23andMe Holding Co. (NASDAQ:ME) Q1 2025 Earnings Call Transcript

23andMe Holding Co. (NASDAQ:ME) Q1 2025 Earnings Call Transcript August 9, 2024

Operator: Hello, and welcome to 23andMe’s Fiscal Year 2025 First Quarter Financial Results Conference Call. As a reminder this call is being recorded. At this time, all participants are in a listen-only mode. After the prepared remarks’, there will be a question-and-answer session. I would now like to turn the call over to Ian Cooney, Senior Director of Investor Relations at 23andMe to lead off the call. Thank you. Please go ahead.

Ian Cooney: Thank you. Before we begin, I encourage everyone to go to investors.23andme.com to find the press release we issued earlier today reporting our financial results for the first quarter of fiscal 2025. A replay of today’s webcast will also be available on our website. Please note that certain statements made during this call regarding matters that are not historical facts including, but not limited to, management’s outlook or predictions for future periods are forward-looking statements. These statements are based solely on information that is now available to us. We encourage you to review the section entitled Forward-Looking Statements in our press release, which applies to this call. Also, please refer to our SEC filings, which can be found on our website and the SEC’s website for a discussion of numerous factors that may impact our future performance.

We also discuss certain non-GAAP measures. Important information on our use of these measures and reconciliation to US GAAP may be found in our earnings release. Joining us on our call today are Anne Wojcicki, our Chief Executive Officer and Co-Founder; and Joe Selsavage, our Chief Financial and Accounting Officer; Jennifer Low, our Head of Therapeutics Development will join us for Q&A. I’d now like to turn the call over to Joe.

Joe Selsavage: Thank you, Ian. Hello, everyone. Reiterating what we said on our last call, the focus of the call is on the first quarter fiscal 2025 results. We will not comment on the ongoing process of reviewing potential take private proposals or strategic alternatives. This call is focused solely on the company and its earnings release, and we will not be addressing or responding to any questions regarding the aforementioned matters on this call. I’d now like to turn the call over to Anne.

Anne Wojcicki: Thank you, Joe. Hello, everyone. The first quarter saw us achieve significant progress on our key objective of becoming a sustainably growing, profitable company while remaining committed to our vision of improving the health of millions of people worldwide. We remain focused on adding value to and prioritizing memberships in our PGS segment, driving growth in telehealth and leveraging our data assets to create a thriving, profitable research data business. Over the past quarter, we also presented data at two major oncology conferences, the American Association for Cancer Research and the American Associate Society of Clinical Oncology, highlighting the continued progress of our clinical stage therapeutics assets.

Q&A Session

Starting with the consumer business. Today, we are excited to announce we launched a large-scale research study to help identify the genetic mechanisms that may drive the efficacy and potential side effects of GLP-1. Through our unique research model, we believe we can quickly scale the study through our outreach to the millions of 23andMe customers who have consented to participate in research. In conjunction with this research, we are planning to launch a GLP-1 weight loss telehealth membership on the Lemonaid Health platform at the end of this month. This will enable members to be prescribed and receive brand name or compounded semaglutide medications. The addition of weight loss management for our customers fits directly within our strategy of delivering services to improve an individual’s health through preventive actions.

We also continue to add features to our membership services as we focus on creating longitudinal value that can help our members remain focused on improving their health. This quarter, we added another polygenic risk score report for bipolar disorder, bringing our market leading total available PRS reports to over 30 and we have more planned rollouts in the near future. We continue to build out our Total Health offering with the addition of a proprietary biological age feature to help members monitor how their body is aging physiologically over time. We also recently announced a collaboration with Nightingale Health to pilot a metabolomics blood biomarker panel with a cohort of our 23andMe+ members. We believe this collaboration, if successful, can help customers access, track and optimize their health with a new generation of biomarker products.

I’m happy to report that this continued focus on improving the value of our membership offerings is paying off. This quarter we saw meaningfully improved membership revenue growth from the previous year. We also saw better member retention metrics, higher upgrade rates and increased LTV in telehealth, all of which we believe should persist. Our membership offerings are the most effective way for us to help our customers change their health trajectories over time, while also enabling a scalable, sustainable business model. So, we are encouraged by these tangible signs of progress. Moving to the research data business. Last month, we collaborated with over 20 lung cancer advocacy organizations to launch a study that aims to advance genetic research in lung cancer.

The study aims to build a comprehensive, opensource database of heritable genetics and the patient reported data in lung cancer. Through this research, we collectively hope to better understand the genetics of people with lung cancer in order to improve detection, risk reduction and care. This quarter we also announced the publication of research findings on the LRRK2 gene in Parkinson’s disease in the Journal Brain, highlighting the power and potential of 23andMe’s database, the cohort that participated in the LRRK2 study is three times bigger than any other study published and is 23andMe’s first paper to utilize longitudinal, prospective data collection. I remain extremely encouraged by the potential for our research data business. On the innovation front, we are actively developing a suite of AI models to enhance both our consumer and research data businesses.

