GRAIL, Inc.

Good day, ladies and gentlemen, and welcome to the Grail Third Quarter 2024 Earnings Call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. Please be advised that this conference call is being recorded. Grail Investor Relations, please begin.

Thank you, and thank you all for joining us today. On the call are Bob Ragusa, our Chief Executive Officer, Aaron Frieden, our Chief Financial Officer, Dr. Joshua Offman, our President, and Sir Harpo Kumar, our President, International Business and Biopharma. Before we get underway, I'd like to remind everyone that we'll be making forward-looking statements on this call based on current expectations. It's our intent that all statements, other than statements of historical fact made during today's call, including statements regarding our anticipated financial results and commercial activity, will be covered by the Safe Harbor provisions for forward-looking statements contained in Section 27A of the Securities Act of 1933 as amended and Section 21 of the Securities Exchange Act of 1934 as amended. Forward-looking statements are subject to risks and uncertainties. Actual events or results may differ materially from those projected or discussed. All forward-looking statements are based upon currently available information, and GRAIL assumes no obligation to update these statements. To better understand the risks and uncertainties that could cause actual results to differ, we refer you to the documents that GRAIL files with the SEC, including the risk factor section in GRAIL's most recent quarterly report on Form 10-Q. This call will also include a discussion of GAAP results and certain non-GAAP financial measures, including adjusted gross profit or loss and adjusted EBITDA, which are adjusted to exclude certain specified items. Our non-GAAP financial measures are intended to supplement your understanding of Grail's financials. Reconciliations of the non-GAAP measures to most directly comparable GAAP financial measures are available in the press release issued today, which is posted to our website. And with that, I'll hand the call to Bob.

Good afternoon, everyone, and thank you for joining us to review results for the third quarter. We remain pleased with the demand for Gallery that we are seeing in the pre-reimbursement environment. Through September 30th of this year, more than 250,000 commercial Gallery tests have been prescribed by more than 12,000 healthcare providers since launch. Grail is an established market leader in the field, and we are proud of the demonstrated impact that Gallery is having on patients' lives. Gallery was designed for population scale and Grail continues to optimize our technology and laboratory infrastructure to enable future growth. At the end of this year, we will launch the next version of the Gallery test. With the new assay, we've integrated a significant level of automation among other efficiencies to support volume at scale and enable reductions in cost over time. Additionally, our large laboratory facility of approximately 200,000 square feet in Research Triangle Park, North Carolina, enables us to scale laboratory capacity substantially for multiple years of growth. We continue to present evidence demonstrating Gallery's performance at renowned medical conferences and publish the results in leading peer-reviewed publications. In September, JCO Precision Oncology published a sub-analysis from our CCGA and Pathfinder studies in prostate cancer. For prostate cancer in general, over-diagnosis of insulin cancers is a particular concern. The analysis demonstrated that when gallery-detected prostate cancer, most were high-grade and clinically significant and usually indicative of aggressive disease where additional diagnostic evaluation is necessary. These data, previously shared at AACR in March, build on earlier findings regarding galleries' preferential detection of aggressive, deadly cancers. This is important because any screening paradigm, when designed for population scale, in addition to standard of care of screening, should not exasperate overdiagnosis of indolent cancers. In October, Guerrero presented early results from the Reflection Real-World Evidence Study of Gallery at the Early Detection of Cancer Conference. In this study, a diverse population of approximately 2,800 veterans from the U.S. Department of Veterans Affairs sites with toxic exposure but with no symptoms suggestive of cancer were evaluated. Initial results show that among study participants, the veteran cohort had a cancer signal detection rate of 1.3% and a positive predictive value of 42.9%. More than half of the cases were identified at early stage of 1 to 3. To discuss our second quarter financial results, I'll turn it over to GRAIL's Chief Financial Officer, Aaron Frieden.

