Guardant Health, Inc. Q3 FY2022 Earnings Call

Thank you. Earlier today, Guardant Health released financial results for the quarter ended September 30, 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 securities laws. These statements involve material risks and uncertainties that could cause actual results or events to materially differ 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. A Reconciliation to the most directly comparable GAAP financial measures 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 live broadcast November 3, 2022. With that, I'd like to turn the call over to Helmy.

Thanks, Alex. Good afternoon, and thank you for joining our third quarter 2022 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 business including progress with ECLIPSE and multi-cancer screening. And finally, Mike will provide a more detailed look at our financials and guidance for 2022. 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 by sharing an example of how our recently launched Shield laboratory developed test is positively impacting screening for the noncompliant population. Our Shield LDT test is off to a fantastic start and has vastly exceeded our expectations. With Shield, we have a unique opportunity to impact outcomes at both the practice and health system level. In one primary care practice, over 100 Shield tests were completed as of early October. These tests primarily address a noncompliant population who for one reason or another had not completed colorectal cancer screening via stool test or colonoscopy. From these tests, so far, five individuals have completed a colonoscopy, following a positive Shield result. Of these five, four individuals had polyps including adenomas, and one of the individuals with polyps has been referred for further evaluation for potential cancer diagnosis. We developed Shield with the intent to reduce cancer mortality by ensuring more individuals are screened. We are very proud to see that, only after a few short months, this is already becoming a reality. With time, we believe Shield will be a powerful tool for primary care practices and health systems to boost screening compliance in their communities. Now, turning to our performance on slide three. We ended the third quarter with record revenue of $117 million, up 24% over the prior year quarter. Within this, Precision Oncology was up 29% while development services and other revenue declined by 1%. Moving on to slide four, clinical test volume reached over 32,400 tests, up 42% compared to the prior year quarter. In line with recent quarters, growth was driven by an increase in the number of ordering oncologists and by an increase in the number of oncologists ordering multiple Guardant products including Reveal, Response, and TissueNext assays in addition to Guardant360. Importantly, we achieved this accelerated growth despite continuing challenges of staffing shortages and lingering access restrictions across a number of practices, the majority of which we had expected to resolve more quickly. Turning to MRD. Shortly after last quarter's earnings call, we launched Guardant Reveal for multi-cancer adding breast and lung cancers to colorectal cancer. Collectively, these three cancers affect six million people annually in the United States alone, but obtaining tissue in these settings can be challenging. This makes our tissue-free Reveal assay a crucial option and we are very pleased to be able to extend the benefits of our Reveal test to more patients. Following this expansion, we saw significant growth in the number of Reveal tests ordered. Finally, following the positive CMS reimbursement we spoke about last quarter, we are pleased to report that our Medicare reimbursement rate for Guardant Reveal for colorectal cancer has recently increased from approximately $3,600 to over $4,900. We also made great progress with the build-out of our Epic EMR integration capabilities and have the first group of practices expected to be onboarded in Q4. Turning to slide five on biopharma. Volume reached 6,750 samples, a record number, up 40% on a year-over-year basis. During Q3, we saw a rapid uptake of our recently launched smart liquid biopsy Guardant Infinity, which is available for research use by biopharma partners. Infinity accounted for more than 10% of our quarterly biopharma volume just months after launch. We are very pleased with this rapid uptake and believe we are just scratching the surface of Infinity's potential, which will be a major area of focus for us heading into 2023. Additionally, we received FDA approval for Guardant360 CDx as a companion diagnostic for HER2 in non-small cell lung cancer patients with activating HER2 mutations. This adds to our ever-growing list of FDA-approved companion diagnostic indications for Guardant360 CDx. Moving to slide six, I want to take a moment to share a bit more about why we are so excited about Infinity and the capabilities it brings to our customers. We often use the cellular phone analogy to try and put the significant step changes we are delivering into perspective. In 2014, we launched Guardant360 as the first comprehensive liquid biopsy enabling oncologists to genotype their patients' tumors with a simple blood draw rather than a tissue biopsy, a test that is increasingly part of today's standard of care. That was nearly 10 years ago. We are now entering a new age, the age of the epigenome. With our smart liquid biopsy platform, Guardant Infinity, we are shining a light on an area of human biology that has been largely dark and underexplored for a variety of technological reasons. Years of research pursuing early cancer detection have enabled us to develop a revolutionary new chemistry and powerful informatics pipeline that enables broad interrogation of the epigenome at a very low cost. Indeed, with Infinity, we have achieved a seemingly impossible product form factor with 100 times greater breadth than Guardant360 CDx and higher sensitivity at a reasonable cost. Furthering the analogy akin to the smartphone, our Infinity platform opens up countless new potential applications. Examples include predicting drug efficacy from PARP inhibitors and immunotherapies, assessing drug toxicity, and tracking tumor dynamics with greater sensitivity and breadth. The possibilities do not end there. We believe our epigenomic capabilities could lead to countless applications for liquid biopsy that may one day extend to indications even beyond oncology. We look forward to sharing additional details with you, as we continue to develop these next-generation capabilities. I will now turn the call over to AmirAli to provide an update on our screening program.

