Guardant Health Inc (GH) 2023 Q2 法說會逐字稿

Hello, everyone, and welcome to the Guardant Health Second Quarter 2023 Earnings Call. My name is Emily, and I'll be coordinating your call today. (Operator Instructions)

I'll now turn the call over to Investor Relations. Please go ahead. Thank you.

Earlier today, Guardant Health released financial results for the quarter ended June 30, 2023. Joining me today from Guardant are Helmy Eltoukhy, Co-CEO; and AmirAli Talasaz, Co-CEO; and Mike Bell, Chief Financial Officer.

Before we begin, I'd like to remind you that during this call, management will make forward-looking statements within the meaning of federal securities laws. These statements involve material risks and uncertainties that could cause actual results or events to materially differ from those anticipated. This call will also include a discussion of non-GAAP financial measures, which are adjusted to exclude certain specified items.

Additional information regarding material risks and uncertainties as well as reconciliation to most directly comparable GAAP financial measures are available in the press release Guardant issued today as well as in our Form 10-K and other filings with the SEC. Guardant disclaims any intention or obligation to update or revise financial projections and forward-looking statements, whether because of no information, future events or otherwise. The information in this conference call is accurate only as of the live broadcast.

With that, I'd like to turn the call over to Helmy.

Thanks, Carrie. Good afternoon, and thank you for joining our second quarter 2023 earnings call. I will start off our call today with our top line results for the second quarter and go into more detail on our progress in therapy selection and MRD. I will then turn the call over to AmirAli for an update on screening. And finally, Mike will provide a more detailed look at our financials and outlook for the remainder of 2023.

Starting on Slide 3. At Guardant, we are singularly focused on our mission to help patients across all stages of cancer live longer and healthier lives with the data provided from our powerful blood tests. In line with this priority, we will start our call up by sharing a patient story.

In September 2021, a 56-year-old woman had a colonoscopy that revealed colon cancer. She then had curative-intent surgery, which removed 32 lymph nodes. Pathology indicated a diagnosis of Stage 2 colorectal cancer, with no evidence of disease in the removed lymph nodes as well as negative margins on the reception.

With this information, her oncologist determined there was a low risk of recurrence and chose not to administer adjuvant chemotherapy. At a checkup 3 months post surgery, a CEA test was drawn and showed normal results. At our next 3-month check-in, her CEA doubled, but was still within normal limits. The patient requested that her oncologists order a Guardant Reveal test. The results were positive for ctDNA, and as a result, her oncologist put her back on chemotherapy.

Since then, she has had 2 consecutive follow-up Reveal tests showing her to be ctDNA negative. And today, she is fortunately showing no evidence of disease. This story highlights the power of our test to provide meaningful decision support to oncologists and patients earlier in the cancer journey in the MRD setting.

Guardant is the liquid biopsy industry leader in therapy selection, giving us a strong foundation in cancer patient care. From this foundation, we are building out our pipeline of multibillion dollar opportunities in MRD and screening, which we believe will lead to a step change in the magnitude of impact we can have in patients' lives.

Turning to top line performance on Slide 4. We had another very strong quarter, with revenue growing 26% to $137.2 million. This robust growth was driven by precision oncology revenue, which increased 36% in the quarter. I am really pleased by the great progress that we continue to make in our therapy selection business that illustrates we are still in the early innings of its uptake with much more growth ahead.

Turning to Slide 5. Indeed, our team delivered strong growth across precision oncology, surpassing 50,000 combined tests during the quarter. Clinical test volume during the second quarter reached 43,500 tests, an increase of 49% from the prior year quarter. Clinical growth was driven by strong contributions from our key products, supported by a robust commercial platform. For biopharma, we delivered 6,700 tests, increasing 12% year-over-year.

Turning to Slide 6. Looking more closely at the growth drivers for our therapy selection clinical volume. We continue to benefit from the tailwinds we saw at the beginning of the year with strong growth: in lung, with continued strength of our high performance and rapid turnaround Guardant360 test; in breast, fueled by a recent Guardant360 CDx approval for ESR1 mutation-positive patients; and in tissue, aided by our AI-powered Galaxy suite. As a reminder, we introduced the Guardant Galaxy suite of advanced AI analytics for digital pathology applications in partnership with Lunit to enhance our portfolio of cancer tests, starting with the TissueNext PD-L1 test, shown to improve biomarker detection by more than 20% in non-small cell lung cancer.

For MRD, Reveal continued to do well, and we again saw strong volume growth of greater than 100% year-over-year. We are also making excellent progress in our clinical data pipeline for Reveal, and look forward to sharing more about this at our upcoming Investor Day. Our team has worked incredibly hard to establish Guardant as the leader in liquid biopsy. We have made critical investments into our commercial infrastructure that are now paying dividends. We lead the market in share of voice and overall satisfaction with customer experience.

To that end, we have finished development and begun integration with the top 3 oncology EMR providers in the United States. These providers collectively cover nearly 2/3 of all oncology practices in the country. As expected, we see strong increases in ordering volumes once a particular account is able to order our tests through their EMR system. As we continue to broaden our customer base, we look forward to driving further increases in volumes across our product portfolio within such accounts.

