23andMe Holding Co. (NASDAQ:ME) Q2 2025 Earnings Call Transcript

23andMe Holding Co. (NASDAQ:ME) Q2 2025 Earnings Call Transcript November 12, 2024

Operator: Good day, and thank you for standing by. Welcome to the 23andMe Fiscal Year 2025 Second Quarter Earnings Call. At this time, all participants are in a listen only mode. Please be advised that this call is being recorded. I would now like to turn the conference over to your speaker for today, Katie Watson, Vice President of Communications. Please go ahead.

Katie Watson: 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 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 reconciliations 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 Chief Financial and Accounting Officer. I’d now like to turn the call over to Anne.

Anne Wojcicki: Thanks, Katie. Hello, everyone. I’d like to start today’s call by addressing recent developments at the company, and then we’ll get into the second quarter. In late October, 23andMe reconstituted our Board of Directors with the appointment of 3 new independent directors. We are pleased that these accomplished and experienced executives who are committed to our mission could jump in immediately. We have fulfilled our obligations as a public company and regained compliance with the NASDAQ listing standards by reconstituting our Board and executing a reverse stock split. In addition, yesterday, we announced that 23andMe is undertaking a business restructuring to streamline operations, reduce costs and position the company for long-term success.

Under this restructuring, we are discontinuing further development of all therapeutic programs and reducing our workforce by approximately 40%. Joe will discuss the financial impact of the restructuring in his prepared remarks. We continue to believe in the promise shown by our clinical stage oncology assets and our preclinical immunology pipeline. As we immediately start the wind-down process for the therapeutics division, we will be actively exploring a range of strategic alternatives for our therapeutics pipeline that will enable their continued development outside of 23andMe. We intend to continue supporting the collection of data and monitoring of patients in our clinical trials while the strategic alternative process and wind down are completed.

Q&A Session

These are difficult but necessary actions that we believe begin putting 23andMe on a more sustainable path and positioning the company for the future. We appreciate the dedication and contributions of our team to our mission and are committed to supporting the impacted employees through this transition. We also remain deeply grateful to the patients, investigators and study staff for their participation in our clinical trials and will work to ensure development efforts can continue for the benefit of patients. Now I’ll turn to the second quarter of our fiscal year 2025. We made considerable strides in our key objective of becoming a sustainable cash flow positive company while remaining committed to our goal of helping millions of people live longer, healthier lives.

The team continues to leverage the full spectrum of 23andMe platform to deliver integrated preventive health services and genetic insights. We made our Total Health membership service, a comprehensive longevity platform combining advanced exome sequencing, lab test and guidance from clinicians specifically trained in genetics available to our entire customer base. We believe the future of preventive health is understanding your complete health picture, including genetics, lab testing, family health history and other data to help derive a truly personalized health plan. 23andMe made significant progress in Q2, bringing the power of our research, genetic insight and telehealth platform to serve critical consumer needs. As part of our focus on prevention and longevity, we launched a number of weight management initiatives in Q2.

Studies estimate that BMI is 40% to 70% influenced by genetics and that elevated BMI is associated with up to 9 fewer years lived in good health. A few highlights. We launched and enrolled thousands of participants in a new study to understand how genetics can impact GLP-1 efficacy, side effects and length of treatment. We launched a new genetic report on emotional eating, utilizing 23andMe’s polygenic risk score technology for 23andMe+ Premium subscribers. Emotional eating impacts up to 60% of people with a high BMI and knowing this can inform weight management approaches. We also launched a GLP-1 weight loss telehealth membership on the Lemonaid Health platform that enables members to be prescribed and receive brand name or compounded semaglutide medications.

These medications can be life-changing and an important tool for prevention and longevity and offering our customers access to them in a convenient, cost-effective manner is consistent with our mission. We continue to improve and add to 23andMe’s market-leading ancestry composition and historical matches features with new regions for Germanic Europe, Scandinavia and Japan and new historical matches, our subscription-only feature with historical figures from the Medieval Swahili Coast, Medieval Avars and Ötzi the Iceman. We also launched the first AI assistant available to 23andMe+ Premium customers, DaNA, to help find and understand ancestry and health reports. These developments continue to result in increased growth and improved retention rates for the 23andMe subscription services.

