23andMe: Hidden Therapeutics Asset (NASDAQ:ME)

23andMe (NASDAQ:ME) was one of those high-flying SPACs that was trading at crazy valuations not too long ago. Now that the current market environment has turned unfavorable, its stock is trading at a fraction of its all-time high. In this article, I examine whether or not this company is worth looking into.

Quarter Results Analysis

Looking at 23andMe’s results for the quarter does not show a comforting sign. Revenues have slightly decreased from $65 million the prior year to $61 million in the current quarter. This quarter’s decrease was due to lower volumes sold of the company’s Personal Genome Service (“PGS”) kit.

Considering the macro-economic environment, 23andMe has had to focus on profitability and higher average prices thus reducing advertising and discounts. Sales of the company’s PGS kit accounted for about 61% of the company’s revenue. The good news is that given that the product is purely discretionary, it is good to see that there remains a solid market for this.

The bad news is the company’s revenue has never really recovered its 2019 pre-pandemic highs. In 2019, 23andMe had a total revenue of $440.9 million. In 2020 during the height of the COVID-19 pandemic, the company’s revenue was $305.5 million. Currently, 23andMe’s trailing twelve-month revenue is $295.8 million.

The company has never been profitable and has been burning cash on an average of -$140 million per year. For the three months ended June 2023, the company reported a negative Adjusted EBITDA of -$50 million, roughly the same as last year. On the positive side, the company has practically no debt and a solid cash position of $314 million.

23andMe’s Drug Development Pipeline

The truth of the matter is, I doubt you would ever buy this company’s stock solely for its retail genetic testing. In my opinion, this type of business has always been a bit of a novelty. That being said, Ancestry.com is reported to have over $1 billion in annual revenue more than 3 times 23andMe’s based on trailing twelve months.

While both companies do genetic testing, 23andMe has actually approached its business model from a different angle. 23andMe leans more on the healthcare side of the equation. The company has more comprehensive testing as it includes mtDNA, and Y-DNA in addition to autosomal testing. This means that 23andMe has access to a wide array of biomedical data from its 14 million users.

From this massive data set, 23andMe is hoping to turn its genetic research into usable therapies for various diseases. The company has had a multi-year exclusive relationship with GSK (GSK) specifically for this purpose. This has resulted in around 50 therapies that are in various stages of development.

Of the company’s current pipeline, there are two promising therapies that could provide a boost to the company’s revenues in the near term. The first is 23ME-00610 an antibody cancer drug that is exclusively owned by the company. Based on information from the company’s website; “The drug is designed to reactivate the immune system’s response to tumors by restoring the ability of both T-cells and myeloid cells to fight them”. This drug is currently in the midst of Phase 1/2a clinical trial.

The other drug in 23andMe’s pipeline that is coming along nicely is GSK’608 (“CD96”). This immuno-oncology therapy targeting advanced solid tumors was developed in partnership with GSK and is in Phase 1. What’s interesting about this program is that 23andMe has elected to take a royalty option. While this does mean the company would have less upside in case of a successful trial, GSK is now solely responsible for the development and would then bear all the associated costs.

Partnerships Could Exponentially Expand Drug Pipeline

It is my belief that 23andMe should be evaluated as a Biotech company and not as a consumer-facing subscription business. The company is executing well on its plan to leverage its DNA data to produce life-saving drugs. What is key though when evaluating a Biotech company is its drug pipeline. As previously mentioned, 23andMe has its own in-house therapeutics business focused on immunology and inflammation. But what is more exciting is the potential expansion of its pipeline through partnerships.

In the future, I can envision 23andMe’s revenue-producing drug pipeline growing exponentially. As mentioned, the company has about 50+ therapies in the discovery stage with GSK. The company can elect to take a “royalty” option on these therapies and thus not bear any cost in development, just pure upside.

Furthermore, the company just ended its exclusive partnership with GSK this July. The downside is that 23andMe losses a large chunk of its revenue moving forward. GSK was paying the company roughly $13 million in the most recent quarter or 21% of revenue. Thus, expect revenue to take a huge dip YoY in the coming quarters.

The upside though is that this means that 23andMe could now potentially partner up with other major pharmaceutical companies and biotech firms to leverage the company’s massive genetic dataset. Assuming these partnerships are as fruitful as its GSK partnership, 23andMe could grow its drug pipeline exponentially while incurring little R&D cost. As mentioned in the company’s earnings call;

What’s really exciting for me in the post GSK world is the explosion of interest in genomic based discovery. So there are lots of biotechs, lots of pharma companies that now really see the opportunity with having genetics as a fundamental part of their discovery engine. And what we’ve really been able to prove out with GSK during this collaboration is the incredible productivity that we can get from our database. So we are incredibly adept and capable with target discovery and leading that through to novel programs. So we’re focusing really on those types of collaborations, data partnerships as well as research discovery partnerships in specific phenotypes, but we see a real demand now for access to the 23andMe database for target discovery.

Note: 23andMe is still working with GSK on supporting the 50+ programs identified that are in the discovery phase.

Conclusion

Apart from partnerships and pipelines, there isn’t much going on with 23andMe. Management has given full-year guidance for full-year fiscal 2024. Revenue is expected to be in the $225 million to $275 million range with its cash burn (“adjusted EBITDA”) between $160 million to $180 million.

Investing in Biotech is fundamentally a crapshoot. It’s impossible to tell ahead of time which therapies are going to make it past all the Clinical trials. The advantage 23andMe has though is that it has the potential to exponentially expand its therapy pipeline through partnerships. After that, we just have to cross our fingers that at least one of those drugs makes it.

The company is trading at a market cap of $515 million which could make it worth the risk. I think 23andMe could be a very speculative buy at these levels.