23andMe to be Acquired by Richard Branson's VGAC and Go Public?

+25 votes
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The news broke yesterday and I wrote about it here. Branson's SPAC (Special Purpose Acquisition Company), VG Acquisition (NASDAQ: VGAC), was formed just three months ago, and yesterday NASDAQ's "circuit breaker" routine temporarily halted the company's trading when prices jumped over 18% on rumors that they were in talks with 23andMe to acquire a majority stake in the testing company and take it public. The number tossed around has been $4 billion; a 2018 valuation of 23andMe was $2.5 billion.

A SPAC is a company taken public for the specific purpose of acquiring existing companies. Early thoughts were that VG Acquisitions (the "VG" standing for "Virgin Group," Sir Richard Branson's brainchild that now has over 40 branded businesses worldwide) would quickly target Virgin Orbit or Virgin Hyperloop. But it looks like they might have something more biological in mind...at least initially.

Earlier yesterday morning 23andMe announced a new "COVID-19 Severity Calculator," an interactive tool intended to allow their customers insight into their personal likelihood of hospitalization following COVID-19 infection. It's noteworthy that this tool uses non-genetic risk factors, not DNA, to produce the results. Sort of doubtful there is any synchronicity between the calculator announcement and VG Acquisition's stock price shooting up.

It isn't impossible, though, that AncestryDNA's rapid exit from offering health/wellness as an aspect of its consumer DNA business almost immediately after being majority acquired by the Blackstone Group had something to do with the timing. I expect we'll see additional news within the next few days.

I have no idea what this might mean for genealogy and relationship testing, but if it goes through I would very much expect to see 23andMe begin a substantial push beyond microarray testing into whole exome and whole genome sequencing. But with VGAC funding, a fast-track to going public (and the big bump in valuation a SPAC can bring compared to a typical private equity deal), plus the ongoing relationship with GlaxoSmithKline, 23andMe could be positioned to take an unchallenged market share in consumer medical and pharmacogenomic testing. Which may not be the best of news, for example, to Australian company myDNA that just bought Family Tree DNA three weeks ago.

in The Tree House by Edison Williams G2G6 Pilot (434k points)
Edison - so this makes all three of the big consumer testing companies: 2 are headed in the direction of more health-related revenues, and 1 that is shutting down its health-oriented operations. All 3 are presumably reworking their capitalization and investors to survive the lull in genetic genealogy revenue growth (increasing at a decreasing rate). But future revenues may not depend as much on consumer sales as licensing the genetic data to pharma and other health-related research on the back end. There may be additional consolidation among the big 3 before it's all over with...

leake

Quick note that Roberta Estes posted this morning about a change she discovered--and that I certainly hadn't noticed--that 23andMe made probably sometime last month, maybe in January: 23andMe Changes: Triangulation Doesn't Work the Same Way. It also negates some of Roberta's presentation at RootsTech Connect, if you watched that.

Definitely worth a read if you use 23andMe to research matches. But, no, I can't imagine, given the timing, that this is in any way connected to the VGAC acquisition.

Not so sure but it seems a cost cutting exercise. I've noticed in my app that their servers are having more and more timeouts when our users contact them.

So a degradation of their services offered to the genetic genealogy community is noticeable!
Everybody seems to agree that 23&Me are downgrading genetic genealogy and moving more aggressively into the healthcare space, where their main "asset" is a big database of tested customers. If they hope to continue to grow their database moving forward, aren't they shooting themselves in the foot by dissing people who test for genealogy purposes? I tested there and I appreciate that I get matches that often don't show up at other places. I also paid for the health upgrade--but that was an afterthought, for entertainment purposes only.  Currently, the main value most people get from 23&Me healthcare is stuff like, "you have a 60% chance of having blue eyes". I have not changed my health behaviors because of some kind of weak correlation to a particular risk.  That's not much for your money.  If fewer and fewer people test there for genealogy in the future, how many new testers can they attract with healthcare risk suggestions alone?  Regardless of the future direction of the company, downgrading genetic genealogy seems like a stupid move, which inhibits the growth of their main asset.
Fully agree with your PoV, Michael, but we're both not at the helm of 23andMe. I guess we both would do things differently ;-)

So for me I can at least try to do the right thing as I've written my own genetic genealogy app with which I can help people find their birth parents, at least with a higher percentage due to automation of eg DNA triangulation and many more automatic hints and features.

