We read all 323 pages of 23andMe’s SPAC filing. Here are the 5 biggest obstacles it faces after its public debut.

We read all 323 pages of 23andMe’s SPAC filing. Here are the 5 biggest obstacles it faces after its public debut.

Consumer genetics company 23andMe gave a detailed look at the industry’s finances ahead of its public debut, and it’s not pretty.

23andMe went public via a reverse merger with Richard Branson’s blank-check holding company Virgin Group Acquisition Corp. on Thursday. The special purpose acquisition company IPO valued the 15-year-old company at $3.5 billion. That valuation increased when trading opened at $11.13 per share on Thursday, and has risen roughly 22% since opening as of publication.

“My priority is really the long term,” Wojcicki told Insider on Thursday. “The short term is obviously important for a lot of people, but everything that I do is focused on the long term. I’ve only looked at my stock price because I’ve been doing the news articles and people keep showing it to me.”

The filing gives the clearest glimpse yet behind the scenes of the consumer genetics industry, which has faced substantial headwinds and declining demand in recent years. In a conversation with Insider in February, 23andMe cofounder and CEO Anne Wojcicki said that the pandemic actually boosted the company’s business to 9.8 million cumulative genotyped customers at the end of fiscal year 2020, up from 7.8 million cumulative customers the prior fiscal year.

However, its filing showed a steep decline in the company’s revenue during the same time period, indicating that even an increase in cumulative customers wasn’t enough to shore up its business

At $3.5 billion, 23andMe’s debut will be just the second-biggest SPAC-fueled public debut for a healthcare company to date behind Clover Health, which merged with investor Chamath Palihapitiya’s Social Capital Hedosophia Holdings in a  $3.7 billion deal.

Its primary competitor Ancestry was purchased by private equity giant Blackstone in August for $4.6 billion.

Now, 23andMe will have to navigate five major hurdles as a public company. Insider read through its 323-page filing with the US Securities and Exchange Commission to identify where it continues to struggle.

23andMe CEO Anne Wojcicki

CEO Anne Wojcicki of 23andMe, which allows customers to opt-in to research by other groups.

Steve Jennings/Getty Images/TechCrunch


23andMe’s revenue has been declining

In the past few years, 23andMe’s revenue has been falling as the consumer genetics industry has hit a slump. It’s a departure from a more traditional strategy that aims to capitalize on industry momentum before startups go public. 

The company made $305 million in revenue in its fiscal year ending in March 2020, down from $441 million in revenue the company made in its 2019 fiscal year. 

According to the filing, 23andMe pulled in about $155 million in revenue from the end of March until December 2020. 

As revenue has declined, 23andMe is also incurring significant net losses. In the fiscal year ending in March 2020, 23andMe lost $250.9 million, a steeper net loss compared to the fiscal year ending in March 2019 when the company had a net loss of $183.5 million. 

Wojcicki in February said that that the business did better during the pandemic than initially expected. At the time, she attributed the increase in customers and revenue to the public’s increased attention on preexisting conditions that could make them more at risk of severe COVID-19 infections.

She did note that the company decreased its advertising budget at the outset of the pandemic. According to the filing, 23andMe has spent just above $31 million on marketing between the end of March and the end of December 2020. It’s a drop from prior years, when the company spent $110.5 million on sales and marketing in the fiscal year 2020 and $190.8 million in 2019. 

It’s happening at a time when test sales are starting to no longer account for 23andMe’s total revenue. Through the first nine months of the fiscal year 2021, consumer testing kits make up 77% of 23andMe’s sales. As a percentage of revenue, consumer genetics sales made up 89% of revenue for the fiscal year ending March 2020, and 96% of revenue for the fiscal year ending 2019.

The filing indicated that 23andMe is actively searching for ways to diversify its suite of products to help bring in additional revenue, but it advised investors that it may never become profitable. 

Wojcicki will face similar challenges to powerful founders like Mark Zuckerberg

As part of the merger with VG Acquisition, Wojcicki retained a majority of the company’s Class B Common Stock, which counts for 10 votes compared to other shareholders’ single vote. 

23andMe will have a similar share structure to tech giants like Facebook and Google, where their founders and CEOs retain almost universal control of the company. The dynamic, however, can create tension if the founders’ visions don’t align with those of the investors.

