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.
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:
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.
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:
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.
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.
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.
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.”