THE HEDGEYE EDGE
Guardant Health (GH) was one of the first few names our team highlighted when we began our thematic long thesis for genetic testing supplies and labs. While we see another health care active long, Illumina (ILMN), as the paramount opportunity in the space, our claims data pointed to revenue upside for GH heading into 3Q19. Complimentary to our view, Guardant did not disappoint posting a nearly $61 million total revenue number versus the Street’s $45.4 million expectation.
As evidenced by our initial success with this name, our team has continued to update and analyze new data and fundamentals as they become available. Our analysis shows that the correlation between revenue and enterprise value, and more specifically the expected change between these metrics, is the key fundamental driver of the GH share price. For a TAM story, a tight correlation to revenue should not be surprising. If consensus isn't wrong, forward estimate trends will resume an upward expansion, taking the shares with it.
In addition to the data we’ve collected to support this long thesis at a company level, GH provided a great buying opportunity given the stock had fallen from a peak of 35x price to sales to a low of 19.9x alongside the collapse in other Softbank names, such as UBER. In the near- term, the volume trends for GH continue a steady climb in the Guardant Volume Index providing investors with yet another opportunity to buy into our process.
As is our wont, we will continue to track the proprietary data we have not only on Guardant, but on the space (including private names), and asses how GH fits relative to intense competition. Highlights of this data include the claims data we are beginning to roll out to interested clients and particularly:
- Guardant patient and claims volume trends
- Guardant volume by diagnosis code
- Guardant volume by CPT code and "code signature"
While there are reasons to be cautious of management's description of their large market opportunity, we have received feedback from thought leaders in the space and the data supports that we are experiencing the early adoption of this technology. For example, while there are 288,000 newly diagnosed patients in the United States each year, many physicians reported that they remain unlikely to move to Guardant's blood- based test over tissue- based testing. However, these same doctors believe it is reasonable to use Guardant360 to scan patients for cancer recurrence in place of an expensive imaging study. We believe that this narrative has been the key to gaining traction for genetic testing within oncology.
To put the actual penetration into perspective, Guardant only did approximately 5,000 lung cancer tests in 3Q19, or 8% of the annual incidence rate for lung cancer. These results represent minute penetration into the monitoring population, which will only be amplified by forthcoming data and education for when the early majority begins to enter the adoption curve.