Moving on to Slide 7. We had some big breakthroughs in payer coverage during the past quarter that will provide tailwinds for our clinical business in the near term. Since our last earnings call, we secured coverage from Anthem, Blue Cross Blue Shield, Aetna and Humana for our Guardant360 test. These tests are now covered for comprehensive genomic profiling by all major U.S. commercial health insurers with over 300 million of covered lives.

We are also making good progress on increasing covered lives for newer products in our portfolio. For example, with TissueNext, we are approaching 200 million covered lives and hope to cross this threshold later this year. We also recently received our first commercial coverage for Guardant Reveal. Blue Cross and Blue Shield of Louisiana is providing coverage for Guardant Reveal for individuals with Stage 2 or Stage 3 colorectal cancer after period of treatment including surgery. This is a major milestone for patients. This is the first time a liquid-only MRD test has been granted reimbursement coverage by a private payer to inform physician's decision about post-treatment therapy and to monitor for disease progression, recurrence or relapse. Importantly, this coverage provides broad access for CRC patients at Stage 2 or 3, which amounts to a significant number of tests for patients across the adjuvant and surveillance settings, in line with NCCN monitoring guidelines.

On to Slide 8. Outside of the United States, we are continuing to make progress on our strategy of achieving global scale with a focus on large core markets. Most notably, we recently received national reimbursement approval from the Japanese Ministry of Health, Labor and Welfare for Guardant360 CDx, which became effective at the end of July. Japan currently represents the largest expansion opportunity for our portfolio of products outside of the United States.

There are more than 390,000 deaths from cancer each year in Japan and more than 1 million new cancer cases annually. And despite this large population, CGP testing is still in its very early innings of adoption, with currently about 25,000 CGP tests performed annually and only 15% to 20% of that in blood-based testing. In addition, Japan has focused centralized care with about 250 core genomic hospitals.

Importantly, Japan is a single-payer health care system, and we received pricing better, in line with our U.S. ASP of $2,600 to $2,700. With this pricing, we expect our clinical testing for Japan to have positive margins and contribute to our therapy selection business, reaching breakeven by the end of the year. This reimbursement decision represents a significant milestone for our international business.

We are encouraged by the strong support we have received from oncologists in Japan, and we look forward to furthering these partnerships as we continue our commitment to democratize access to precision oncology and bring blood-based comprehensive genomic profiling to patients and care teams across the region. Beyond Japan, we are also very excited about our opportunities in the U.K. and China, and we look forward to providing updates on our progress across our international business in the future.

With that, I will now turn the call over to AmirAli to provide an update on our screening business.

Thanks, Helmy. Turning to Slide 9. We are continuing to make advances in our screening business as we spread -- had a new patient preferred category in the screening market with our Shield blood tests. We are making steady progress with the FDA review of our PMA package for Shield, and we are pleased with the recent successful preapproval inspection by the agency. We continue to expect FDA approval and the launch of Shield IVD in 2024.

Turning to Slide 10. We continue to believe that Shield will transform CRC screening and result in more life saved. We have developed and validated a discrete-event simulation model, integrating real-world longitudinal adherence rates to evaluate the effectiveness of Shield relative to existing screening modalities. At a conference in late June, we presented the initial results from our health outcome modeling. This model examined the simulation of average risk U.S. adults receiving a Shield screening test every 3 years.

On the left, we see the health outcomes over a lifetime horizon when assuming real-world adherence to different screening modalities. Life-years gained for Shield was 217, with 820 total colonoscopies; while the life-years gained for other modalities was in the range of 126 to 255, with 126 to 1,996 total colonoscopies. This initial data shows for Shield, the life-years gained versus the number of colonoscopy is in range, even favorable compared with other guideline-recommended tests.

At Guardant, it is in our DNA to stay at the forefront of innovation. With Guardant360, we launched the best-in-class liquid biopsy and have maintained our market leadership with continued performance enhancements. We are taking the same approach with Shield. We are confident that the performance of current version of Shield exceeds the bar for approval guideline inclusion and reimbursement, but this is just the beginning for what Shield can offer. Since we filed our PMA with the FDA, we have made progress developing a more sensitive next-generation Shield, powered by data and clinical insights gathered from early-stage CRCs, including Stage 1 malignant polyps. We look forward to sharing more later this year.

Moving on to Slide 11. At Guardant, we have always had a vision for blood-based multi-cancer screening. We started with CRC as the first indication for Shield because of the established pathways for FDA approval and reimbursement, which allow for broad access. We are planning to add lung cancer as the second indication. Lung is the leading cause of cancer-related mortality. There are about 15 million high-risk individuals eligible for lung cancer screening. However, the overall screening rate is less than 15% due to the complexity of guideline-recommended screening modality and significant follow-up requirements. This is where the value of our differentiated blood-based test comes into play.

We are pleased with our progress in our NCIRE study. We are also making good progress on recruitment for our pivotal SHIELD LUNG study and have surpassed 6,000 patients enrolled. Beyond lung, we plan to add a large panel of cancers, all to the same test.

As a reminder, we are committed to an operating loss from our screening pipeline of less than $200 million for the next 12 months. This will fund our top priorities in screening and set us up to achieve our upcoming milestones.

With that, I will now turn the call over to Mike for more detail on our financials.

