• Brett Schafer

Not So Deep Dive: 23andMe

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Show Notes

(Ryan) What they do: 23andMe is a direct-to-consumer genetic testing company (I believe the first). Basically, people can go to the 23andme website and order one of 3 kits. The Ancestry Service for $99, the Health Service for $99, or both for $199. Customers receive a vile and they’re supposed to fill it with saliva then ship it back to a 23andMe laboratory. From there, the sample is tested and customers receive a plethora of information depending on the package they ordered.

If the customer consents to it during registration, 23andMe can add the patient’s information to their database. The database is then used to help the company’s research initiatives. The goal of the research is to identify drug targets and then ultimately develop successful drugs. The sale of these drugs then gets recorded as therapeutics revenue. It looks like they also get paid by another company for that research under what it calls the GSK Agreement. But right now the majority of revenue still just comes from selling kits or what it calls Personal Genome Services.

To simplify it. Customers buy a kit online, they spit it into a tube, and send it back. 23andMe runs its tests, processes the data, and sends the customer back a full suite of genetic reports. This can include ancestral origins, genetic health risks, chances of passing on carrier conditions to children. Then 23andMe also collects the data and uses it as the basis for research of drug development.

(Ryan) History: Anne Wojcicki started 23andMe in 2006 with Linda Avey and Paul Cusenza. It was basically the same model they have today and by the next year, they received $3.6 million in funding from Google and some other VCs. Worth noting, Anne Wojcicki was married to Sergey Brin at the time. However, in 2013, the FDA ordered 23andMe to stop marketing its tests because it wasn’t cleared to provide its customers with health risks in case they provide misinformation. This halted them in their tracks until 2017 when their application was approved. Now, 23andMe is back up and running and Anne Wojcicki is still there. And they finalized their SPAC merger with VG Acquisition Corp in June of this year. And VG is one of Richard Branson’s SPAC vehicles.

(Brett) Industry/Landscape/Competition:

  • Genetic testing is expected to reach $10 billion a year in the US by 2027 (take with a grain of salt)

  • However, 23andMe also operates as a pharmaceutical company, which is a much larger market of over $500 billion

  • Competitors in genetic testing: Ancestry.com, Futura Genetics, Veritas Genetics, Helix, Regeneron, there are a ton.

  • The reason for so many start-ups? Genetic testing has gotten a lot cheaper but does rely on an arguable monopoly supplier called Illumina

  • In pharma, they compete with all the companies trying to develop drugs

(Ian) Management and Ownership:

  • Anne Wojcicki (wojiski) is the co-founder and ceo of 23andMe

  • She owns ~24% of the shares outstanding (largest shareholder).

  • She was married to Sergey Brin, dated Alex Rodriguez after that

  • Her older sister is the CEO of YouTube

  • She was on Masters of Scale with Reid Hoffman, a great podcast

  • Pretty impressive to have steered the company through the difficult times to a SPAC merger

  • Seems very determined, all the stories point toward that

  • 94% of employees approve of her on Glassdoor

(Brett) Valuation:

  • Market cap of $3.3 billion, ticker ME

  • P/S of 13.2 based on full-year guidance

  • P/GP of 25.5 extrapolating last quarter’s financials

  • No relevant ratios lower on the income statement or cash flow

  • 65.9 million stock options outstanding vs. 407 million shares

  • 16.9 million in public warrants

  • 161 million future shares of common stock eligible to be issued, so expect dilution

(Ryan) Earnings:

  • At first glance, the earnings are not very exciting. But I’ll caveat with something that’s a little interesting.

  • Full-year 2021 revenue was $244M. That’s down 20% YoY. And down 45% from 2019.

  • 2021 gross margin was 48%, up from 45% in 2020

  • They have negative 75% operating margins. Profitability doesn’t look very good at all.

  • And they spent 36% of revenue on SBC in 2021 which was egregious.


  • Consolidated revenue grew 23% YoY. However, it’s still down over two and three-year comps.

  • Expanded their total genotyped customer base but didn’t say by how much.

But here’s where it gets interesting.

  • From 2019 to 2021, consumer and research services revenue declined by 44%. However, revenue from kits declined by 54% during that time. So in that period, revenue from what I can only assume is database licenses increased by 274%. But there could be another contributor that I’m just not thinking of.

(Ian) Balance sheet and liquidity:

  • Cash of $770mm

  • Enough to sustain about 8 years at the current burn rate

  • No debt, but about $90mm in operating lease liabilities

  • Keen to highlight strong cash position probably knowing that a lot of burn is ahead and trying to quell investor fears of significant dilution

Anecdotal Evidence:

  • (Ryan) None.

  • (Brett) Don’t have any inkling to get a test. Maybe my hurdle is higher than most but I don’t think so

  • (Ian) I typically would not have gotten a test, but I had a family member who was doing some genealogy work and asked me to get it (even bought the test for me). I will say that the data has changed/gotten better over the years since I got it, probably like 4 years ago. Kinda cool to look at, but I don’t feel any great allegiance to the brand.

Future growth opportunities:

  • (Ryan) Targeting their true customers which are pharmaceutical manufacturers. Granting licenses to more pharma labs. Right now I believe most of their revenue in that segment comes from their GSK Agreement. But adding new pharma labs could reduce concentration risk, and it’s obviously a higher margin than selling kits or even developing drugs for that matter.

  • (Brett) Cancer drug candidate called P006. It is supposed to treat tumors before they turn cancerous/deadly (no other information besides that)

  • (Ian) Subscription service. $29 a year provides access to exclusive reports and “enhanced” ancestry features. It’s a low enough price that users who love it may get in, but I am failing to see the current value prop for the average user. I have no interest in purchasing it.

Highlights and lowlights:

  • (Ryan) Highlights: User-generated database sounds like an attractive model. And research services revenue, which is them I believe selling access to their database is growing at an impressive clip. Not sure why they avoid saying that outright in their financials. Lowlights: Declining overall revenue and increasing operating expenses. That’s typically not a recipe for success.

  • (Brett) Highlights: Fast-growing industry, the biggest dataset among competitors, and the upside from drug development are super high. Lowlights: The kit business looks bad, and we are relying on two pivots to succeed. Lots of dilution potential here, share count could double in a decade

  • (Ian) Highlights: I think that they are right about the problem of preventative medicine. Pretty impressive that the company is still around and has built such an impressive database. Lowlights: Focus may be too broad, not sure what the core competency. Poor recent numbers. A little worried about ethical/legal implications.

Bull case:

  • (Ryan) They pour money into marketing expenses and build up an extremely valuable database. I would think, though I don’t know how useful saliva-based data is, that labs would be willing to pay up to have access to this.

  • (Brett) the database gives them an advantage and subscription product gets to a few million users

  • (Ian) A replica of Facebook. Questions about monetizing the data seem pointless 5-10 years from now and it becomes clear just how valuable the database is. Not clear who pays for the value though

Bear case:

  • (Ryan) The data isn’t all that useful to other labs, they don’t develop any successful drug candidates and they burn through all the cash they just raised. So bankruptcy is the bear case here.

  • (Brett) Subscription product is a dud, and the database doesn’t give them an advantage

  • (Ian) Genetics does not become the major component of preventative medicine, and it captures a relatively small piece of the value chain.

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Disclosure: The author and podcast guests are not your financial advisors. Ryan Henderson and Brett Schafer are general partners and portfolio managers at Arch Capital. Clients of Arch Capital may hold securities discussed on this show.

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