Archives August 2020

Guardant Health, Inc. (GH) CEO Helmy Eltoukhy on Q2 2020 – Earnings Call Transcript


Guardant Health, Inc. (NASDAQ:GH) Q2 2020 Earnings Conference Call August 6, 2020 4:30 PM ET

Company Participants

Carrie Mendivil – IR

Helmy Eltoukhy – Co-Founder & CEO

AmirAli Talasaz – President & Co-Founder

Derek Bertocci – CFO

Conference Call Participants

Doug Schenkel – Cowen and Company

Puneet Souda – SVB Leerink

Tycho Peterson – JPMorgan

Ivy Ma – Bank of America Merrill Lynch

Patrick Donnelly – Citigroup

Max Masucci – Canaccord

David Westenberg – Guggenheim Securities

Operator

Ladies and gentlemen, thank you for standing by, and welcome to the Guardant Health Q2 2020 Earnings Conference Call. [Operator Instructions]

I would now like to now hand the call over to your speaker today, Ms. Carrie Mendivil, Investor Relations. Thank you. Please go ahead, ma’am.

Carrie Mendivil

Thank you. Earlier today, Guardant Health released financial results for the quarter ended June 30, 2020. If you’ve not received this news release or if you’d like to be added to the company’s distribution list, please send an e-mail to investors@guardanthealth.com.

Before we begin, I’d like to remind you that management will make statements during this call that are 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. Additional information regarding these risks and uncertainties appear in the section titled Forward Looking Statements in the press release Guardant issued today. For a more complete list and description, please see the Risk Factors section of the company’s Annual Report on Form 10-K for the year ended December 31, 2019, and in its other filings with the Securities and Exchange Commission. Except as required by law, Guardant disclaims any intention or obligation to update or revise any financial projections or forward-looking statements, whether because of new information, future events or otherwise. This conference call contains time-sensitive information that is accurate only as of the live broadcast, August 6, 2020.

With that, I’d like to turn the call over to Helmy Eltoukhy, Guardant’s Co-Founder and Chief Executive Officer. Helmy?

Helmy Eltoukhy

Thanks, Carrie. Good afternoon, and thank you for joining our second quarter 2020 earnings call. Joining me today is AmirAli Talasaz, our President and Co-Founder; and Derek Bertocci, our Chief Financial Officer. To start, I hope everyone is in the best of health and in good spirits as we face the continued ramifications of the pandemic. As expected, the impact of COVID-19 created headwinds for the oncology space during the second quarter and not surprisingly, various aspects of our business were affected to varying degrees, which I will review in a bit.

That said, in the face of these ongoing challenges, the Guardant team has continued to make substantial progress across our business, presenting new data for our LUNAR-2 assay, announcing 2 new contained diagnostic partnerships and launching our GuardantINFORM platform. Indeed, these past few months have made me more confident than ever in the promise of our platform and the significant opportunity ahead to transform patient care, despite the challenges posed by the pandemic today. I’m extremely proud of the Guardant team for the fire and dedication they have shown in this new environment. The fuel to the fire, so to speak, is their commitment to serve patients and consistent with these values, I will start off our call with a patient story.

Recently, a 60-year-old man presented with a brain met and an initial workup identified lung nodules and suspicious lymph nodes. Unfortunately, as oncologists with practices in the community setting, have noticed that patients are coming in at more advanced stages due to delays in addressing symptoms as a result of a pandemic. The brain met was the most urgent matter for this patient and brain surgery was performed. The provider was suspicious of lung cancer given the histology of the brain biopsy and the presence of lung nodules, but a lung biopsy following the brain procedure was deemed too risky. His oncologist needed a genomic assessment of his tumor. And while tissue from his brain biopsy was sent off for genomic testing, they were still awaiting results. The provider decided to try a liquid biopsy and sent to Guardant360 at the suggestion of his colleague, a frequent Guardant360 user. Guardant360 quickly identified a MET exon 14 skipping alteration. Based on this result, the oncologist was able to select capmatinib for his first line treatment. Not only does this story demonstrate the importance of the precision oncology paradigm, but highlights how our liquid biopsy platform is uniquely qualified to address the needs of patients during this challenging time.

Turning to our business, we ended the second quarter with revenues of $66.3 million, growing 23% over the second quarter of 2019. Clinical volumes for Guardant360 grew 15% to 13,694 clinical tests compared to the second quarter of 2019. On our last earnings call, I shared that our U.S. clinical volumes were down about 30% exiting the first quarter compared to the average level of clinical samples over the first 10 weeks. And by early May, we had begun to see a slight uptick in sample volume from the lowest points in early April. We continue to see improvement in clinical volumes throughout May and into June and are pleased to report that we exited the quarter with volumes similar to the levels we saw in mid-March prior to the impacts from COVID-19.

Through this difficult time, our team was not only able to maintain uninterrupted operations, but was also able to consistently maintain our industry-leading turnaround times for Guardant360 of 7 days or less. Diving deeper into clinical volumes, growth recovered more quickly in community hospitals compared to the academic setting. Additionally, we saw a rapid shift towards telemedicine. Before the pandemic, oncology visits very rarely used telemedicine, with just a few percent of visits performed virtually. Over the past few months, this trend has reversed itself to protect advanced cancer patients, an extremely high-risk population, from exposure to COVID-19. As a result, there have been fewer physical visits to oncology offices and fewer new diagnoses, factors that benefit the increased use of liquid biopsy testing, especially when coupled with our mobile phlebotomy services and digital offerings. While these trends are encouraging, we believe that the path of recovery is likely to remain uncertain in the near term. Since the end of June, we have seen a resurgence of COVID cases in some regions across the U.S. and it’s unclear how a second wave of closures resulting from the pandemic may impact our clinical volumes through the end of the year.

Turning to our biopharma business. Volumes declined 47% year-over-year to 2,805 tests. This was counterbalanced by 29% year-over-year growth in development services revenue of $15.3 million. On the whole, we remain pleased with our biopharmaceutical business. AmirAli will give further detail in a few minutes.

Across the board, we remain unwavering in our commitment to serving patients in advanced cancer settings and have continued to shift the market to a blood-first paradigm for genotyping. At the end of 2018, we outlined 3 key catalysts that will be critical to shifting the market to a blood-first paradigm: first, demonstrating concordance between liquid biopsy and tissue testing; second, Pan-Cancer Medicare coverage; and finally, FDA approval of Guardant360 with a Pan-Cancer tumor profiling label.

In the first quarter, we began to see benefits from Pan-Cancer Medicare payments outside of non-small cell lung cancer and we are looking forward to achieving the third catalyst with the approval of Guardant360 for all solid tumor types. We believe FDA approval will help to accelerate wider adoption of guideline-recommended genomic profiling, increasing the number of advanced cancer patients who receive potentially life-changing treatments. Specifically, we expect FDA approval to: strengthen reimbursement by advancing conversations with private payers and further improving existing Medicare coverage; extend momentum for our companion diagnostics business through increased opportunities to work with biopharma in the clinical setting; and over the medium to long term, advance the use of Guardant360 with physicians who have been slow to adopt CGP.

Looking ahead, we continue to believe that the unique opportunity we have here at Guardant will allow us to serve patients well beyond those in advanced stages of the disease. During the quarter, we completed a follow-on offering, raising approximately $355 million of net proceeds, bringing our cash, cash equivalents and marketable securities total to $1.1 billion. We intend to use these funds to accelerate development in our LUNAR program and pursue the large market opportunities in front of us.

I’m incredibly proud of the outstanding efforts across our organization and the last few months only reaffirms my belief that we will come out of this period even stronger as a company.

With that, I will now turn the call over to AmirAli for more detail on our biopharma business and our LUNAR program.

AmirAli Talasaz

Thanks, Helmy. I hope all of you and your families are staying safe and healthy. Turning first to our biopharma business, as Helmy mentioned, we had a strong quarter for our CDx development services, offset by lower sample testing volumes.

Starting with biopharma volumes. We have always noted the likelihood of ebbs and flows in our biopharma business. Back in February, on our 2019 year-end earnings call, we anticipated that biopharma volumes would be lighter in the first half of the year. In addition to these anticipated fluctuations, COVID-19 has clearly impacted the sample testing in prospective studies and also the timely shipment of biobank samples from retrospective studies. Looking ahead to the next couple of quarters, we expect that the effect of COVID-19 may continue to ripple through biopharma sample testing volume. However, through conversations with our biopharma partners, we continue to see robust future demand for sample processing, especially using GuardantOMNI.

Conversely, we experienced strong growth in our companion diagnostic business, which speaks to the progress we are making in our CDx product development activities and the robust interest from our biopharma partners. We recently announced 2 new CDx partnerships. In early July with Janssen for amivantamab, an investigational EGFR-MET bispecific antibody being studied in the treatment of non-small cell lung cancer patients with EGFR exon 20 insertions, which comprise 4% to 12% of non-small cell lung cancer patients with EGFR mutations. We are encouraged that our partners are recognizing the value of comprehensive testing to find these patients and to support the broad commercial penetration to accelerate uptake of these types of target therapies from the first day of approval.

