Genetics company 23andMe (ME) hasn’t exactly been a strong performer, with shares down by about 73% since it went public via a special purpose acquisition company (SPAC). And it’s not hard to see why — the market not only soured on SPACs, but on unprofitable growth stocks in general.
However, 23andMe could still have a very bright future ahead for patient investors. The company recently reported stronger results than analysts had been expecting and it has a massive pipeline of opportunities in the works. While there’s a lot that needs to go right for this to be a successful long-term investment, the recent signs look positive.
Strong results from the business
23andMe is best known for its consumer genetics testing, but it also offers subscription products and telehealth services. In the most recent quarter, 23andMe reported 18% year-over-year revenue growth in its consumer business, which exceeded analysts’ expectations. Plus, the company raised its full-year guidance. In all, the company generated $67 million in revenue, most of which came from the consumer services segment.
Tons of future potential
Now, if its consumer products were the only focus of 23andMe, it might be profitable, or at least close to it. But the reason that it isn’t is the therapeutics business.
The idea behind the therapeutics side of the business is simple. 23andMe’s genetic testing kits have allowed it to accumulate more genotyped individuals than any other company, and it isn’t even close. So the company aims to leverage its massive library of genetics data to develop pharmaceutical products.
However, developing new therapeutics is expensive. 23andMe spent 46% of its total research and development (R&D) expense in a recent quarter on developing therapeutics, and this part of the business generates no revenue whatsoever.
23andMe has identified 50 therapeutics programs. One is in development with GSK, and one that the company owns is currently in early-stage clinical trials. The rest are in pre-trial development. If any of them eventually come to market, it could be a massive win — after all, one successful drug can mean billions in revenue. But that’s a big if at this point and will likely require tens, if not hundreds of millions in additional R&D spending.
A long way from profitability
As mentioned above, 23andMe is not a profitable company at this point, and isn’t likely to get there until some of the pharmaceuticals actually reach the market. In a best-case scenario, this could be years away.
Management anticipates an adjusted EBITDA loss of $170 million to $180 million for the current fiscal year (ending in March), and while this includes some impact from the acquisition and integration of the company’s telehealth business, it’s important to keep in mind that 23andMe is losing money quickly. This is a big loss, considering the company’s total revenue is expected to be $300 million for the year on the high end of guidance.
However, 23andMe does have some time to let the business grow. It ended 2022 with $433 million in cash on the balance sheet, giving it at least a couple more years of runway. The company also recently filed for an at-the-market program to raise an additional $150 million in equity capital from time to time, according to a recent SEC filing.
Is 23andMe a buy?
While 23andMe’s consumer segment is solid and its pharmaceutical development business has a lot of potential, there’s a lot that needs to work out in the company’s favor if this is to be a viable long-term investment. I own 23andMe in my own portfolio because the risk-reward dynamics look rather attractive from a long-term perspective, but as with any speculative growth stock, it’s important to limit your position size and not invest money you aren’t prepared to lose if it doesn’t work out.
— Matthew Frankel
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Source: The Motley Fool