I'm still not convinced on their future direction either but I had taken a Whole Genome Sequence test in combination with analyzing the resulting whole genome data which is 1000x more useful IMO in providing advice than what 23andMe is and can offer right now (until they also move into the WGS space which I think they will do).

Yeah; from the recent movement--and after having read just about everything I could find related to the VGAC acquisition--it seems pretty clear that 23andMe is moving all their eggs into the health and pharmacogenetics basket; they intend to own that DTC market segment. And while I don't believe they have any intent of leaving the genealogy market (it makes for a nice and inexpensive gateway "drug," as it were), clearly the research and development will be elsewhere. We only have to take a look at the little introductory line now on the home page of their website:

Hi, we're 23andMe. We're all about real science, real data and genetic insights that can help make it easier for you to take action on your health.

No "Where do you come from?" emphasized there.

But Andreas brought up previously the single biggest constraint to flipping the switch and making whole genome sequencing ubiquitous: it's the computing power, not the DNA testing technology or cost.

Illumina, PacBio, and Oxford Nanopore have been introducing new stuff for the lab continuously, and the rate of new DNA NGS technology just in the past few years has been impressive, from sample size required to speed of analysis to cost of processing. But for WGS the results still produce data for 30, 60, or even more passes at all 3+ billion base pairs in the genome. That's a lot of data to store and manipulate if we're talking, say, 20 million consumer customers.

And the kicker is that, if 23andMe really doesn't place a priority on genealogy/population genetics, they aren't concerned at all with 98% of those data. It's a throwaway. For health and pharmacology purposes what 23andMe--and their Big Pharma partners and investors--really want is the exonic data: the regions where coding DNA and untranslated areas of mRNA live. When you target the whole exome (plus probably the hundred or so base pairs flanking each segment), you're talking around 40 million base pairs or so. Much easier to store and manipulate the data...most of which has little to no applicability for genealogy.

And whole exome sequencing, or WES, is easier and cheaper to perform. WES can even be done (and is still offered some places) by the same microarray technology used with our common genealogy tests: technically, hybridization using oligonucleotide probes, or synthetic DNA, on a programmable chip. I'd bet a lot of money on 23andMe not going the microarray route, though. Newer NGS methods will give faster turnaround times and much more accurate results.

The company currently offers the "23andMe+Membership" for $29 per year. If I were to prognosticate with a marketing hat on, my guess is that the amortized sunk-cost of NGS whole exome sequencing would probably come in under $75, maybe even under $50 at volume. At this point, 23andMe likely has around 15 million existing DTC customers. I think I'd use the Gillette model (give the razor away to make money on the blades) and go loss-leader for upfront conversion: "Upgrade to the amazingly fabulous Whole Exome Sequencing for only $29, plus $29 per year for your membership, which will include constantly updated health and wellness reports as more discoveries are made. You'll be billed just $58 total for your first year, then $29 per year afterward; cancel anytime." Start it out with new customers paying $199+$29 (or even $249+); put that on sale only after, Pareto's law, you get 80% of the low-hanging existing customer conversion fruit.

(Fine print: to be eligible for this astounding rate for the amazing Whole Exome Sequencing, you must answer a health history questionnaire and agree that we can share your completely anonymous DNA data with our partners.)

It's the WES data and questionnaire information that folks like GlaxoSmithKline really, really want. Current microarray data just aren't that effective for their purposes. A page might even be taken from the UK's Sano Genetics and allow WES test-takers to qualify for and enroll in specific research projects...with both non-profit and commercial enterprises. That model seems to work; and it could net 23andMe additional institutional revenue plus keep end-users engaged (re: $29 annual subscription), because those who have been impacted by a genetically predisposed condition--whether personally or via an immediate family member--are often eager to help, God bless 'em.

So there's my guess. Genealogy: won't go away, but...meh. Whole Exome Sequencing: flashy introduction and big push right after the 23andMe/VGAC deal finalization and the new NYSE stock ticker symbol "ME" hits the boards.
wink

For 23&Me customers who agreed to have their DNA "biobanked", can 23&Me go to their freezer and collect WES from the same samples?  If yes, does the customer need to give permission?  My reading of their biobanking agreement is that they can do further tests on your sample whether you want to pay for the "fabulous WES" or not.  Or, is this illegal bioethically-speaking?

I'm not informed enough to comment, I'm afraid.

As to part one: I would think that, yes; stored samples should be adequate for a current, long-read, small initial sample WES. But I can't say for sure because I have no idea how much sample material is left over from the microarray test, or exactly how it's stored. Or what sequencing equipment/workflow would be used.

