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Investment Thesis
A bioinformatics pioneer and industry front-runner, Guardant Health (NASDAQ:GH) specialize in cancer diagnoses and genetic analysis. Headquartered in Silicon Valley, the company’s mission is to help cancer patients access their genetic data and use it to fight their disease. Its product suite utilizes a Cell-Free DNA “ctDNA,” including Circulating-Tumor DNA “ctDNA” —the cancer genome found in the blood— to deliver oncology testing services to patients and physicians.
Since its commercial launch in 2016, GH expanded its revenue from $25 million to more than $400 million as of June 2022 “TTM.” The FDA recently expanded the label of its Guardant360 product suite, providing renewed revenue tailwinds.
However, as will be shown below in further detail, one must be wary not to overlook commercialization risks for its approved products and regulatory risks for its pipeline. The following paragraphs discuss the company’s products and market position and explain why they’re not perfect, but just the same, highlighting the elements of our modestly-bullish case.
Revenue Trends
Colorectal Cancer Screening
Even before the most recent data in May 2022, it was clear that GH’s Guardant SHIELD – the company’s colorectal cancer “CRC” screening product – was inferior to currently recommended screening methods. GH has recently revealed more information on its Eclipse clinical trial, showing lower sensitivity than previously estimated in earlier releases, bringing expected accuracy closer to pundits’ estimates.
We know that blood testing will be less accurate than Cologuard® and certainly less accurate than colonoscopy – Kevin Conroy, April 2022
Earlier attempts to commercialize CRC blood tests have been disappointing, including Epigenomics’ (OTCQX:EPGNF) Epi ProColon®, which has a sensitivity of around 70% compared to the current standard of care, currently standing in the ballpark of 90%. Six years after its introduction, Epi ProColon® remains excluded from CDC CRC screening recommendations and ignored by Key Opinion Leaders “KOL.”
We suggest that the Septin9 serum assay (Epigenomics, Seattle, Wash) not be used for screening – U.S. Multisociety Task Force on Colorectal Cancer.
One would ask, what are GH’s Guardant SHIELD chances? Well, we’ll have to wait and see. The latest data show a sensitivity of 90% for stage I-III CRC and 20% for adenomas (pre-cancer polyps), the latter comprising half of that of Cologuard’s®.
| Test | Company | Type | Overall Sensitivity | Adenomas |
| Cologuard® | (EXAS) | Stool DNA | 92% | 42% |
| Guardant SHIELD | (GH) | Blood DNA | 90%* | 20% |
| FIT | – | Stool DNA | 72% | 6% to 56% |
| Colonoscopy | – | Surgery | 95% | 75% to 93% |
| Epi ProColon® | (OTCQX:EPGNF) | Blood DNA | 68% | 11% |
*Based on the most recent results
I expect Guardant SHIELD to earn someplace in the market, perhaps better than Epi ProColon®, but I don’t believe it will shake the CRC screening industry as many suggest. The FDA is not in the habit of introducing screening devices inferior to current standards. Nonetheless, a middle ground can be reached, incorporating Guardant SHIELD’s advantage as a non-invasive blood test with insufficient accuracy, perhaps by maintaining its limited label as a second-line screening test for patients who refuse the current recommended standard of care.
Moreover, even if the FDA expanded the test’s label (currently limited as a second-line test, as mentioned above), Guardant SHIELD will need to find a way to KOL’s hearts and minds, which is another issue. Remember, Epi ProColon® is an FDA-approved test, yet, most medical societies recommend against its use.
Finally, commercial success is another issue even if Guardant SHIELD gained acceptance from US medical societies. FIT is currently the most used CRC screening test for two reasons, 1) it is a non-invasive test 2) it costs $30. EXAS Cologuard® sells for $500 – $600 (depending on the payer – public v. private), and Epi ProColon® sells for $192. Thus, given Guardant SHIELD’s accuracy, I expect it to be priced between $192 and $550 to compete in the market.
Minimal Residual Disease
One application of ctDNA testing is measuring a patient’s response to treatment. Cancer patients undergoing therapy should see their ctDNA levels decline. If that is the case, then the treatment works, and vice versa. When ctDNA testing is used for this purpose, it is called Minimal Residual Disease “MRD” assessment. GH introduced its MRD test, Guardant Reveal, on February 2021, initially for CRC, before adding Breast and Lung Cancers last August. The company received Medicare coverage for the test in the same month, but only for CRC stage II and II. Still, this recent development bodes well for revenue growth in the coming quarters.
