Guardant Health (GH) is the leader in next-gen oncology diagnostics

Guardant Health (GH) has been on our radar for over 1.5 years since its IPO in October 2018. GH IPO'd around $29 per share and peaked at $103 per share in August 2019, increasing by 255% in less than one year. Right now, GH is $60 per share, falling within our buy range.

Here is why we believe GH is a buy:

  1. Liquid biopsy is the future for cancer diagnosis and GH is one of the main players in liquid biopsy. During my time at ClearView, a top tier life sciences consulting firm, I completed a project on liquid biopsy and discovered the huge potential for liquid biopsy to replace tissue biopsies for diagnosis in the future. Physicians currently use liquid biopsy for patients that have inaccessible tumors or for high-risk patients (e.g., old age). However, as technology advances, liquid biopsies may be used for diagnosis of all patients who may have cancer. The capability to sequence for cancer mutations with a simple blood draw allows for physicians to leverage precision therapies to maximize the impact of toxic cancer therapies. During my interviews with physicians, GH was used by the majority of physicians. The only other main competitor was Foundation Medicine, which is no longer a public company.

  2. GH is positioning itself for a future paradigm shift in cancer towards recurrence and early detection. Currently, physicians do not conduct regular tests to monitor for recurring tumors post-resection or early detection for high-risk patients (e.g., family history of cancer). However, this will likely change in the future as we gear up for novel cancer prevention. GH currently provides its LUNAR-1 and LUNAR-2 tests for recurrence/residual disease detection and early detection, respectively. GH is well positioned to dominate this market once the treatment paradigm for cancer shifts for focusing on treatment to focusing on prevention.

  3. GH has positioned itself with several large pharma companies as a companion diagnostic, creating exclusivity for its test. GH entered into a strategic collaboration with Amgen to develop Guardant360 assay as a blood-based companion diagnostic test for AMG 510, an investigational oral therapy that inhibits KRAS G12C mutant protein. This means that any patient receiving AMG 510 must be tested with GH. Companion diagnostic partnerships are a great way of providing exclusivity to diagnostic tests.

  4. While GH is not cash flow positive, it has experienced 100% YOY revenue growth, while only 50% expense growth. GH has very strong financials, with revenue growth significantly outpacing expense growth. One key reason why GH has been successful at grower revenue faster than expenses is because it's been able to reduce the cost of completing each diagnostic cost. This drives its skyrocketing valuation and the recent drop in stock price due to COVID-19 provides an opportunity to purchase shares of GH at a discount.

  5. GH has 9x more assets than liabilities. GH's balance sheet is health with its assets far outweighing its liabilities. Furthermore, it has about $600M of current assets that could tide them over any disturbances in business during the COVID-19 crisis. While it's P/B ratio is not under 1, GH is more of a growth stock that is poised to dominate the diagnostics market.

Risk: The key risk is that GH has not disclosed how COVID-19 will disturb the company's operations. We are not aware whether coronavirus will impact diagnostic operations as physicians need to send in blood samples for testing and technicians at GH need to prepare the tests.

Overall, we like GH. It's not "cheap" at $5B market cap but the company is well poised for success. We will likely take a small stake on Monday and continue purchasing throughout the week and dedicate 5% of our portfolio to the company since we perceive it as less risky than many of our other positions.

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