And last week, we announced the CDx collaboration with Radius Health for elacestrant, our first companion diagnostic program in breast cancer. Given the high prevalence of bone metastases in advanced breast cancer disease, our Guardant360 liquid biopsy can help overcome the challenges of bone biopsies by identifying significantly more actionable biomarkers, including ESR1 mutations, which are being studied in the Radius EMERALD trial.

We are extremely pleased by the progress of our companion diagnostics business to date and are encouraged by the healthy pipeline of other CDx discussions underway.

Our companion diagnostic program supports the critical expansion of targeted therapies, which we believe will be one of the most important drivers of Guardant360 clinical adoption. 2020 has seen more new targeted therapies approved by FDA than prior years and we are already seeing the positive effects in clinical volumes for indications with recent drug approvals, for example, in prostate cancer.

We also remain deeply cognizant to continue generating robust data to further improve cancer diagnosis and treatment. In late June, we launched a real-world clinical genomic platform, GuardantINFORM, to help accelerate research and development of the next generation of cancer therapeutics. Each Guardant360 test provides critical genomic information on various tumor profiles and we have now collected this genomic information from more than 100,000 patients to date. GuardantINFORM combines this robust genomic data with the identified clinical information for each patient. This clinical genomic data set offers our biopharma partners real-world insight into how patients are treated based on their mutation profiles as well as pattern of drug resistance and tumor evolution. The most notable applications for GuardantINFORM include targeted drug development and label expansion, clinical trial optimization by incorporating real-world clinical genomic data into trial design and control arm development as well as post-marketing studies.

Now turning to our LUNAR program. We are continuing our research on clinical development activities at relatively full capacity. We have expanded our trial site in ECLIPSE to over 130 sites. Patient enrollment began to reaccelerate in late June, following lulls throughout April. In fact, June was a record month of enrollment and we have continued to see growth subsequent to quarter end. Overall, we are very pleased with our progress, particularly during these difficult past few months. And we continue to believe we will complete enrollment within the 24-month time frame announced last November.

After ECLIPSE, we are also developing robust data in support of our LUNAR-2 assay. At AACR, we shared data from a new patient cohort that demonstrated improved performance of LUNAR-2 assay to detect early-stage colorectal cancer in average risk adults. Our assay achieved 90% sensitivity and 94% specificity in detecting early-stage CRC and even higher specificity when restricting analysis of the controls to those who are negative for CRC by colonoscopy.

Finally, on our last earnings call, we shared details on our efforts to develop a diagnostic success for SARS-CoV-2. We recently filed for an Emergency Use Authorization of our NGS assay and are currently using it in-house for surveillance testing of Guardant employees. As an essential business, weekly COVID-19 screenings have been critical to both keeping our employees safe and maintaining business continuity. We continue to believe that similar screening programs will be an important component of the sustained reopening of the economy and educational systems across the U.S.

With that, I will now turn the call over to Derek Bertocci for more information and details about our financials. Derek?

Derek Bertocci

Thanks, AmirAli. Revenue for the second quarter of 2020 totaled $66.3 million, up 23% from $54 million in the prior year quarter, but down $1.2 million or 2% from the first quarter of 2020. The increase from Q2 2019 was driven by an increase in precision oncology testing revenues resulting from significant increases in average selling price or ASP per test as well as higher development services revenue. The decline from the first quarter of 2020 was driven by lower test volumes caused by the COVID-19 pandemic, mostly offset by higher development services revenue. Total precision oncology testing revenue for the second quarter was $51 million, comprised of $39.6 million from clinical tests and $11.4 million from biopharmaceutical tests. Precision oncology revenue from clinical tests included $2.6 million in revenue received from Medicare for samples processed in 2019. Given the age of the samples associated with this revenue, we do not believe it to be indicative of ordinary course of operations.

Second quarter clinical precision oncology volume totaled 13,694 tests, up 15% from 11,875 tests in the prior year quarter, but down 10% from 15,257 tests in the first quarter of 2020 due to the COVID-19 pandemic. Clinical precision oncology ASP was $2,893 in the second quarter of 2020, up 57% from $1,839 in the prior year period and up 16% from $2,489 in the first quarter of 2020. The 57% increase in clinical ASP over the prior year quarter was due principally to the reimbursement from Medicare for testing of non-lung cancer samples in addition to lung samples starting in March 2020, with a modest increase in reimbursement from commercial insurers and $2.6 million received from Medicare for samples processed in 2019.

In Q2, the processing of samples reimbursed by Medicare stabilized under the new coverage policy, and as a result, we recorded revenue on approximately 85% of Medicare samples in Q2, up from approximately 75% of Medicare samples in Q1. This increase in Medicare reimbursement plus a modest increase in reimbursement from commercial insurers as well as revenue from Medicare for samples processed in 2019, resulted in a 16% increase in clinical ASP in Q2 over Q1.

Precision oncology revenue from biopharmaceutical tests in the second quarter totaled $11.4 million, down 44% from $20.2 million for the second year quarter and down 49% from $22.3 million in the first quarter of 2020. Second quarter pharma precision oncology volume totaled 2,805 tests, down 47% from 5,285 tests in the prior year quarter. As expected, second quarter volume was lower than the prior quarter, down 47%, due mainly to the impact of the COVID-19 pandemic on customer programs. ASP was $4,054, up 6% from $3,827 in the prior year period, but down 4% from $4,230 in the first quarter of 2020. The ASP was driven by changes in the proportion of total biopharmaceutical tests using the GuardantOMNI test, which has a higher selling price than the Guardant360 test.

Development services revenue in the second quarter totaled $15.3 million, up 29% from the prior year quarter and up 111% from the first quarter of 2020. The increase was primarily due to companion diagnostic revenue, including programs with Amgen and Janssen, which boosted development services revenue in the first half of 2020.

Gross profit for the second quarter of 2020 was $43.9 million compared to a gross profit of $37.1 million in the same period of the prior year and $47 million in the first quarter of 2020. Gross margin in the second quarter was 66% as compared to 69% during the second quarter of 2019 and 70% in the first quarter of 2020. The decline in gross margin compared to the second quarter of 2019 was primarily due to a lower gross margin on development services revenue, the result of normal variability across programs. The decline in gross margin compared to the first quarter of 2020 was due principally to the lower ASP for pharma testing, plus an increase in overhead cost per unit due to the decline in total volume of samples tested. Total operating expenses for the second quarter of 2020 were $98.5 million, an 88% increase from $52.4 million in the second quarter of 2019 and up 20% from $81.9 million in the first quarter of 2020.

R&D expenses for the second quarter of 2020 were $36.3 million compared to $19.5 million in the second quarter of 2019. The increase was primarily attributable to increased expense for our LUNAR programs, including the ECLIPSE clinical trial, our FDA submission for Guardant360 and other research and development programs, including development of our COVID-19 test. Sales and marketing expenses for the second quarter of 2020 were $25.0 million compared to $19.4 million in the second quarter of 2019. The increase was due to growth in sales marketing staff, plus spend on programs to increase education and awareness about liquid biopsy.

General and administrative expenses for the second quarter were $37.2 million compared to $13.4 million in the second quarter of 2019. G&A expenses for the second quarter included $18.3 million in stock-based compensation, or SBC, related to market-based restricted stock units granted to the company’s founders on May 26, 2020. The remaining increase in G&A expense was $5.5 million, which was primarily due to additional staff to support the growth of the company, legal expenses and the cost of compliance with the requirements of becoming a large accelerated public filer with the SEC. The market-based restricted stock units were designed to focus the founders on the long-term operational and strategic development of the company, including the successful development and commercialization of the key LUNAR programs. The design of the market-based restricted stock units builds upon the successful company performance that the founders have led to date and the Board believes the market-based restricted stock units further align the founders’ interests with those of the company’s long-term stockholders because the vesting will depend on creation of significantly enhanced stockholder value over the following 7 years.

Net loss attributable to Guardant Health common stockholders was $54.6 million or $0.57 per share compared to $11.6 million or $0.13 per share in the second quarter of 2019. We ended the second quarter of 2020 with $1.1 billion in cash, cash equivalents and marketable securities.

Beginning this quarter, we added disclosure of adjusted EBITDA, a non-GAAP financial measure, to our financial reporting to assist management and investors in evaluating the performance of our core business by removing the impact of income or expenses attributable to material noncash items, specifically stock-based compensation and fair value remeasurements due to the subjectivity, management judgment and market fluctuations involved in these amounts. We exclude certain other items because we believe that these incomes or expenses do not reflect expected future operating expenses.

Additionally, certain items are inconsistent in amounts and frequency, making it difficult to perform a meaningful evaluation of our current or past operating performance. You will find a detailed presentation of non-GAAP adjusted EBITDA and a full reconciliation to GAAP net loss attributable to Guardant Health, Inc. common stockholders in our Q2 2020 results press release and quarterly 10-Q filed with the SEC. Our use of adjusted EBITDA as a non-GAAP financial measure is not intended to be considered in isolation from as substitute for or as superior to the corresponding financial measures prepared in accordance with GAAP. Non-GAAP adjusted EBITDA was a loss of $25 million in the second quarter of 2020 compared to $9 million in the second quarter of 2019.