Thanks, AmirAli. Turning to Slide 12 to review our financial results. Total revenue for the second quarter of 2023 grew 26% to $137.2 million compared to $109.1 million in the prior year quarter. Total precision oncology testing revenue for the second quarter was $125.2 million, increasing 36% compared to $92.1 million in the prior year quarter. As in previous quarters, this increase was driven by strong year-over-year growth in clinical and biopharma volumes.

Precision oncology revenue from clinical tests in the second quarter totaled $100.2 million, up 42% from $70.5 million for the prior year quarter. Second quarter clinical test volume was 43,500, an increase of 49% from the same period of the prior year and an increase of 11% or 4,400 tests from Q1 2023. While Guardant360 continues to be the main revenue driver with continued strong growth in lung cancer and a significant uptick in breast cancer, we again saw very strong year-over-year volume growth in both Reveal and TissueNext both growing over 100%.

Second quarter Guardant360 ASP continues to be at the upper end of our target range of $2,600 to $2,700. As Helmy mentioned, we had some big breakthroughs in payer coverage during the past quarter. While this additional coverage will provide tailwinds for our clinical business in the near term, we expect, however, that it will take some time for these upsides to flow through to our clinical ASP due to the length of time it takes to contract with insurers.

Blended clinical ASP was approximately $2,300, in line with our expectations. As a reminder, blended clinical ASP will continue to be influenced by both the volume mix between Guardant360 TissueNext, Reveal and Response, as well as the mix of overall clinical volume between U.S. and international. Precision oncology revenue from biopharma tests in the second quarter totaled $25.0 million, up 16% from $21.6 million for the prior year quarter.

Biopharma test volume was strong, with second quarter totaling approximately 6,700 tests, up 12% from the prior year quarter. Biopharma ASP in the second quarter was approximately $3,700, which was higher than both last quarter at $3,550 and the prior year quarter at $3,600 due to the product mix.

Development services and other revenue for the second quarter totaled $11.9 million, down $5.2 million or 30% from the prior quarter. This was primarily due to the timing and amount of milestones related to our partnership agreement and the change in companion diagnostics collaboration projects with biopharma customers.

Gross profit for the second quarter of 2023 was $83.3 million compared to a gross profit of $72.4 million in the same period of the prior year. Gross margin was 61% compared 66% in the prior year quarter. The change in gross margin was driven by a number of factors.

For precision oncology, gross margin was 61% in the second quarter of 2023 compared to 63% in Q2 2022. This reduction was due to the change in mix between clinical and biopharma revenue, with clinical revenue growing faster than biopharma revenue as well as the year-over-year change in blended clinical ASP from $2,400 to $2,300 due to the increased proportion of clinical volume coming from Reveal, TissueNext and Response.

Development services and other gross margin was 62% in the second quarter of 2023 compared to 86% in Q2 2022. The change in margin was primarily due to the cost of processing Shield LDT samples as part of our market development activities for which we are currently booking minimal revenue. We continue to expect overall gross margins to be approximately 60% for the full year 2023.

Operating expenses for the second quarter of 2023 were $202.9 million compared to $202.7 million in Q2 2022. Net loss was $72.8 million or $0.67 per share for the second quarter of 2023 compared to $229.4 million or $2.25 per share in the second quarter of 2022.

The year-over-year reduction in net loss is primarily due to 3 factors. Firstly, our loss from operations reduced from $130.3 million in Q2 2022 to $119.6 million in Q2 2023. Secondly, in Q2 2022, we booked another expense of approximately $100 million to reflect the increase in the fair value of the outstanding shares in our EMEA joint venture, which we acquired in June 2022. Finally, in the second quarter of 2023, we recorded a $64 million unrealized gain related to our strategic equity investment in Lunit, our AI partner for TissueNext, which had its IPO in Korea last year and has seen a substantial increase in its share price over the last few months.

Moving on to non-GAAP financial measures on Slide 13. Non-GAAP operating expenses were $180.5 million for the second quarter of 2023, a 2% increase from $176.2 million in the prior year quarter. Non-GAAP net loss was $88.7 million or $0.82 per share for the second quarter of 2023 compared to $101.8 million or $1.00 per share for the second quarter of 2022. Adjusted EBITDA was a loss of $85.2 million in the second quarter of 2023 compared to $94.3 million loss in the second quarter of 2022. Free cash flow for the second quarter of 2023 was negative $100.5 million compared to negative $135.0 million in Q2 2022.

We continue to make very good progress in diligently managing our operating expenses and cash burn, and we are confident that we will achieve our stated goal of lowering our full year operating expenses compared to 2022 as well as reducing our free cash flow to approximately negative $350 million for the full year.

Turning to Slide 14. In May, we completed a successful equity offering where we raised $381 million in net proceeds. This puts us in a very strong position with approximately $1.2 billion of cash, which provides the runway to reach cash flow breakeven, which we are targeting in 2027, '28, 1 to 2 years following Shield inclusion in CRC screening guidelines.

As we look ahead, we are still on track to achieve cash flow breakeven in therapy selection within the next 3 to 6 months. We'll be able to achieve this milestone as we are now gaining significant leverage from the investments we've made over the last few years to scale our core therapy selection business across commercial, lab and back office operations, and as we've been able to maintain high volume growth and consistently strong ASPs and gross margins for Guardant360.