In line with our focus on shifting to higher-margin recurring revenue streams, we were able to more than double the percentage of revenue that is recurring with more than 21% of total revenue in Q2 versus only 9% in the prior year quarter. On the research front, we presented a new study using 23andMe research data that builds on previous research and indicates that drug targets supported by human genetics are two to three times more likely to succeed. With the scale of our data and using proprietary gene mapping algorithms, we not only find many novel insights, but can also increase the relative rate of success even further. We also published one of the largest and most diverse genetic studies of sickle cell traits in collaboration with the National Institute of Health and John Hopkins University School of Medicine.

Important research such as these and the caliber of research organizations we are working with demonstrate the value of 23andMe database to continue discovering new insights into disease that benefit the entire population. Turning to therapeutics. In Q2, we presented data on our 23ME’610 and 23ME’1473 clinical stage immuno-oncology programs at the European Society for Medical Oncology Annual Meeting. The data showed that 23ME’610 monotherapy demonstrates preliminary evidence of clinical benefit in clear cell renal cell carcinoma, with one confirmed partial patient response. Further, the data show higher tumor expression of CD200 and human genetics correlated with increased clinical benefit, indicating CD200 could be a promising biomarker. We also saw 23ME’1473 inhibit tumor growth in a patient-derived mouse model of non-small cell lung cancer.

While we are winding down this part of our business, we will continue to leverage 23andMe’s unmatched genetic community with over 15 million customers to pursue collaborations with pharmaceutical and biotech companies as part of our mission to help people benefit from the human genome. These collaborations run across several areas, including drug target discovery and validation, clinical trial recruitment efforts and disease awareness, among others. 23andMe Therapeutics was established to improve people’s health by harnessing the power of human germline genetic data at scale. Over the last 9 years, we have taken major step forward, leveraging the 23andMe database to identify a large number of potential therapeutic targets and to develop unique and valuable insights.

We have engaged in a highly productive 6-year collaboration with a major pharmaceutical collaborator, GSK, and have advanced two in-house immuno-oncology assets into the clinic with positive results. We are proud of the work we’ve done, and we look forward to advancing it further with collaborative efforts. And with that, I will turn it over to Joe to walk through the numbers.

Joe Selsavage: Thank you, Anne. During the quarter, we continued to make strides towards our goal of operating a cash flow positive consumer business, improving our GAAP net loss by 21% and adjusted EBITDA by 26% for the same period in the prior year. Revenue for the quarter was $44 million, a decrease of approximately 12% over the same period in the prior year. This is due to lower consumer services revenue, driven mainly by lower PGS kit sales volume and telehealth orders, as well as lower research services revenue as the GSK collaboration exclusive discovery term concluded in July 2023. These decreases were partially mitigated by growth in membership services revenue, driven by increased upgrades from other tiers of PGS kits and sustained growth in our customer renewal rates.

Revenue from consumer services, which includes PGS, telehealth and membership services represented approximately 99% of total revenue for fiscal year ’25 Q2. Research services revenue accounted for approximately 1% of total revenue for fiscal year ’25 Q2. 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 $22 million, representing a 3% increase over the same period in the prior year. The increase was driven primarily by growth in our high-margin membership services, which more than offset the lower consumer and research services revenue mentioned previously. Operating expenses for fiscal ’25 Q2 were $84 million compared to $101 million for the same period in the prior year.

The decrease in operating expenses for the quarter was driven by lower personnel-related expenses, including noncash stock-based compensation expenses following workforce reductions in the current and prior quarters and the disposition of Lemonaid Health Limited in the U.K. in August 2023. The improvement also reflects lower therapeutics-related R&D spend as we opted for a royalty on several GSK partner programs, resulting in a significant reduction of GSK collaboration expenses compared to the prior year quarter, while retaining upside in those programs. Looking at the bottom line. Net loss for the quarter was $59 million compared to a net loss of $75 million for the same period in the prior year. The improvement in second quarter net loss was driven mainly by savings in operating expenses, as just discussed.

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 second quarter was a loss of $33 million compared to a loss of $45 million for the same period in the prior year. The improvement in adjusted EBITDA was primarily due to lower R&D and personnel-related expenses and improvements in our consumer services gross profit, partially offset by lower research services gross profit. We ended the quarter with cash and cash equivalents of $127 million compared to $216 million as of March 31, 2024. Our financial statements for this quarter include a going concern disclosure. The company will need additional liquidity to fund its necessary expenditures and financial commitments for the 12 months after the date our 10-Q was filed, resulting in the going concern disclosure.