Thanks, Bob, and good afternoon, everyone. I'm pleased to present our results for the third quarter. Third quarter results were strong with revenue of $28.7 million up $7.9 million or 38% as compared to Q3 2023. Total revenue for the quarter is comprised of $25.4 million of screening revenue and $3.3 million of development services revenue. Development services revenue includes services we provide to biopharmaceutical and clinical customers, including support of clinical studies, pilot testing, research, and therapy development. We see continued demand for our gallery test and sold approximately 32,600 tests in the third quarter, which historically has been our slowest quarter of the calendar due to summer holidays. Screening revenue of $25.4 million in the third quarter was up 52% as compared with the third quarter of 2023, primarily based on an increase in sales volume in Q3 2024 as compared to the same quarter last year. Net loss for the quarter was $125.7 million, an improvement of 86% as compared to Q2 2023, which was impacted by a large goodwill and intangible asset impairment. We additionally report non-GAAP financial measures to enhance investors' understanding of our business. These measures include adjusted gross profit or loss and adjusted EBITDA and exclude accounting impacts related to Illumina's acquisition of Grail. We encourage investors to carefully consider results under GAAP in conjunction with our supplemental non-GAAP information and the reconciliation between these presentations available in our third quarter earnings press release. Non-GAAP adjusted gross profit for the second quarter of 2024 was $11.8 million, an increase of $4.8 million, or 68% as compared with Q3 2023. Primary drivers of the increased margin were revenue mix and the efficiencies of scale related to increased gallery volume. Adjusted EBITDA for the second quarter of 2024 was a negative $108.2 million, representing an improvement of $17.9 million or 14% as compared to Q3 2023. And we ended the quarter with a cash position of $853.6 million. We continue to expect reductions in our cash burn in line with the guidance we provided last quarter. In August, we lowered our second half cash burn guidance from $250 million to $220 million. Additionally, we guided full year burn for 2025 expected to be approximately $325 million. Given our experience through the first nine months, we are narrowing our guidance for gallery sales for 2024 to be between 40 and 50% growth when compared to 2023. As a reminder of the expected impact of the restructuring we announced in the last quarter, we plan for gallery revenue to grow more moderately after 2024 until we receive broad reimbursement. With our reduced spending profile, our cash balance provides runway into 2028. I will turn it back to Bob for concluding remarks.

Thank you, Aaron. We are a mission-driven company, and we are focused on improving cancer care and enabling broad use of Gallery. We are focused on our strategic goals, seeking FDA approval of Gallery and pursuing broad reimbursement for Gallery. In terms of upcoming milestones this year we expect to continue enrollment in the gallery medicare or reach study drive access to gallery and advance our commercial and research partnerships. We also anticipate transitioning to a new version of gallery, which will enable us to scale efficiently as gallery demand increases. We're looking forward to the expected readouts of our registrational studies and anticipate results from the first 25,000 participants in the Pathfinder 2 study in the second half of 2025 and the full results from the NHS Gallery study in 2026. With that, we'll turn the call over to Q&A. Operator, please go ahead.

Thank you. At this time, if you would like to ask a question, please click on the raise hand button, which can be found on the black bar at the bottom of your screen. You may remove yourself from the queue at any time by lowering your hand. When called upon, you may unmute your line and ask your question. We will wait one moment to allow the queue to form. Our first question will come from Subbu Nambi with Guggenheim.

Hey, guys. It's Thomas on for Subbu. Thanks for taking the questions. A decade into the Grail journey, can you walk through some of the progress that's been made and give a little bit more color on the outlook for gallery reimbursement, the TESS FDA regulatory pathway, And then just your commercial strategy in general, especially that comes to that new test. You know, what comes next? And specifically, when do you expect to be in front of the FDA regulatory pathway? And how long after would you envision CMS reimbursement?

All right. Thanks for the question. You know, a fair amount to unpack there. So, you know, I guess maybe focusing first on the FDA pathway, you know, so we've now in July completed the study visits for our two key registrational studies. So Pathfinder 2, where we've enrolled 35,000 people, and the NHS Gallery study where we've enrolled 140,000 people in that. That's the clinical data across that 175,000 people where we will use to submit for our PMA. And the submission time is the first half of 2026. And so from that, we do expect an advisory committee at the FDA. And so we expect about a one year timeline from that, which would drive us into first half 2027 for FDA approval. is the tentative timeline that we're working towards. As mentioned in the question, the next version of the assay. One of the things we recognize is that the gallery test has always been built for population scale. With the next version of the assay, we really looked to two things. One, nearly fully automate the assay itself to get great scalability. With that also comes cost reduction. We expect near-term variable cost reduction from the assay. And then longer term, as we get volume, we expect fixed cost leverage from the assay. So we're looking to transition to that new assay at the end of this year. And then on the reimbursement pathway, you know, clearly CMS is an important element of that. There is the MSED law going through in going through Congress right now. In the summer, it had a markup in the House Ways and Means Committee where we had a rather rare and unusual unanimous vote for it, 38 to 0. And so we're very encouraged by that. We're encouraged by the large stakeholder groups that are advocating for the bill. You know, one of the things that's very clear is that, you know, cancer is not a partisan issue. So we have bipartisan, bicameral support for the bill. And so we're really highly encouraged by that, plus just the support networks that are and sponsors for the bill. But, you know, given the nature of our Congress and, you know, any of the, you know, lack of productivity in Congress in the last year or so, it's difficult to predict timing on that. But, you know, we're hopeful that before we get, you know, before we get FDA approval, we will have the bill pass and that will give CMS the authority to be able to cover an FDA approved MSED test. So maybe I'll stop there and see if there's any follow-on.