MRD spend will continue to be focused on increasing our market penetration, our technical platform upgrade and developing clinical data to support reimbursement coverage. However, we are confident that the total investment in MRD across the next 5 years can be started from the total contribution generated from therapy selection and from increasing Reveal revenue driven by reimbursement coverage. For screening, we anticipate that the operating loss from our screening pipeline will be approximately $200 million per year over the next 5 years.

Over the next 12 months, we'll be ready for the Shield IVD launch upon successful FDA approval to deliver the next generation of Shield with potentially even better early-stage performance and make significant progress on indication expansion to lung and other cancers. Investments beyond this will be contingent upon receiving FDA approval and then gated by ongoing commercial success and revenue milestones.

Now turning to our outlook for the full year 2023 on Slide 15. We are raising our full year 2023 revenue guidance and now expect revenue to be in the range of $545 million to $550 million, representing growth of approximately 21% to 22% compared to 2022. This compares to our previous expectation of $535 million to $545 million. This update reflects the very strong performance of our clinical business in the second quarter.

For the remainder of the year, we expect to see a sequential decline in development services and other revenue in Q3 due to the timing of project milestones and declining royalty revenue. For the fourth quarter, we expect to see a seasonal uptick in biopharma volume that we've historically seen towards the end of each year. Finally, as just mentioned, we continue to expect 2023 operating expenses to be below full year 2022 and free cash flow to improve to be approximately negative $350 million in 2023 and to consistently improve in the following years.

Turning to Slide 16. Our long-term vision is to transform cancer diagnostics through cutting-edge technology, a focus on high-impact opportunities and consistent execution. In the second quarter, we were very pleased to achieve major reimbursement milestones, obtaining national reimbursement coverage for Guardant360 in Japan, and our first U.S. commercial reimbursement coverage for Guardant Reveal.

Finally, turning to Slide 17. We'll be hosting our first Investor Day on Thursday, September 7 in New York City. We look forward to sharing the deeper dive across our business. Please reach out to investors@guardanthealth.com for more information.

At this point, we'll now open the call up to questions.

(Operator Instructions) The first question today comes from the line of Jack Meehan with Nephron Research.

I wanted to ask about -- so the clinical volume really showed strong momentum this quarter. Is it possible to call out what you're seeing high cancer indications like breast cancer with the CDx approval versus lung or others?

Yes, it's a great question, Jack. Yes, we're seeing, I think, really strong growth across multiple indications. And I would say that it's both lung and breast that are carrying the momentum we started from the beginning of the year. I think we're just seeing further consolidation behind our product, given the leading turnaround time and leading performance we have with lung. It certainly does have -- the product market is good. We see that we're probably testing more lung cancer patients in the United States in the metastatic setting with MGS and really any other modality, tissue or liquid. It's really a great place to be, and I think we're just seeing continued momentum there.

And then, obviously, with the breast, the ESR1 drug approval, we're continuing to see a nice volume lift. Breast has really taken sort of swing up. In terms of volumes, we're doing a very large percentage of metastatic breast cancer patients now in the United States. And so we've really been pleased by the progress we've made there, but the growth is just not limited to those 2 indications. We're seeing it across the board.

Great. And then a follow-up for Mike. On the clinical ASP, I know you said the G360 towards the top end, $2,600, $2,700. I was wondering if there were -- we've heard one other lab that reported tonight talk about some claims issues with some Blues plans. I heard others talk about payment integrity. I was wondering if maybe you're seeing incremental traction with some of the new coverage, but were there any headwinds that are kind of keeping it within the range versus above the top end?

Yes, Jack. No, there's no headwinds that we're seeing with payers, and we're not seeing any sort of negative traction with any payers. I think we definitely had tailwinds with respect to future ASPs. We've gained coverage now from these major payers in the last 3 months. And I think, yes, we've been at pains to sort of point out that even though we've got the coverage, it's just going to take time to see that coverage come through to ASPs because we need to go through the contracting phase, and then we need to start to see the sort of new rates come through from those phase.

So we're confident that, over time, ASPs will continue to track upwards and potentially beyond that range that we're currently in. But yes, it will just take time. We've not seen it now. And maybe just to add, for the remainder of the year, we're still sort of forecasting within this $2,600, $2,700 rates. So if things were to happen quicker than expected on the contracting side with the payers, we could have some upside there. But we are -- so far, things are steady.

Our next question comes from the line of Puneet Souda with Leerink Partners.

So first one on Reveal. Wondering if you can provide any context around contribution in the quarter, what are you expecting for within the guide for the full year. And is there any update on upgrade of the assay because, obviously, the upgrade of the assay then drives the submission to the common MRD LCD that is out there. Maybe just if you could outline the sort of the time line on that. And then I have a follow-up on FDA primarily.

Take the first part analysis.

Yes. We're -- I think the color on Reveal, and we're not breaking out those volumes, we've consistently not done that. But I think we said in the prepared remarks, in the quarter, Reveal volume grew over 100%. So we're really pleased with the continued traction that we're getting there. And I think previously, we've talked about Reveal revenue in sort of low double-digit millions. And so yes, we're still on track for that. So yes, overall, Reveal is doing really well and as well as we would hope. But that's probably as much color as we're giving in the numbers. Helmy?

