Can You Count on 23andMe Stock?

On June 16, SPAC Virgin Group Acquisition completed its merger with the consumer genetics company 23andMe (NASDAQ: I). The latter was funded by the deal with $ 592 million in cash for a total company valuation of $ 3.5 billion. Investors were delighted with the deal, with stocks rising over 20% on the day of their trading debut.

That’s quite a leap, considering that 23andMe’s management projects will decline sharply over the next few years and will not recover to 2019 levels until 2025. So what’s behind the hype?

Image source: Getty Images.

Growth stagnates

23andMe is known for its eponymous health and parentage testing. After purchasing and receiving the test kit, consumers send a saliva sample to a laboratory for analysis. The results include a full breakdown of the user’s genetic background. Customers can also use the data to find close relatives on the 23andMe platform.

The report given to each client includes health predispositions (such as susceptibility to chronic diseases), carrier status for hereditary diseases, and various characteristics (eye color, wake up time, alcohol flush, caffeine tolerance, etc.).

23andMe has sold over 11.3 million tests since its inception – but that number looks like it’s about to hit a wall. The company’s declining sales over the past few years show that in the developed countries 23andMe operates, almost everyone who cared about their lineage or genetic health and could afford to buy has already done so. In 2019, the company had sales of $ 441 million, with consumer services accounting for 96% of sales. However, the forecast for this year is only $ 243.5 million in sales. Fortunately, 23andMe is improving its operating income, net of non-cash items, from a loss of $ 85 million in 2019 to a positive $ 7.5 million this year.

Diversification works

It is clear that management also sees the problem. The company has aggressively diversified into pharmaceutical research to make up for lost sales. This segment now accounts for 23% of total sales.

It was able to do this by taking advantage of its extensive genetic database that it received from consumers. Of the 11.3 million people who have used 23andMe’s kits, 8.9 million consented to the company’s use of their data for research and development. This makes 23andMe the largest database of its kind in the country – it is ahead of the next runner-up. Regeneron Pharma (NASDAQ: REGN), by 7.9 million

23andMe develops over 40 therapeutics in areas such as oncology, immunology, cardiovascular disease, metabolic disease, and neurology, all using drug targets derived from studying genomic abnormalities in its database. In addition, the company boasts that it can use consumer genomic data to cut the drug’s clinical trial time by an average of three years and increase the likelihood of a trial being successful. In 2018, 23andMe secured an upfront investment of $ 300 million GlaxoSmithKline (NYSE: GSK) Develop new therapeutics with additional research revenue of $ 127 million by mid-2023.

Finally, 23andMe combines its genetic research and testing to create a subscription service for its consumers. Each subscription provides insights into pharmacogenetics, heart health, DNA relatedness, and polygenic risk assessments (that is, the risk of developing cancer beyond a certain age). The $ 29 / year service has attracted more than 125,000 subscribers since its launch in October.

Overall, 23andMe is celebrating a strong comeback with its new business model. Right now, it looks like the stock has already priced this in and is trading at a very expensive 14.6x EV-to-sale. It’s still a good healthcare stock to buy – albeit a small stake in case growth disappoints.

This article represents the opinion of the author who may disagree with the “official” recommending position of a world class Motley Fool advisory service. We are colorful! Questioning an investment thesis – even one of our own – helps us all think critically about investing and make decisions that will help us get smarter, happier, and richer.

source https://dailyhealthynews.ca/can-you-count-on-23andme-stock/