23andMe Holding Co.

Q2 2022 Earnings Conference Call

11/10/2021

spk03: Good day, ladies and gentlemen, and welcome to the 23andMe's Fiscal Year 2022 Second Quarter Earnings Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question and answer session, and instructions will follow at that time. If anyone should require assistance during the conference, please press star zero on your touchtone telephone. As a reminder, this conference call is being recorded. I would now like to introduce your host for today's conference, Wade Walk, Vice President of Investor Relations. Sir, you may begin.
spk05: 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 quarter. A replay of today's webcast will also be available on our website for a limited time within 24 hours after the event. 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 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 Steve Schuch, our Chief Financial Officer. Kenneth Hillen, our Head of Therapeutics, will also be joining us for Q&A. And now I'd like to turn the call over to Anne.
spk01: Thank you, Wade. I'm excited to talk to you today about the recent progress we've made on our mission to help people access, understand, and benefit from the human genome. We announced recently that we completed our acquisition of Lemonade Health. We believe this acquisition gets us closer to helping our customers more fully benefit from the genetic information we provide them. We have heard from our customers that they want to be able to do more with the information provided to them through our health reports, but most physicians are not trained in genetics and don't know how to integrate the information. We believe we now have the opportunity to change that and expand on our mission to help people benefit from their genetics. Our focus will now be on the integration and developing a plan to accomplish our goal to provide consumers with convenient access to personalized, proactive, and genetically-based primary care. We believe that by combining Lemonade Health's telemedicine platform including its online team of medical professionals and its digital pharmacy services. With our consumer business, we are taking an important step in transforming the traditional primary care experience and making personalized healthcare a reality. I look forward to telling you more about this as our plans develop and take shape. We also launched three new health reports in the second quarter for our 23andMe Plus members. 23Me Plus is our premium content subscription service that provides subscribers with new reports and features through the course of their subscription, giving them even deeper insights into their health. With our database of over 11 million genotype customers and billions of health-related data points, we are uniquely positioned to provide our customers with these health insights. The new reports included a gallstone report, a gestational diabetes report, and an HDL cholesterol report. Each report uses machine learning to estimate a person's likelihood of developing a specific condition. With the addition of these new reports, we now have over 20 reports as part of our 23andMe Plus subscription. If you are not a 23andMe Plus subscriber, you can learn more about these reports on our website at blog.23andme.com. We are also pleased with the progress of our therapeutics pipeline. Our partner, GSK, expects to report clinical data from the CD96 in 2022. In addition, we expect to start a clinical trial with our wholly owned P006 program by the end of fiscal year 2022. Finally, I'm pleased to welcome a new 23andMe board member. As you may have seen from our press release yesterday, Dr. Sandra Hernandez has joined our board. Sandra is the President and CEO of the California Healthcare Foundation, an independent nonprofit philanthropy dedicated to improving California's healthcare system so that all Californians, especially those with low incomes, can get the care they need. I believe Sandra's perspective and guidance will be a great asset to us as we roll out a new digital primary care experience that delivers personalized preventative care to individuals in an affordable, and accessible way. And with that, I'll turn the call over to Steve to review our financial results for the quarter.