Thanks, Helmy. Starting on slide 7 with an update on ECLIPSE, since our last earnings call in early August we've made great progress on the ECLIPSE study. We have all been patiently waiting for the results of this study. And I'm pleased to report that we are very close to locking our study database with about 70 colorectal cancers in the next few days. This means we are now in the final phases and are on track for the study to read out during the fourth quarter. The remaining phase consists primarily of the final steps of QA and QC checks of the clinical and lab data set, un-blinding the database, and data analysis. Pending a successful readout, we will submit our final PMA module to the FDA which remains on target for Q4 submission. Moving to slide 8 and our progress with Shield, in May of this year we launched our Shield laboratory developed test with the ultimate goal of increasing overall compliance to colorectal cancer screening. In the United States, there are about 137 million people between the ages of 45 and 85 and about 120 million of these individuals are at average risk and eligible for colorectal cancer screening. The latest estimates show that only around 71 million people are currently screened for colorectal cancer. Of this screening group, colonoscopy is the main screening modality, and about 15 million individuals are being screened for colorectal cancer using stool tests. While by comparison, 49 million individuals are not getting screened. This unmet need in this segment alone translates to a potential annual opportunity of 16 million tests for Shield, assuming a three-year interval testing. Not only are we confident Shield can significantly increase screening in the unscreened individuals, but based on our early learnings from the market we believe Shield will make a significant impact across the entire eligible screening population. Turning to slide 9 and our learnings from Shield LDT, by the end of the third quarter we received more than 8,000 orders from over 600 accounts, far exceeding our expectations. After only five months on the market, the average depth of ordering for Shield LDT was over four tests per provider. This is much greater than the depth of ordering for Cologuard after many years of being on the market. We are excited by this uptake and believe the promise of blood screening for patients is becoming a reality. The Shield patient adherence continues to be more than 90%. As a reminder, we define patient adherence as the ratio of blood samples received to the total number of tests ordered. By comparison, one out of every three patients that received a Cologuard never completes their tests, even with significant resources spent on patient engagement and navigation programs. These early data point to the power of truly integrating colorectal cancer screening into a patient visit and the high unmet need that exists for a screening test that will be completed. Turning to Slide 10. We believe there are multiple factors that contribute to the adoption of blood-based colorectal cancer screening tests. First is compliance and the unmet need. As I mentioned earlier, 49 million eligible people are currently unscreened, and the overall compliance of colorectal cancer screening using available scopes and stool tests has flattened. A new modality of screening is needed to address this huge unmet need. For this unscreened population, the best test is the one that gets done by patients. Second is the performance level of the test, which impacts the physician adoption rate. The level of colorectal cancer sensitivity in the ECLIPSE trial readout is a key contributing factor. Third is patient access to the test. Once our Shield test is approved by the FDA, the existing Medicare and CD will open up access for millions of individuals and pathways for ACS and USPSTF guideline inclusions will lead to full access for individuals over time. Fourth is patient preference. We believe patient satisfaction and preference for blood tests over other modalities will act as a major catalyst for its adoption over time. And the final factor is the enhanced utility of blood tests. Over time blood tests will be upgraded to multi-cancer screening beyond colorectal cancer, and this utility boost will further drive adoption of blood-based tests in the longer-term. We have covered the unmet need, the impact of colorectal cancer screening, and guidelines on access in our recent earnings calls. I now want to spend a bit more time on the impact of patient preference. Moving to Slide 11. This table shows a readout from our survey of 559 individuals, comprised of people who are compliant to screening as well as those who were never screened. In this survey, we asked individuals to identify their previous screening modality and if a blood test were available, which modality they would choose next time. These results demonstrated a strong patient preference for blood-based tests. For individuals who were previously screened with a stool test, seven out of ten said no to stool test again and voiced their strong preference for blood over stool testing. For those who have never been screened, the preference for blood relative to stool was almost 5 to 1. Turning to Slide 12. Our experience with Shield LDT gives us confidence that the market opportunity for blood screening tests could be higher than our previous forecast. While the performance of the assay in terms of colorectal cancer sensitivity will form the starting point for physician adoption, the overall adoption of the colorectal cancer screening modality is driven by more than the specifications of the assay. Patient preference and physicians' ability to complete colorectal cancer screening during routine care is proving to be a very compelling value proposition for blood testing relative to other screening modalities. We believe the adoption of blood-based colorectal cancer screening will accelerate and deepen once the test utility goes beyond just colorectal cancer and becomes a single screening test for multiple cancers. The additional clinical utility benefit will further give competitive advantages to blood tests relative to a single cancer screening modality. In summary, we believe long-term adoption of Shield colorectal cancer screening will be boosted by patient preference and multi-cancer screening across the spectrum of assay performance. That said, performance will be a significant competitive differentiator once multiple blood tests come to market. I'm excited about the future of Shield and the potential impact for many millions of people. This test can reduce cancer mortality in a meaningful way. I'm looking forward to the ECLIPSE readout and continuing to build this business. 