Part two? Hard to say. The biobanking consent spends 75% of its time telling us that they don't really know how future tests might be used. But, yeah; right there in the first sentence is, "...you are consenting to having 23andMe and its contractors access and analyze your stored sample, using the same or more advanced technologies..." It finishes talking about research on sensitive topics and 23andMe's internal review board. Still rather nonspecific, though.

My gut tells me that, since WES won't be free to 23andMe, that they'd be better off recovering at least part of the cost initially (remember, their ledger sheet hasn't exactly been bathing in green ink; new cash infusion or no, come mid-year they'll start answering to public shareholders) and to get you to enroll in an annual subscription...at which time new terms of use might be introduced.

Dunno. But, hey! It's never boring!

2 Answers

+3 votes
 
Best answer

This is a very telling interview with Sir Richard Branson and Anne Wojcicki:

 Why Sir Richard Branson gave 23andMe millions of dollars to go public

If you listen to what Anne says at 5:57 onwards, she said:

"... was really about emphasing more and more of the health opportunity. And Ancestry and Health have always been key components of the product. But more and more, the future is about the health side." and "... it's a bigger opportunity on the health side."

That's obviously a very disappointing direction that 23andMe is taking for all genetic genealogists. And it comes despite AncestryDNA pulling out of that same DNA health sector.

It's clear that they think that the market for the ancestry product is saturated or rather "belongs" to AncestryDNA and maybe newcomer MyHeritage.

I'm not going so far to say that 23andMe will be pulling out of that, with 10 million existing customer.

But their focus for the future is clear and investment in new genetic genealogy features or improvements of their consumer facing genetic genealogy features will be little.

BTW, there is a ton of interesting numbers in their investors deck: 23andMe and VGAC Investors Presentation

But there's also a telling when numbers only start in 2020 and nothing is being shown especially for the "growth" period from 2018 to 2020 (which probably was pretty flat).

Oh and I love her not answering about profit. Because 23andMe has made a loss as per the investor paper. Adjusted EBITDA for FY19A: -$141 millions, FY20A: -$147 millions

Lastly, both years their top management was so successful that the stock based compensation was $37 and $44 million respectively (and remember that they spend $45 in 2020 on restructuring and exit costs). To me, that's anything than successful but it's the typical corporate greed of today, fire low level people whilst filling your own pockets with millions from of stock compensation.

So I guess the merger was a "no brainer" because 23andMe burned through all the money their early investor gave them already.

by Andreas West G2G6 Mach 7 (74.8k points)
selected by Lucas Van de Berg
Yup, this merger indicates that 23&Me will continue to sell kits (in order to collect more data)--but probably not do much to enhance their genetic genealogy tools unless it is cheap and easy, not innovative.  They predict that their revenues won't return to 2018 levels until 2025 (!), which is the first year they expect to have a profit.  They make a big deal about their new "growing" health subscription service, which is something investors like to see. Who is subscribing to this? I am not seeing much value added for subscribing to  23&Me+ "personal health service" for $30/year. Heck, their current health service predicts me to be bald, with no widow's peak and no unibrow--when actually I have a full head of hair, including unibrow and widow's peak.  Currently they run a sale that makes the first year of the subscription essentially free because they are running a "sale" price on the standard "health" service (30 bucks off) if you subscribe.  Probably most people will just just sign-on to get the free year and then cancel before renewal, like I do for free Hulu.

They are betting on Big DNA Data (and presumably whole-genome sequencing coming soon?) to become very valuable in healthcare, in a "disruptive technology" sort of way.  See: ARK Investing.  Definitely not a sure bet.  As an investment, it's a "buy and hold at least 5 years," with the potential for big gains if they are right and the risk of the company not being able to keep its head above water until if/when the technology truly become "disruptive."  And then there are day-traders, who are simply hoping that ARK adds the stock to their portfolio, causing the price to spike temporarily so they can sell and reap short-term profit.
I think the current prediction is so far off in some cases because a majority of the polygenic markers influencing it not being tested in the microarray. Therefore, I'm pretty sure we'll see WGS (Whole Genome Sequencing) at an aggressive price from 23andMe soon.
Agreed.
+4 votes

I just saw that announcement yesterday and was telling my husband about it today. . .  Nice article you published!  smiley

by Darlene Athey-Hill G2G6 Pilot (536k points)

Many thanks, Darlene! Checking this afternoon, there are no new status updates to this deal, though I certainly expect some form of a public announcement within a couple of weeks. It has to be close for it to have leaked like that and for investors, in this case no doubt mostly hedge funds, to start buying stock.

