23andMe Holding Co. (NASDAQ:ME) Q2 2024 Earnings Call Transcript

23andMe Holding Co. (NASDAQ:ME) Q2 2024 Earnings Call Transcript November 8, 2023

23andMe Holding Co. misses on earnings expectations. Reported EPS is $-0.16 EPS, expectations were $-0.14.

Operator: Hello, and welcome to 23andMe’s Fiscal Year 2024 Second Quarter Financial Results Conference Call. As a reminder, this call is being recorded. [Operator Instructions] 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 second quarter. 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 U.S. 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 Interim Chief Financial and Accounting Officer; Bill Richards, our Head of Therapeutics Discovery; and Jennifer Low, our Head of Therapeutics Development will join us for Q&A. I’d now like to turn the call over to Anne.

Anne Wojcicki : Thank you, Ian. To kick off the call, I would like to start with an update on our strategy. 23andMe’s mission has always been to help people access, understand and benefit from the human genome. The 23andMe brand is most known for how we transformed access to genetic information and enabled over 14 million people to learn about themselves, their ancestry and their health risks. Over the last 5 years, we have increasingly put more effort and resources into how customers will benefit from the human genome. Over 80% of our 14 million customers, trust and consent to using their genetic information and phenotypic insights for research, creating the world’s largest set of re-contactable genotypic and phenotypic data in the world.

We have a world-class team of statistical geneticist, bio-informaticist, computational biologists and data scientists leveraging the data to create consumer products and discoveries for therapeutics development. As a reminder, we have 3 main businesses powered by our database in creating a new future for health care powered by DNA. First, our consumer business. Where we are taking a precision health approach in generating insights to help customers improve their health and health span based on their unique genotypic and phenotypic profiles. We are moving toward a more subscription-based longitudinal model so we can have a positive impact and help our customers take action to improve their health over time. The subscription business also offers a much more sustainable and attractive operating model for us to create value for our customers and investors.

Second, our research business. This is where we are in discussions with collaborators in pharma, biotech and adjacent industries to sell them licenses to our database. They can then come up with their own insights to help make drug discovery in development more efficient or care delivery more effective. And third, our therapeutics business, where for the past 7 years, we have interrogated our database to pursue targets and develop therapeutics that will, hopefully, one day help many of our customers directly. We currently have 1 immuno-oncology asset in the clinic in Phase 1/2a with encouraging early efficacy activity. Another IO asset with a particularly exciting profile and a pipeline of molecules targeting immunology and inflammation in the discovery phase.

We focus the business on creating value from our dynamic data assets and expect to continue to do so in the future. As we move toward building a model that helps our customers take action from their genetic and health data, we aim to meaningfully increase the percentage of subscription-based offerings so we can provide long-term value and insights to our customers. As therapeutics assets develop, we expect to partner them out to create near-term and longer-term value inflections for our shareholders while also getting them in the best hands to develop through approval and commercialization for the eventual benefit of our customer. Moving to the second quarter and recent events. Yesterday, we launched a new subscription membership called Total Health, a continued effort to be the world’s best at risk prediction.

Total Health is our most advanced prevention-based health membership. It includes clinical grade exome sequencing, biannual blood testing and access to clinicians with unique training and genetics. Members of Total Health will also receive all the reports and features offered in our existing 23andMe membership. Through the combination of comprehensive genetic data, blood biomarkers, personal and family health history and genetics trained clinicians, Total Health will provide members with personalized guidance for ongoing disease prevention and early detection. This membership is for the consumer looking for access to advanced genetic risk testing so they can focus on ongoing health management through direct access to mitigate or prevent disease.

This is precision health with the support of a clinician who specializes in genetics. In addition to the launch of Total Health, we continue to add more value to our 23andMe membership. Last month, we introduced 23andMe Health Action Plan, a new digital feature that draws on your personalized genetic reports, health history survey data as well as blood and biomarker data to provide tailored, bite-sized health recommendations for subscribers to take action. In addition to suggestions on altering activities like sleep, diet and exercise, eligible members may also receive recommendations for further clinical actions like getting a blood test, which now can be ordered directly through 23andMe. We also recently launched 23andMe HealthTrack, a digital health tool aimed at driving behavior change by integrating lifestyle and genetics into a single model for the first time.

In July, we launched a new FDA-cleared pharmacogenetics report for 23andMe Plus members on a commonly prescribed statin called Simvastatin. In 2020, about 8 million people in the U.S. were prescribed Simvastatin, making it among the most prescribed medications in the U.S. This new report allows people to understand how their genetics may impact how they respond to the statin and whether or not they may experience side effects. We have another milestone FDA clearance in August to report additional BRCA variants for all 23andMe Health Plus ancestry customers. This allows us to report 41 additional variants in the BRCA1 and BRCA2 genes known to be associated with higher risk for breast, ovarian, prostate and pancreatic cancer. Many of these additional variants occur more often in populations that have traditionally been underserved by genetic testing, including the African-American and Hispanic-Latino communities.