Yes. No, I mean I think the smart liquid biopsy transition, they're on track and will continue to happen this year. Obviously, we've been really digging in, in terms of the capabilities of this new platform. And it's just, frankly, amazing us every single day in terms of the increased capabilities that we can have. Just -- I think it's not only going to make the performance of our tests so much better in terms of sensitivities, but just a little to do with it. But just the capabilities that we'll offer to the field are frankly groundbreaking, not just in the field of oncology, but even to our understanding of the science of disease progression. And so, yes, we're very, I think, hopeful that we can present some of that data at our Investor Day as well. So it's -- yes, it's going better than we planned.

Look forward to that. And then just on FDA for AmirAli. Wondering if you can provide us an update on the Shield 2.0 or the next-generation improvements that you're doing in the assay. Is there a way to submit that as a supplement into the current FDA filing? And then also wondering, do you think FDA is going to put weight on the adherence aspect of this assay? Just wondering your thoughts on those 2 points.

Yes. Thank you, Puneet. As I mentioned, we are making steady progress with agency. And in terms of V2, we are also excited with some, actually, insight that we are getting on V2, and we see actually what happened. In terms of the regulatory pathway for V2, our current assumption right now, our best judgment is, hopefully, we get V1 approved. And due to the fact that V2 is just optimized algorithm on the chemistry, all the workflows are the same. Effectively, it would be just a supplemental PMA review by the agency that we are planning to submit right after we get approval for first version. So that's our operating assumption at this time.

And in terms of adherence, our reg agency actually acknowledged enough allocation for us, that they acknowledged the value of blood-based testing for this field. So we believe actually it's on the top of their mind that blood has some kind of unique value for this field based on the experience that they have. So we will see.

Our next question comes from Tejas Savant with Morgan Stanley.

This is [Yuko] on for Tejas. I was wondering when can we see the next-gen Shield validation data? And could that come as soon as year end? And if so, what then should we be looking out for?

Yes. So actually, we are expecting to share actually more information and data actually later this year. So please stay tuned.

Great. And I also have a follow-up. Generation of outcomes data will take time, but when should we expect the next larger cohort data on a tumor-naive approach? And then separately, how do you go about getting mind share from physicians who are already using a tumor-informed approach? Can you give us a sense of what proportion of current customer accounts are using competing MRD assays versus just the tumor-naive approach?

Yes, it's a great question. We've made really great progress in terms of clinical validation core service. We have clinical utility studies. They've been running for some time. So we are going to present likely more data later this year in breast and colorectal cancers. I think that data, hopefully, if it's positive, will get published sometime next year and will allow us to expand reimbursement.

But yes, we're very confident that in terms of the performance of this, this platform can do much better than almost any sort of tissue-informed approach because of the science and the sort of ability to detect more features per test. So we're pleased -- we're looking forward to presenting more of the background around the technology, how it works and why it works and some of the data at our Investor Day.

And yes, we're seeing great traction. I mean we have a test that is much faster, doesn't require tissue. There's a product-market fit that's undeniable. We saw this with tissue biopsies and liquid biopsies, with Guardant360 in lung cancer. People asked us, why would someone use a blood test instead of a tissue biopsy or tissue biopsy is the gold standard. Now there are way more patients in the U.S. getting NGS from Guardant360, liquid biopsy than tissue biopsy tests today. So once you have product-market fit, that becomes the gold standard and the North Star by which everyone will have to follow up. So yes, we're on the right path. But it will take some time to get there and ramp things up. But we're very pleased with the progress at this time.

Our next question comes from Dan Brennan with Cowen.

It's [John] for Dan. I believe the previous guidance range is based on clinical volume growth of about 35% year-over-year. With 1H tracking well ahead here, is there an updated number you're looking for, for the year?

Sorry. Is there is an updated what? What was the question again?

Clinical volume growth number because I think the last guidance is based on 35% year-over-year. You're tracking pretty far ahead of that in 1H.

Yes. I think, yes, clinical volumes obviously growing very strongly. And 49% in this quarter was, yes, I'd say, ahead of our expectations. Yes, I think as we look out for the guidance and the increase that we've seen, the increase that we've just had in our guidance, yes, it's all driven on the clinical volume side. So I would say, yes, now our expectation is probably trend into the high 30s, low 40% growth on the clinical volume. So yes, we're able to have an increase from the previous 35%.

Got it. And then back on ASPs, I guess it will take some time for the coverage rate to flow through your pricing, but is there some range that you see blended clinical ASPs going for the rates are locked in and the increase are fully realized.

Yes. I mean it's easier to talk about the Guardant360 ASP. And I think, yes, today, it's at the higher end of that $2,600 to $2,700 range. I think if we get sort of full coverage from all of these major payers, and we can contract with those payers, then over time, we think the ASP can get north of $3,000. So potentially a significant increase, but it is going to take time.

It's harder on the blended ASP. It's primarily -- obviously, it's due to the mix and the mix between Guardant360, Reveal, Tissue and Response. And so how that mix changes over time, it's very difficult to sort of forecast. And then -- but as each of those products get incremental reimbursement over time and we've got pathways for each of that to happen then I think overall for each product, the ASPs are going to increase. But to really forecast, say, beyond the end of this year, what that blended ASP is going to look, it is very digital. I'd say our assumption for the remainder of this year is that the blended ASP is going to stay around this sort of $2,300 level.