After the FDA approved Guardant Reveal for CRC in February 2021, it took Medicare another 18 months to begin paying for the test. Assuming the public insurer takes the same amount of time to cover the two recently approved incidents (Guardant Reveal for Lung and Breast cancers), one should expect Medicare coverage in April 2024.
Exact Sciences (EXAS) offers a competing product, Oncotype Dx, for two indications targeted by Guardant Reveal; CRC and breast cancer (but not lung cancer) and is priced at $3200, slightly below Guardant Reveal’s $3500 price tag. Natera (NTRA) has also been selling Signatera®, an MRD liquid biopsy test, since at least 2017, giving it a head start in commercialization. Signatera® covers all indications covered by Guardant Reveal, plus Bladder Cancer. Considering these competitive dynamics, I believe one should be conservative when assessing revenue growth.
One example of the intense competition is the recent lawsuit filed by GH against NTRA for allegedly conveying that Guardant Reveal is less accurate than Signatera®. This is not the first time NTRA has been accused of false advertising. Earlier this year, a jury found NTRA guilty of a similar charge and ordered it to pay $45 million to CareDx (CDNA).
Intellectual Property
ctDNA has been known to be present in the blood plasma of cancer patients for some time, but only recently have researchers been able to effectively use it to diagnose cancer and monitor treatment response and recurrence. The introduction of Next Generation Sequencing “NGS,” and Comprehensive Genome Profiling “CGP” by Illumina (ILMN) opened the door for the commercialization of ctDNA decades after its discovery by reducing sequencing price while increasing accuracy. Thus, I don’t believe that any of the numerous gene testing labs have a foundational patent on ctDNA as a medical test. The industry’s proliferation in recent years was merely a suited timing to capitalize on the growing interest in preventive care and the falling cost of sequencing.
Nonetheless, from my understanding, industry participants compete in different avenues, including bioinformatics and sample preparation methods, both critical factors impacting test accuracy. These methods are often a source of patent disputes. For example, Ravgen recently won a $270 million patent verdict against Laboratory Corp. of America (LH) for infringing a sample-prep patent method. Quest (DGX), NTRA, Illumina, and Roche (OTCQX:RHHBY) are also facing Ravgen in court for the same dispute. Invitae (NVTA) and NTRA are also disputing a sequence assembly technique that, from my understanding, enhances DNA sequencing results via bioinformatics techniques.
From what I’ve seen, Guardant’s patent conflicts have been less in scale and number of court hearings (as opposed to outside-court settlements) than those of its competitors. Earlier this year, it secured a $25 million one-time payment and single-digit royalties from Foundation Medicine, and in 2020, Personal Genome Diagnostics also settled with the company for a separate patent dispute for an undisclosed amount.
TwinStrand Bioscience, a struggling biotech business that just laid off half of its workforce, has also filed a patent lawsuit, which is currently ongoing. As far as I can tell, the dispute revolves around sample prep methods.
GH’s two CEOs worked for ILMN for 3.5 years (2008-2012) and are now accused of stealing trade secrets from the company, which filed a lawsuit against GH earlier in March, claiming ownership of certain of its patents. One should note that GH’s co-CEOs are industry pioneers with multiple patents and awards, including Times Magazine 2018 Most Influential People in Healthcare and Fortune’s 40 under 40. They built two separate biotechs that were acquired by ILMN in 2008-2009, where they both met.
In any case, as one can see from the examples above, none of the disputes are foundational, and I believe, in the worst-case scenario, that GH can develop workarounds for many of the non-core techniques of DNA testing currently under dispute.
Summary
Guardant appears well-positioned to gain some market share thanks to its access to a large pool of capital and strong expertise in developing and commercializing diagnostic assays. However, the company is vulnerable to competition from companies like ILMN, EXAS, NTRA, and many others, with a strong market customer base and access to a strong pipeline of new products and diagnostic tests. Nonetheless, GH’s products are FDA-approved, unlike many of its peers, who are exploiting the 1988 CLIA waiver on Laboratory Developed Tests “LDT.” Now that the FDA is preparing to extend its regulatory arm over the market (as discussed in previous articles), shifting your industry exposure to companies with a more favorable regulatory position might be a good idea.
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