The impact of COVID-19 created headwinds for the oncology space during the second quarter and due to its unpredictable evolution, we do not believe that we can reasonably estimate the magnitude or duration of specific impacts on our business. Accordingly, we are not reinstating financial guidance at this time. As Helmy mentioned, we exited the second quarter with clinical test volumes similar to the levels we saw prior to the impacts from COVID-19. That said, we believe the effects from COVID are likely to continue to impact the oncology space in the near term and we anticipate third quarter clinical volumes will be up modestly from the first quarter. Clinical precision oncology ASP in the second quarter was $2,702 when we exclude the $2.6 million of revenue received from Medicare for samples processed in 2019. We expect this clinical ASP to remain steady through the balance of 2020.

As AmirAli mentioned, we expect that the effects of COVID-19 may continue to impact biopharma sample testing volumes through the second half of the year. Nonetheless, our customers continue to demonstrate strong interest in our capabilities and we saw record development services revenue in the second quarter. That said, given the lumpiness of our CDx programs, we do not expect development services to remain at this record peak for the second half of 2020.

At this point, I would like to turn the call back to Helmy for closing comments.

Helmy Eltoukhy

Thank you, Derek. Before closing, I want to again thank our team at Guardant for the strength, dedication and effort they have shown, particularly over the past few months. In these unprecedented times, I have even more confidence in the value that liquid biopsy can bring to the cancer treatment paradigm. We are well prepared operationally, financially and strategically to navigate through this challenging period and we remain focused on our long-term opportunity ahead of us to transform cancer patient care.

With that, we will now open it up to questions.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question comes from the line of Mr. Doug from Cowen.

Doug Schenkel

Starting on clinical testing revenue, that was up sequentially, as you know, quarter-to-quarter. I think a lot of folks, including me, were expecting a decline, keeping in mind how you exited Q1. And that’s encouraging and your commentary is also really encouraging regarding how you exited the quarter and what you’re looking for in Q3. What I’d like to dig in on a little bit more is, where have you seen the recovery most? I mean I know you talked about academic centers versus the community. But I guess if you could cut it a different way and talk about existing accounts versus new accounts. I’m just wondering if you’ve started to be able to be more successful in adding new accounts over the course of the quarter as the world started to open up a little bit more. I ask because in some ways, it would be great to hear that you are able to, once again, open more accounts. But in other ways, if you’re still challenged with that metric, it could be argued that the rebound in same-store sales is all the more impressive.

Helmy Eltoukhy

Yes. It’s a great question, Doug. This is Helmy. It’s really interesting when you look at the data. Clearly, we’ve been in the market now for 5 or 6 years, over 7,000 oncologists out of the 10,000 or 12,000 have ordered our test at least once. And so the majority of the market does have exposure to Guardant. They have used it at least once and that’s where we believe we have an advantage in this time. We think this sort of time period of uncertainty and lack of access, at least face-to-face, really favors incumbents in this space, of which we are in the liquid biopsy testing arena. And so we have seen and continue to see addition of new oncologists, but the majority of our business is really catering to existing clients and customers and those that may have only sporadically used our services in the past and getting them to use it more consistently.

And to give you a little bit of color, we track a lot of metrics in our business. And I can tell you that June was a record month for us in terms of a number of kind of unique orders of physicians in that month. So we did see, I think, fundamental progress in terms of the KPIs we look at underlying those numbers. And so we do see some certainly positive signs of recovery. That said, we are seeing certain regions that are closing down again. There are clearly many hotspots that are raging on and that has impact as well. There is some fatigue going on in terms of virtual consultations and so on in terms of these physician offices. And so it’s something we’re continuing to monitor and we see the ebbs and flows regionally. But I think the underlying message is that we think we’re building differential strength, I would say, in terms of the landscape as a whole in terms of really the compatibility of our offering and the advantages of our offerings, amidst the backdrop of COVID and the challenges that it presents.

Doug Schenkel

Okay. Super helpful, Helmy. AmirAli walked through some of what you released during the quarter on LUNAR-2, some nice data updates. I’m just wondering when we should expect the next data release? And kind of building off of that, it’s encouraging and frankly, maybe even a little bit surprising, to hear that ECLIPSE is getting going in terms of enrollment and site opening so quickly. That’s good news for you and frankly, in terms of what it implies about what’s going on with colonoscopies, I think that’s a good sign for all of us. That being said, I’m just wondering, given the momentum you have there, are the original time lines in terms of when you’d expect completion and readout still intact? Or at this point, should we be thinking that there is going to be at least 1 to 2 months, maybe 3 months delay, given where you are right now?

AmirAli Talasaz

Yes. So regarding data presentation, Doug, you can’t expect in all majority of major conferences, oncology or related GI congresses, we would have some kind of presence in terms of optics. Regarding ECLIPSE, actually, we are very pleased with our progress. In fact, during the days that patient enrollment were slowed down because of COVID, we put a lot of energy behind bringing new sites on. And I’m very happy that we have over 130 sites. By end of this quarter, we are going to basically reach our 150 site target that we have for ECLIPSE. Month of June was our record month in Q2 and on the quarter, we find July was even better in terms of enrolling patients in the trial. And we do believe that we can finish this study within the original time frame that we mentioned last November, which was within the 24 months from SPI. And we think still we can finish the study even during this environment within the time frame we mentioned earlier.

Doug Schenkel

Okay. Super helpful. Last one and then I’ll leave it to others. Really pivoting to a completely different topic. I mean I think a lot of us, or at least I tend to think of Guardant as being primarily focused on internal development of products and advancement of internally development — developed products. That said, the balance sheet is in a really good spot. More broadly, there has clearly been a pickup in the pace of industry consolidation. I’m just wondering if there is any change in how you would describe your appetite and your readiness for more material M&A?

Helmy Eltoukhy

Yes. That’s a great question. I think certainly, all of that is on the table in terms of having a balance sheet that we have right now. We obviously have done some small acquisitions in the past, but I think if we think about the commercial channel that we have built, the product portfolio we have, where we’re going in terms of the market, there is certainly a place for inorganically adding to that and increasing leverage in terms of the core competencies we have in our business. And so it’s something that we’re certainly open to, and we continue to look at opportunities.

Operator

And our next question comes from Mr. Puneet Souda from SVB Leerink.

Puneet Souda

Great. So first one on biopharma revenue and thanks for the details there, AmirAli. Appreciate those details. So I think the important question there is despite the impact you’re seeing due to COVID and prospective samples and the biobank retrospective samples, what would be helpful is if you can help us understand your view on the underlying studies that are driving those samples to you. Do you think those studies are simply delayed? Or is there any fundamental change in those studies? If you could clarify that and provide us, if you can, in terms of when do you expect sort of those samples to return back to you and into the second half or maybe even later.

AmirAli Talasaz

So what the experience is actually in light of what has already been known in terms of prospective studies sponsored by pharma companies on our prospective trial side. And what also we experienced is some of the major pharma companies are putting a lot of attention into COVID-19 vaccine development and they’re taking a fresh look into their pipeline activities. So having said that, we are very pleased with all the conversations we have across many, many pharma companies around the utility of our products, especially around GuardantOMNI. We still expect that what we experience with COVID-19 is going to ripple through the rest of the year, at least for a couple of quarters. But we are optimistic about the future and all the conversations that we had around our portfolio of products, especially OMNI.

Helmy Eltoukhy

Yes. I mean let me just add one thing. This is Helmy here. I think we’re seeing there, I think, very good underlying signs in terms of the business. The pipeline is progressing very strong as well as diversification in terms of the types of partners that are using OMNI and kind of deepening use of that test. So all the kind of underlying metrics we look at are looking good in our view.

Puneet Souda

Okay. That’s great. And if I could have a follow-up on in terms of your LUNAR-1 program, can you elaborate where you stand on different efforts? I know you’re in a number of biopharma collaborations and partnerships are ongoing, there’s the COBRA trial that you have invested into and a few other studies. Maybe just give us a sense of where that stands and then potentially, when can we see that product in recurrence monitoring markets this year or the next? If you could provide any color on that. And then I have a small follow-up.

AmirAli Talasaz

Yes. As you mentioned, our LUNAR-1/MRD product, initially, we had an RUO version of it, then we had the clinically validated version of that product for CRC, which we are running currently a few trials based on that. And I’m pleased actually with the solid progress that we’re making on the R&D side. We have been working for a while to expand our MRD platform technology from basically a CRC device or CRC assay to really a multi-cancer type. So pleased with all the progress that the team has made on that front and please stay tuned about some data sharing around that platform, which is around multi-cancer MRD units.

Puneet Souda

Okay. Great. And last one, if I could, on COVID testing. I recall you were working on a differentiated high-throughput platform and thanks for the update on that in terms of filing the EUA. Anything you can provide in terms of the volumes per day that system can produce, or cost or turnaround time and maybe potential pricing, if you can?

AmirAli Talasaz

Yes. So this COVID test, yes, we filed our current EUA a few weeks back. So — and in parallel, we are talking with a bunch of potential partners in terms of bringing that test up for clinical use cases beyond testing Guardant employees and some small activities that we have today. The platform technology is pretty high throughput. We are bringing a high-throughput operation on. Having said that, we never look at COVID, really regard it as a new business line for us. We are — we brought it up as a social responsibility and we — even the partners that we are looking at are the ones that — that are in alignment with our mission and saw the value-add that we want to have in the field. On the other side, we are trying to make sure that this wouldn’t be a activity at Guardant that would come at a loss. But again, we are prioritizing the social responsibility here versus really making a new business line item in our P&L.