spk04: Thanks, Anne. We're excited about the progress we're making on pursuing our vision across both our consumer research services segment and our therapeutic segment. On the consumer and research services side, we believe that our customer-centric, genetically-focused model where health services can significantly improve upon traditional healthcare by providing a new focus on individualized wellness, prevention, and care. The recent acquisition of Lemonade Health is just one of several steps we're taking to make this model a reality. We're also continuing our internal investment in delivering innovative product enhancements made possible by our research capabilities combined with the unmatched scale of our genetic database. One such example of this is what we're doing with our proprietary polygenic risk scores. On the therapeutic side, we continue to invest in advancing our therapeutics discovery and development pipeline. We believe that the unique insights we obtain from our premier genetic database of approximately 11.9 million genotype customers and our billions of phenotypic data points will give our therapeutics programs a distinct advantage as they move from discovery to clinical development. As we continue to grow our genetic database and the associated health data, we will continue to invest in our unique and increasing understanding of human genetics and biology in order to drive the discovery and development of new therapeutics. We believe this is one of the very best opportunities we have to invest. Now let us turn to our second quarter financial performance. Our revenue for the three and six months ended September 30th, 2021 was $55 million and $114 million respectively, representing increases of 7% and 15% respectively over the same period in the prior years. This revenue growth was primarily due to higher sales volume in both our personal genome services or PGS product and our subscription product. As we have pointed out previously, a significant portion of our overall revenue comes from our consumer business. Additionally, PGS revenue fluctuates during the year due to many seasonal, promotional, competitive, and economic factors, and those patterns can vary year to year. Finally, we note that our second fiscal quarter has historically been one of our seasonally low revenue quarters. When we look at the composition of revenue, consumer services revenue represented approximately 81 percent of total revenue for the three and six months ended September 30th, 2021. And research services revenue, which was substantially all from the GSK collaboration, accounted for approximately 19 percent of total revenue. Our gross profit for the three and six months ended September 30th, 2021, was $28 million and $58 million, respectively. representing a 14% and 25% increase over the same periods in the prior year. This increase was driven primarily by the above-mentioned PGS and subscription service revenue increases, as well as lower lab processing costs. Operating expenses for the three and six months ended September 30, 2021, were $74 million and $147 million, respectively, compared to $61 million and $121 million for the same periods in the prior year. The increase in operating expenses was primarily attributable to the increase in research and development expenses related to our therapeutics programs, along with increased sales and marketing expenses intended to grow the consumer business. Looking at the bottom line, Net loss for the three and six months ended September 30th, 2021 was $17 million and $59 million respectively compared to net losses of 36 million and 72 million for the same period in the prior year. Improvement in net loss was primarily driven by non-cash changes in fair value of warrant liabilities of $30 million and $29 million respectively for the three and six months ended September 30th, 2021. offset by higher loss from operations for those periods. We anticipate that there could be significant changes in the fair value of warrant liabilities from quarter to quarter. Let's look at adjusted EBITDA. For details on how we define adjusted EBITDA, please see our earnings press releases. Total adjusted EBITDA for the three and six months ended September 30th, 2021 was a loss of $30 million and $57 million respectively, compared to a loss of $20 million and $40 million for the same periods in the prior year. The increased loss in total adjusted EBITDA was driven primarily by an increase in research and development expenses related to our therapeutics programs and in sales and marketing expenses aimed at growing the consumer business. Looking specifically at the adjusted EBITDA for the three and six month periods for the consumer and research services segment, we saw a loss of 0.8 million and 1.3 million respectively compared to a gain of 1.8 million and a loss of 2.5 million for the same periods in the prior year. Quarterly adjusted EBITDA for the consumer and research services segment will have seasonal variation just as the consumer segment top line does. and will be further impacted by the timing of our media spending pattern, which has varied over time. For this reason, we focus managerially on our full year adjusted EBITDA performance. As I've mentioned previously, we continue to focus on the aim of economically efficient growth of the consumer and research services segment over time. We ended the quarter with a strong balance sheet, which included $701 million in cash, which gives us substantial capital for pursuing our strategic objectives. Subsequent to the end of the second quarter, we paid approximately $102 million in cash consideration for the acquisition of Lemonade Health, of which approximately $13 million was placed in escrow to cover potential purchase price adjustments and to secure the indemnification obligations of the former equity holders of Lemonade Health. Turning now to the topic of guidance, our previous full-year fiscal 2022 guidance excluding the effects of the Lemonade acquisition is unchanged. Updated fiscal 2022 guidance including the effects of the Lemonade acquisition will be provided with our third quarter update. For purposes of our net loss guidance, due to the unpredictable nature of market-driven changes in our warrant liability, we have assumed no net change in the fair value of warrant liability for the year within our guidance. And now I'll turn the call back over to Anne.
spk01: Thanks, Steve. I believe the recent strategic steps we've taken and the continued progress we have made with the acquisition of new health services, new health reports, and our therapeutics efforts demonstrates the significant advancements we are making toward our goal of personalized healthcare. Now with that, let's open it up for questions.
spk03: Thank you. At this time, to ask a question, you will need to press star 1 on your telephone. Again, to ask a question, please press star 1. To withdraw your question, just press the pound key. Your first question comes to the line of Daniel Grosslight from Citi. Your line is now open.