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 13. Total revenue for the third quarter of 2022 was $117.4 million, or 24% from $94.8 million in the prior year quarter. Total precision oncology testing revenue for the third quarter was $102.1 million, increasing 29% compared to $79.3 million in the prior year quarter. This increase was driven by year-over-year growth in both clinical and biopharma sample volumes as well as by improved reimbursement for new products, specifically TissueNext, which received Medicare coverage in early 2022 and Reveal, which received Meditech coverage for colorectal cancer midyear and recently received a rate increase from approximately $3,600 to just over $4,900. Precision oncology revenue from clinical tests was $77.8 million, up 27% from $61.3 million for the prior year quarter. Third quarter clinical test volume was 32,400, an increase of 42% from the same period of the prior year and an increase of approximately 3,100 from the previous quarter. Besides strong Guardant360, our new products Reveal, TissueNext and Response again contributed to the growth for the quarter. For the third quarter of 2022, the ASP for Guardant360 was in the range of $2,600 to $2,700, which is consistent with the last few quarters. The blended clinical ASP was in line with our expectation of approximately $2,400. As we have previously stated, the blended clinical ASP will continue to be influenced by both the volume mix of Guardant360 new products as well as the reimbursement received for new products. Precision oncology revenue from biopharma tests in the third quarter totaled $24.2 million, up 35% from $17.9 million for the prior year quarter. Biopharma volume was strong, with third quarter samples totaling 6,750, which was up 40% from the prior year quarter. Biopharma sample ASP in the third quarter was approximately $3,600, a slight decline from the prior year period in line with the prior quarter. Development services and other revenue in the third quarter totaled $15.4 million, down 1% from the prior year quarter. As we have previously noted, while we continue to see strong demand for our development services, we still expect that our 2022 development services and other revenue will continue to be lower than prior years, with several companion diagnostic projects we successfully completed in 2021, and new projects will take time to ramp up. Gross profit for the third quarter of 2022 was $76.9 million compared to a gross profit of $64.0 million in the same period of the prior year. Our gross margin percentage continues to be in line with our mid-60s target being 66% compared to 67% in the prior year quarter. Operating expenses for the third quarter of 2022 were $221.5 million, an increase of 29% compared to the $171.3 million in the third quarter of 2021. Net loss was $162.0 million or $1.58 per share for the third quarter of 2022 compared to $107.5 million or $1.06 per share in the third quarter of 2021. Moving on to non-GAAP financial measures on Slide 14. Non-GAAP operating expenses exclude stock-based compensation and related payroll tax payments, amortization of intangible assets, and contingent consideration. Non-GAAP operating expenses for the third quarter of 2022 were $200.5 million, a 48% increase from $135.1 million in the prior year quarter. This increase was driven by the investments made over the past 12 months across both our oncology and screening businesses, primarily in the commercial infrastructure, and the continued development of our product pipeline and clinical data. Throughout 2022, we have continued to invest in progressing our strong pipeline of oncology products, as well as in generating clinical data to support their reimbursement. The screening 2022 investment has been focused on the commercialization of our Shield LDT test, completing the data readout from ECLIPSE, the PMA submission for our colorectal cancer device, and the continued development of our multi-cancer screening test. Non-GAAP net loss was $120.8 million or $1.18 per share for the third quarter of 2022 compared to $70.5 million or $0.70 per share for the third quarter of 2021. Adjusted EBITDA was a loss of $112.8 million in the third quarter of 2022 compared to a $65.2 million loss in the third quarter of 2021. We define adjusted EBITDA as non-GAAP net loss adjusted for interest income tax depreciation, amortization, and other income and expense. Turning to the balance sheet. We ended the first quarter of 2022 with approximately $1.1 billion in cash, cash equivalents, and marketable debt securities. We continue to be in a fortunate position to have sufficient cash on our balance sheet to fund the business for the foreseeable future, and we will continue to actively manage our capital allocation with a goal to long-term profitability. Now, turning to our revenue outlook for the full year 2022 on Slide 15. We are revising our revenue guidance from the previous range of $460 million to $470 million to now be in the range of $440 million to $450 million. This revised guidance represents growth of approximately 18% to 20% compared to 2021. There are a few notable changes to our guidance since our Q2 earnings call in early August. Firstly, with regards to our clinical volume. While below our previous expectations, we were pleased with both the 42% year-over-year volume growth and the sequential volume growth we saw in the third quarter of 2022, which we view as a strong leading indicator of the trajectory of our business. We still expect to see sequential clinical sample growth in the fourth quarter. However, as Helmy noted, we continue to see challenges with practices still experiencing staffing shortages and lingering access restrictions, the majority of which we had expected to be resolved more quickly. In addition, at the start of the fourth quarter, we also saw an impact on our volumes due to the hurricane in Florida, which is a major region for our business. Given our year-to-date growth at the end of Q3 and the factors just mentioned, we now expect full-year clinical volume growth to be approximately 40%. Although we consider this to be very strong growth, it is lower than the 45% level that we previously guided. Secondly, reimbursement timing has affected our forecast. Although we received Medicare reimbursement for TissueNext and Reveal in 2022, our previous guidance had assumed Medicare reimbursement for Response and Guardant360 CDx reimbursement in Japan during 2022. We now assume reimbursement will come after the year-end. At the midpoint of the range, $445 million, our revised guidance assumes full-year biopharma volume growth of approximately 40% compared to 2021 and full-year development services and other revenue of approximately $55 million. Although we have a good line of sight to the end of the year for most of our business, there are still some potential swing items, which include the timing of receipt into our lab of contracted biopharma samples, which could impact our ability to process and recognize revenue by the end of the year and the timing of revenue recognition related to some of our companion diagnostics project milestones, which are dependent on our partners. While the reduction in our revenue expectation for the year is disappointing to us, we believe our core business is as strong as ever, demonstrated by the approximately 40% year-over-year volume growth of both our clinical and biopharma businesses despite the challenging backdrop throughout the year. Finally, note that our clinical volume does not include screening volume, and that while we are highly encouraged by the strong reception to the launch of our Shield LDT test, we are not expecting significant revenue contributions from it this year. Moving to slide 16. We are continuing to make great strides across our business, obtaining reimbursement for our new products, 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 up the call to questions.