Awesome. Thanks for that color. And then just one more building off of that. You mentioned cash balance. How do you manage your commercial efforts, given everything that you just said and that spend?

Yeah, so I think one of the things we did in the restructuring in August is we looked at our spend across the organization and really focused on our North Star of getting Gallery FDA approved and reimbursed. Within that, we've recognized that as an early stage unreimbursed test, that it's really an investment in commercial. And as you can see from this quarter's results, we know that if we invest in commercial, we can drive sales and drive sales rapidly. In August, we looked at moderating the amount of investment in there in order to extend our cash runaway out into 2028. And so right now we're prioritizing that cash runway. And on the commercial side, what we're really looking to do is to drive that to be more cost neutral so that the margin generated by the tests that they're selling can at least cover the commercial expenses. So it's a more moderate approach. We've learned a lot about what works and doesn't work. So we've been able to concentrate our commercial efforts on the most productive areas. and you know pull back from some of the other areas and so we think we'll continue to learn as we go even at a more moderated pace um but but that is the expectation our next question will come from teja savant with morgan stanley please go ahead uh hi this is jason offered tejas thank you for taking our questions

So Grail is going to be the first mover in the MSED market. Obviously, the market right now is very decent, and you have to build awareness for technology for both physicians and patients. So with potential FDA approval and establishing reimbursement two years away, give or take, can you talk about any plans you have to build the MSED market in the next year or two before reimbursement? Thank you.

Sure. So over both over the last couple of years, as well as going into the near future, we're going to look to you know, we've looked to really build out, you know, how how the ecosystem works. And so what we wanted part of wanting to drive the commercial experience here is to get providers involved. health systems, very comfortable with the test, know how to operate with the test and really integrate it into their standard practices. And so we've been very successful at that aspect of it. And so we will continue to push on that and understand what resonates with providers, what resonates with patients in terms of how we describe the test. And then from a very practical standpoint, making sure our laboratory is able to deliver high quality tests in a very timely manner. So just kind of exercising the whole ecosystem is very important. Because again, this is a population scale test that's been designed. And so we expect to operate at very high volumes. And so while we're already operating at reasonably high volumes, when we get to the next stage of broad reimbursement, the volumes will go up exponentially and we'll need to be prepared for that.

Got it. Thank you for that. And then as a follow up on version two of gallery, you've mentioned that the main goal is to produce a scalable version of the test. Can you confirm if you anticipate any major performance differences for version two compared to the current version? And additionally, can you confirm what bridging studies you might need to do with respect to the studies you're submitting as part of PMA submission? Thank you.

Yeah, so we, you know, while we expect some, you know, minor improvements in the performance, you know, from a, you know, end user perspective, we would not expect a significant difference in the actual performance of the test. The main drivers here are, as we mentioned, scalability and cost on the both studies and, you know, in terms of you know, from an FDA perspective. We're in discussions with them on the appropriate bridging studies for the next version of the assay from the current version. And as we go later on, we'll have, you know, similar discussions with the NHS, you know, if they want to move forward in the full-scale deployment.

Great. Appreciate the time.

Our last question comes from Vijay Kumar with Evercore ISI. Please go ahead.

Hi, guys. This is Mackenzie on for Vijay. Just another question on cash burn. How should we be thinking about phasing of that through 2025? I know you gave us a number, but is this something that's going to be spread evenly across the quarters, or do you expect that to improve sequentially throughout the year?

Aaron, you want to take that one? Yeah, great question. So we'd expect cash burn to some of the programs that we've been talking about getting to PMA submission, getting to the next version of the test roll off.

Okay, great. That's helpful. And then I know you talked about in the new version of gallery, this is supposed to reduce your cogs, but it sounds like it's going to take a little bit of time for that to ramp. So how should we be thinking about how long that ramp to sort of a normalized cogs run rate will take? And what can we expect on the margin front there?

Yeah, so hard to predict right now from a timing perspective, but there'll be an impact to begin with on the variable front. Part of the main driver for that program was to bring down the cost of the test and then increase the throughput. So there'll be some pickup to begin with, but we won't realize the entire benefits of that test, the cost of that test until we get into significantly more volume than we're at today. I you know that's something as we, you know transition to that test at the end of this year run it for the you know following quarters we'll be able to give more line of sight to that.

got it Thank you.

There are no further questions at this time, I will now turn the call back to grail for closing remarks.

want to thank everyone for joining today's call.

Ladies and gentlemen, this concludes the call. You may now disconnect.