This Healthcare Company Could Deliver a 77% Gain
Guardant Health, Inc. (Nasdaq: GH), a precision oncology company focused on helping conquer cancer globally through use of its proprietary blood tests, vast data sets and advanced analytics, reported financial results for the first quarter ended March 31, 2019.
The stock jumped on the news.
GlobeNewswire reported, “During the first quarter of 2019, we made important headway on several key initiatives,” said Helmy Eltoukhy, PhD, Chief Executive Officer.
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“We are encouraged by the momentum we are seeing with continued adoption of Guardant360 and GuardantOMNI in the advanced cancer setting and the progress we are making with our LUNAR program in proving out the feasibility of our liquid biopsy platform for early cancer management and early detection.”
ASC 606 primarily impacted the company’s recognition of revenue related to patient claims paid by third-party commercial and governmental payors. The company adopted ASC 606 using the modified retrospective method, which means that the total amount of revenue reported for first quarter 2018 has not been restated in the current financial statements.
Instead, the accumulated difference resulting from applying the new revenue standard to all contracts that were not completed as of adoption was recorded to accumulated deficit as of January 1, 2019.
Total revenue was $36.7 million for the three months ended March 31, 2019, a 120% increase from $16.7 million for the three months ended March 31, 2018.
Without the adoption of ASC 606, total revenue for the three months ended March 31, 2019 would have been $37.6 million, a 126% increase over the first quarter of 2018. Precision oncology revenue increased 103% driven by higher testing volume and increased revenue per test. There were 9,521 clinical tests and 3,762 biopharmaceutical tests performed during the first quarter of 2019.
Gross profit, or total revenue less cost of precision oncology testing and cost of development services, was $23.1 million for the first quarter of 2019, an increase of $15.7 million from $7.4 million in the corresponding prior year period. Gross margin, or gross profit divided by total revenue, was 63.1% as compared to 44.6% in the corresponding prior year period.
Total operating expenses were $46.8 million for the first quarter of 2019, as compared to $26.1 million in the corresponding prior year period, an increase of 79%.
Net loss attributable to Guardant Health, Inc. common stockholders was $26.1 million in the first quarter of 2019, which included a charge of $4.7 million for an increase in the fair value of the redeemable noncontrolling interest in our joint venture with SoftBank, as compared to $13.8 million in the corresponding prior year period. Net loss per share attributable to Guardant Health, Inc. common stockholders was $0.30 in the first quarter of 2019, as compared to $1.16 in the corresponding prior year period.
Cash, cash equivalents and marketable securities were $492.8 million as of March 31, 2019.
2019 Financial Guidance
Guardant Health now expects full year 2019 total revenue to be in the range of $145 million to $150 million, representing 60% to 65% growth over full year 2018. This compares to the company’s previous full year 2019 total revenue guidance of $130 to $135 million.
The stock’s jump on the news may have signaled a break out from a brief consolidation.
A Trade for Short Term Bulls
As with the ownership of any stock, buying GH could require a significant amount of capital and exposes the investor to standard risks of owning a stock.
To reduce the risks of a trade, an investor could purchase a call option. This allows them to benefit from upside moves in the stock while limiting risk to the amount paid for the options. However, buying a call option can also require a significant amount of capital and includes the risk of a 100% loss.
Whenever an option is bought, the maximum risk is always equal to 100% of the amount of spent to purchase the option. Since options cost significantly less than a stock, the risk in dollar terms will usually be relatively small to own an option.
To further limit the risks of the trade, an investor could use a bull call spread. This strategy consists of buying one call option and selling another at a higher strike price to help pay for the cost of buying the first call. The spread strategy always reduces the risk of an options trade.
This strategy is designed to profit from a gain in the underlying stock’s price but has the benefit of avoiding the large up-front capital outlay and downside risk of outright stock ownership. The potential risks and rewards of this strategy are summarized in the chart below.
Source: The Options Industry Council
Both the potential profit and loss for the bull call spread are limited. The maximum loss is equal to the net premium paid when the trade is opened. The maximum profit is limited to the difference between the strike prices, less the debit paid to put on the position.
This strategy could be especially appealing with high priced stocks where the share price and options premiums are often a significant commitment of capital for smaller investors.
A Specific Trade for GH
Every day, we scan the markets looking for trades with low risk and high potential rewards. These trades are available almost every day and we share them with you as we find them. Now, it’s important to remember these are trading opportunities in volatile stocks.
When we find a potential opportunity, we evaluate it with real market data. But because the trades are volatile, the opportunities may differ by the time you read this. To help you evaluate the current opportunity, we show our math and explain the strategy.
For GH, the July 19 options allow a trader to gain exposure to the stock.
A July 19 $80 call option can be bought for about $6.80 and the July 19 $85 call could be sold for about $5.00. This trade would cost $1.80 to open, or $180 since each contract covers 100 shares of stock.
The amount paid to enter the trade is the largest possible loss on the trade. This is generally true whenever a trader is creating a debit to enter an options trade. “Creating a debit” means there is a cost to enter the trade. You could create a debit by simply buying puts or calls to open a directional trade.
In this trade, the maximum loss would be equal to the amount spent to open the trade, or $180
The maximum gain on the trade is equal to the difference in exercise prices less the amount of the premium paid to open the trade.
For this trade in GH the maximum gain is $3.20 ($85 – $80 = $5; $5 – $1.80 = $3.20). This represents $320 per contract since each contract covers 100 shares.
Most brokers will require minimum trading capital equal to the risk on the trade, or $180 to open this trade.
That is a potential gain of about 77% based on the amount risked in the trade. The trade could be closed early if the maximum gain is realized before the options expire.