Operator

Our next question comes from Tycho Peterson from JPMorgan.

Tycho Peterson

Helmy, on the reimbursement front, you’ve brought up for CMS, a number of CMS payments for non-lung. Can you just give us a sense of what percentage of the payments today from CMS are non-lung? And I guess, how do you think about that trending until you have the FDA approval?

Helmy Eltoukhy

Yes. So Tycho, approximately 85% of our Medicare samples are covered now under our current reimbursement from Meridian. And whether it’s lung or non-lung, it’s about the same. So I think really, the way you want to think of it is most all of our Medicare samples are covered now. There is an opportunity, with the FDA approval on the NCD, to have a slight increase in that. But at 85%, there is not a huge amount left to improve there.

Tycho Peterson

Okay. And then, Derek, on the development services side, you noted the milestone component for CDx. Can you just talk about how significant the milestone piece was in the quarter?

Derek Bertocci

Well, it’s actually making progress towards those milestones. So not a — we don’t take revenue on an individual milestone. That’s a little bit of a misnomer in the way the wording was. So we just continue to make progress. What we had was a lot of programs active in the quarter. So therefore, we had a lot of progress in the quarter. Those programs that you can, well, imagine with biopharma programs, there are peaks and valleys in those programs. So this happened to have been a very strong quarter for the companion diagnostics revenue, which is the bulk of the development services revenue.

Tycho Peterson

And then just one last one, following up on the question earlier on LUNAR-1. We’ve been hearing more about some off-label use. I guess as we kind of think about the commercialization strategy here, you’ve got the research-use only product and then the clinically validated, as you mentioned. Can you just talk on how material you think LUNAR-1 could be for you guys going forward? And to what extent you’re making investments in the channel there to roll it out more broadly?

AmirAli Talasaz

So in terms of, actually, the level of investments, we’re very excited about it. The team is focused on that program. And our belief is one of the main things that needs to be done in the MRD space is proving the clinical utility in order to really accelerate the clinical adoption, when you take it — put it in the marketplace. We’ve been in conversation with all major KOLs who have a lot of experience with us on the Guardant360 side around MRD. We have ongoing conversations around ISTs, so — but instead of just putting the clinical-grade test that we have right now in the market, we always went with this philosophy that grow aggressive after clinical evidence generation and prioritize that or just put something out in market and then try to convince everybody why it’s good for a patient to use the device once still the clinical utilities are a question. When you think about this in the long term, we do believe, actually, the way we are doing MRD assay is going to revolutionize the patient journey in the oncology space and it would really bridge the stories that we have on advanced cancer treatment selection, so adjuvant, neoadjuvant and MRD-positive patient treatment selection, to early cancer detection pipeline that we have. So we are very excited about it and we are bringing a lot of investment around that space.

Operator

And our next question comes from Ms. Ivy Ma from Bank of America.

Ivy Ma

This is Ivy on for Derik today. Firstly, on Lunar-2, just wondering if you had any initial conversations with the CMS, since there are a lot of companies working on pan cancer early detection these days. So wanted to see if there is any feedback on pan cancer reimbursement or multi-cancer reimbursement? Or how are you thinking about reimbursement for multi-cancer in general?

AmirAli Talasaz

In our LUNAR-2 CRC screening program that we have, we’ve been obviously in touch with agency, FDA and national CMS, both sides. And I think we have a good picture of what it takes for FDA approval and national reimbursement on the Medicare side. And one of the reasons that actually Guardant’s strategy is to go after CRC screening first and maybe think a follow-on with multi-cancer screening down the road, is one of the reasons is reimbursement. Besides the clinical value, unmet need and technological advantages that CRC has, we believe that the reimbursement pathway for CRC-only screening is in fact very different than multi-cancer and there is good pathway for it and claim path for potential [FCR] approval and national CMS coverage policy. On the multi-cancer side, there are a lot of conversation on — workshops, I’m pretty sure you guys are familiar with. It’s not easy. So we have to see what’s going to happen on multi-cancer side. But we are bullish about our strategy of going to market with CRC device.

Ivy Ma

Great. And then on biopharma, we’re seeing a lot of companies entering the liquid biopsy space. So I wanted to see if you’re seeing more competition for OMNI and how does that shape the revenue trajectory going forward? And then if there is any quantifying color you could offer on how to look at the companion diagnostic line going forward? It would be super helpful.

Helmy Eltoukhy

I guess I can jump in. This is Helmy here. I would say that from a competition point of view, liquid biopsy space has always had dozens of companies in it from even 8 years ago when we started and many of those companies that still exist. And there is — some of them are gone and there are new companies that have come in. I would say from a competitive point of view, OMNI is really, I think, really second to none. It’s head and shoulders above really any other offering we see in the space. And so that’s not something we frankly see a lot of in terms of competitive noise, especially with respect to, to OMNI. I think we’re much more, I would say, focused and laser-focused on the evolution of the therapeutic pipeline and where that’s going and continuing to meet really the requirements in terms of the types of biomarkers that are of interest to our biopharma partners. And so that’s really what we’re focused on in terms of really listening to our customers and moving and advancing our offerings in step with that.

Ivy Ma

Great. And lastly, if I may, on G360, could you update us on the FDA approval situation? And how that conversation has been going? I know there are some delays due to the whole COVID situation, but I wanted to see if there is any updates? Appreciate the color.

AmirAli Talasaz

Yes. The experience that we have — we — I don’t believe we experienced any slowdown in our FDA traction because of COVID. We are very pleased with the progress that we made and based on all the conversations, I think we are very close. So please stay tuned.

Operator

And our next question comes from Patrick Donnelly.

Patrick Donnelly

Helmy, maybe just on the second wave of COVID, you mentioned you saw a little bit of pullback on the volume side. Can you just talk through — I know you guys get some pretty real-time data geographically and where — how sharp are you seeing the pullback? It doesn’t seem overly concerned, given by the guidance you guys gave, but just curious in terms of your perspective on how impactful the second wave has been? And how confident you are in the outlook at this uptick from here?

Helmy Eltoukhy

Yes, it’s a great question. I mean certainly, nowhere as close to, I think, the first wave and the impact that was there. I think the challenge with the first time was it was the first time, by definition, a lot of these offices have been dealing with this kind of situation. And so there was just a lot of learnings in terms of how to deal with this sort of new normal. We see certainly a lot more resiliency in terms of impact of the second waves and reclosures and so on. And so I would say the — these are, I would say, minor perturbations regionally as you see some of these closures and some of the orders that are going into place regionally. So it does have an impact and that’s why I said I think it’s difficult to forecast. Obviously, if you have a lot of these happening simultaneously through multiple parts of the country, then that’s certainly going to have some negative impact on — on volume, new diagnoses, patients coming in and so on and so forth. But we’ve been seeing these kind of ripple through kind of in different parts of the nation and then kind of come back. And so it’s certainly less severe so far than what we saw in March.

Patrick Donnelly

That’s good to hear. And then maybe just one on mobile phlebotomy. I know you talked about that being a good opportunity in 2Q and even beyond as maybe the market focus shifts a little bit towards that. How did that trend relative to expectations? And just your go-forward view on that side as well?

Helmy Eltoukhy

Yes, as I think we mentioned in the last call, we certainly saw certain regions that leverage that offering quite a bit. That said, it’s just that the very nature of liquid biopsy is it’s so much simpler than a tissue biopsy-based approach. If you think about the coordination of multiple medical specialties, whether it’s pathology or surgical oncologists, or interventional radiologists, the fact that you essentially can empower oncologists with the ability to identify biomarkers through a simple blood test by itself and by its very nature is very well suited to the practical realities that COVID imparts on the space right now. And so and even that alone, with that mobile phlebotomy, is something that’s a huge advantage and something very beneficial to physicians. But clearly, there is going to be a subset of patients that find it very difficult to come in and that’s where mobile phlebotomy has been really key in terms of being able to provide a complete offering for really the majority of patients that an oncologist may have. So it’s been something that’s very synergistic with ease of use of liquid biopsy itself. Clearly, our turnaround time is sometimes half or 1/3 of other tissue-based approaches. And so you really just can’t beat that holistic offering, in our view, compared to some of the other approaches of getting that information.

Operator

And our next question comes from Max from Canaccord.

Max Masucci

This is Max Masucci. So the supply of COVID-19 testing in the U.S. is still well below demand. The U.S. is conducting about 700,000 COVID tests per day by our estimates, which is a bit underwhelming compared to, say, China, which has capacity to process around 5 million tests per day. So what role or magnitude do you think you can play in COVID-19 testing, now that testing is becoming more widely available for asymptomatic individuals versus the early prioritization of testing for health care workers and first responders?

Helmy Eltoukhy

Yes. That’s a great question. So we certainly are providing testing on a weekly basis for our employees at Guardant. And we found that to be, from multiple aspects, very critical for continuity of the business, for ensuring, I think, the safety of our employees and really making sure that we can continue to weather the storm of these surges in the raging pandemic that’s going on around us all. And so we see firsthand the value of testing for surveillance and asymptomatic individuals and so it’s something that we continue to explore. We’re speaking with multiple partners and so on in terms of the kind of potential — us potentially jumping in and really helping with the undersupply that exists today, but I would say, stay tuned and we’ll be happy to update everyone as we continue to make progress there.

