A Member of Pat McKeough’s Inner Circle recently asked for his advice on a company that specializes in consumer genetics testing.
Pat likes the firm’s rising revenue, but feels a recent acquisition adds considerable risk and the U.S. government may restrict the firm’s use of big data. Ongoing losses are also a concern.
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23andMe Holding Co., (Symbol ME on Nasdaq; www.23andme.com), is a provider of consumer genetics testing. It has created the world’s largest crowd-sourced platform for genetic research; more than 80% of its customers have agreed to have their genetic profiles available on the platform.
In February 2021, VG Acquisition Corp., a special purpose acquisition company or SPAC backed by British billionaire Richard Branson’s Virgin Group, announced that it would merge with privately held 23andMe to complete the qualifying transaction for this type of acquisition.
On June 16, 2021, VG Acquisition Corp. and 23andMe completed their merger transaction. 23andMe’s stock started trading on the Nasdaq under its new symbol ME on June 17. As part of the merger, 23andMe received funds of around $500 million.
Co-founded in 2006 by current CEO Anne Wojcicki (the former spouse of Google co-founder Sergey Brin), the genetic testing company was a pioneer in the business of personalized gene testing kits.
Along with Ancestry, it helped pioneer the idea that genetic testing is not just a medical field, but a consumer business as well. 23andMe’s at-home testing kits, which let people learn about their genetic profiles and ancestry by sending a saliva sample by mail, ushered in a new era of personalized medicine.
Inner Circle: Acquisition and government scrutiny add to potential risk
On November 1, 2021, 23andMe completed the $400 million acquisition of Lemonaid Health, a platform for accessing medical care and pharmacy services online.
Lemonaid Health aims to offer patients affordable and direct online access to medical care, from consultation through to treatment for a number of common conditions. Within minutes, patients can interact with a licenced doctor or nurse practitioner for consultation and treatment. The platform offers patients free and fast delivery of prescription medications, thereby increasing the speed, accessibility, and efficiency of treatment.
The acquisition adds Lemonaid Health’s telemedicine and prescription drug delivery services to 23andMe’s consumer business. Meanwhile, 23andMe believes that Lemonaid doctors will be able to utilize its pharmacogenetics (the study of how genes affect the body’s response to certain medicines) reports when prescribing drugs for individual patients.
Once the acquisition is completed, Lemonaid CEO Paul Johnson will become the general manager for 23andMe’s consumer business. In addition, Lemonaid co-founder Ian Van Every will become 23andMe’s managing director for the U.K.
23andMe’s revenue rose 11.5%, from $243.9 million in fiscal 2021 (years end March 31) to $271.9 million in fiscal 2022 (its first year as a public company). The company lost $183.6 million, or $0.51 in fiscal 2021, followed by a loss of $217.3 million, or $0.60 a share, in fiscal 2022.
In the quarter ended June 30, 2022, 23andMe’s revenue increased 8.9%, to $64.5 million from $59.2 million a year earlier. Revenues were higher primarily due to the addition of a full quarter of telehealth business revenue from the Lemonaid Health acquisition, as well as an increase in subscription revenue.
The company lost $89.5 million, or $0.20 a share, in the quarter. That’s compared to its year-earlier loss of $42.0 million, or $0.09.
Now, to spur growth beyond the market for direct-to-consumer genetic testing, 23andMe aims to turn its wealth of data into therapeutics. It hopes to build a big consumer business off its base of 12.8 million genotyped customers and its drug research and development platform where 80% of test takers have opted to share their genetic information for disease research and development.
All in all, 23andMe’s future success will depend on renewed growth in the personal genetics market and its ability to fully realize its drug development efforts—as well as the new services offered by Lemonaid Health. But whether it will succeed is uncertain, especially in drug development. Drug development is expensive, takes years to complete, and has very uncertain outcomes.
What’s more, rising government scrutiny of big tech’s use of data could result in new regulations for the collection of user data. Any regulation targeting companies like Facebook and Google could inadvertently sweep up other companies that heavily rely on data, like 23andMe, and make collecting data extremely expensive or cumbersome. Doing so could put the company’s drug development efforts at risk.
Recommendation in Pat’s Inner Circle: 23andMe Holding Co. is not recommended.
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