We continue to make significant progress in developing new AI models to unlock novel insights about the human genome using our proprietary database. Our research data business recently published a preprint demonstrating how large language models can be leveraged to better interpret genetic association studies, helping to more accurately pinpoint genes linked to a variety of diseases and phenotypes. These initiatives leverage the size and scale of 23andMe’s unique database to deliver more effective, personalized health recommendations and accelerate therapeutic target discovery. Moving to our therapeutics business. Q1 saw us present data at both AACR in April and ASCO in June. We continue to be pleased with the progress of 23ME610 as monotherapy, which continues to demonstrate therapeutic potential for inhibiting CD200R1 in cancer patients.

We are also seeing evidence of CD200 emerging as a potential biomarker associated with 23ME610 monotherapy efficacy. Further, we are encouraged by the continued safety and tolerability profile of 23ME610, which, as presented at AACR earlier this year, points to potential combination strategies with commonly used standard-of-care agents for added therapeutic benefit in cancer patients. We plan on sharing additional clinical and biomarker data at upcoming scientific conferences later this year. At AACR, we also have the opportunity to present the genetics and biological rationale for bringing our 23ME1473 program into the clinic. As we have previously disclosed, we have initiated our Phase 1 clinical trial in solid tumor oncology, and we look forward to sharing the results of that study in 2025.

Finally, I’d like to acknowledge the 8-K we put out this afternoon announcing that Bill Richards is stepping down as Head of Therapeutics Discovery and the elimination of our Therapeutics Discovery Group. Our Therapeutics Discovery team has identified hundreds of new targets leveraging our unique database, and they were the original foundation upon which we launched our 23andMe therapeutics organization. I want to truly thank them for all their hard work and dedication. I also want to make it clear that today’s news does not impact our ability to pursue collaborations that leverage our database for Discovery and other therapeutic insights, or the therapeutics development team led by Jennifer Low or indicate any change in enthusiasm for our two clinical assets.

We are still moving both forward in the clinic and exploring optimal development and funding paths for these assets. Overall, in Q1, we made meaningful progress on multiple, strategically important initiatives. I am encouraged by the positive returns on our investments in improving our membership offerings. I’m very excited about the potential to help customers and improve the profitability and growth of Lemonaid, and I am optimistic that our longstanding investments in AI are enabling rapid progression and drug discovery, customer engagement and operational efficiencies. And with that, I’ll turn the call over to Joe to review our financial results for the quarter.

Joe Selsavage: Thank you, Anne. I’d like to reiterate Anne’s optimism about our recent progress in all areas of the business, and I am proud of our ability to execute while maintaining cost discipline amid our shift toward a more sustainable operating profile. Revenue for the quarter was $40 million, a 34% decrease over the same period in the prior year. Similar to the last few quarters, the year-over-year decrease in revenue was primarily due to the conclusion of the exclusive discovery term under our GSK collaboration in July 2023, as well as lower consumer services revenue in our PGS kit and telehealth businesses. The decrease in consumer revenue was driven by our focus on marketing efficiency and membership sales, both of which have resulted in improved unit economics margin and customer lifetime value.

We expect that these decisions will continue providing benefits to our gross margins and bottom line over the short and longer term, and are encouraged that the revenue decreases were partially offset by the continued growth in our membership services. Looking at the composition of our revenue, consumer services revenue represented 97% of total revenue for the quarter, and research data revenue, which was primarily derived from other research partners, accounted for approximately 3% of total revenue for the same period. As a reminder, we expect to begin recognizing revenue in the second half of the fiscal year 2025 from the GSK data license announced last October. Our gross profit for the quarter was $21 million, representing a 33% decrease over the same period in the prior year.

The decrease was driven primarily by lower research data revenue, by improvements in membership revenue and telehealth margins, helping to offset the declines from research services margins. Turning to our expenses. Total operating expenses for the three months ended June 30, 2024 was $92 million compared to $141 million for the same period in the prior year. The decrease in operating expenses for the quarter, which is driven by lower personnel related expenses following workforce reductions in prior quarters and lower therapeutics related R&D spend due to a significant reduction in GSK collaboration programs. There was also a reduction of $22 million from a non-cash, stock-based compensation expense taken in the prior year quarter as a result of the departure of a former Lemonaid officer.

We are pleased with our efforts to more tightly manage our cost base and continue to put areas to drive efficiencies in our spend in coming quarters. Looking at the bottom line, net loss for the quarter was $69 million compared to a net loss for the same period in the prior year of $105 million. The improvement in the first quarter net loss was driven mainly by the stock-based compensation expense taken in the prior year and a significant reduction in GSK collaboration programs, as mentioned previously. Next, our adjusted EBITDA. For details on how we define adjusted EBITDA as well as the corresponding reconciliations to GAAP, please see our earnings press release. Total adjusted EBITDA deficit for the first quarter was $35 million compared to a $50 million deficit for the same period in the prior year.

