. The NCD language is very clear. I think one thing that maybe I take this opportunity that maybe there is not high awareness around is the way CMS looks at it: specificity of 90%. Our understanding is they want to ensure that the specificity is better than Cologuard, and that 90% is coming from 89.8% from the Cologuard study when you exclude advanced adenomas. So when we talk about our specificity numbers, like for instance, in this LDT, it's not that 92% for LDT; that includes some early adenomas like when you exclude that. So that 90% the FDA or the final readout of ECLIPSE could be lower, but more of 90% is possible. So we feel based on the threshold we set, hopefully, we can achieve that with the ECLIPSE trials.

Great. I recently put out a survey where 75% of doctors indicated that they were likely to order a new blood-based test even if it was not recommended by USPSTF. So I guess I would be curious if you think that that's reasonable relative to some of the survey work you've done. And then there's been a lot of pushback about your 20% AA sensitivity. Can you walk us through how you think you can gain uptake? Notably, it seems like AA is not at the forefront in mind of many primary care physicians; it seems like it's FDA approval and overall sensitivity and specificity. But help us think about how you can get to a $500 price and get into USPSTF even if your AA is not above what Cologuard is.

Yes. So actually, I think those may be a few things at the same time. In terms of the PCPs, we talked about our market research and clear top thing for them is CRC performance. Advanced adenoma still in terms of awareness of differentiation of products; we think in the mid to longer term, that could be a parameter, but this is research-based, and you're just very few days into the market. What we are hearing today in the early days is actually strong confirmation of what we've said so far. But again, this is just a 3-day conference activity, and maybe we can have the same conversation in 3 to 6 months. We cannot be more pleased with what we are hearing from the market, confirmation of what we think would really drive the adoption of blood-based tests and how much market is waiting for these tests to come out. That's the reality. In terms of the requirement for the USPSTF, I tried to cover it in the prepared remarks. The most important thing is they look at 3 things: clinical evidence, that's why we are doing ECLIPSE. Second, they look at benefits and harms; lack of compliance is on many people's minds. So it's something that's not a high bar of education or awareness around that. Adherence, there's a good understanding. We are going to show the modeling work and the way it operates. The blood-based tests shine significantly with what we’ve talked about. We believe we can show in the near future a significant value proposition.

Our next question comes from Max Masucci of Cowen.

Just a quick follow-up on Mark's question. I think the NCD states that it will provide coverage for any qualifying test, either once every three years or at the interval designated in the FDA label if the FDA indicates the specific test interval. So I'm curious if you're expecting the FDA to recommend a specific interval when they rule on the ECLIPSE data and if they do, how that recommendation would influence USPSTF's eventual ruling on the test interval as well.

Based on what I know with the FDA in the label, I would be surprised if they get into interval testing. This is not our expectation based on the experiences we've had with other products. The bodies involved know that the lack of compliance is a major issue. People are noticing blood-based cancer screening can provide tremendous population and health benefits. Many stakeholders are working to make these life-changing diagnostics widely accessible.

Got it. USPSTF, obviously, assuming 100% adherence in some of the models to support the recommendations, but they clearly acknowledge the importance of adherence in the real world. So if you're looking across healthcare advocacy groups, guideline bodies, regulators, and reimbursement decision-makers, which of those parties do you expect to be the biggest advocate for the use of adherence-adjusted modeling, especially when they are determining the role that your test could play in underserved populations and other individuals that are in lower-income areas?

Our relationship with multiple patient advocacy groups is very exciting in this front. Again, like the entire ecosystem is making significant efforts to ensure blood-based screening tests are accessible. We can improve compliance rates to well over 80% with these high-sensitivity, high-performing tests, not only those that focus on late-stage detection. It needs to be the right diagnostics. I think all stakeholders and influencers are in alignment; adherence is paramount. Former USPSTF members are on our advisory board, and we’re brainstorming about these strategies together, ensuring these positive life- and health-gain contributions are understood clearly.

Our next question comes from Patrick Donnelly of Citi.

I'll just keep it to one. I know it's run a little late. AmirAli, maybe just on the ECLIPSE delay, just following up on the earlier question. Just to be clear, it sounds like it's just kind of the review running along. You guys are still confident that the sample size is correct. And then on the back of that, how quickly can you turn the PMA submission around? It sounds like you're still confident that happens in '22. So the timeline on the FDA side doesn’t sound like it's slipping. I just wanted to confirm that. And again, confidence level and the ability to turn that around relatively quickly.

