4 takeaways from 23&Me’s planned SPAC deal

As sales for DNA testing kits flatten, the companies that make them are faced with a predicament. Revenues are falling as the market became saturated, and more consumers began to wonder about the privacy of their data.

After a bumpy 2020, consumer DNA testing company 23andMe plans to go public through a blank-check deal. The Sunnyvale, Calif.-based business will merge with a special-purpose acquisition company started by Virgin Group in a deal that would value it at $3.5 billion.

After the merger closes, which is expected to take place next quarter, 23andMe will begin trading on the New York Stock Exchange under the ticker “ME.”

It would have $900 million in cash on its balance sheet. That includes $509 million reserved by acquiring company VG Acquisition Corp., as well as a $250 million private placement, with CEO Anne Wojcicki and Virgin Founder Sir Richard Branson each contributing $25 million.

Here are four takeaways from what we know so far about the deal.

Fewer people are buying tests
Demand for DNA tests has cooled quickly over the past two years.

In financial data shared in an investor presentation, 23andMe’s expected revenues for the current fiscal year are nearly half of what it brought in two years ago. The company reported $441 million in revenue for 2019 and $305 million in its most recent fiscal year, which ended on in March 2020.

With two months left in its current fiscal year, the company expects to bring in $218 million in revenue. It hopes to rebound back to $400 million in revenue by 2024.

It’s also worth noting that 23&Me slashed its marketing expenses this year to $44 million in expected costs from $111 million in 2020

The company pulled almost all of its television advertising last year, as it gauged consumers’ response to the Covid-19 pandemic, CFO Steve Schoch said in an investor call.

“We took a very conservative approach to running the business this year,” he said.

The company is pulling away from ancestry tests
23andMe plans to move away from ancestry testing, while its biggest  competitor, Ancestry.com, is scrapping its health tests. Last year, Ancestry.com sold to private equity firm Blackstone 

Currently, 23andMe sells ancestry tests for $100, along with some lighthearted observations, such as whether someone is more likely to prefer chocolate ice cream or be afraid of heights. Now, the company plans to double down on its pricier $200 health tests, which include reports on whether someone might be a carrier for an inherited health condition, or whether they might have a genetic predisposition for certain conditions, such as breast cancer.

“The health product has a list price that’s twice the ancestry product price, and they have the same cost of goods,” Schoch said. “So, as we began to focus our attention on that, we began to see average selling price and margins improve. It’s a bigger market, so we’re facing off and putting resources against a better growth opportunity to begin with.”

That said, some of its reports have not been reviewed by the FDA, such as whether someone is more likely to develop Type 2 diabetes.

23andMe quietly launched a subscription service
Last fall, the company quietly launched a subscription service. Called 23&Me+, it costs $30 and includes new reports issued by 23&Me, such as whether someone is more likely to develop high blood pressure or experience migraines.

After a soft launch in October, the company has drummed up 75,000 subscribers. The idea, Wojcicki said, was to provide more content so users could benefit more from sharing their genetic information.

“The additional content was one of the main things when we surveyed our customers that they asked for. They want to keep learning more about themselves,” she said in an investor call. “Doctors are mostly trained on how to treat disease, not about how to prevent it. So what 23andMe is going to own is the genetics-based primary care experience, leveraging all this information that our customers have to create unique protocols about how you actually help them prevent disease, based on the genetic information, as well as all the lifestyle information that we’re collecting.”

Pharma partnerships are still its long-term focus
The long-term focus for 23andMe still remains using all of its accumulated DNA data to strike partnerships with pharmaceutical companies. Of its 10.7 million genotyped customers, the company said 80% of them have consented to sharing their information for research.

23andMe has an ongoing collaboration with GlaxoSmithKline, which invested $300 million into the company in 2018. The companies struck a four-year partnership to identify new drug targets and shorten recruitment times for clinical trials. They agreed to split the costs and profits 50-50.

So far, the companies have a handful of drugs in their pipeline, including a cancer immunotherapy treatment that entered phase I clinical trials last year.

Photo credit: Gabe Ginsberg, Getty Images for LARAS 

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