I recently deluged an acquaintance we both know with (surprise) way too many words because the subject of SPACs and their desirability came up. I'll slice out 50% (well, 40%) of that verbiage here because I think folks may be wondering what, specifically, this might mean for 23andMe and our current tests there. This is not a repeat of the recent Blackstone Group and Ancestry.com acquisition, but the whole SPAC thing probably looks mysterious...and maybe even downright shady.

On one hand, I think the market should be as free as possible; on the other, I lived through the Penny Stock Reform Act and it's difficult to argue that measures of regulatory protection for investor aren't needed.

Superficially, a SPAC might seem like a back-door, lawyer-created way to...bend federal regulations a bit. But learning more about them recently (heck, even Shaquille O'Neal has a SPAC!), I've come to look at them more like a double-edged sword. If you, validly, describe a SPAC as a shell company that goes public with no assets and whose only business plan is to purchase an as-yet unidentified company, well, it doesn't sound exactly on the up-and-up. But a SPAC's primary investors are the most sophisticated--hedge fund managers, mainly--and they, as a SPAC, aren't going to end up on anyone's index fund or likely impacting 401(k)s and IRAs. Too, the Securities Act of 1993 put in a number of regulations to protect investors from the penny stock boiler-room type stuff of the '80s.

A SPAC is like betting on the driver, not the car. It's the expertise and reputations of the management that formed the SPAC that big-block investors are willing to get behind: their acumen about what companies to buy. Branson's VG Acquire being a good example. A SPAC is actually a vehicle that looks more like a limited partnership than a traditional corp or S corp, plus there are other restrictions. For example, a minimum 85% of the proceeds from the SPAC has to be placed in a trust or escrow that, until an acquisition is made, must be kept invested in low-risk government securities. At least 80% of the SPAC's investors have to approve of the target acquisition, and the SPAC, after formation, has 18 months to make an acquisition (plus a 6-month grace for a total of 24 months if a deal is announced during the first 18 but not finalized). So there are steps to mitigate investor risk and keep the acquisition on the level.

On the flip side, while IPOs certainly still happen every week, they're harder to pull off and generally less explosive and publicly visible than they were from the mid-90s through the early-2010s. The three largest IPOs since 2007 were mainland Chinese firms, headed by Alibaba Group in 2014. The last big biotech IPO was Hong Kong's JD Health that raised about $3.5 billion last year. Branson's SPAC offers 23andMe a way to go public without a traditional IPO and reliance on private equity money.

And it's sort of a "reverse merger" because, unlike big-player private equity (a la Blackstone and Ancestry.com) or a leveraged buyout, with a SPAC there typically isn't an existing management structure waiting to sweep in and clean house: the acquired company, at least initially, keeps control of its operations. While I knew before the ink had dried on the Blackstone deal that Ancestry.com's president would be gone, I don't think we'll see Anne Wojcicki go anywhere anytime real soon.

All that said, the frequency of the use of SPACs has been going through the roof...well, as a growth percentage anyway. And I don't really know what to make of that. In 2016 there were 13 SPACs formed to the tune of $3.5 billion, and in 2019 there were 59 and they raised a total of $13.6 billion. In 2020 we saw 248 SPAC IPOs raising $83 billion. It still isn't quite February yet and 2021 has already had a whopping 91 SPAC IPOs raising $25.4 billion (https://spacinsider.com/stats/).

Of the main genealogy DNA testing companies, and even though 23andMe had to cut some employees last year, they and their business model have weathered the sales-growth downturn better than any. Going public with an IPO is always risky, but I think particularly so right now in the middle of a pandemic-driven recession. (Okay; maybe nobody's officially calling it a recession, but if it walks like a duck and quacks like a duck....) This Branson SPAC deal, if it happens, removes most of the risk and fast-tracks 23andMe getting on NASDAQ. Unlike Blackstone/Ancestry and FTDNA/myDNA, I view this as a potentially big jump forward, not sideways...which I think is the best that can be said of those other two acquisitions.

Your wealth of information continues to dazzle me!  FOFL!!