As part of the FDA clearance, we were also granted the first-ever FDA predetermined change control plan, allowing us to update our BRCA report with additional validated variants without additional premarket review. You can begin to see the significant investment we’ve been making in our product and report innovation within our consumer business over the last few months. This includes continuing to provide value in the form of membership services, while expanding margins. We’ve seen better-than-expected results after increasing our kit and subscription pricing with higher margins, partially offsetting reduced kit sale volume. Transitioning to therapeutics. We completed the restructuring of the organization with a clear focus on the areas where we believe our data insights provide us with the greatest strategic advantage.

This includes continuing to advance our immuno-oncology assets, certain programs stemming from the GSK collaboration as well as focusing on the immunology and inflammation therapeutic areas. This allows us to pursue the most impactful programs in the most efficient manner in terms of capital and resources. In Q1, we discussed pursuing nonexclusive collaborations with pharmaceutical companies for target discovery. We continue to pursue these collaborations across an array of structures and are excited about the opportunity to attract multiple and varied partners in this business. Last week, we announced progress in this area with a new 1-year nonexclusive data license with GSK, which extends our collaboration. Under the agreement, we will receive a $20 million upfront payment, which enables GSK to conduct drug target discovery and other research using the 23andMe database.

The license also includes access to certain research services such as further analyses of the 23andMe data set not provided in the core data release. The collaboration with GSK has been hugely successful, and this collaboration extension validates the power of the 23andMe database to consistently produce novel insights for therapeutic development rooted in human genetics. As part of this agreement, we have made the strategic decision to take the royalty option in lieu of the opt-in on 3 programs we previously initiated together, which will help us reduce our cash burn and allow us to focus on our wholly owned program. We also continue to advance our pipeline of clinical and preclinical program. Last week, we presented positive safety and preliminary efficacy data from the Phase 1/2a clinical trial of our wholly-owned immuno-oncology program, 23andMe 610, an antibody targeting CD200R1.

In two presentations at the Society for Immunotherapy of Cancer and Annual Meeting, we showed the therapy is well tolerated at our highest dose level. We also reported stable disease in 52% of response evaluable participants in our Phase 1 dose escalation portion of the study. This includes preliminary clinical activities of 23andMe 610 and a patient with neuroendocrine cancer, showing a maximum reduction of 19% in target lesions with a single lesion achieving a sustained 58% reduction in the longest dimension. The participant continues on study drug past 40 weeks with stable disease at the time of data cutoff. Overall, we’ve demonstrated that 23andMe 610 is well tolerated and shows promising preliminary efficacy in patients with advanced solid malignancies.

We are continuing to enroll the Phase 2a portion of the trial and anticipate reporting further data next calendar year. We are also continuing to advance a preclinical program, P014, an investigational antibody that has dual mechanism, targeting ULBP-6, -5 and -2 to restore antitumor immunity through NK and T cells and inducing Fc receptor mediated killing of ULBP-2, -5, -6 expressing cancer cells. With these programs advancing, the extension of our GSK collaboration and our streamlined focus on immunology and inflammation, we’re excited about the progress and direction of our therapeutics group. In closing, I’d like to provide a brief update on the ongoing cybersecurity investigation that we initiated early last month. Detailed information can be found in an 8-K we filed with the SEC and on our blog.

At this time, we do not have any indication that there has been a data security incident within our own system. Data privacy and security remain a top priority. We have recently required all customers utilize 2-factor authentication, and we will continue to invest in protecting our systems and data. And with that, I’ll turn the call over to Joe to review our financial results for the quarter.

Joseph Selsavage : Thank you, Anne, and hello, everyone. We remain well positioned to continue advancing our consumer and therapeutic goals. Our margin expansion momentum continued this quarter had the impact of PGS kit and subscription price increases to date have been better than expected, as Anne mentioned earlier. Revenue for the quarter was $50 million, representing a decrease of 34% on a strong prior year comparable. The year-over-year decrease in revenue was primarily due to the conclusion of our exclusive discovery term under our GSK collaboration in July, providing 1 month of collaboration revenue in the quarter compared to a full 3 months in the prior year as well as nonrecurring payments from other research partners in the prior year.