Thank you. Our first question for today comes from Puneet Souda from SVB Securities. Puneet, your line is now open.

Hey, Helmy, AmirAli, thanks for taking the question. So first one is really on the timeline and learnings from the Shield launch. I mean, you mentioned a September, October timeline before, and that was already extended from the summer. So, I appreciate your locking in the database now with 70 CRCs, but what is the level of confidence you have at this point to have the data released by September, and this did not stretch into Q1? And then on the learning side from the 8,000 orders that you received, I mean it's great to see the 90% adherence rate. But just wondering what have you learned about the performance of the test in terms of sort of sensitivity specificity there in the real-world setting? I mean, I appreciate this is not an FDA registrational trial, but just wondering what learnings you have on the performance there? And I have a quick follow-up on the guidance.

Yes. Thank you, Puneet, for your question. Starting with the ECLIPSE trial readout, we expect it to be in Q4 as mentioned in the last earnings call. We are locking the database, so it will be a Q4 readout, and that will be soon. Regarding the Shield LDT and the 8000 samples we received, we are very pleased with the adoption level and the feedback from the marketplace. In terms of performance, it's challenging because we are not conducting a registry study to track patients, making it hard to assess the true performance of the test. Anecdotally, we are hearing positive stories, and we shared a few patient experiences in our prepared remarks. There are other positive cases we've heard from practices, but it's difficult to link those anecdotal stories to the performance of the test. Overall, based on the positivity rate we are observing with our device and the reports we are receiving, it aligns with our expectations for device performance. However, it's hard to connect this to colorectal cancer sensitivity since the prevalence of CRC is very low.

Okay. Got it. And then on the $20 million, I mean you're lowering your guide by $20 million at the midpoint. I mean that is still sizable. Helmy, can you elaborate a little bit on the staffing challenges and other things that you're seeing in the market? And why is this sort of unique to the clinical side? And then I think the question we didn't frequently get is on the competition side. Obviously, G360 has been a well-established product in the marketplace as FDF and then reimbursement too. So are you seeing any impact from the larger panels in the market? It's a bit surprising to see this lowering of the guidance? Thank you.

Thanks. Obviously, we set some really high expectations at the beginning of the year for 50% year-over-year volume growth, and we're hitting above 40%. So still fantastic growth but not what we expected at the beginning of the year. And that's largely just because we expected a snap back from some of the lingering effects of COVID in the second half of the year, and it just hasn't happened as fast as we expected. That being said, when we look at the underlying metrics of the business in terms of number of physicians that are ordering per quarter, depth of ordering, and our share in terms of liquid, even how we're doing on the MRD market. I mean, Reveal was a monster quarter for us in terms of the expansion in terms of breast and lung. We're very pleased, super pumped about where the business is going. And we're not even getting started in terms of what we're going to do with some of the technology in 2023. So we feel like we're very well poised in terms of this market and where we are. Obviously, we thought it would be even more explosive, but 40% year-over-year is still very, very strong growth, and we believe we're growing faster than the market. So we believe we're still taking share and we're a dominant force in the liquid biopsy field.