spk02: Hi, guys. Thanks for taking the question. Steve, you mentioned 2Q is typically seasonally light, but I would have assumed that you would start to see some revenue come in from Mother's Day, Father's Day, and this year Prime Day in this quarter. Can you share some details around demand you saw during these holidays, any discounting you may have taken during these holidays, and if the kit sold successfully? are taking longer to process. And so we should start to see more of that revenue come in, in 3Q. And then maybe if you can just relate that to what you're expecting for this, this holiday season coming up.
spk04: Yeah. So I think, you know, I'd start with the guidance that we've, you know, that we've said is unchanged. So, you know, as we look at the full year, it's, it's running within our expectations that that, you know, that guidance represents. And, you know, in, in our estimation, the seasonality this quarter in particular was kind of exactly where we thought it would be. And which is why we haven't changed, you know, that guidance. You know, we, our pattern of spending, and we've talked about this a little bit before, our pattern of spending of, of marketing money is, changes over time and year to year. And I would say that probably, you know, in thinking about this quarter, the next quarter, we were pretty quiet in the summer. We, you know, we had some spending start to pick up in September, which really didn't affect this quarter other than its cost. And, you know, and as usual, we'll spend quite a bit of our money in the full year's media budget in the current quarter that we're in. So I think all the parameters of the business ASPs were healthy. All the parameters of the business are in line with what we would have expected to see. So from our point of view, there really weren't any surprises.
spk02: Got it. Okay. And I understand you don't guide quarterly, but maybe if you can directionally give us some – guide posts around how we should think about revenue? Should that be up sequentially? Or, you know, just some details around how we should think about revenue in this current quarter?
spk04: Yeah, I mean, we stay out of the business of quarters just because of, you know, the number of, you know, moving parts and the way that revenue gets recognized. But, again, I would point to two things. One, I would point to the, you know, the seasonality factors that we've provided for the last three years, you know, last three full fiscal years, those are helpful. They even have some variability in them because we spent marketing money in different patterns in those years. And it's why we, we kind of try to point to the, to the annual number because we actually run the business that way. We, we don't, We don't really get too hung up on quarterly numbers and their exactness because we constantly shift how we're doing our promotions, including the way we price and how we're spending our media money and the timing of that. So we'll probably just stay out of the business of talking about the individual quarters because it's literally not the way we run the business.
spk02: Yep, fair enough. On Lemonade... Can you provide some details around how much of that business or those visits are done asynchronously? And if you anticipate as you move more into primary care and informing that visit with genetic data, do you think you'll move more towards a video and telephonic visit type model?
spk04: I can start with kind of how to think about information flow and then let Ann talk about the vision. So, you know, we'll have a lot more to say about overall performance of that business within the context of our total company next quarter for sure. We'll give guidance, as we've talked about, with kind of that business coming in. So much like our own business, we will not get into a lot of detailed KPIs or you know, certainly on a quarterly basis and largely not a lot of them on an annual basis. But I'll let Anne talk a little bit about kind of the vision for the product and the product environment.
spk01: Yeah, I don't have a specific breakdown on asynchronous versus non-asynchronous, but happy to – again, I think when we do have – you know, a more in-depth call, you know, for next quarter, and we want to talk more about sort of integration plans, I think that we can answer some more questions there. I think as we are envisioning a future that is focused on primary care and focused on genetics, I think that there is a great opportunity to have a lot of it continue to be asynchronous. And I think we both, you know, Paul, the whole Lemonade team, and I are very aligned with in how do you actually really deliver health care that can scale. And I think that's one of the important aspects that 23andMe has really been able to pioneer is that we've been able to show that we can deliver information to customers without having to have a health care professional. And so I think you can imagine we are thinking more and more how is it that we can deliver high-quality care at scale for a number of individuals and really have the teleconference or the video conference, the chats, others as needed and at the appropriate times. So it's definitely going to be a balance.
spk02: Very helpful. Looking forward to that call next quarter. And the last one for me, I know everyone's very excited to hear more details about P006. You mentioned you're going to kind of give more color on that program, but I was curious if you know, when you initiate the trial. I'm curious if you're willing to share any additional information about P006, how that's been progressing, and when we might actually hear more about kind of the target that's going after.
spk06: Yes, Kenneth, maybe I can take that. Happy to respond. Yeah, we continue to make really nice progress with P006. As we've communicated, we anticipate having first patients in before the end of March of next year, and We would also be planning in between now and then to be ready to talk more about the target and the antibody and the biology and why we're so excited about this. So we're looking forward to sharing that. And as I said, we continue to make very nice progress with the program.
