Guardant Health Stock: The Storm Before the Storm
Given today’s investor has such high expectations of growth it seems prudent to wait until after an earnings announcement before purchasing a stock. Likewise, checking in with a company right before earnings allows us to take an inventory of what’s happening prior to all the price action noise that typically takes place around earnings announcements. Look no further than this gem of wisdom from Zacks Equity Research regarding Guardant’s (GH) earnings release tomorrow:
The stock might move higher if these key numbers top expectations in the upcoming earnings report, which is expected to be released on May 5. On the other hand, if they miss, the stock may move lower.Zacks Equity Research
“The stock could fall, or it could rise” advice is the sort of value provided by pundits who focus on short-term price movements as opposed to the overall health of a company. Given Guardant is having an earnings call tomorrow (May 5th) after market close, and the stock price fell 12% yesterday (May 3rd), our vision is already being clouded and the news hasn’t even broken yet. Since it’s been a while since we wrote about this Liquid Biopsy Stock That’s Going Places, we’re going to focus on how things went for the company in 2021 by perusing their latest 10-K filing.
Checking in With Guardant Health Stock
In evaluating the progress made by any disruptive tech company, the first thing we look for is revenue growth as a proxy for market share captured. At the same time, we need to be aware of firms that spend $1.5 on ads for $1 in revenues. Guardant has managed to show strong yearly revenue growth at the cost of some staggering losses. That’s shown below in the chart on the left (annual revenues and losses) while the chart on the right (quarterly revenues and losses) shows they’re reigning in costs a bit.
That revenue growth comes from selling the market-leading comprehensive liquid biopsy test based on the number of tests ordered. Guardant360 CDx is a 55 gene test approved by the FDA to provide tumor mutation profiling for cancer patients with any solid tumor. It’s hardly the only test Guardant Health makes, but it’s their bread and butter today with the number of tests sold increasing over time (the blip in biopharmaceutical test sales is because of the Rona).
We’re only assuming the above test numbers are mostly the Guardant360 CDx test because the company doesn’t tell us otherwise. Given a potential test population of 700,000 patients in the United States alone, the company has only begun to realize the potential opportunity at hand with an implied market penetration of around 12.5%. Using the Medicare reimbursement rate of $5,000 a test, back of the napkin math tells us there’s a good $3.5 billion in revenues to be realized in ‘Murica (less than 6% of Guardant’s 2021 revenues were from outside the U.S.), though the company claim it’s a $6 billion opportunity. That estimate was taken from an article by Evaluate published last year on the topic which included the excellent table seen below which shows the evolution of Guardant’s test offering which moves from testing known cancer patients (Guardant360 CDx) to testing healthy people to see if they have cancer (Lunar-2).
In contrast to the aforementioned drivel published by Zacks Equity Research is an exceptionally useful article by Bill Alpert of Barrons who talks about how Guardant launched its first blood-based screening test for colon cancer this week – Shield (previously referred to as LUNAR-2) – which will compete with Exact Sciences, another firm we’ve talked about in the past, along with Illumina’s Grail.
Grail’s Galleri has a remarkably low 0.5% rate of false positives—a feature that Illumina argues is essential to the wide acceptance of a cancer screen that it hopes will be used by millions of generally healthy people. Guardant’s Shield, by comparison, has an 8% rate of false positives.Credit: Bill Alpert of Barron’s
Having 8% of your patients temporarily freak out over a false positive can’t be a good thing, though that’s better than a false negative (Guardant’s shield correctly identified cancer 90% of the time). Speaking of Grail, we’re still miffed at why Illumina thought it was a good idea to steamroll regulators and move forward with their acquisition of Grail which is said to contribute $70 – $90 million towards 2022 revenues.
Our understanding is that this acquisition could still be unwound, and who knows how investors will react to that. Shares could go up or go down, it’s just hard to say. At a minimum, Illumina has sufficiently pissed off European regulators such that the door is wide open for competitors like Guardant to expand across the pond.
Regardless of which test pundits predict will come out ahead, the life sciences community will vote with their wallets. It would be exceptionally useful for Guardant to begin breaking out test sales by type so we can see how these new offerings are being received by those who prescribe them. For example, the CEO of Guardant told Elevate that Guardant Response would be priced similar to Guardant 360 CDx and would “boost” the aforementioned $6 billion TAM, but they’re “not providing a forecast at this time.” Fair enough, but investors need to see that all those dollars spent on R&D and marketing are showing a return that allows the company to service the debt used to fund all that spend, among other things.
Guardant’s Burn Rate and Debt
Since Guardant stock may go up or down at any time, you’re better off using dollar-cost-averaging to accumulate a position over time. As the stock flirts with 52-week lows, it’s a great time to buy a quality company at a discount. But with easy capital drying up and growth falling out of favor, we also need to start considering burn rate in addition to revenue growth. As of December 31, 2021, Guardant had cash, cash equivalents, and marketable securities of approximately $1.6 billion. Assuming a burn rate of $100 million per quarter, they can last four years with current cash before having to raise more money. That’s about when their 2027 convertible notes of $1.13 billion will come due as well.
Guardant’s 2027 notes could dilute current shareholders if they’re converted into shares at a strike price of $182.60 a share. That strike price used to be $139.82, but for whatever reason Guardant hedged that at a cost of $90 million so that the new strike price is $182.60. While shares are nowhere close to either strike price, that debt won’t magically disappear. Even if shareholders don’t get diluted, Guardant will either need to fork over $1.13 billion in 2027 or refinance that obligation. If that hedge ends up making sense, then shareholders should be pretty stoked about the outcome, regardless of whether dilution happens or not.
The best thing that can happen is for shares of Guardant to absolutely crater when earnings come out in the next 36 hours. That way, investors can buy shares of a quality company even cheaper (provided no systemic problems are revealed, of course). Then, all the pundits can talk about proceeding with cautious optimism because shares could go up over time. Or they could go down, it’s just hard to say. If we decide to add some shares of Guardant at any time, Nanalyze Premium subscribers will be the first to know.
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