Our next question comes from Derik De Bruin with Bank of America.

This is [John] on for Derik. So I appreciate the color on the market landscape in Japan and the pricing and whatnot. I wanted to ask what you see to be the contribution from that market over the next couple of years. If you could talk about the ramp, that would be great.

Yes, it's Mike. I can take that. Yes. I mean for Japan, we were really pleased to get reimbursement coverage this quarter. And in fact, we've just sort of processed our first patient sample in Japan. So really positive news. In our guide for the remainder of this year for Japan, we've got very minimal revenue in there. And then I think we're hoping and expecting in 2024 that revenue starts to become material. I think when we look at Japan as an overall market, it's a very large market. It's probably overall half the size of the U.S. So we think this can be, over time, a significant contributor for us. But at the moment, I think it's a bit too early for us to be really pointing out any specific guidance for 2024 or specific years.

And on the China side, yes, that's really going to help power our biopharma business. The lab partnership we've got there enables us to have global offerings to our biopharma partners. And so we're very excited to hopefully soon have that lab go live and start to offer products in China. And again, it's going to be very incremental to our biopharma business.

Appreciate that. And in terms of the OpEx guide, you've talked about the sales and marketing spend and the research spend, and that makes sense. Just really specifically the G&A was sequentially up this quarter. How is that tracking for the rest of the year for that line specifically?

Yes. That line is probably in the second half of the year, will be maybe a little bit lower than what we saw in the first half. We saw a bit of an uptick in this most recent quarter from a legal litigation expense perspective. And we've just finalized the Illumina litigation that we had, we made press release on that yesterday or the day before. And so we're hopeful that, that expense can drop off in the second half of the year and G&A should stabilize going forward.

Our next question comes from Patrick Donnelly with Citi.

Maybe just one on the biopharma segment, just given overall concerns on kind of budgets and funding there. Can you guys just pull back the curtain a little bit what you're seeing there, what we should expect on the volume side in that segment for you?

I think it's sort of in line with sort of what we highlighted at the beginning of the year that there is a little bit of sort of rejiggering in a bunch of pipeline. Some companies had some layoffs. They're sort of deciding what areas in the therapeutic areas to invest next. But that was all kind of factored in at the beginning of the year. So I think we've been pleased that we continue to diversify our customer base, we continue to grow volumes in this sort of challenged environment. But we also see this as an opportunity. We're having a great conversation with a number of pharma companies that are really looking for new areas by which to really expand some of their pipelines. We have a very unique platform. So it's -- we think this is a in future years, it's going to be a very strong growth for us.

Okay. That's helpful. And then maybe just on the MRD side, thinking about the spend levels again. You guys have been pretty clear on the screening piece. But just on MRD, can you just talk about your expectations around the spend there, thoughts on data generation versus kind of driving the increased market penetration. Again, just how we should think about the level of investment around that segment. Obviously a nice growth area for you guys.

I will start and I'll let Mike sort of fill in some of the financial pieces. It's an area that requires a heavy amount of clinical validation and clinical studies. It's something that we've been building up for the last 4 or 5 years, and we have a very nice pipeline of studies across multiple indications. We're planning to essentially process and run and have these collaborations going forward, and hope we can share some more of that in the coming months. And that being said, we're going to be very judicious about how much we invest, how we phase those investments, and how much we invest in terms of market share.

And so we're continuing to grow really nicely, 100% year-over-year. But we're engineering the demand, as we said in the beginning of the year. So the -- we're not letting essentially the burn sort of get ahead of us too much. We really see no competition from a tissue degree point of view. We think this is a product category of its own, product category that is going to be the ultimate winner in this MRD market. So we're in a very good spot right now.

Yes. I mean maybe just to reiterate that we would be a very sort of judicious on the investments we make. That's investments on -- as well as the market development and technical development, but also on just processing the samples and running those samples prior to getting reimbursement. So we're managing that very, very closely. We've got our stated goals on cash burn this year and going forward and on operating expenses this year. So we're just -- we're closely managing that investment within those parameters that we have set.

Our next question comes from Dave Delahunt with Goldman Sachs.

Congrats again on another strong quarter. Any additional color you could give us on MRD trends? I think I heard you say to Pat's question, you're seeing market share grow 100% year-over-year. Is there any qualitative color you could give us around what are the main selling points have resonated the most with docs? And what are the main questions they've had?

I would say it's really the fact that it's simple blood test to get the results really quickly, much faster than tissue-informed approaches and really just, I think, customer service that we have, the quality of the commercial team, the strength of our commercial team. I mean there's really very few oncologists, if any, that haven't ordered a test from us. And so really sort of being integrated with their offices and having that unified experience, I think, is another big piece.

And then obviously, as we sort of continue to evolve the platform towards smart liquid biopsy really going to just change the game in terms of what MRD even means, what MRD has to provide to position. So we're very confident in terms of where things are going in this market and where we are right now. But yes, we see really no sort of product out there that has the same product markets as we do, especially in the coming quarters as we continue to upgrade the capabilities of the device.

Great. And on the screening side, you guys have been super successful in the past with leading the field for liquid biopsy. What do you think is a mix of PCPs who understand the value of blood screening versus the share that would still benefit from more physician education?