Okay. Thanks, guys. I'll hop back in the queue.

Thank you. Our next question comes from Jack Meehan of Nephron Research. Jack, you’re your line is now open.

Thank you. Good afternoon, guys. Wanted to start with a focus on Reveal. What was the catalyst for the price increase with Medicare? Were there any other changes in the coverage there? And similar, was there any Medicare reimbursement quarter or backpay that you’ve received yet?

Yes. So we had ongoing discussions with MolDX around pricing. We believe the pricing didn't quite reflect some of the value and some of the capabilities in the test, and they agreed with us and revised pricing. So it's the same indication, but just a much better price that we now have. And I'll turn it over to Mike for the second part.

Yes, Jack, on the Medicare reimbursement. Yes, for Reveal, for the eligible samples, we were able to book revenue this quarter. And actually, that reimbursement coverage was backdated to the start of the year. So, yes, this quarter includes that sort of catch-up on those samples year-to-date that have been eligible for reimbursement for Medicare.

Got it. And Mike, as a follow-up for you, Helmy and AmirAli kind of referenced, I think you did as well, the challenging environment. Can you just talk about how you're planning to manage costs as you go into 2023? And is there any color you can share around investment levels on sales and marketing and R&D? Just any color to think about cash burn would be really helpful.

Yes, we are managing our operating expenses very carefully, and despite the change in our revenue guidance, our approach to managing expenses in the third quarter and our plans for the fourth quarter will not significantly impact our bottom line. We are actively reviewing all our investments. As we move forward, especially concerning the screening business, we recognize the need to build our commercial infrastructure as we approach FDA approval. Therefore, we are being mindful of our increases in operating expenses as we reach key milestones, and we are closely monitoring and tightly managing these decisions.

Great. Thank you.

Thank you. Our next question comes from Matt Sykes of Goldman Sachs. Matt, your line is now open.

Hi. Good afternoon. Thanks for taking my questions. Maybe just on, Mike, your comments around the reimbursement delays impacting guidance in Japan and other places. Do you see that as just sort of a few months slippage? There's no other issues in there that would cause that to last longer? Is this something you expect in early 2023?

Yeah. That's right. We were hopeful for both Response and Guardant360 CDx in Japan that we'd get reimbursement well before the end of the year. But it looks like that's getting pushed back into 2023, but there are no fundamental issues. We're continuing to engage in dialogue with MolDX regarding response. And we know there's a lot of work happening in Japan on the reimbursement front. So both of them, we're hopeful will come relatively soon in 2023. So it's just a timing impact for us.

Great. Thanks for that. And then AmirAli just on slide 9, where you had the four tests per provider per month. You said it was above kind of your expectations for what it would be. What were your expectations? And what do you think that could potentially go? I know it's obviously very early, but in terms of what your longer-term expectations are on test per provider basis, what are you thinking?

In terms of the renewal, we renewed what the industry benchmark is in terms of the utility of tests like Cologuard. When you look at historical trends, even from launch, to my best knowledge, and assessment, almost from the beginning until now, many years after, the utilization of that test per prescriber per month has been less than one order a month. We knew that the unmet need here is very deep. But the industry benchmark is the industry benchmark and literally seeing, just even less than five months after being in the field, with a test that is a completely brand-new modality, we don't even have our ECLIPSE trial readout yet. But just right off the bat, we are seeing more than four per provider per month generates a lot of excitement for us. It’s really a confirmation of the reality that unmet need is big. And the patients that we are talking about are not the patients in the rural area that don't have access to anything; they are really the patients that doctors are seeing, and prescribers are ordering our tests, some of them are the same prescribers who are using other modalities. So we are very excited. But also, we don't want to get ahead of ourselves, and we have to monitor to see what happens here. It's very good.

Okay. Thanks.

Thank you. Our next question comes from Kyle Mikson from Canaccord. Kyle, your line is now open.

Hey. Thanks, guys, for the questions. Just thinking about the cost per Shield test, how do you get down to the $200 range over time? I know it's been touched on it before. I just want to revisit that given expense – question is on recently. So, if Guardant's clinical COGS per test are still currently around $1,000 per test, the question kind of remains like what gives you confidence there's a path there to get to that 50% margin perhaps $200 in COGS per test on that $500 ASP? And I think that you’ve said in the past that, I wouldn’t have allowed lower COGS cost you could get down to the $200 per test. I mean, $100 per test. They did lower down to a price per gig of $2 for 2023. How does that affect your thoughts on COGS and the margin profile will Shield over time?

