The key to the future of 23andMe, and thus the VG Acquisition (NYSE:VGAC) SPAC being used to take it public, is its database. If you’re buying VGAC stock, that’s the underlying asset that matters. Forget spitting into the mail-in test tubes.
Once the deal is complete, the company will have the ticker symbol ME. And that asset is a growing stack of 11 million DNA sequences that can identify the source of disease or the efficacy of drugs. Yes, the ancestral links make for good theatre, but it’s the health considerations that matter.
GlaxoSmithKline (NYSE:GSK) signed a deal in 2018 to use that 23andMe database. But the big bucks may lie in 23andme analyzing the data itself.
SPACulation on VGAC Stock
The VGAC SPAC values 23andme at $3.5 billion. Only 19% of that is going to public shareholders. The deal will unlock $759 million in cash, $509 million of which is already held by VGAC.
The other $250 million comes from its private investment in public equity (PIPE), with VGAC sponsor Richard Branson and 23andMe co-founder Anne Wojcicki each kicking in $25 million. The rest is coming from venture and private equity names.
Wojcicki is the former wife of Alphabet (NASDAQ:GOOG) co-founder Sergey Brin. She had an estimated net worth of $690 million in 2019. VGAC, meanwhile, closed yesterday at about $10.10 a share, a market cap of $642 million. The shares had a brief spike in early February, when the target was announced, topping $17.50. They now trade below where they started the year as SPAC fever has cooled.
The company can use the cash. It took a capital infusion of $82.5 million just in January. Over the years it has had over $850 million in venture funding. It had a rough time in 2020, sacking 100 people in its consumer business as sales slowed.
Testing Kids Have Been Loss Leader
The genetic testing kits have been marketed to consumers at $100 to $200 each. Share a bit of your saliva and learn your ancestry or discover known genetic risks you may carry.
But the kits have always been a loss leader. The aim of the company was always to create a large library of genetic information for use by researchers. It got $300 million in the 2018 GSK deal. It also has a deal with the Michael J. Fox Foundation for Parkinson’s Research.
More recently, 23andme won clearance from regulators to issue a report on two generic drugs. One is the blood clot drug originally called Plavix, the other an anti-depressant first sold as Celexa. The report identified a common genetic variant, CYP2C19, which can change how these drugs are used in the body.
This is where the big money will be. Anonymized genetic data is a huge step forward from the previous gold standard of data mining. This was the Framingham Heart Study, which has followed thousands of people since 1948 tracking their behaviors and cardiac risks.
Getting the database to this point, however, has created controversy. The U.S. military has urged soldiers not to take the tests over privacy concerns.
The Bottom Line
When our Larry Ramer analyzed 23andMe’s prospects, he focused on the consumer business. That business is subject to intense competition and price-cutting. Growing the database is going to be a loss leader and increasingly controversial.
But the database itself could be the largest medical gold mine ever created. That’s why our Matt McCall called this SPAC a buy, especially with its recent fall. He sees $218 million in revenue for the year ending March and believes it could double over the next three years.
I lean toward Matt’s view on long-term value. But whether that justifies a price of 16 times sales is speculation. The risks here are on the income side of the business, the value proposition on the asset side. If you do buy ME, be patient with it.
At the time of publication, Dana Blankenhorn owned no shares, directly or indirectly, in any companies mentioned in this article.
Dana Blankenhorn has been a financial and technology journalist since 1978. He is the author of Technology’s Big Bang: Yesterday, Today and Tomorrow with Moore’s Law, available at the Amazon Kindle store. Write him at danablankenhorn@gmail.com, tweet him at @danablankenhorn, or subscribe to his Substack newsletter.