So what we are seeing in the marketplace with Shield LDT right now is, I mean, obviously, for almost everybody, the fact that you can do colorectal cancer screening with blood is it's new concept. But what they are very well aware of, and in fact, is helping the brand and acceptance of this offering is how unpleasant and inconvenience other modalities are.

And again, like we are just promoting this test for onscreen patient population or have not done any kind of screenings or haven't been compliant to other solutions. And these doctors know those patients. They know their patients that they have ordered other modalities that they did not complete the test. So that is on the top of the mind. Completion is not there, unpleasant experience is there, and that's really helping the brand in terms of acceptance of this new modality.

Our next question comes from Mark Massaro with BTIG.

This is Vivian on for Mark. I was wondering when TissueNext and Guardant Response will start to become more material to volumes. Is reimbursement a key gatekeeping item there? Or is it more about marketing and maybe some additional data development? So any color you can share there.

Mike mentioned that TissueNext is also growing 100% year-over-year. It's been a very good contributor to our business, I think approaching over 200 million covered lives. We obviously have Medicare coverage there. It's just a very good franchise for us. Strong growth, I think very smartly growing ASPs, and it's something that I think is going to be a big driver for us. They're already becoming a contributor to our business. And Response, we just received Medicare coverage there a few months ago, and that's also going to be a very strong component to our business. So yes, we're very pleased with both aspects of our portfolio.

Okay. And now just to dig in a little bit more on a prior question on screening. So I know you've conducted your own PCP survey work. We recently commissioned a survey that showed about 3, 4 primary care docs are looking to order a simple blood test, and over half of docs want to order for all or most of their patients. So I'm just curious if you think our data is in a similar ballpark to the current thinking around order and interest for Shield.

I heard you right, like 3/4 of the doctors are interested to order like -- or some, even up to 50% of their patient population. So I think, in general, it's in line with what we are experiencing and our survey shows. I think the fact that, again, still there are 50 million of these patients who are unscreened in the field and also the whole kind of patients like 120 million. And then the fact that, again, this unpleasant experience and lack of completion is a known feature of this market for the PCPs, like these kind of numbers make sense. I'm not surprised with your survey results.

Our next question comes Dan Leonard with Crédit Suisse.

A question for you, Helmy. You mentioned the EMR integration in your prepared remarks and that's underway. Possibly, you can quantify the volume lift you're seeing at accounts that are -- that you've initially integrated and how you'd frame the benefit from broader integration.

Yes. I mean, I think that, historically, rule of thumb is you get a sort of 50% to 100% volume lift that it comes when integration happens, and we're seeing that really play out in a number of accounts that we've integrated with. So yes, we're hopeful that as we continue to make progress there, it's going to be a strong growth driver. It's just -- there's a lot of friction to have to go into another portal or fill out a paper, the test requisition form or PDF. And so being able to just be in an account system, order the test from that same system that they're using for everything else is a huge part of removing friction. And that's a lot of what we're doing in the coming quarters and the years is really building up that customer experience so that it really is as seamless as possible to order a Guardant test.

Understood. And then for my follow-up, Helmy, could you elaborate further on the import of Galaxy? I don't recall that being a primary point in your talk track prior.

Yes. It's sort of got kicked off with our partnership with Lunit. They're a leader in AI, power digital pathology to really thinking about sort of the spatial genomics and special biomarker analysis space and using AI to sort of read those images. And the first application that we launched was PD-L1 potentially using AI to read that. And so it's pretty powerful, even though it's a relatively straightforward application, being able to find 20% of patients that might have been negative with manual review is positive for PD-L1 has a very important therapeutic implication. So that's really resonating with a lot of physicians that's helping to drive our growth in tissue. But it's just the beginning in terms of what's going to be possible as we sort of tie that in to our other tissue testing and even on the liquid side. So stay tuned.

Our next question comes from Andrew Brackmann with William Blair.

Maybe a couple for AmirAli. First, on the upcoming NCIRE-LUNG readout. Can you maybe just sort of level set us on your performance expectations there, just sort of what constitutes a success? And then as a follow-up on Shield CRC, I know it's been asked in the past, but any update to your expectation on whether that goes to an advisory panel or not. Just sort of remind us on how you're thinking about that potential.

Yes. So for the lung, actually we've shown a bunch of case control studies. This NCIRE is going to be actually the first data that even we are going to see, which is a good indication of the performance of our test in screening relevant patient population, really in a mini screening kind of study. So we are waiting to see actually what that ad data is going to show.

In terms of the bar, I mean when you look at this space of lung cancer, the 15 million people at high risk, as I mentioned in the prepared remarks, they have the adherence rate of less than 15%. Now that we are doing this study, even we are seeing really the real-world standard of care that even people are getting diagnosed with some relatively high-risk nodules by again just due to risk factor associated with biopsy. That biopsy is not getting done, that's sometimes getting delayed till another imaging actually confirms still that even that large high-risk nodules continue to grow. When you look at the reality of standard of care, it gives us a lot of excitement about the opportunity that blood-based screening can put on the table.