Despite the decline in revenue, we are pleased with our ability to drive meaningful adjusted EBITDA leverage through cost discipline and investment prioritization. Achieving adjusted EBITDA profitability remains a key company-wide goal, and while we are encouraged by our progress, we are also focused on and working diligently to find opportunities to improve margins. We ended the quarter with $170 million in cash and cash equivalents compared to $216 million as of March 31, 2024. We continue to be judicious with our cash usage and believe the current level of cash supports 23andMe’s plans for targeted investment in high ROI growth initiatives. Wrapping up, we are pleased with the progress made in the first quarter. We continue to add value and innovation to our services, are seeing improvements in our membership metrics, and we are better managing our cost base.

I am incredibly optimistic about the future of the company and our ability to help people access, understand and benefit from the human genome. With that, let’s open it up to questions.

Operator: Thank you. [Operator Instructions] And we have a question from the line of David Lebowitz with Citi. Your line is open.

Unidentified Analyst: Hi, guys. John on for David. Thanks for taking our questions. Got a few on our end. So, starting with Total Health. In terms of launching Total Health, can you just give us a status update on whether or not this has been launched to existing customers and if not, what else needs to be done and when that might be ready to roll out.

Anne Wojcicki: Yeah. I can take that one. I’ll take that one. Total Health has not rolled out to existing customers. Yet, it is something that is definitely in the works that we are working on. If you remember when we originally planned to launch Total Health, that overlapped with our cyber incident. So, it has been really a soft launch and it’s something that we’re thinking about for the fall, about how we relaunch it.

Unidentified Analyst: Okay. And at this point, is it more of just an engineering hurdle as was previously highlighted, or is there anything else that needs to be…?

Anne Wojcicki: I mean, there’s engineering hurdles. It’s just also a question of, we have a number of priorities and a number of launches coming up. So, it’s about just finding the right priorities in the right time.

Unidentified Analyst: Got it. Okay, great. In terms of margin expansion, I know you’ve also previously highlighted marketing efficiency and membership sales, resulting in better unit economics. I’m just wondering, is there any space left to also continue pushing price at all, or is that lever sort of maxed out at this point.

Joe Selsavage: I think we have actually increased the pricing on our subscriptions from $29 to $69 for 23andMe+. I mean, we’re really pleased with the retention and that we’ve seen and the upgrades and uptake on that subscription product, even with the increased pricing. We’ve also worked on increasing ASP on our kits as well. And we’ll continue to look for efficiencies in our marketing spend going forward. I think we see some good opportunities there and market for margins.

Unidentified Analyst: Okay.

Joe Selsavage: And I also want to highlight in our subscription product is really — it’s extremely high margin for us and will help us improve overall margins in the business.

Unidentified Analyst: Got it. So, to the extent that you can say, and I know you don’t give official guidance on this, but as you look ahead to the rest of fiscal year 2025, can we get a sense of how much margins can grow year-over-year, net-net with given all these different variables?

Joe Selsavage: No. We are at this time not giving any guidance, but I can say that basically we did see our margins in this quarter grow over year over year, up four percentage points in the PGS business. So, I think that was significant for us.

Unidentified Analyst: Got it. Thanks. In terms of — you mentioned that the Therapeutics Discovery group will be winding down. What sort of impact does this have on your go forward decisions and your strategy for your two internal assets?

Anne Wojcicki: I can take that one. So, it doesn’t impact it. Those were two pretty different groups. We have our two clinical assets continues to be run by Jennifer Low and Jennifer is continuing to develop those and has a team that is also looking at. Are there other opportunities out there for us to continue to grow our immune-oncology portfolio? But it is an area we’ve been pretty committed to saying what we are going to fund, and we are committed to funding these now through the Phase 2 and the Phase 1, and continuing to look at opportunities for us to fund these programs and potentially grow it. So, no other impact from the downsizing of our Discovery team.

Unidentified Analyst: Okay. Got it. So, speaking of those internal assets on 610, you’ve highlighted the favorable safety and tolerability profile, and that might position it well for potential combination strategies. Given that you’ve shown a partial response in neuroendocrine tumors at ASCO, what are your thoughts on a potential combination with a tyrosine kinase inhibitor such as Cabo, which is filing an NDA to treat neuroendocrine tumors? Yeah. Jennifer, you want to take that?

Jennifer Low: Yeah. That’s consistent with the data that we showed preclinically at ACR, and we are actively looking at that. We will also plan on presenting additional data from that study later this year. And I think what you’ll see is a theme and a pattern emerging in terms of what’s possible for this drug.

