23andMe Stock: Continued Drug-Development Progress Can Deliver Long-Term Gains
Summary
- 23andMe is well known for their services around DNA testing, ancestry mapping, and genetic data.
- By collaborating with GlaxoSmithKline, the companies can better use 23andMe's 11.6 million genotyped customer database to develop beneficial drugs.
- Long-term investors should be focused more around the potential drug discovery revenue rather than the short-term volatility and high R&D expenses.
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23andMe (NASDAQ:ME) recently went public through a SPAC vehicle and despite the stock currently trading below the $10 level, I believe the long-term optionality remains very strong. The global pandemic has potentially accelerated consumer demand in the area of learning more about their health history and better understanding their DNA. In addition, consumers are naturally attached to further understanding and mapping out their ancestry, which 23andMe assists with.
Even though the stock currently trades below the $10 price that SPACs typically start off trading, I believe investors need to look at the long-term optionality of the company. First, the company has a strong consumer base that will pay for services to learn more about their health, DNA, and ancestry. While this provides a solid base of revenue, the real long-term potential comes from their database.
Right now, 23andMe is working with GlaxoSmithKline (GSK) to develop an immuno-oncology drug that is currently in Phase 1 studies. By partners with drug-development companies, the collaboration can better use 23andMe's database to develop medications that can become commercialized and monetized over time.
For now, I continue to believe in the long-term potential of the company and remain bullish at these levels.
23andMe Overview
While 23andMe is not a new company by any means, the company recently went public through a SPAC vehicle that included Sir Richard Branson as an early investor. Essentially, the company provides a DNA genetic testing product that enables consumers to learn more about their ancestors, DNA, and genetics. The at-home DNA kit is simple to use, with the consumer sending 23andMe a swab of their saliva and 23andMe does the rest.
With DNA services, scale is essential. 23andMe notes they have 11.6 million genetic tests performed within their data set, which compares to the next leading company, Regeneron (REGN), at just 1 million.
Let's not forget, the global pandemic has caused many individuals to become more curious about their health and wellness history (source: McKinsey). By better understanding their genetics, individuals can put themselves in a better position to remain healthy and avoid certain serious illnesses. By providing a direct-to-consumer testing kit, 23andMe also eliminates the need for individuals to visit the doctor's office in order to become more informed about their DNA and ancestry (sources: Bloomberg and 23andMe).
The company also boasts that 80% of their consumers opt-in to 23andMe's research, meaning the more consumers that use this product, the better the company's data set becomes. And with a larger data set, the outcomes tend to become more precise and informative, thus driving further customer interaction.
By partnering with other biomedical sciences and drug-related companies, 23andMe can better utilize their massive data set to help develop effective drugs.
Currently, the company has 40+ programs in process with the most relevant one being their CD96 immuno-oncology drug co-developed with GlaxoSmithKline. Yes, this drug currently remains in Phase 1 studies, but by having a relationship with GSK, 23andMe has positioned itself up well for success. In addition, their P006 program, which is wholly-owned, remains on track to start the first clinical trial before the company's fiscal year ends on March 31, 2022. This is just another proof point of what the company can accomplish given their massive DNA dataset.
Brief Financial Review
During the company's most recent quarter, they reported revenue of $59.2 million, which represented growth of 23% yoy. Adjusted EBITDA loss was $27 million, which was slightly worse than the loss of $20 million in the year-ago period. However, right now, investors should be more focused on the company's customer database, genetic research, and potential therapeutics programs.
Source: Company Presentation
23andMe expanded their customer database to 11.6 million genotyped customers as of their most recent quarter, which is up from 11.3 million at the end of the prior quarter. More importantly, the company continues to expand their data points (over 4 billion) which results in richer data sets to use for developing therapeutics.
In my opinion, recent therapeutic and report announcements have more incremental value to the company's story than their current financial position. Just during the most recent quarter, 23andMe announced three new reports for customers, including a medication insight report on information about genetic variants, a wellness report on cat/dog allergies, and an eczema report.
These types of developments, among others, will continue to drive the company's use-case and encourage new customers to try their service. These are relevant to consumers because if 23andMe is able to expand their use-cases, more consumers will become attracted to the product. For example, if 23andMe were to only provide DNA data, then only a select amount of consumers would be interested. However, with developments such as insights on medication, genetic variants, possible allergies, eczema reports (among many others), this widens the amount of consumers who will be interested in 23andMe's testing services. In other words, the greater number of potential reports that can be generated from their testing, the greater number of consumers will be attracted to the product.
In addition, 23andMe announced new details on advanced therapeutics programs, including the following updates.
Progress on CD96 (GSK6097608), an immuno-oncology program currently in a Phase 1 clinical study, was highlighted by the Company’s partner GlaxoSmithKline at their Investor Day in June 2021.
P006, a wholly owned immuno-oncology program, is on track to start its first clinical trial before the end of the Company’s fiscal year on March 31, 2022.
23andMe has a strategic collaboration with GlaxoSmithKline with the companies agreeing to split costs and profits 50/50. With this collaboration, GSK will be able to utilize 23andMe's vast amount of DNA data. Per the company, the industry average to get an investigational new drug application takes 7 years; however, this only took 4 years for the two companies' CD96 drug. With this program currently in Phase 1 clinical study, there remains a long-term horizon for future monetization, though the outcomes still remain quite uncertain.
This partnership represents just one area where 23andMe has room for growth. By collecting vast amount of data, drug discovery and biomedical science companies will surely want to partner with 23andMe over time.
In relation to the company going public via a SPAC, 23andMe ended the most recent quarter with cash of $770 million, giving them plenty of liquidity to continue to invest in R&D.
The company also provided guidance for FY2022, which included revenue of $250-260 million, adjusted EBITDA loss of $143-158 million, and a net loss of $210-225 million. While the company still has a long way before becoming profitable, the strong cash balance gives them the funds necessary to remain fully operational without further tapping the debt and/or equity markets.
Valuation
Currently, the company has a market cap of $3.6 billion and with an additional $770 million of net cash, their enterprise value stands at $2.8 billion. The challenging part with valuation is two-fold.
First, it's challenging to know where revenue could actually be in the next 3-5 years. Yes, the company will likely continue to grow their Consumer and Research Services revenue, which is their traditional direct-to-consumer model. But given the company's continued improvement in drug discovery, revenue could be vastly different when they receive FDA approval. For example, if their CD96 immuno-oncology program with GSK achieves approval and becomes commercial, then revenue could potentially be multiples of their current run rate.
Second, it's near impossible to predict at which revenue multiple this company should trade at. Given the unknowns with their drug pipeline, investors will need to be confident in the long-term viability, rather than simply placing a revenue multiple on next year's revenue. However, given the company's 40+ products in their pipeline, I believe they will be able to achieve some level of success, as opposed to other companies who solely focus on 1-2 drugs.
For now, I am a long-term believer in the company. Given the fact that it's more likely the stock trades based on drug-related developments, I believe investors may need to hold through some volatile periods. Yes, it's great to see revenue grow at 23%, but the real value comes from their DNA data sets and the endless opportunities to monetize drug productions.
The biggest risk with investing in 23andMe is if the company is not able to monetize or develop any successful drugs. Even with their large database, it does not guarantee success when it comes to drug approval. If the company is not able to achieve some level of scale with their drug sales in the next few years, the stock could be challenging to hold.
This article was written by
Analyst’s Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
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