Yes, I will begin with the last part of your question. According to our planning, we still believe we can submit our PMA package to the agency this year. There are several analytical clinical validations that need to occur based on the realities of what is happening clinically. However, project planning will be adjusted regarding the sequence of experimentation and other factors. We feel confident that we can submit the final module of our PMA to the agency this year. As I mentioned, we have already started the modular submission, and reviews have commenced on some of our early modules. Regarding the timeline delay, while we are executing many aspects well, this situation is disappointing. We are doing our best to accelerate the centralized review, which is outside our control. The way to address this backlog sooner is through an improved review process. We need to meet our CRC number, and we still have work to do to get through the backlog. Therefore, we expect to have a readout in the second half of the year, with our best estimate around September or October.

Our next question comes from Julie Qin of JPMorgan.

So maybe just a quick follow-up on Shield. I know you made a very clear point about the importance of compliance in terms of guideline reviews. How much does USPSTF we put on AA performance? And I assume that you talked about using an improved version of the assay for this later study. So I assume there are additional levers you can pull to further enhance the AA performance as well. Just wondering if you can get any color in terms of the theoretical potential for performance improvement.

We are satisfied with our progress on the current region of the test, CRC. We have conducted extensive work on it, producing many samples that demonstrate performance similar to what we have observed so far, and it has been validated with ECLIPSE in terms of advanced adenoma performance. We believe we are poised to have the leading test for colorectal cancer screening in the long term, with many cases expected to be ordered. However, I cannot claim that this is the absolute best version or that there is no room for improvement in advanced adenoma performance. Looking at the evolution of Guardant360 over the past eight years, we anticipate performance enhancements with this latest iteration of the assay. Regarding the USPSTF, it considers multiple factors where CRC sensitivity, advanced adenoma detection, and early-stage adenoma detection are crucial, along with adherence, which significantly influences overall effectiveness. We believe our blood-based test will result in much greater life year gains compared to any stool-based tests.

Our penultimate question comes from Matthew Sykes of Goldman Sachs.

This is Dave on for Matt. Congrats again on the Shield launch. Can you give us an idea of the order of magnitude of Shield volume you expect next year? It looks like the multi-cancer screening test in the market is expecting around 80,000 or 100,000 tests in its full year.

So maybe actually give us some time for next year's guidance. I can tell you that what we are seeing in the very few days of this launch is actually a lot more than what we expected. But we have to see. Even based on what we see, it looks like there has been a bunch of underestimation of what it would be even with such a limited commercial team. But we are not ready to talk about next year's guidance for sample volume on Shield. This is very new for us, so we need to understand this better. But so far, so good, I can say. We will keep you posted.

Yes. So obviously, we talked about the value of the test. For people going to offer some cash basis, we need to establish a list pricing, and this cash pricing will be vital in terms of the track record of payment for us when we go to the ADLT pricing post FDA approval. So we are setting groundwork here. Please stay tuned.

And our final question comes from Brian Weinstein of William Blair.

I was just going to ask you about that pricing question as well. Maybe it's a substantial premium to Cologuard. Just was thinking through that and thinking through with the ADLT; you will obviously get reviewed on that pricing based on what you are seeing on the private side. Do you expect that you will be able to contract with private payers ahead of inclusion in quality metrics? And then I'll just ask the second one right now just because it's a short one. In the near time, do you guys expect that there will be any kind of FDA panel review for this, given this is kind of a new class, and we're going to have, I think, 3 or more coming in a short period of time?

Maybe again, I start from the last part of your question, Brian. So in terms of panel review, the FDA makes that decision on what they want to do. I don't agree that 3 or 4 devices will come at the same time. What we know is we will be at least quarters away from anybody else trying to submit their package. However, I have had experience of making random statements that come to our market from different angles. In terms of reimbursement expectations, the reality is the FDA would enable CMS coverage, Medicare coverage shortly afterward. We certainly want to ask for Medicare Advantage coverage. There are always early players that would jump on it post-Medicare. Some may act post-potential ACS guideline inclusion. But as the default expectation, many private payers would join after USPSTF guideline inclusion. This is our current expectation.

At this time, we have no current questions. And therefore, this concludes today's call. Thank you all for joining. You may now disconnect your lines.