If I got your second part of the question right about the ad com panel advisory for Shield CRC, we haven't heard from agency that they want to call any panel, advisory board, so far. So probably if they want to do that, we should have heard already. But we'll see. Like it's agency's choice of what they want to do. And -- but so far, we haven't got any indication on that.

The next question comes from Sung Ji Nam with Scotiabank.

Just a couple of quick ones for AmirAli. Maybe with the -- just remind me again whether the ECLIPSE peer-reviewed publication, is that an important milestone in terms of receiving the FDA approval?

FDA approval, no. Like FDA, independently, they are looking at all the data and the details of data in their own hand, and I saw not that peer-reviewed publication. What's important for us for USPSTF review cycle, typically they do data reviews when -- majority of cases, when the evidence is published in peer-reviewed journal, everyone shades that box. We are on track. We've done our part, and we'll see. But we should be able to have that paper published before end of the year.

Okay. Got it. And then for lung cancer screening, you talked about -- realized it's less than 15% screening. Is that largely driven by the primary care market today? Just kind of curious what the educational process might entail with a new modality of testing and whether you might need to involve the pulmonologist?

Still, we are kind of learning about a bunch of details of that market as we speak. But at a high level, just modality of screening that needs significant patient commitment and follow through, mostly around imaging, biopsies. Still a large fraction of biopsies would not indicate patient has cancer, adverse events associated with those biopsy. It's a journey which is very hectic, long, and it's a lot of commitment. So in fact, we are not very surprised that the adherence rate is much lower than CRC. But we are continuing to learn more details about the market dynamics.

Our next question comes from Liza Garcia with UBS.

Great. I just wanted to circle back on Response. I know, obviously, kind of one of the smaller assays. But I think last quarter, you had kind of indicated maybe like a low single-digit contribution -- revenue contribution was what to think about. And I was wondering, I know clinical volume trends have just been doing pretty well, if that was the right way to think about this assay still. And just with another quarter kind of under your belt, if you had any clinician feedback, just given that maybe other assays kind of work a little differently in the treatment monitoring space and what you're hearing there. And then a follow-up.

It's Michael, I'll take the financial piece. I think, yes, maybe on the last earnings call, when asked about what contribution will Response deliver now this year because we received Medicare reimbursement, yes, it's very early days since Medicare reimbursement. And I think we mentioned a very low single-digit million dollar revenue that would come from Response. And so, yes, that's still the case. I think on the second part of the question, Helmy?

Yes, I think the view of it is that, right now, the sort of leading product and therapy selection, liquid biopsy with Guardant360. It's the fact that they work in conjunction with one another is a huge advantage that we have and really works in a pretty straightforward fashion in terms of mapping tumor burden quantitatively. So it's a -- yes, I know it's a product that I think resonates well, one that we're continuing to promote much more aggressively now that we have reimbursement behind those, at least on the Medicare side. We think it should be a very important growth driver for us in the coming years.

Great. And then just one last one on the EMR integration. I think you -- on a prior question, you cited some pretty big increase in utilization from oncologists ordering when EMR integration happens. And obviously you -- I think you mentioned integration with 2/3 of oncology practices just finished. So I was wondering if that happened in this quarter. So to kind of think of 2Q is like that kind of happening or if you could just provide some context around kind of that increase in ordering and kind of how that happens or some kind of time line, that 100% figure, would be great to kind of dig into that a little bit more.

Just to be clear, we're just starting the integration. We've done a lot of the work in terms of being able to integrate with those vendors that comprise about 2/3 of the market, but there's still work to do on the account side where we have to turn them on one by one, many of them. So we're in the early innings of that. We're very pleased with initial progress and a handful of accounts that we've integrated with. But it's a multiyear journey to turn all these things on.

Our final question today comes from Rachel Vatnsdal with JPMorgan.

Great. This is Casey Woodring on for Rachel. Thanks for taking our questions and squeezing us in. So I guess just 2 quick ones for you. On the CDx side, can you talk about what's next in the pipeline in terms of maybe other indications or areas you're targeting for approval and time lines around some of those and when you'd expect -- or if you'd expect similar volume ramps to the ESR1. I think last quarter, you said breast volume picked up 40% right after that approval.

And then my second question is just around the biopharma business. I think last quarter, you talked about plans to expand into China. Is that still on the table this year? The companies that we've heard from, so far that have been reporting it, flagged material weakness in China. So is that still on the table this year, thoughts around that?

Another good question. Yes, I mean we have a whole host of like CDxs that were either in negotiations with or have signed on, a bunch of other ESR1s, but other indications as well. And I think that's the opportunity ahead of us in terms of being able to partner with new classes of therapeutics or biomarkers and other indications. We see hopefully a similar volume uplift in other indications in the future.

In terms of China, we're starting at 0 right now. So there's still upside at this point. But yes, we're very pleased with the progress we've been making, strong partnership with Adicon over there. We should be up and running by end of this year. And there's a very strong pipeline in terms of biopharma partners that want to be able to test samples in China.

There's a vacuum right now in terms of sort of global companies that have the scale that we do that can operate in China. And so we see maybe that weakness that maybe others are facing there is a spring for us, and we are moving very nicely in terms of progress there.

We have no further questions. So I'll turn the call back to the management team for any closing remarks.

Well, thank you so much.

Thank you, everyone, for joining us today. This concludes our call, and you may now disconnect your lines.