Max Masucci

Great. And then on the sales force, can you just share how your sales force is adjusting to the COVID-19 virtual environment? What sort of initiatives or targeting strategies are sales reps having success with?

Helmy Eltoukhy

Yes. So I think it’s a lot of what we outlined I think in our previous earnings call. It’s really the fact that we’re able to do a lot of consultations online through Zoom. We’re able to employ our medical affairs team to essentially help with interpretation of reports, obviously over Zoom or over teleconference as well as the mobile phlebotomy services that were brought online. And we have other kind of financial assistance type programs that are specifically tailored to those affected by COVID. And so we found that, that overall offering was very helpful in terms of really supporting physician offices in their time of need and get through some of these kind of challenging times. And we believe we were one of the earlier companies to provide that kind of suite of services to many of these offices and I think that really helped us in terms of achieving the kind of rebound that we saw during the quarter.

Operator

And our next question comes from Mr. David with Guggenheim Securities.

David Westenberg

This is David Westenberg. So my first question is with KeyTruda’s approval in TMB-high patients, does that maybe change the look in terms of the ramp for GuardantOMNI? And if it doesn’t, can you at least talk about the appetite for larger panels from oncologists?

AmirAli Talasaz

So currently, actually, we — the clinical product that we have, Guardant360 for oncologists order, does not provide TMB score, but GuardantOMNI, which has been a product that we opened up to our pharma companies so far has been able to do that. We’ve been working with bunch of pharma companies who were investing heavily on the TMB side, not just TMB, even on the other kind of biomarkers that we have in GuardantOMNI panel. And still, there is — we see there is a lot of excitement. And the conversation that we have around GuardantOMNI is pretty robust about what’s going to happen within the next maybe couple of quarters based on COVID, but the conversation around GuardantOMNI has been solid and one of the drivers has been TMB.

David Westenberg

Got it. And then now just a quick one for Derek. Is there — as we’re modeling the back half of the year, is there anything to call out in terms of comp? I know that you’ve had pretty strong quarters and then you’ve also had some maybe back payments from certain payers. I just want to make sure that our models are tight in the back half of the year as we think about year-over-year comps. And I’ll take the rest offline.

Derek Bertocci

Sure. So what we tried to do is give you nuggets of information. We expect modest increase in volume, clinical volume, in Q3 compared to Q1, so not comparing to Q2, which is obviously a down quarter. Going all the way back to Q1, we’re expecting modest volume increase in Q3 in clinical. We also indicated that for ASP purposes, you want to pull out the effect of that revenue we earned from samples processed in 2019. There were some changes in the Medicare interpretations of the NCD, which allowed some prior samples to get billed and reimbursed. So you shouldn’t assume that. So I gave you a $2,700 ASP for you to use. And then we talked about the biopharma. It was a record quarter for development services, probably won’t have a record quarter every quarter.

Operator

And that is all the questions we have at this time.

Helmy Eltoukhy

Thank you, everyone, and look forward to talking next quarter.

Operator

And ladies and gentlemen, this does conclude today’s conference call. Thank you very much for your participation. You may now disconnect.





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U.S. judge denies bail to two men accused of aiding Ghosn escape By Reuters


© Reuters. FILE PHOTO: Former Nissan chairman Carlos Ghosn talks during an exclusive interview with Reuters in Beirut

By David Shepardson and Nate Raymond

(Reuters) – A U.S. district judge on Friday denied bail to two Massachusetts men accused of helping orchestrate former Nissan (OTC:) Motor Co Chairman Carlos Ghosn’s escape from Japan.

Judge Indira Talwani rejected bail for U.S. Army Special Forces veteran Michael Taylor and his son, Peter Taylor after Japan had sought their extradition. A magistrate had also previously denied their release.

Ghosn fled to Lebanon, his childhood home, after being charged in Japan with engaging in financial fraud by understating his compensation in Nissan’s financial statements. He denies wrongdoing.

Lawyers for the two men did not immediately respond to a request for comment.

“While the Taylors may well seek to remain in the United States to fight extradition through available legal channels, they have also shown a blatant disregard for such safeguards in the context of the Japanese legal system and have not established sufficiently that if they find their extradition fight difficult, they will not flaunt the rules of release on bail and flee the country,” Talwani wrote.

The Taylors are charged with implementing a sophisticated plan assisting Ghosn, who paid them, to jump bail, which Talwani noted included hiring a private jet in the United Arab Emirates and “Peter Taylor making seven trips to Japan to meet with Ghosn multiple times and to set up and participate in Ghosn’s escape plan.”

It also included, she added, Michael Taylor in Japan “checking with airport staff about security procedures and giving an airport worker a bundle of Japanese yen, secreting Ghosn out of a hotel room in a large box and bringing him aboard the private jet, and flying Ghosn to Turkey.”

A prior ruling said the Taylors appeared to have “substantial resources” they could exploit to potentially flee, including about $860,000 that Ghosn appears to have wired to a company co-managed by Peter Taylor before the escape.

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New York schools get green light for in-person learning—raising myriad questions


New York state schools have the green light to reopen for in-person learning in September with social distancing and health screenings, Gov. Andrew Cuomo announced Friday—a decision that immediately raised more questions than it answered.

“If any state can do this, we can do this,” said Cuomo during a conference call with reporters. 

The decision comes as school districts across the U.S. grapple with competing pressures to bring students back in September without exacerbating the spread of the coronavirus. Cuomo’s decision paves the way for New York City—the nation’s biggest school district with more than 1.1 million students—to return to the classroom, even as school systems in Los Angeles, Chicago and Dallas plan to remain remote this fall. It’s on track to be the only one of the nation’s top 10 biggest school districts to reopen in-person learning this fall. 

Despite Cuomo’s green light for the state, nearly all of the details will be left up to New York’s 750 school districts, which have only three weeks to hone plans on exactly how students will return, and how schools will monitor the health and safety of pupils and teachers.

Coronavirus update: Global case tally climbs above 19 million; U.S. death toll moves above 160,000 after 11 straight days with 1,000-plus fatalities 

So far, districts are proposing everything from a mix of in-person and remote instruction, such as the hybrid model proposed in New York City, to sending children home before lunch to avoid a risky indoor-dining environment, Cuomo said on a conference call with reporters. 

“I can’t fashion a plan that would work in every school district; they are just too different,” he said. 

Theoretically, individual school districts could still opt to delay the start of in-person learning or go completely remote if they choose, particularly if they face enough pressure from parents and teachers. 

“It’s up to them,” Cuomo said. “In-person, hybrid, outdoor education, remote education, blended, half day, quarter day, third day — that is all up to their discretion.”

The state, through the health department, has set only a few hard rules, including a maximum positivity threshold of 5% — meaning the proportion of testing coming back positive — which would automatically trigger a region’s school buildings to close again. New York City has set a more conservative positivity threshold of 3% for the five boroughs. Schools must conduct health screenings, which at a minimum means daily temperature checks, said Jim Malatras, the president of Empire State College and an adviser to Mr. Cuomo, at the governor’s briefing. 

Districts must also devise a system for testing symptomatic students and staff, he added. 

Also on MarketWatch: Calculating America’s eviction crisis: Up to 40 million people are at risk of being kicked out of their homes

COVID testing is a major concern among parents, from whom the governor said he’s received a “deluge” of worried phone calls. To address that, he gave districts until the end of next week to finalize and post plans about how testing will be carried out, when a child must be tested and where it will be done.

Next week, districts must also publicly post specific plans for tracing outbreaks and explain their remote learning option, he added. 

“We’ve learned from the experiences we’ve had during COVID that remote learning can be quite unequal, given the demographics and given the circumstances,” Cuomo said, adding that he wants districts to draw attention to these three areas of concern so parents aren’t forced to go “wading” through lengthy reopening plans. 

The governor also gave districts until Aug. 21 to conduct three town halls with parents — five for big school districts like New York City — and one with teachers. The next few weeks promise parents, teachers and administrators a whirlwind of information, and certainly some disagreement, over reopening right on the cusp of the school year. 

Parents and teachers are feeling particularly unsure in New York City, once the national epicenter of the pandemic and where many lost colleagues or loved ones during the peak of the crisis. 

“It’s a cloud that hangs over our school,” said Paul Kehoe, who teaches humanities and science at M.S. 250 West Side Collaborative Middle School on Manhattan’s West End Avenue. Students at the school have lost family members, and a fellow teacher was suspected to have died from COVID-19. 

Kehoe, 39, disagrees with New York City’s hybrid-learning plan. He would prefer to see schools continue an improved version of all-remote learning as the safest and least disruptive option for students. The logistics of students coming to school on a rotating schedule, potentially spending the other days at one of the city’s proposed learning centers, all the while taking a bus or public transportation to and from school, creates numerous opportunities for exposure and spread. 

“No matter how much they pretend to have some barriers around, it’s just artifice. It’s just placating people’s concerns,” he said. 

Michael Mulgrew, president of the United Federation of Teachers, which represents most public school teachers in the five boroughs, on Friday applauded the state’s effort to ensure teachers and parents were confident in reopening plans. 

Though, he said, “in New York City, that is still an open question.”