To improve our financial condition and liquidity position, the company is working to execute its business plan, managing ongoing operational expenses and implementing cost-cutting measures, as well as considering raising additional capital. The business restructuring we announced yesterday is expected to substantially reduce our operating expenses. We expect annualized cost savings of at least $35 million per year, and we expect to incur approximately $12 million in costs and expenses primarily related to onetime severance, transition and termination-related costs. We believe these efforts will help improve our financial condition and liquidity position to extend our cash runway. Before I conclude, I also want to mention that we recently regained NASDAQ listing compliance with the minimum closing bid price and the majority independent Board and various Board committee requirements.

Looking ahead, we are focused on getting 23andMe on a more sustainable path towards positioning the company for the future. We’ll now turn the call to Q&A.

Operator:

A – Katie Watson: Thank you, Joe. We have a few questions from investors and shareholders that came in through our Q&A platform that we use through Say Technology. The first question is for Anne. What is the plan for recovery?

Anne Wojcicki: Thanks, Katie. Good question. So a number of different areas I want to chat about. So first, what Joe referenced, regaining compliance was a top priority for us. So we did that with the new Board, the share price, reverse stock split. So regaining compliance was a high priority for us. Second, on becoming more sustainable has been a top priority, and that was really achieved with now deprioritizing therapeutics and committing to we are going to either shut down or out-license those assets, as well as cutting expenses. So dramatically reducing all of our costs. Third was, as I mentioned, was out-licensing our therapeutics programs and focusing there. And fourth is now on growing our business. And the areas that we’re focused on growing the business are really on subscriptions and continuing to really encourage our customers to take advantage of all the value that we are putting into the subscription products, like the additional health reports, the additional fun features like historical matches, getting more and more customers recognizing the value that are in a subscription product, as well as now really focusing on the database opportunities.

And we see an increasing interest from the therapeutics world on using genetics in discovery and in clinical trials. And we are focused on making sure that we are front and center there and are the leading opportunity for the pharmaceutical industry and clinical trials that they are leveraging 23andMe in those opportunities.

Katie Watson: Great. Thanks, Anne. The second question is for you, Joe. Why was the 120 reverse stock split necessary?

Joe Selsavage: Thank you, Katie. We completed the reverse stock split transaction in October of this year to regain compliance with the NASDAQ listing requirement that 23andMe have a bid price of at least $1 per share. The reverse stock split was approved by the stockholders at our most recent Annual Meeting of Stockholders. And the good news is we subsequently received notification from NASDAQ after the reverse stock split that we are now in compliance with this listing requirement.

Katie Watson: Great. Thank you, Joe. The third question, due to the nature of the industry and your current business model, what steps are being taken to make it profitable? I’ll hand that to you, Joe.

Joe Selsavage: Thank you again, Katie. We are continuing to prioritize our subscription products with recurring revenue to reflect the ongoing value that we provide our customers and growing our research partnerships and collaborations. We are also continuing to look at reducing our cost base. And as we announced the restructuring yesterday of headcount and pausing on our therapeutic assets that we have in clinical trials, all of which will result in significant annual cost savings.

Katie Watson: Great. And the last question, I’ll direct to Anne. What goals are you looking to complete in 2025?

Anne Wojcicki: Well, after getting through today and some of the restructuring plans that we have announced with therapeutics as well as with cutting costs, the three areas that we’re really focused on is, as I mentioned, growing subscriptions and really continuing to provide value for our customers in the subscription product and more and more enabling customers to recognize the value that’s there and encouraging them to be part of the subscription. Second is the database business. And as I said, there’s increasing evidence showing that genetic utilization in the clinical trial and the drug discovery process is going to increase outcomes or increase the likelihood of success. So focusing on developing those products so that we can serve the industry. And last is out-licensing our therapeutic programs so that they can continue to be developed and eventually really be great products that could benefit customers.

Katie Watson: Great. Thank you. That completes the top questions we’ll be answering. I’m going to hand it back to the operator now.

Operator: Thank you all for joining today’s conference. You may all disconnect.