Yeah. Sure. So maybe I start, and if Mike you have some additional comments, please fill in. So maybe starting just from the sequencing, because sequencing cost is a natural part of our material, but not a significant part of our COGS really. So we assume some sequencing cost reduction in our roadmap for the next three years, but not to the level of some of the new technologies or even something new promises by Illumina is actually Seriti kind of new assessment for us. So all that would be upside. Really, the things that we have to do are mainly around process engineering and additional automation to take labor out of our system to a large extent and amortize our fixed costs over a larger volume. Without going into a lot of details now, we kind of ran ECLIPSE samples and commercial samples effectively like we are running relatively at high throughput still, not at the 0.5 million sample kind of throughput. And our cost structure is not $200 yet, but it's pretty reasonable at the scale that we are in. So we just need to reach the higher volumes and improve some of our processes through the introduction of automation. I see this pathway for us that we can get to the $200 kind of COGS and gross margin of that 350%.

Yes. I mean, I think the only other thing I would reiterate, Kyle, is that you mentioned relative to Guardant360 COGS. And as AmirAli mentioned, even with just the ECLIPSE volume and what we've seen from the LDT launch, our COGS on yield are currently lower than the Guardant360 COGS. So, we've made really good progress in such a short time on the COGS on Shield.

Okay. That was great. Mike, I have a question for you about next year. Previously, analysts were predicting over 30% top-line growth for Guardant in 2023. Given the guidance reduction today and the lower run rate as we exit 2022, are you more comfortable with a lower growth rate for next year, perhaps in the 20% range? I'm asking because, theoretically, the comparison looks better for 2023. I'm curious about your thoughts now, considering these ongoing changes and the relatively new test.

Yes. We don't want to particularly give out 2023 guidance today. And as Helmy mentioned, we're feeling really strong on the fundamentals of the business as we sort of go out of 2022 and we've got 40% year-over-year volume growth in both clinical and biopharma. I think where we're trending towards this year on total revenue is around about 20% year-over-year. And obviously, we'll be starting at a bit of a lower base in Q4. So, we're probably at least comfortable with that going into 2023, but our plan obviously will be, as we usually do, giving 2023 full-year revenue guidance when we do our Q4 call in February next year.

Okay. Thanks, Mike.

Our next question comes from Mark Massaro from BTIG. Mark, your line is now open.

Hi, guys. Thanks for the questions. Maybe the first on Reveal CRC. Nice to see the reimbursement rate increase there to $4,900. Can you just confirm that you're still planning to obtain coverage in the surveillance setting? Helmy, I think you said it's for the same indication. And then, are you expecting to submit additional information to secure that?

Yes. We have a number of studies that we're compiling, and they're underway that would go into a subsequent submission to be able to secure that surveillance setting indication.

Okay. And my second question is about the ECLIPSE data, which we're all anticipating. I wanted to ask about the market sizing you've done. You mentioned 120 million average risk individuals, whereas earlier this year it was sized at 110 million. Is the increase due to the addition of the 85 cohort from 84? I don't think there's been a significant population increase in the U.S., so I'm trying to understand why the total addressable market seems to have grown since a few months ago.

Yes, this is AmirAli. As we continue to grow, we are refining our models with the latest information. One significant recent change is the introduction of screening recommendations for the younger age group of 45 to 49. This is a relatively new factor in our market sizing, based on guidance updates on what percentage of that specific age group would be eligible each year. I believe this is one of the main reasons for the increase in our estimate from 110 million to 120 million.

Okay. Thank you.

Thank you. Our next question comes from Tejas Savant from Morgan Stanley. Tejas, your line is now open.

Hi. This is Neel Ram for Tejas. So certainly, Reveal and one of the pushbacks seen for one of your peers. Do you expect any shift at CMS in regards to evidence requirements for PMA? And has this driven any changes in your approach as you look to expand coverage for Series C and receive coverage for breast and lung down the road?

No. I think we have a better understanding, obviously with all the dialogue that we've had. The bottom line is you need clinical studies, clinical validity studies showing the performance of the test published in peer-reviewed journals. And so that's the bar for really everyone in this space, and it's something that we are committed to and we have underway in terms of the studies for the various indications that we're pursuing.

Got it. And you mentioned the headwinds on the clinical side. But in biopharma, are you seeing any delays to clinical trial enrollment or sample treatments given some of the recent ones peers? And there's also been some noise around budgetary concerns for pharma and biotech. So that dynamic that you're seeing based on your recent interactions?