Also see: NYC’s urban oases reopen, providing a much-needed escape for shut-in residents

New York City asked parents to decide whether they would opt for all-remote learning by Friday, even though many of the schools have yet to communicate specific details about the school year to parents. Mayor Bill de Blasio said he would offer more districtwide information on Monday and that school- and child-specific information would arrive “in the course of the next couple of weeks.”

Meanwhile, the state health department is still missing reopening plans from 127 school districts, and has already deemed at least 50 plans incomplete or insufficient. 

Without approved plans, however, Cuomo said: “School districts cannot open.”



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CubeSmart (CUBE) CEO Christopher Marr on Q2 2020 Results – Earnings Call Transcript


CubeSmart (NYSE:CUBE) Q2 2020 Earnings Conference Call August 7, 2020 11:00 AM ET

Company Participants

Josh Schutzer – Director of Financial Analysis

Christopher Marr – President & Chief Executive Officer

Timothy Martin – Chief Financial Officer & Treasurer

Conference Call Participants

Smedes Rose – Citi

Todd Thomas – KeyBanc Capital Markets

Ryan Lumb – Green Street Advisors

Michael Mueller – JP Morgan

Samir Khanal – Evercore

Ki Bin Kim – SunTrust

Operator

Good day, and welcome to the CubeSmart Second Quarter 2020 Earnings Conference Call. All participants will be in listen-only mode. [Operator Instructions] Please note this event is being recorded.

Now, I’d like to turn the conference over to Josh Schutzer, Senior Director of Finance. Please go ahead.

Josh Schutzer

Thank you, Cole. Hello, everyone, and good morning, welcome to CubeSmart’s second quarter 2020 earnings call. Participants on today’s call include Chris Marr, President and Chief Executive Officer, and Tim Martin, Chief Financial Officer. Our prepared remarks will be followed by a Q&A session.

In addition to our earnings release, which was issued yesterday evening, supplemental operating and financial data is available under the Investor Relations section of the company’s website at www.cubesmart.com. The company’s remarks will include certain forward-looking statements regarding earnings and strategy that involve risks, uncertainties and other factors that may cause the actual results to differ materially from these forward-looking statements. The risks and factors that could cause our actual results to differ materially from forward-looking statements are provided in documents the company furnishes to or files with the Securities and Exchange Commission, specifically, the Form 8-K we filed this morning, together with our earnings release filed Form 8-K and the Risk Factors section of the company’s annual report on Form 10-K.

In addition, the company’s remarks include reference to non-GAAP measures. A reconciliation between GAAP and non-GAAP measures can be found in the second quarter financial supplement posted on the company’s website at www.cubesmart.com.

I will now turn the call over to Chris.

Christopher Marr

Thanks, Josh. Good morning, everyone. I will begin by recognizing our 3100 teammates across the country. We’ve had to change the way we do, but along the way our mission has been our guide and together, we’ve been simplifying challenges, creating innovative solutions and delivering unparalleled service.

Tim will provide insight into the second quarter results. From a high level perspective, rentals hit the bottom in April, rates in May and both began to recover in June. Even July was our first month of what we would consider more normal pre-COVID operations. I will focus my comments on trends we observed post the end of the second quarter.

Positive year-over-year demand trends, which began in June continue to show strength in July with same-store move-ins, up 3.8% over July of 2019. We resumed our normal lean process in June and made significant progress in addressing our past-due customers in July. We expect to conclude the process substantially at the end of August certainly by the end of the third quarter at which point we anticipate our receivables returning to more normal pre-COVID levels.

Our July same-store vacates were down 7.7% year-over-year partially reflective of the status of our auction process, but also reflective of continued increases in length of stay. Our same-store year-over-year net effective rents for new customers shifted into positive territory in July up 2.5% on average for the month compared to July of 2019, and ended the month up approximately 7% compared to the last day of July 2019.

As we noted in our press release, we resume more traditional pre-COVID operational processes by the end of June. During the month of July and into early August rate increase letters were sent to all of our customers including those remaining in our portfolio for whom we had pause the process in mid-March. We anticipate that the rent roll will be fully caught up with rate increases by the end of the quarter.

We continue to innovate at a rapid pace reaping the benefits of investments we have made in our technology stack, revenue management and marketing automation. SmartRental our online contact free experience accounted for approximately 25% of our rental volume during the quarter. We remain cautiously optimistic. Our industry has been and remains very resilient. We are keeping a watchful eye on customer behavior in light of continuing uncertainty around government stimulus, the opening and closing of schools and segments of our economy and the varying impact the pandemic is having in each region of our country.

We believe that the breadth of our need based customer, the quality of our portfolio, the strength of our balance sheet and the investment we have made in our people in our systems will continue to create value for all of our stakeholders.

Thank you. And with that, I’ll turn the call over to Tim.

Timothy Martin

Thanks, Chris, and thank you to everyone on the call for your continued interest and support. Picking up on Chris’ comments, we do find ourselves feeling cautiously optimistic and interestingly, as we report second quarter results, we find ourselves in a similarly strange position as last quarter. When we reported first quarter results the numbers we were reporting seemed stale, and not particularly reflective of the environment we were in, at the time since the impacts of the pandemic were front and center but the first quarter results didn’t include much of the impact.

And now as we report second quarter results the current operating environment feels much more positive, certainly than April and May when we were seeing what we hope was the worst of the impact of storage fundamentals. Overall for the quarter, we reported FFO per share of $0.41, same-store revenue growth of negative 2.2%, same-store expense growth of 2.4% and same-store NOI growth of negative 4.1%.

Last quarter, we adjusted several of our operating practices by stopping our lean sales and pausing on our rent increases to existing customers, among other things. Throughout June and July, we began methodically resuming normal operations in those areas, but of course it’s not as simple as flipping a switch and things revert back to normal as there are notice periods that need to occur prior to the financial impact.

So as we resume those practices the positive impact of doing so will be partially evident in the latter part of the third quarter and then looking a lot more normal in the fourth quarter. Of course, all of that assumes macro conditions don’t reverse, and we don’t go back to a more restrictive environment as a result of COVID-19.

Our store teams and district managers have done a great job working through our delinquent accounts as well as various levels of lean sales as we had a lot of work to do with the backlog created from pausing in April and May. As a result of those efforts we’re in really good shape with our collections and our receivable balances. Couple of different ways people have been looking at that, someone an update on how the current months collections are trending, that doesn’t always work all that well in our sector, but on last quarter’s call, we were talking about April collections and we told you at the time that we collected 93% of April rents compared to ultimately collecting 98% of April rents in 2019. This year, that 93% grew and grew and as of today we’ve collected 97.6% of April rents, pretty much right on top of last year.

So the answer to the question for July is that as of today we’ve collected 95.6% of July rents again compared to about 98% ultimately collected last year. Of course we fully expect that as the weeks continue our July rent collections will continue to grow and ultimately will likely end up being very similar to last year.

Another way to think about collections is look at accounts receivable balances, and from that perspective, things also look very healthy. As we look at AR balances less than 30 days, and AR balances less than 60 days and compare those levels to last year at the same time, our comparable balances are actually slightly better than they were last year.

And then the final thought on collections and delinquencies, then from an occupancy standpoint since we paused on customer lean sales, our occupancy levels have been slightly inflated by those cubes that normally would have been subject to the lean sale process. That incremental occupancy was 90 basis points at the end of June and was down to 40 basis points at the end of July. So that’s another good indicator that we’re trending back towards normal.

So trying to provide some color there, and details that I know some of you were looking for, but in short collections, AR balances, write-off none of those are of concern to us. And in fact really speak to the quality of the cash flows in our sector, the quality of the self-storage customer and the high levels of customer diversification in our business. In the second quarter from an external growth perspective, we closed on two acquisitions for $65.7 million, and during the quarter we added 27 stores to our third-party management platform. As detailed in our earnings release last evening given the volatile macro environment and continued uncertainty of potential future economic disruption caused by COVID-19, we have decided not to reinstate guidance at this time, there simply remains too many unknowns and uncertainties to factor in to provide a range of estimates per our normal practice.

From a balance sheet perspective, we remain very healthy and are well positioned not only to have capacity to meet our near and medium-term commitments, but we have plenty of capacity, financial flexibility and access to attractive capital to support pursuing external growth opportunities, if and when we identify attractive investments that will allow us to continue our history of creating long-term shareholder value.

At quarter end, our leverage levels remain conservative at 39% debt to gross assets. Our debt to EBITDA was 4.9 times and our fixed charge coverage ratio was 5.6 times.

Thanks again for taking the time to join us for today’s call. At this point Carl, let’s open up the line for some questions.

Question-and-Answer Session

Operator

And we will now begin the question-and-answer session. [Operator Instructions] Our first question today will come from [indiscernible] with Bank of America. Please go ahead.

Unidentified Analyst

Hi everyone, thank you for taking my questions. So I just want to start off with those units up for the lean sales. So I was wondering if there are certain markets that those are mostly concentrated, just trying to figure out the delta between you guys and your peers?

Timothy Martin

So it’s pretty universal as we stopped lean sales across the entire portfolio and as we began to resume the lean sales it was pretty programmatic, and certainly varied a little bit market by market, and there are different — there different requirements in each market as it relates to notice periods and the like, but generally speaking, we’ve started the process across the entire portfolio and we expect to have things pretty much wrapped up in August, some will slip into September, but by the time we get to the end of third quarter, we expect to be in good shape across the country.