In February, Wojcicki, who has worked as an analyst on Wall Street, told Insider that she was selective when evaluating how she wanted to take the company public. She was swayed to take the

SPAC
IPO route, a relatively new phenomenon, because of Richard Branson’s involvement.

“I know who your shareholders are matters,” Wojcicki said, adding that “one of the No. 1 pieces of advice I give to founders and startups is that you have to pick your investors wisely.”

As of Thursday, Wojcicki’s stake in the company will be worth just over $1.05 billion. She and Branson each personally contributed $25 million as part of the transaction, which was expected to top out at $759 million. 

DNA Testing 23andMe



Hollis Johnson/Business Insider


23andMe’s future could hinge on its ability to develop personalized medicine

In the filing, 23andMe said its success depends on several major factors including continued growth in the personal genetics market and its ability to fully realize its drug development efforts.

Despite the overall downturn in personal genetics, cited as a general business risk, 23andMe is still mainly dependent on generating sufficient sales of its consumer genetics reports. 

On the drug development side, 23andMe said its long-term success will also depend on its ability to commercialize, develop, and win FDA approval for its drugs. 

“Drug development is expensive, takes years to complete, and can have uncertain outcomes,” the filing states.

23andMe is still largely new to the world of drug development. If the drug development efforts fail, its ability to expand its business and succeed in the long run could be threatened.

In detailing the risks of its drug development business, 23andMe laid out several potential failed outcomes, including drugs that do not demonstrate safety or efficacy in clinical trials and patients developing side effects or experiencing other adverse health effects. 

The company also noted its lack of experience in running clinical trials and dependence on third-party drug manufacturers.

DNA Testing 23andMe



Hollis Johnson/Business Insider


It’s ‘substantially dependent’ on other companies like GSK and Illumina 

23andMe’s future is linked with a number of companies that work with and power 23andMe’s testing.

Like other consumer genetics companies, 23andMe relies on one company to manufacture its saliva collection kits. It also almost entirely works with Illumina to run its tests, according to the filing.

The partnership could represent a risk for 23andMe, because it indicated in the filing it had no plans to develop tests in-house in the future. Many other consumer genetics companies rely on the same companies to process DNA tests.

23andMe said its business is “substantially dependent” on pharmaceutical giant GSK to develop and commercialize any drugs it intends to release. 

In July 2018, the two companies entered a four-year agreement to research potential drugs from 23andMe’s genetic database. The two companies will split the costs of discovery, development, and commercialization of any potential drug candidates, but the filing gives a more in-depth look at the terms of the partnership, which seems to heavily favor GSK.

For example, GSK can opt to extend the partnership another year. It also accounts for a “substantial” amount of 23andMe’s research revenue, but GSK has the ability to terminate the partnership entirely under certain circumstances not outlined in the filing.

23andMe’s trove of user data is particularly susceptible to regulations 

As outlined in the filing, 23andMe’s trove of user data generated by the saliva-based tests is key to helping the company realize its future in personalized medicine. 

Acquiring data on millions of peoples’ health statuses, genetic predispositions, and family history would be incredibly difficult for other companies to scale up, giving 23andMe an advantage in the race to develop cost-efficient personalized drugs or treatments.

However, how companies use and store user data has come under intense scrutiny both in the public and by elected officials. When Blackstone acquired Ancestry, for example, a CBS report highlighted potential conflicts of interest over what Blackstone may do with Ancestry’s own substantial database.

Big tech companies’ use of data has caught the attention of Congress, which has suggested implementing new regulations over the collection of user data. Any regulation targeting companies like Facebook and Google could inadvertently sweep up other companies that heavily rely on data, like 23andMe, and make collecting data extremely expensive or cumbersome.

Doing so could put 23andMe’s nascent drug development efforts at risk.

“To date, more than 80% of 23andMe’s customers have consented to participate in its research programs. If this percentage were to decline, or if consenting customers were to decide to opt out of 23andMe’s research programs, such that it cannot continue to grow its database, the utility and value of its database would be adversely affected,” the filing states.

This article was initially published in April and has been updated after 23andMe started trading in June. 

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