Yeah. I think we've had very strong growth on the biopharma side. But that being said, there have been slowdowns in some of the prospective trial enrollment. That's something that we continue to monitor. They haven't progressed as fast as I think some of our pharma partners would have liked. And I think it's still TBD in terms of some of the budgetary concerns related to the Inflation Reduction Act and so on.

Great. And then one quick one for me. Would you be able to quantify the catch-up payment you saw for Reveal in the quarter?

No, we're not breaking that out. I mean, I think – in the past we've talked about not really breaking out our volumes between REVEAL, 360, Tissue, and Response. And so, yes, we're not going to sort of provide the detail on that catch-up payment.

Got it. Appreciate it. Thanks.

Thank you. Our next question comes from Amy Qian from JPMorgan. Amy, your line is now open.

Hi. Thank you for taking my question. I have two questions on Shield. So first, I appreciate you guys laid out the commercial plan. So I was wondering how would you address the compliant and non-compliant population differently to achieve that goal? And is your current salesforce enough to support the revenue ramp in 2024 once the ACX guideline is in place?

Yes. Right now for the Shield LDT, the main target for us is just because it's launched and it's awaiting FDA approval. We're positioning and marketing that for unscreened patient populations versus really pushing hard on changing the modality of the screening. The depth of ordering that I mentioned is really while we are just promoting for unscreened patient populations. Regarding the size of the sales force, our commercial team is about 100 people now, and we will expand in a milestone-based way. Effectively as we build ASP, we are going to increase our investment in commercialization. So as we get to FDA approval and derisking, we may increase the size of that channel. And as we effectively build ASP on the top line for that business, we would increase our investment in commercialization of the test.

Great. Thank you. So my third question – second question is on the ECLIPSE trial. So if you can share what does the staging mix look like so far? And when will we have the final information on the staging mix? Because the previous study showed like 2% to 3% or lower single-digit difference between the early Stage 1/2 sensitivity versus overall. Do you expect to see similar patterns for the trial? Thank you.

Yes, very good question. Our main focus, and our trial operation focus, was to get to this final analysis of our top line information to see really what's the sensitivity specificity of colorectal cancer and advanced adenomas in the study. So we expect that top line data to include those information. For a fraction of colorectal cancers, actually the patients are staged but it's kind of a lagging information. But we are going to have this information updated by the time that we submit our PMA to the FDA since we need to include that information in our PMA package. So, but in order to have the whole staging for everybody could take some time.

All right. Thank you.

Yes.

Thank you. Our next question comes from Max Masucci from Cowen. Max, your line is now open.

Thanks for taking the questions. So first one, the advanced adenoma detection sensitivity range in the May data release was decently widening 11% to 32% based on 51 advanced adenoma cases, and you're able to incorporate the components into the trial assay before locking it down. So, number one it would be great to hear just generally how many total colorectal cancer cases you were able to train that final optimized assay on before locking it down. And then number two that there can be heterogeneity in size differences for advanced adenomas. So, if you could offer any detail around the profile of the types of advanced adenoma cases that you've trained the assay on, and any steps you've taken to better address the diversity that does exist even in the advanced adenoma population?

Yes. Regarding training, our CRC models are now fairly outdated. We included thousands of cases, over 5,000 or 6,000 on the healthy normal side. For the CRC and DC side, we included more than 2,500 cases across various stages, focusing heavily on Stage 1 and Stage 2. In terms of advanced adenomas, we faced limitations in obtaining advanced adenoma cases for screening patient populations before they are removed during colonoscopy, resulting in just a few hundred cases in our training set and only 50 cases for our LDT validation. The performance in LDT validation was around 20%. ECLIPSE will provide a more accurate characterization, with a high percentage of advanced adenoma cases expected based on real-world data. However, I emphasize that the most crucial metric is colorectal cancer sensitivity, which I will focus on more during the ECLIPSE trial readout, reflecting feedback from physicians and various surveys. That will be the key performance indicator when we report the findings of ECLIPSE.

Yes. Makes sense. Final one for me. I think there was some Reveal data presented at an international conference late last month, and we've received some inbound on the data. And so I'm asking questions about the capital survival curve that was presented. So, I just wanted to ask an open-ended question and just get your perspective and sort of key observations from that recent data readout so we can round out our perspective.

Which data readout are you referring to? I missed the first one.

In late October at the Japan Society of Clinical Oncology.

Yes. I don't know exactly which one that was, but.

The COSMOS study.

Yes, COSMOS. We've been conducting that study for some time in CRC, and we're quite pleased with the output and the data. There seemed to be some confusion regarding the numbers in the abstracts compared to what was presented, but it aligns closely with the data we've seen before. One of the challenges with new data sets is the time it takes to mature, especially in detecting recurrence in a clinical setting. However, it is consistent with the data we had observed previously.