Unidentified Analyst

Got it. And so there is no — there aren’t many markets that are still restricting you from proceeding with this?

Timothy Martin

No.

Unidentified Analyst

Okay, got it. And then, just anything on the SmartRental other than just 25% of rental volume as what feedback have you got from customers? Anything else you can tell us about that program?

Christopher Marr

So, we would expect there is a segment of the customer base who understands the product, feels comfortable with the space requirement that they have and is used to a self-service experience, and they are enjoying SmartRental as a way to meet their needs. Clearly, we have another tangible segment of the customer base who are either first time users of our product, unsure of the space need or just like to have that interaction. So we’re able to serve at both ends of the spectrum. We will continue to innovate SmartRental adding features. We’re adding features almost weekly. I think it’s been very helpful in terms of thinking about times where for example on a Sunday afternoon or early evenings, et cetera where customers may drive up the office is closed, but there is a QR code on the door that they can scan and go through the rental process at their convenience. So it has been helpful. I think what this is going to look like someday when we return to more normal levels, I think you’re always going to have a significant segment of the consumer who likes a more traditional process as opposed to the self-service model. So, we will continue to provide them with both ends of the spectrum.

Unidentified Analyst

Understood. And then, just following up on that. Has that helped you in terms of your marketing spend, like is that in any way going to benefit you in the future considering marketing spend continues to be really high?

Christopher Marr

I don’t know whether you can draw a straight line between SmartRental and marketing spend. I think they are independent of one another, certainly complementary in terms of again, being able to attract a customer for whom contactless is a search term that they choose to use. But I think they are largely independent of one another.

Unidentified Analyst

Okay. Got it. Thank you.

Timothy Martin

Thank you.

Operator

And our next question will come from Smedes Rose with Citi. Please go ahead.

Smedes Rose

Hi, thanks. I was just wanted to ask, now that you’ve put back in place rent increases for existing customers, you said for pretty much across the board. Just any change in the way you’re thinking about the degree of the rent increases, it’s kind of pre or post-pandemic, or is it kind of just in line with where you board have been regardless?

Timothy Martin

Hey, Smedes. Thanks for the question. Yes, we are still programmatically looking at rate increases to existing customers in a very similar way to what we have — would have done pre-pandemic and lessons learned over many, many years, even going back to the global financial crisis is that all of our data, all of our testing suggests that those levels consumer behavior simply doesn’t change as a result of continuing to push those rate increases again, in the high single-digit range. Of course history doesn’t always repeat itself. And we have the tools and the systems to monitor behaviors very closely, and if we were to see something that would give us some type of evidence that the consumer wasn’t behaving the same way they had in the past, we can certainly be extremely nimble and adjust accordingly. But to-date we haven’t seen any evidence nor our intuition suggests that we won’t.

Smedes Rose

Okay, thanks. And then I was just wondering, I don’t know you may not really have a good read on this. I mean do you think that the $600 it’s kind of the unemployment benefits that around top-of-state benefits helped your existing customers, or do you think for the most part, maybe there is not really in that category and it sort of less of an issue if that goes away or it’s changed meaningfully? I don’t know if you have any way to any kind of thoughts on that. Curious if you do.

Christopher Marr

Yes, Smedes is just purely anecdotal I think at the margin it certainly was helpful for folks who had that additional cash. Again, I think across the customer base, it so diverse and such a different segments of both the country geography, as well as economically that I can’t imagine having it or not having it is a material impact on our customer.

Smedes Rose

Okay. Thank you.

Operator

And our next question will come from Todd Thomas with KeyBanc Capital Markets. Please go ahead.

Todd Thomas

Hi, thank you. Tim, thanks for the detail around the collections and the impact the delayed auctions had on occupancy and everything. What was the bad debt expense, or the reserve in the quarter that impacted the income statement? And how do you expect that to trend in the third quarter as you work through the backlog of auctions? Do you expect it to be larger or smaller relative to 2Q?

Timothy Martin

Well, I expect the impact from bad debts to decline, but I mean of course it’s all in a net revenue reporting structure right. So we only report revenue on cubes that are rented where we expect that we’ll ultimately be able to collect it. So obviously, during the second quarter, we experienced a period of time with a delay in the lean sales that we had that portion of our occupancy that was in our cubes that we didn’t believe would ultimately pay given historical trends of it. If you get that far behind and are subject to typically to a lean sale we view that rent is ultimately not collectible. So we don’t recorded it by way of reserving against it, and netting down our revenue. So certainly, I think the levels of that will decline as we’ve caught up now or are catching up with the lean sales. I don’t think the impact to the trajectory of revenues, or the growth in revenues has any direct impact from the write-off amount, right, it’s all net revenue presentation.

So, I think as things improve the impact from write-offs, the improvement in collections is helpful, but we don’t disclose the exact amount, but the impact of it is certainly going to decline here, as we return to normal.

Todd Thomas

Are you able to sort of book, and how much above average levels it was in the quarter?

Timothy Martin

Yes, I would say that our delinquencies to ultimately that we didn’t think we were going to collect would have gone from around 2% to somewhere between 2.5% to 3%. So then the write-offs, then that would come from that, if you do the math, is that write-off then would have been up just north of 50%.

Todd Thomas

Got it. That’s helpful. And then I was also wondering if you could give us an update on ICAP. I believe there were some pending legislation trying to loosen up the regulations to get new developments in ahead of the July 1 deadline, or maybe some other possible changes. Can you provide an update on what’s happening there?

Christopher Marr

Yes. The update that I can provide you is certainly there is a lot of discussion. There are many impacted parties who had things in the planning stages, or who had made investments either in real money or in a lot of time, and they are very interested parties in trying to get some levels of exceptions to the line that was drawn. I don’t have anything to update you on any formal action that has been taken as a result of those efforts. We certainly believe that the legislation that was passed ultimately is passed, and medium to long term wouldn’t expect that that would be reversed anything that’s done in the short-term to make a handful of exceptions too early to tell, and would just be conjecture.

Todd Thomas

Okay. And then have you started to see developers begin moving outward from New York City, may be looking to explore an uptick, I guess an activity around New Jersey or Westchester, maybe Long Island? And then, also just in terms of New York MSA exposure. I was just wondering if you could also comment on conditions there were they sort of consistent with what you laid out for the improvements that you saw in the second quarter, and into July, or do you think that conditions in New York could intensify a little bit, or way further on revenue growth in the third quarter?

Timothy Martin

I’ll take the first part of that and then Chris can chime in. As it relates to developers and where their focus is even before the ICAP legislation took hold, we were already seeing folks that were in the area start to look further out, as the supply that has come into the Boroughs has been supply that frankly over time is going to be entirely justified the levels of square foot per capita in the Boroughs is still extraordinarily low relative to any other market. And so, that said the attractive opportunities have — were picked over and so those who have development platforms in the Boroughs were already starting to look outside of the Boroughs to continue to find opportunities to develop our product type, certainly the ICAP legislation is going to enhance that, and perhaps accelerate folks looking in different places, but it was already underway.

And then, for color on performance, Chris, if you want to jump in?

Christopher Marr

Sure. New York, both the MSA and the Boroughs, July was the fabulous month. In fact for the MSA exceeding what I quoted nationally. So rentals were up 7%, net effective rents to new customers were up just about 5%, occupancy was up 150 basis points, for the Boroughs specifically rentals were up consistent with the same-store portfolio in that three plus percent range, net effective rents for the new customers were up much higher than what we had seen in the rest of the country, 5.8% for the month of July and that really ranges from the Bronx at just about 7% to Queens being up only a couple of basis points. So, it perform both as an MSA and the Boroughs themselves, really, really well in July and we’re excited about that continuing on here into August.

Todd Thomas

Thank you.

Timothy Martin

Thanks, Todd.

Operator

And our next question will come from Ryan Lumb with Green Street Advisors. Please go ahead.

Ryan Lumb

Thanks. And actually to stay on similar topic in New York there. We’ve heard anecdote of residents in New York are just packing up, and going elsewhere either temporarily or maybe more long-term as the city faced worsening case count in the second quarter. Give any color around some of the flight out of New York in the second quarter? Do any of that turn in to storage demand? Any color you can provide there would be great.

Christopher Marr

Yes. I may be wrong, but I think this little company called Facebook just made of rented 750,000 square feet of office space in New York City. I’m not sure if I read that correctly. But I think the demise of New York as it has been for a 100 years is premature. From our customer base in the outer Boroughs, Brooklyn, Queens, the Bronx particularly I think the storage…

Timothy Martin

It looks like we — looks like Chris losses audio. I think anecdotally, what you’re referring to as folks moving around and maybe leaving for a temporary period, certainly there have been some articles on that, and that’s a trend that certainly has legs to it. I think that’s just yet another description of a type of customer who needs a temporary place to store their goods. I would think most likely those customers are going to store for a period of time when their work situation returns to normal, and they want to start coming back to the office. I would suspect that many of those people will migrate back in, and their need for a temporary place to store their belongings will end. They’ll find a new apartment probably at a much lower rate, and things will get back to normal.