It also reflects our continued focus on driving improved product margins through higher average selling prices and marketing efficiency, resulting in lower overall volume of PGS kit and telehealth orders. These decreases were partially offset by continued growth in our subscription services. Looking at the composition of our revenue, Consumer service revenue represented approximately 97% and of total revenue for the 3 months ended September 30, 2023, and research services revenue, which was primarily derived from the GSK collaboration, accounted for approximately 3% of total revenue for the same period. Our gross profit for the second quarter was $22 million, representing a 43% decrease over the same period in the prior year. The decrease in second quarter gross profit was driven primarily by the decrease in research services revenue, while subscription revenue and improved PGS kit selling prices helped to offset through continued margin accretion within their respective categories.

Turning to expenses. Total operating expenses for the quarter were $101 million compared to $106 million in the same period in the prior year. The improvement in operating expenses was primarily driven by reductions in marketing advertising spend aimed to boost efficiency as noted previously. This improvement also reflects lower personnel-related expenses following the reductions in force in June and August earlier this year as well as the disposition of Lemonaid Health Limited in the U.K., also in August. This decrease was partially offset by continued investment in therapeutics and portfolio advancement and also includes onetime severance and related charges related to the workforce reductions and transaction-related expenses for the U.K. disposition.

Looking at the bottom line. Net loss for the quarter was $75 million compared to net loss for the same period in the prior year of $66 million. The increase in second quarter net loss was driven mainly by the lower research services revenue mentioned previously, partially offset by our improved operating expense profile and an increase in interest income from cash held in money market times. Next, our adjusted EBITDA. For details on how we define adjusted EBITDA as well as the corresponding reconciliations to GAAP, please see our earnings release. Total adjusted EBITDA deficit for the 3 months ended September 30, 2023, was $45 million compared to $30 million deficit for the same period in the prior year. We ended the quarter with $256 million in cash and cash equivalents compared to $387 million as of March 31, 2023.

As always, we are actively evaluating the use of our capital for both the consumer and therapeutic businesses, including responsibly opting in or out of therapeutics programs based on opportunity potential and timing of returns as appropriate given market conditions. Now turning to our guidance. As a reminder, the company’s full year 2024 guidance is based on a conservative approach, recognizing current uncertainties in consumer sentiment, the macroeconomic environment and geopolitical conditions. Our focus within the existing lines of the TGS and telehealth consumer businesses remains unchanged. We continue to prioritize margin expansion and progressing towards cash flow profitability. These efforts include ongoing value additions to our current services like the recently announced HealthTrack and Health Action Plan features within 23andMe. The newly launched Total Health membership, our most advanced and comprehensive precision health service and the reorganization of our consumer segment to streamline our expense profile.

Within the therapeutics business, we continue to invest in programs we believe are most strategically and financially valuable. With the end of the exclusive discovery term under the GSK collaboration in July, we decided to narrow our discovery and development efforts to areas that best align with our core strength. This resulted in a workforce reduction in August as we realigned our resources to the revamped structure and the more recent decision to take the royalty option on several programs initiated together with GSK, which will allow us to reduce cash burn and focus on our wholly owned programs. We expect these decisions to yield meaningful economic benefit in future periods. While we’re pleased with this year’s progress and excited for the launch of Total Health, we remain prudent with our outlook given current uncertainties in the macro environment.

Similarly, although, the new GSK data license announced last week serves as further validation of our databases value, we expect the deal’s $20 million revenue to have minimal impact on this year’s results, with the majority of landing in fiscal year ’25 given the terms of the agreement. The company is partially adjusting its full year guidance for fiscal year ’24, which ends on March 31, 2024. In terms of revenue, we are updating our fiscal year 2024 guidance to be in the range of $240 million to $250 million, with net loss reaffirmed to be in the range of $325 million to $345 million loss. Full year adjusted EBITDA deficit is reaffirmed to be in the range of $160 million deficit to $180 million deficit for fiscal year 2024. This updated outlook is a result of our commitment to delivering critical insights and values to our customers through impactful new services while improving our cash flow through better unit economics and cost discipline.

Also, a reminder that adjusted EBITDA is our best proxy for cash burn. And now I’ll turn the call back over to Anne.

Anne Wojcicki : Thanks, Joe. I’m optimistic as we head into fiscal year Q3. We’ve made incredible progress through the innovation happening within the consumer business, both by increasing the value of our 23andMe Plus membership with new features and reports as well as launching Total Health, a new comprehensive subscription offering that positions us to be the world’s best at risk prediction. Our therapeutics team continues to demonstrate progress advancing our pipeline of clinical and preclinical programs. And our new GSK nonexclusive collaboration extension demonstrates the value of our database as we continue to pursue new opportunities with pharmaceutical and biotech companies. With that, let’s open it up to questions.

