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  • Writer's pictureAbacus Research

Guardant Health: 100% upside ($109)

Why is GH worth $200?

Our upside was $200 one year ago, little has happened to change that opinion. On all fronts GH is closer to the goals than it was a year ago. The biggest negative change has been a slightly longer delay in volume growth due to Covid.

  • We estimate the core business, i.e. products that are on the market today are worth $60-$70. Probably closer to $70 in our eyes given current discount rates.

Other options on using the technology are therefore valued at ~$4bn.

  • They are 'residual disease screening' and cancer screening.

We view these as attractive options given the huge markets, unmet need, potential savings to the healthcare system and probable data/ platform advantage that Guardant has for going after these markets.

  • The next 6 months will be important for data and execution and could see the value of those options expand significantly.

    • These are the catalysts coming: cyclical bounce in test volume on easy comps.

    • Medicare reimbursement for Guardant Reveal, a product that is already on the market, with a large TAM.

    • Eclipse study results in early 2022.

Remind me what Guardant does?

Guardant Health sells liquid biopsy tests at an ~70% gross margin, which are seeing rapid adoption. GH plays ‘pan cancer,’ relying on the growth in genetic testing of cancers as gene-based cancer drugs proliferate.

  • Guardant’s technology is a ‘one test for everything solution’ with two main commercial products

    • Guardant360, which tests for >70 genes relevant to solid tumours

    • Guardant OMNI a CGP tool to help accelerate clinical development.

  • There is a quiet ‘data revolution’ happening in cancer treatment. This has been enabled by genotyping. There are 700+ genes being researched across cancers, these genes are then matched with targeted therapies which have better treatment outcomes. Almost 40% of new cancer drugs coming into the market are for targeted gene therapies. This will require companion diagnostics or, a broad test such as Guardant 360.

Link to research we wrote ~1yr ago which goes into much more detail.

Something we have learned:

TAM assumptions for CGP (late stage cancer, G360 test) are based on two tests per patient. As in all things data related, once people see what data is possible they want more. Guardant has mentioned that the frequency of CGP tests, which are used to influence therapy selection, is increasing. It may not be 2 per patient, but 4-5 long term. NB: we would caution ourselves on getting too excited. Yes it is possible in Lung and other cancers with multiple treatment options, but is it realistic to expect community oncologists to get to this level?

Our assumed recovery in 2021 from COVID pressure in 2020 has not played out as we anticipated, it has been delayed. Q2 21 was the first quarter where normal growth began to assert itself. 2yr stacked growth of 50% on volume, and ~60% revenue growth.

In terms of the next 12 months revenues:

  • For the core G360 business, late 2021 / 2022 should see continued acceleration in growth, with easy comps until Q1 2022.

  • It is just about driving adoption within the oncology community. GH needs to execute, plus a return to normal for pharma trials would be a benefit.

The next 12-24 months will be about 'screening'

The colorectal cancer (CRC) market for testing and screening is huge. This is where the next few years will be focused.

  • So far, all the data on colorectal has been excellent, suggesting that whatever market GH goes after, they have a very good change of being the most accurate test.

Near term, screening cancer survivors:

  • Guardant Reveal is the first liquid biopsy test for the detection of residual disease and recurrence monitoring of colon cancer (CRC).

  • Commercially launched in February 2021. Very early, but clearly generating a positive response and early traction. It is a much better product than the current standard of care, the CEA test.

One can argue that adoption could be very quick as there are no workflow changes to what is currently used for ordering the CEA test, Guardant Reveal is simply faster and more accurate.

  • Reveal can detect CRC recurrence in 7 days, vs. > 1month with current standard-of-care methods such as tissue samples and carcinoembryonic antigen (CEA) tests.

  • The Guardant test has higher sensitivity (91%) vs CEA ~68%.

Longer term, Guardant estimates a TAM of $15 billion in terms of minimal residual disease (MRD) screening.

  • This assumes 15m cancer survivors at about $1,000 a year for the U.S market. It could be higher because the frequency of test assumption (1) in the model may be conservative.

  • Then there is international, which assumedly aprox. doubles the market. (NB, there are about 18.4m cancer survivors in the U.S. today)

  • We think it is a positive indication that Guardant has recently launched a broader study (ORACLE) for Reveal for other cancers such as breast cancer, bladder cancer and lung cancer.

Pricing: GH is likely to announce status on medicare reimbursement in next couple of months. It may be higher than $1000 initially.

  • For patients without insurance, the cash rate for Guardant Reveal is $3,500.

  • Y/e 2021: expected Medicare reimbursement approval. Leading to significant revenues from 2022.

Cancer screening data in early 2022

The most important near-term data, in our eyes, will be results from the Eclipse study. Enrolment finishes in November 2021, and the results should be ~3-4months later, i.e. at the end of Q1 2022.

  • Eclipse is a CRC screening study. Full implementation of a national CRC screening program would require nearly 60 million tests annually by 2040. (see p41-43)

  • 13k patient study.

  • Data so far on sensitivity (94%) and specificity (91%) is really good. Although it is on a small sample size, so it may not be quite as good on a wider population.

When screening products ramp, they can ramp very fast. EXAS is a good example in CRC. ~4 years to hit $1bn in revenues. The market is huge, and EXAS has a less differentiated product than GH.

  • Screening will start with CRC and expand to other cancer types

Then there is Grail, which was bought by ILMN for ~$8bn. General cancer screening is a new and potentially huge market.

  • TAM of $20+bn globally easily.

  • Medical costs generally escalate for late stage cancers, hence it will be cheaper and more effective to treat early stage cancers resulting in enormous savings to the health care system. Outcomes are generally worse with late stage cancer too, but it does depend on each cancer type.

The next few years could see a huge accretion of value if GH proves its relevance and position within the screening market. $8-10bn of incremental value is not crazy in our view.

Near-term risk: Execution

If we were going to worry, this is the area we would focus on.

GH founders, and indeed the early development of the company was centred on differentiated science. They clearly have a lead in liquid biopsy and the data needed to make it effective.

A key strength of GH is that both founders excel in science and scientific research. Commercialisation is more of an open question.

  • G360 execution has been pretty good so far, however it is still within the early adopter portion of the market.

  • The NEO debacle (a reason for the stock decline), shows that GH leaders are struggling a little on commercialisation questions in our opinion. Buying a distribution channel vs building it organically.

Given the new screening products that are going to hit the market in 2022 GH has changed leadership roles and implemented a co-CEO structure:

  • Oncology to be led by Helmy Eltoukhy

  • Screening, to be led by AmirAli Talasaz

Previously Eltoukhy was CEO, and Talasaz, President.

some comfort?

  • If GH cannot execute, it is too attractive an asset for large Pharma, especially someone like Roche to pass up. M&A has been around 15x sales for smaller companies, which provides support for GH if they fail to execute – someone else will.

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