The timeframe for which that would happen, your guess is good as mine at the moment. Could be a couple of months, could be six, 9 months, either way, I think that’s just again anecdotally another type of customer who needs our product and we’re happy to have them as a customer.

Ryan Lumb

Sure, understand. And then we heard from PS Business Parks which caters primarily sort of smaller tenants, smaller businesses some weakness among small businesses. Can you provide any additional color around maybe the health of your small business customer?

Christopher Marr

Yes, I’m sorry, my myself on disconnect me there. I am — what we’re seeing across the portfolio is that the majority of our customers, that are small businesses continue to rent and they’re continue to be current on their rent. We are seeing, as we did during the great recession, unfortunately, the return of the customer whose small business or restaurant they elected to close and they have inventory, or they have restaurant equipment that they own, and they want to store with a belief that coming out the other side of this, they will resume business. So, we are starting to see those customers coming into the portfolio much as we did during the great recession.

Ryan Lumb

Okay. Great, thanks guys.

Timothy Martin

Thank you.

Operator

And our next question will come from Michael Mueller with JP Morgan. Please go ahead.

Michael Mueller

Yes, hi. I was wondering, can you talk a little bit about the spread between move in and move out rates during the quarter? And how that look compared to, I guess a year ago?

Christopher Marr

Yes, I’m trying to trying to put my fingers on it here, it’s a — the gap widened a little bit from last year. Mike, if you had, do you have second question, I’ll try to pull that number for us. Apologies, I just don’t have right in front of me.

Michael Mueller

Actually, that was it — some stuff that New York…

Christopher Marr

Yes. Hey, I’ve got. I think the difference between move in and move out there in the quarter was down about 21% which would have been compared to about 9% in the second quarter of ’19.

Michael Mueller

Got it. Okay. And any early commentary of how that’s trending in Q3?

Christopher Marr

No, not at this time. I don’t have any update.

Michael Mueller

Okay. That’s it. Thank you.

Timothy Martin

Thanks.

Operator

And our next question will come from Samir Khanal with Evercore. Please go ahead.

Samir Khanal

Yes, good morning everybody. I guess, Chris or Tim, can you talk a little bit about the third-party management platform. I mean, have you seen private owners want to be part of the — that whole platform here as they navigate through the environment. And I guess, how should we think about that platform the growth over the next sort of several quarters?

Timothy Martin

Yes, I think it’s, continues to be a business that the inbound calls continue, our pipeline of management contracts to bring on over time here continues to develop, and looks pretty healthy and it’s a combination of existing open and operating stores, many of which are stable and you have the owners who for a magnitude of reasons recognize and continue to recognize the value of a large platform like ours, the sophistication from a business intelligence revenue management perspective, the sophistication from a marketing perspective, and the power of having an operating platform and the ability to navigate through the crazy world that we find ourselves in here over the last few weeks as far as being able to react quickly to create the ability for customers to find new online in a no touch way and they managed through all of the — it’s a heavy intensive operating business that we’re in and working through everything over the last couple of months, our team has just done such a fantastic job of adjusting, and I think if you’re a small owner, you look at that you say, wow, I can’t compete with that.

So, you certainly have folks from that perspective. You also have, while the development cycle is getting late, there are still new stores being delivered, and many of those new stores are going to find a home in our management platform, or one of our peers management platforms, because again, their expertise as a developer is not in running our business, and running a store and so they need help, and they’re going to come to a large player for that help. So, which we continue to see inbound calls — we continue to — our business development folks are busy. So there’s certainly a lot of interest.

Samir Khanal

Okay. And I guess my second question is around the transaction market. Sorry, if I missed this, but is there any color that you can provide. I know at the beginning in the year, I think things are starting to pick up and then you hit the impact from COVID, and there was a bit of a pause there, but I’m hearing that things are starting to pick back up again, those certainly from seller and buyer perspective. Any color on that and cap rates, and pricing would be helpful.

Timothy Martin

Yes, I think part of it is just seasonal. Many folks on the selling side, want to at least get partway end of the summer busy season and see their occupancies tick up or get a little bit of pricing power before they come to market. So I think there’s two things happened. One, you’re getting to the front point of the year where you have a little bit more activity in the normal year. And then of course we’re starting to get a little bit more clarity on operating performance, and the impact on rates and the like as a result of the pandemic. So certainly activities picked up a little bit. Pricing remains very strong from a seller’s perspective certainly on an open and operating stable property. There is an awful lot of capital that’s interested in those types of assets. Certainly, not just the REITs, there is an awful lot of private capital that is looking to invest in our sector, given the strength of the cash flows in our sector, certainly, on a relative basis to a lot of other product types, storage remains a very attractive asset class. So there is an awful lot of interest, which is keeping cap rates down. I think no surprise, but the potential area that we could find some opportunities that might be a little bit more attractive on a risk adjusted basis, our stores that are in some stage of lease-up.

And if you’re seeing some of those opportunities, I would say there is still quite often a pretty big disconnect between buyer and seller expectations that the seller is still looking to put out a package that shows the dream as they rates are going to return to where they were back a year ago, and the lease-up in the pace of lease-up will continue to be what they thought it was when they built the store, and on the buyer side people are being a little bit more cautious and perhaps a little bit more realistic on their underwriting. So whether those trades find a mark, were the buyer and seller can meet, we’ll see how things play out.

Samir Khanal

Any idea as to how far off in pricing, buyers and sellers are off right now?

Timothy Martin

And it’s just wildly going to differ from deal to deal. We’ve been this connected by as much as 20%, 30% sometimes and then, but what’s interesting is somebody will pop up and paying there what the seller is looking for. So it only takes one, it only takes one buyer to make the transaction.

Samir Khanal

Got it. Okay, thanks so much for that.

Timothy Martin

Thank you.

Operator

And our next question will come from Ki Bin Kim from Truist Capital. Please go ahead.

Ki Bin Kim

Thanks, good afternoon. I just wanted to tie up some data point of your ECRI program. If you never stopped it in 2Q what benefit, would that have provided?

Christopher Marr

It would have been better.

Ki Bin Kim

Any kind of better color to that in terms of [indiscernible].

Christopher Marr

That wasn’t clear enough for you. We didn’t quantify that. I mean, as we’ve talked about in past we haven’t quantified the components of the revenue growth down to that level. I will tell you that it is the, as we are modeling things out back in late March and looking at the potential impact of all kinds of different things, rate increases to existing customers, move in volumes, effective rates to new customers, write-offs, delinquencies you go through all of those variables. I will tell you that the pass along increases to existing customers in the three to nine month period of turning those off was the single biggest impact to revenue growth year-over-year, because if you’re doing that consistently as we have been for years, and then you stop it’s a pretty big drag on earnings growth. So, without giving you a number because we’re not going to disclose it. I will tell you that in the range of things that could impact it was certainly the biggest one.

Ki Bin Kim

Okay. And other rental income, I’m assuming there’s best of — registration fees, late fees. How much did not charging customers late fees impact that trend? And as the business returns back to normal should I just expect that to normalize by end of the year?

Timothy Martin

Yes. The majority of the amount that’s down year-over-year was attributable to late fees. A little bit early in the quarter would have been on administrative fees things that are associated with customers moving in. And so move-in volumes were down of course. And so that had a little bit, have an impact but you hit the big one which was when you start charging late fees, that was the biggest driver of the variance in that line.

Ki Bin Kim

Okay. And just high-level, do you think was there a different customer segment, or customer using storage for different reasons that made a pronounced impact, in July that might have contributed to the kind of higher rental activity?

Timothy Martin

It’s just anecdotal stuff. We have hundreds of thousands of customers who all come to us. Again, as I talked about earlier the beauty of the business is there are so many different needs that create demand for our product. It would be anecdotal at best anything that I would provide there from a color perspective.

Ki Bin Kim

Okay. Thanks.

Timothy Martin

Thanks, Ki Bin.

Operator

And this will conclude our question and answer session. I’d like to turn the conference back over to Chris Marr for any closing remarks.

Christopher Marr

Okay. Thanks, everybody, for participating in our call. Please continue to stay safe. We wish you all the best. And we look forward to speaking to everyone on our third quarter earnings call. Take care having great rest of your summer.

Operator

The conference is now concluded. Thank you for attending today’s presentation. You may now disconnect.





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Home Buying Boom Boosts Zillow’s Fortunes to a Record By Investing.com


© Reuters.

By Christiana Sciaudone

Investing.com —  Zillow Group Inc (NASDAQ:) bounced to a record as Americans went shopping for new homes in the pandemic.

Shares of the real estate listings company jumped 17% Friday after it reported revenue rose 28% to $768 million, compared to the average analyst forecast of $619 million. The loss per share of 15 cents compares to the expected loss of 48 cents. The shares gave back some of the gains to close up 11.5%, at $79.78.

Traffic to Zillow Group’s mobile apps and websites reached a record 218 million average monthly unique users, an increase of 12% year over year, driving 2.5 billion visits during the quarter, the company said in a statement. Zillow ended the quarter with the highest cash balance in its history, growing cash and investments to $3.5 billion from $2.6 billion at the end of the first quarter. 

Shares have eight buy ratings, nine holds and one sell, with an average price target of $65.25, analyst tracked by Investing.com say. The stock has more than doubled since March.

 

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