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Q&A Session

Operator: [Operator Instructions] Our first question comes from Chad Wiatrowski with TD Cowen.

Chad Wiatrowski:

Joseph Selsavage: I can take that question. We haven’t really seen any impact on the — from the cybersecurity incident on revenue to date. We’re continuing to — on the cybersecurity incident investigation, and we don’t have any specific guidance on cost estimates of that yet or the insurance recoveries, but what will be updating in the future and future quarters.

Anne Wojcicki : Just one thing I wanted to add was just we’ve had a very intentional push on revenue — sorry, on margin expansion. So again, I just want to be able to push that to you as well is that our — not on the cybersecurity side, but it has been very intentional for us as a company to be disciplined with our marketing disciplined with our costs and like really focusing on the margin expansion, which is why we took down that top line because we are not focusing as much on that top line acceleration, but really on margin.

Chad Wiatrowski:

Anne Wojcicki : So I think obviously, I can take that advance. So I — there’s a whole world, I think, that is out there where people are looking for access and ease of use for ways that they can make themselves healthier. And I think you see an explosion of whether it’s a watch or it’s a wearable of some store or an MRI service where people want to get — be focused on being proactive. So Total Health is all about empowering our customers to really have a comprehensive assessment of themselves with their genetics, with blood, with medical guidance, and those costs are obviously higher, like that is very different than the 23andMe company ancestry product that we have, but this is an ongoing. We absolutely anticipate with these customers that we are going to have an ongoing relationship with them, where we can really get involved, we can coach, they can have interactions with health care providers, we’re going to keep following them up with blood, making sure that they’re getting a level of care about themselves that’s going to be optimal for prevention.

So we did do a fair amount of market research on this. We did do a fair amount of assessment of the — what our pricing flexibility could be. There are obviously more costs associated with this product, but I believe there is a significant market at this price level.

Operator: Next question come from the line of David Lebowitz with Citi.

David Lebowitz : With respect to the increased kit pricing, could you comment if it’s had any impact to this point on your marketing strategy, or how it might change your — what you plan to do into the holiday season?

Anne Wojcicki : So, this is Anne. So I assume you mean the base pricing on the health and ancestry and not solo health?

David Lebowitz : Yes.

Anne Wojcicki : I think that has definitely been a priority for us. Our customers see incredible amount of value from the subscription product. They see a tremendous amount of value from the health and ancestry service. So it was absolutely — and if you think back on how long we had at a $99 or $199 price point, it has been a long time since we have raised those prices. So we’re quite happy to see the response from customers, continued uptake on our subscription part of the product, that obviously, as we have increased margin from all of our products that absolutely allows us the opportunities to do more with our marketing spend, and particularly top of the funnel marketing spend, where we can have more brand awareness. So you should definitely be looking for us to do more with TV and more marketing in — especially for holiday season and going forward.

David Lebowitz : Got it. Given the nature of the Total Health product, is there — is it primarily going to be a direct to consumer, or is there consideration for looking into alternate approaches may be coming from the health care providers themselves, to try to grow the overall product.

Anne Wojcicki : Yes, that’s a great question. I think we’re in the earliest days of launching this. It is really a soft launch so far. We see demand. We see that there is — there are absolutely clinicians who are out there who would like to offer a comprehensive exome to their patients, but don’t necessarily have that interpretation experience. They don’t necessarily have the genetics training, and that’s where we could potentially partner in the future. So I would look for us to focus on direct-to-consumer in the short term, but absolutely, we are exploring what are those additional opportunities as the product continues to go. And I just want to cite, and I don’t have the specific numbers in front of me, but we did talk about in the past, these Medscape surveys that we did, where there is 90-plus percentage of physicians that are interested in integrating genetics into their practice.

And so we see ourselves as a global leader in the delivery of genetics-based preventative care. So how is it that we can enable all of those clinicians who are eager to do more to actually be able to do that. So I think this is a product that will absolutely have a direct-to-consumer feel as well as a potential health care provider appeal.

David Lebowitz : And on the $20 million payment, are we to assume that it’s basically going to be paid, amortized over the year, so kind of $5 billion per quarter type thing?

Joseph Selsavage: From a cash perspective, we expect to receive $5 million in this — in Q3 and the remainder in Q4 of fiscal year ’24. From a revenue perspective, there’s only a small amount in fiscal year ’24 because it will be amortized over the period of the agreement. So the majority will land from a revenue GAAP perspective in fiscal year ’25.

David Lebowitz : Got it. And just jumping over to the other side of the world. We recently reported data at SITC. Could you, I guess, characterize the 52% greatest stable disease give us a sense of how that might translate ultimately into clinical response when you — in your Phase 2a.