Unidentified Analyst: And I guess to that point, and this is my last question. I think it was mentioned the next data readout could be at ESMO, but for that longer term follow up data, can you just help frame expectations for that readout and what the benchmark for success would look like at that point?

Jennifer Low: As you know, information around our upcoming presentations is embargoed, so I can’t comment on that. But we do remain optimistic and feel that the data that we presented at ASCO is reflective of the overall program.

Unidentified Analyst: Thank you so much for taking all of my questions.

Operator: Thank you. Now I’ll turn it over to Ian for any further questions.

Ian Cooney: Yeah. Thank you. I’ll read the top few questions here from our Say Technologies’ Q&A platform from investors and shareholders. Question number one for Joe, what are the plans to regain NASDAQ listing compliance, and is there still a plan to take the company private.

Joe Selsavage: On the first part of the question, we received a 180-day extension from NASDAQ to become compliant with the listing requirements, which expires on November 4. We’ve been focusing on improving the overall operating profile of the company to execution and focusing operating momentum to become re-compliant. But in the event that we cannot achieve compliance by November 4, prior to that, we are seeking shareholder approval for a reverse stock split at our annual meeting of stockholders in late August. And it’s necessary, we want this to be an option available to the Board to ensure that we actually can become compliant with the NASDAQ requirements before November 4. On, is there still plan to take the company private? We don’t — cannot comment at this time on that matter until we have another material update.

Ian Cooney: Great. Thank you, Joe. One more for you. What is the plan to address upcoming liquidity challenges? What are the operational milestones that investors can watch for, and how should we sort of track that we’re executing on our plan.

Joe Selsavage: We’re actively discussing the most effective ways to increase our cash runway and intend to continue to drive efficiencies that we’ve shown in our operating results to date. And we’re also looking at how to continue to drive growth in our revenue and especially margin, and also, finally, are discussing potential financing options. At the milestones, we think that membership growth is extremely important and continue to look for ways to drive growth in our PGS and Lemonaid businesses as we continue to drive meaningful revenue also from our research data businesses.

Ian Cooney: Great. Thank you. Anne, this one’s for you. Are there plans to engage with pharmaceutical stakeholders to facilitate clinical trials or other types of businesses in that area?

Anne Wojcicki: Yep. Great question. Clinical trials is definitely an exciting area to apply genetics and particularly the data that 23andMe has. So, we definitely look at a couple options. One is recruiting individuals who have a specific and probably a rare genotype for clinical trials. So that is something that we have done quite a bit that we know how to do and we’ve been executing on. The other area that’s quite interesting is using polygenic risk scores to help understand how clinical trials could be or should be designed and what are the right patient populations to be recruiting. So, both of those are areas, one, recruiting individuals, and then second, helping think about [technical difficulty].

Ian Cooney: Anne, you broke up there a little bit at the end.

Anne Wojcicki: Do you hear me now? Sorry about that.

Ian Cooney: Yeah.

Anne Wojcicki: So, I was saying is that for the pharmaceutical clinical trials, there’s really the two areas. One is being able to recruit patients with specific genotypes out of our data set, so we are able to identify people who have potentially rare genotypes and recruit them for studies. The second area is to really help partners, pharmaceutical partners, think about who are the right patients to be recruiting for their study and what is the right kind of clinical trial design that they should be. How could they better be using genetics to improve their clinical trial design. So, both of those are areas where we have been focused with pharmaceutical partners.

Ian Cooney: Great. Last one. We’ve given some color on how we’re starting to develop AI, but can you give some more detail on what the plans would be to how we’ll deploy AI and how it will impact the business?

Anne Wojcicki: Definitely. AI is going to be an exciting part of our future. As a company that was set up to have data set up to become one of the world’s largest healthcare data companies. We are in a great position now to be able to think about how we can actually use all the data that our customers have contributed for really improving our understanding of basic science and human biology, as well as disease prevention or disease management, as well as can we actually use all of our data and AI to be improving the therapeutics discovery process? So, we have our first preprint that came out. We referenced that in the press release and in earnings. There’s [technical difficulty] potential for how the data is going to be human health or understood therapeutic development center.

Ian Cooney: You cut out there at the end of that answer the last couple sentences.

Anne Wojcicki: Sorry. I just said, I think that it’s going to be an exciting time to see how AI is going to impact human health. We’re all learning more about disease [ph]. It’s going to help us understand how we are — the genome and actually what it all means, and how we can apply genomics to meaningfully improve the outcomes of clinical trials of the whole drug discovery process.

Ian Cooney: We lost you a bit there, but I think we got the gist of it. I think that’s all the questions we have from Say Technologies. Operator?

End of Q&A:

Operator: Thank you. And ladies and gentlemen, thanks for joining us. This concludes today’s conference call. Thank you all for participating. You may now disconnect. Everyone have a great day.