I just use a whole lot of words. My wealth of knowledge plus $5.12 will get you a Starbucks Caffe Mocha Venti. Sales tax not included.
angel

Yeah, sure . . .  tell that to someone who'll believe you!  I'm still bummed that you weren't able to make it to the genetic genealogy conference in Houston so I could meet you!
I'm one of the weirdos who actually read Edison's posts all the way to the end.  If I order 2 Caffe Mocha Ventis, can we get more words?

Hey now, Michael!  What's weird about reading his posts all of the way to the end?  I do that, and I'm not a weirdo?!  (Am I?!  Egads!  Is this a revelation?!!)  surprise

I would point to a comment written by Edison to you a couple of months ago:  "at least 4.2% of people who read my posts on G2G enjoy them...and 2.3% of those 4.2% actually read the entire post! So you aren't alone!  :-)"

Yeah, I watched the interview with him and Anne Wojcicki on CNBC this morning.  They didn't say much . . .
I wonder what that means for the direction that 23andMe will go.

I assume if I'd be the owner of a DNA testing company that offers WGS (Whole Genome Sequencing) and/or a company that offers health reports based on WGS (like eg. Dante Labs - which BTW I'm surely not recommending based on my own experience), well then I'd be really wondering what pivot to make with my company.

I think that's the direction 23andMe is going to take and given the enormous money that's going to be given to them in their IPO they will push all these small companies out of business.
Sir Richard commented that the ancestry aspect is the 'bread and butter' for these companies.  Anne mentioned the health research aspect due to the large database of people that have opted in to the use of their data for such research.

In terms of the effect on genetic genealogy, I think this merger/IPO is a wash.  23andMe will probably keep or even expand that part of its business (and its associated revenue stream)—but for them, it’s more of a means to obtain more and better data that can be monetized via medicine, wellness, and healthcare.

This merger raises the following (non-genealogy) question:  would investing in 23andMe be a smart long-term (i.e., value) investment?  Seeing as the investors behind it (Branson et al) are solid and the management is good (Wojcicki)—I think the answer is yes.  The deal values the company at $3.5 billion for the IPO; there is a reasonable chance that 5 years down the line, it will be worth more.  In an interview today, Wojcicki mentioned immuno-oncology as a priority area, which by itself has a big upside.  The company will attempt to leverage Big Data in healthcare,  which seems like a smart play in general, even if the specifics remain a bit vague.  Would be better to invest in the SPAC right now or wait for the IPO and invest in the newly merged company?  I haven’t a clue

First of I didn't know that you can invest in the SPAC? Is it publicly available?

Secondly I don't have such a positive outlook (though I will probably still try to buy when it launches as it's quick money to be made.

23andMe was founded in April 2006. That's almost 15 years ago. So what breakthrough in medicine have they achieved? Please let me know as I can't find any significant one.

People still die of the major diseases whilst billions have been poured into the research.

They have 475 million revenue, mind you that says nothing about them making a profit actually (we don't know). The profit for a sold DNA test is very thin and their sales surely sometimes eat that up as well. Let's not forget their huge marketing and sales cost. The testing isn't cheap either, nor is the compute and storage of all that data that their customer who maybe bought the test ones are then consuming when they use their tools.

To me that's all the same marketing bla bla and empty promises. Surely, we can't give up trying to find a cure for cancer, Alzheimer, Parkinson and other genetic illnesses but all the research, the CRISPR gene editing has let to what so far?
The stock ticker for the Branson's SPAC is VGAC, and it's up 16% today at the time I write this.

I am not talking about "quick money." A "buy and hold" stock investment is a bet on the management and on the future. While it is certainly disconcerting that the company did not have a  hugely profitable medical product in the last 15 years--that does not say much about the the new direction of the company and the future.

Immuno-oncological approaches to cancer have huge potential and they have already saved lives (Jimmy Carter, or example).  I don't know how having a full-genome sequence might benefit  this sort of therapy. But because this area is a priority for the company, I trust they have a good plan.  Concerning CRISPR, I heard on the radio recently an interview with a person with sickle-cell disease who was (apparently) cured with CRISPR.  Again, the question is not, "what are the benefits so far", the question is "what are the likely benefits in the future?"  Huge upside.
Thanks for the additional info on SPAC and your examples. Investment at the stock exchange are always about likely benefits in the future.

May I say "Thanos"?

Actually no need to go so far back in time, here's another example, very similar to VGAC via another SPAC:

https://www.fastcompany.com/90601578/clover-health-under-fire-from-hindenburg-the-research-firm-that-took-down-nikola

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