Is 23andMe Stock a Good Play on Genetics Testing?

With more than 9,700 hedge funds in operation around the planet, it’s highly unlikely that a handful of amateur stock manipulators on Reddit are bringing down Wall Street. It’s a myth that the media continues to perpetuate, further exacerbating the problem by encouraging even more dumb money to enter the fracas. What you are seeing is a massive transfer of wealth from people with little money to people with loads of it. Keep on sticking it the man lads.

Another thing hedge funds are making a killing on these days are special purpose acquisition companies (SPACs). A paper titled “A Sober Look at SPACs” elaborates on how “SPAC investors are bearing the cost of the dilution built into the SPAC structure, and in effect subsidizing the companies they bring public.” It only further reinforces what we continue to tell our readers – SPACs Reward Everyone Except Retail Investors. Today, we’re going to talk about a SPAC offering from 23andMe.

About 23andMe

Click for company website

After rumors surfacing of a possible 23andMe SPAC, it’s now official. Virgin’s VG Acquisition Corp (VGAC) plans to merge with 23andme. Like every other SPAC out there, 23andMe treats us to a glossy investor deck that presents the investment opportunity in the most favorable light possible. “The healthcare system is broken, and we can fix it by empowering the consumer,” translates into an investment thesis that surrounds big genetic data. Over the years, 23andMe has sold direct-to-consumer genetics tests and amassed a database of over 10 million genetic profiles, 80% of which have consented to their data being used for research. The approach has evolved over time, from finding out who your ancestors are, to learning if you’re predisposed to breast cancer.

Direct-to-Consumer Genetic Tests

23andMe started out with an ancestry focus and then pivoted into other areas. The goal has always been to collect as much genetic data as possible and then monetize it. To avoid regulatory scrutiny, some of the insights they provide are largely benign. Telling someone that 56% of people with a similar genetic profile like chocolate ice cream may sound like useless information because it is. Yet, this example graces their deck as something “engaging and fun” that gets people to give up their DNA. The company says it’s one of the reasons that over seven million customers logged in, in 2020, and over 60% of our customers from before 2015 also logged in, in 2020.

While a certain number of people might be interested to know they have more Neanderthal DNA than 78% of other customers, these gimmicks only go so far. That’s why 23andMe emphasizes their six FDA authorizations thus far that cover topics like carrier status and pharmacogenetics and significant health risks like breast cancer. 

Anyone who has seen a 23andMe commercial on the telly would suspect that the company has spent a fair amount of money acquiring customers over the past six years:

Credit: 23andMe

Once a customer has purchased a test, the key is to get them to make subsequent purchases. That’s why 23andMe is now offering a subscription service for $29 a year which gives you additional reports as time goes on.

Frankly, some of this stuff seems like drivel. Genetics tests for migraines and sleep apnea seem pointless, no matter how you try and spin them. 23andMe emphasizes how 76% of the people who take their tests “report taking a positive health action.” The list reads like someone’s goals for the New Year. Just over half the 1,046 people surveyed said they “set future goals to be healthier.” Haven’t we all.

Subscription is the next phase of 23andMe’s direct-to-consumer journey, and they already have 75,000 subscribers. That’s not a huge surprise given their current pricing strategy pushes you firmly in the direction of a subscription package.

Credit: 23andMe Website

If it’s all about the data, why not just give the test away? It’s a good question, and a good segue into the other side of the revenue equation.

Selling Big Genetic Data

The real opportunity for 23andMe seems to be around the value in their data set. At least that’s what one of the world’s largest pharmaceutical companies, GlaxoSmithKline (GSK), seems to think. In 2018, 23andMe and GSK entered into an agreement which involved a $300 million equity investment and over 30 joint profit-sharing programs in the pipeline today spanning oncology, respiratory, cardiovascular diseases, and more. Their first drug candidate is already making headway as the two companies began their first joint human clinical trial this past summer. A population of 10 million people gives them plenty of opportunity for genetic research as seen below:

23andMe can do research on all diseases with over 0.1% prevalence in the population. Credit: 23andMe

The hope is that the 30 or so programs both companies are working on will yield additional revenue streams over time. Given how revenues have been declining over the past few years, this is welcome news.

The Financials

Like most SPACs, the 23andMe pitch deck includes some sparse financial numbers as if they’re some sort of footnote instead of a focal point for any investor. The forward-looking numbers show a focus on growing the direct-to-consumer subscription business to nearly 3 million subscribers by 2024.

Credit: 23andMe

Even then, they don’t expect to surpass the $441 million in revenues the company realized in 2019.

In the last few years, revenues have fallen by 50%. Perhaps it’s all part of the master plan, but like the Velodyne SPAC, we’re expected to believe that the company has hit some inflection point, and the declining revenue problem will suddenly be resolved post-SPAC. At least they’re honest about what to expect, and it’s not the double-digit revenue growth that we’re hunting for.