Great. Thank you, everybody for giving some additional perspective. Thanks for taking my questions.

Thank you. Our next question comes from Andrew Brackmann of William Blair. Andrew, your line is now open.

Good afternoon. Thank you for taking my questions. First, regarding ongoing access restrictions, last quarter you indicated it was about 60% of pre-pandemic levels. Is that still the case today? Do you see this as the new normal? I'm interested in your thoughts on what might drive improvements moving forward.

Yeah. That's part of it. But I think another aspect of it are the staffing shortages that we're seeing, the whole sort of travel nurse kind of issue, and difficulty in terms of staffing some of these hospitals and practices. And that's just leading to a cap on growth rate and acceleration that we can see in the near term. But we know that these issues are going to resolve eventually. And so we see them as very much kind of short-term issues and not a reflection on any intrinsic element of our business. In fact, as I mentioned before, our business is really firing on all cylinders from the number of physicians that are engaged, the number of physicians that are ordering, the depth of ordering. So we're very pleased in terms of the progression of the underlying metrics. But we see this as resolving eventually. And we do think that that sort of 60%, 70% access will probably be there for some time, but we think the staffing shortages should certainly resolve.

Okay. And one on the our U.S. opportunities, can you just talk about how you're thinking about the incremental revenues that those can drive, between Japan CDx reimbursement coming soon? You bought out the rest of the immune JV partnership lab in Spain and one coming in the U.K. I mean, is it right to think about all these opportunities sort of summing as meaningful incremental revenues here in the short-term?

Yeah, maybe let Mike talk about the specifics, but I'll just give you a kind of overview of how excited we are about the Japan opportunity. I mean, it's a country that we've really built some very deep partnerships with and hundreds of practices over the last now five years. We have a lab that's open there. We're one of the few international companies that have a physical laboratory presence in the NGS space and comprehensive genomic profiling in Japan. And we're really hoping to get reimbursement very soon there for our regulatory approved Guardant360 test. So obviously, that has been delayed from where we thought it would initially happen. One of the challenges in Japan is that you can't actually sell in the interim period between regulatory approval and reimbursement. And so we're sort of in this limbo there. But once again, once we get reimbursement that's a market that's about 40% of larger the U.S. population with reimbursement rates that are as good and better in a single-payer system. So it's a fantastic opportunity. We obviously just announced the partnership in China with Adicon; it’s a very big opportunity as well. And then, we're also making good progress in Europe, as you mentioned. So yes, we think this will increasingly be larger percentages of our revenue.

Yes, maybe to add. Obviously, ex-US revenue is below 10% of our total revenue at the moment. So, it's relatively small, but as we mention the opportunities ahead of us, we'll start to see the Japan revenue come through next year. In China, that will start to add to our biopharma revenue line. And then we've got the labs coming online in Europe and starting to generate revenue. So, without breaking out the specifics, we feel excited that revenue can start to contribute next year.

Thank you. Our next question comes from Patrick Donnelly of Citi. Patrick, your line is now open.

Hey guys. Thank you for taking the questions. A lot has been covered. Maybe just a quick follow-up for you Helmy, just on the staffing shortages. It seems like you're pretty confident those will be relatively near term. Did you see improvement kind of throughout the quarter even into October? Just wondering, in terms of kind of that volume progression trying to think through the trajectory as we work our way towards '23, if that's easing at all or kind of still is pretty heavy, and you're just kind of looking forward and assuming it eases as we get into '23? Thanks.

Yes, we definitely saw continued improvement. That's why despite our current position and some of the guidance, we are very pleased with the underlying metrics. We anticipated a much quicker recovery and resolution of some lingering effects. However, we continue to see strong growth across nearly all areas of our business, particularly in our core business, Reveal, and our Tissue products.

Thank you. Our final question for today comes from Derik De Bruin from Bank of America. Derik, your line is now open.

Hey everyone, this is someone filling in for Derik. I appreciate the question. I just have a quick one. I wanted to start by addressing the delays. Another competitor mentioned delays in pharma samples and trials. Can you provide some insight into how significant the impact was during the quarter and how trends have been in the fourth quarter?

Yes. On the biopharma, I don't know if we saw any specific delays to samples in the quarter. And again, we reported really strong year-over-year growth on biopharma samples. I flagged in the prepared remarks that one of the swing items is going to be the biopharma samples that we get in by the year-end, and we need to get those in time to process them and recognize the revenue. I think some of those delays we're anticipating. And so we're looking at that as a swing item in the sort of $2 million to $3 million level. But if the samples don't come in by the end of the year, we're expecting them a little bit later into 2023. So, for us, yes, it's just the timing rather than a reduction in overall volume on the biopharma business.

Got it. Got it. Thank you.

Thank you. This concludes the conference call for today. You may now disconnect your lines.