To Buy or Not to Buy

While shares are trading up +70% already on the news of the SPAC merger, let’s pretend that at some point in the future we can pay what institutional investors paid – $10 a share. Let’s also assume that price point represents a fair valuation, despite the fact that some of the stakeholders involved are purely driven by the need to do a deal at all costs. The question is, does 23andMe complement our existing portfolio of 29 tech stocks?

We previously wrote about Invitae Stock – A Pure-Play on Genetics Testing, noting that “selling direct-to-consumer genetic healthcare tests means lots of regulations and rules.” Invitae (NVTA) believes that healthcare professionals are fundamental in ordering and interpreting genetic information. In other words, anything sufficiently useful and actionable should have a healthcare professional involved at every step of the process.

In order for genetic testing to be the foundation of personalized medicine, demand needs to be driven by the healthcare community, and insurance companies need to help pay for the costs of testing. That’s the business model Invitae is working towards, and we believe that’s an easier path to take than direct-to-consumer. If not less risky, it certainly comes with more reward. The real value in genetic testing isn’t telling Bob he doesn’t like broccoli, it’s telling Bob’s doctor which cancer treatment will be most effective in extending Bob’s life expectancy by a decade.

Even if we did find 23andMe to be a worthwhile investment from a business model perspective, we’re kept away by their decision to go public via SPAC. Companies that choose the SPAC route can’t be blamed for making hay while the sun shines. However, we feel that they do themselves a disservice as investors are increasingly realizing that these vehicles do not benefit serious long-term investors, the type that every company wants to hold their shares.

Conclusion

SPACs are flying out the door faster than anyone can keep track. They’re all trying to find target companies to merge with, and this supply of capital means that companies will have their pick of the most favorable terms possible. Investors who treat these vehicles as long-term investments are getting the short end of the stick. If anything, the 23andMe public offering has assured us that our investment in Invitae is the right place to be when it comes to investing in genetic testing.

The deal is expected to close as early as May of this year after which time shares of 23andMe will trade under the ticker “ME.”

Invitae is one of around 30 tech stocks to be found in The Nanalyze Disruptive Tech Portfolio. Want to see the rest? Become a Nanalyze Premium subscriber and find out today.

2 thoughts on “Is 23andMe Stock a Good Play on Genetics Testing?

  1. I find your criticism of SPACS kind of interesting because I look at your companies research prospects as being one of the potential winners from SPACS. You company does great research in emerging area but since a large portion of these companies are not yet public we retail investors are left setting on the sidelines. The reason I love SPACS is that it gives me the opportunity to get into an emerging public company without having to wait until there is a possible dip after their IPO. I have purchased over ten SPACS and have had great success like DM and LAZR. I had two convert this week and will have to wait and see how they do. But that happens with all companies. Like all companies I buy the underlying company has to be in a business I think has a future with good management etc. I have passed on all the EV and batteries stocks because IMO EV’s are going to become like computers. A massive drop in prices and a quick track to a commodity. There is a great opportunity for traders but GME was a great play for traders. I pass on gambling. I bought VGAC for $11 bucks this week. I bought on the rumor but so what. If it was false I would still have a $10 floor under me. 23 and me has some very interesting and connected management. There is one Company floating around out there with gene sequencing better than Illumina IMO. That is Cal Bio. It is into reading longer sequences than other which is where I think the market is headed. Plus Cathie Wood is already into the stock. Will it be a winner? There are no guarantees but something tells me 23 and me will be a much different company in a couple of years. I will wait it out and hope it takes off like all my stocks. PS I owned Invitae. Good company. Made a profit.

    1. Thank you for the feedback James. Perhaps the biggest problem with SPACs is that you immediately pay a steep price premium compared to what institutional investors paid. If anything, you might consider paying a small premium. For example, we paid 11 and some change for our DM position. There is no reason it should be trading up nearly 200% so we’ve been covering our cost basis a bit. The hype in the market these days is ludicrous, and risk-averse investors like ourselves are proceeding with a great deal of caution.

      Buying a SPAC before an announcement and then selling it afterwards for a profit has been so easy to do it’s almost laughable. That $10 floor as you pointed out is a great hedge. We did this a few times (and wrote about both trades) but don’t anymore as we’re not speculators, and the SPAC music will stop at some point in time. We believe any pre-revenue SPAC should just be avoided like the plague. Like you, we see the EV SPACs as nothing but trouble.

      You said “Cal Bio,” but perhaps you are talking about PacBio? We’ll look to do a piece on them soon as that’s long overdue.

      We’re really happy to hear you’re doing well in the market. Make hay while the sun shines mate! We really appreciate you taking the time to talk about your experience in SPACs. We especially appreciate having you as a premium subscriber. Your support is what funds our research.

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