spk02: Got it. All right. Lots to look forward to. Thanks, guys.
spk03: Your next question comes from the line of Dan Kim from Credit Suisse. Your line is now open.
spk00: Hi, this is Dan. Thanks for taking the questions. Looking ahead to the end of the fiscal year, do you plan to disclose the number of new programs and validated targets in the pipeline? And can you help set expectations for what you would like to see and sort of frame the bar of success in this area?
spk06: Steve, do you want to start and I can follow?
spk04: Yeah, I think when we disclosed information earlier this year in the SPAC process, I think we talked about doing an update once a year on kind of macro progress there. And so I think that's kind of the basic plan at this point is to just note progress as we go along annually. Great.
spk03: Thank you. Speakers, there are no further questions at this time from the phone lines. Mr. Wach, I turn the call over back to you.
spk05: Thank you very much. We have some questions that were submitted through our online portal from shareholders, and we'd like to address some of the top questions at this point. I'll read the questions, and then a member of the management team will take a shot at answering them. The first question that we have is, how do you plan on integrating Lemonade Health with 23andMe Genetics products?
spk01: Excellent question. Lemonade plays a very strategic role for us, and it plays a strategic role in helping our customers really do more. So we've learned from our customers that they get genetic information, they understand it, but they would like to integrate it more with their health and like to actually make it actionable with their healthcare. So by having Lemonade, we have the ability to really start to think about how do you really have genetics-based primary care that is going to have a heavy emphasis on prevention. And one of the first areas we will really be able to think about is pharmacogenetics and really integrating genetic information in with pharmacy.
spk05: The next question we have is, other than charging for kits, what business models has 23andMe considered, and are there any being tested or near launch?
spk01: Yes, we actually have been testing a subscription service, also going along with the theme that our customers have been very clear that they want more from 23andMe. And so 23andMe Plus is the subscription service we launched last fall that is specifically about providing additional content to our customers on a regular basis. So we think about all kinds of opportunities of how we'll be able to expand that in the future, and I think that is a key area to stay, that we'll continue to update you on as we learn and as we evolve.
spk05: The next question is, what is the most exciting thing on the horizon for 2022?
spk01: So many things coming in 2022. I think it's definitely going to be an exciting time, at least from my perspective. We have a lot coming on therapeutics. I'm very excited about CD96. I'm obviously very excited about P006, so continuing to watch the progress of both of those. Also, we're in the thick of it now with integration with Lemonade. So my enthusiasm for our 11 million plus customers is really about what are the various services we are going to be able to roll out to our customers and really be able to impact their lives.
spk05: Our next question is, what genetic research is being prioritized?
spk01: Great. Kenneth, you want to take that?
spk06: Yeah, happy to do that. I'm sorry, I was just on mute. My apologies. Yeah, so we've, you know, within our therapeutics research, we have programs across multiple therapeutic areas, including oncology, immune and inflammatory-based diseases, and then also on cardiometabolic diseases. What we've done is within those therapeutic areas, we've specifically prioritized indications or, you know, clinical disease ease, where we have power in our database to identify novel genetic signals that others are not able to identify, where we believe there's considerable unmet medical need, and where we can advance potential new therapeutic candidates to clinical proof of concept with speed, so power, need, and speed. So anyway, those are the focused therapeutic areas, and the database continues to yield new data and new insights.
spk05: Great. Our next question is a two-part question. First one is, are you currently or do you have plans to sell or license the data that you have to other BioPharm Circle research companies?
spk06: Yeah, Wade, I can take that. So, you know, our drug target discovery development and commercialization collaboration with GST is exclusive for the four-year term, and you'll recall that GST has the right to extend that exclusivity for a fifth-year term. Certainly after that expiration of exclusivity, we may well pursue collaborations as we have done in the past with other pharma companies, universities, or research institutions. And we may also consider partnering some of our programs that we have at the end of the GSK collaboration. The one other thing I would point out, though, in terms of our database is we have data beyond information for the purposes of target discovery. So we can continue, as we do today, to collaborate with other pharma partners or with academic partners outside of the areas of target discovery, even during the period of the GSK collaboration.
spk05: Great. And the second part of the question is about what you're excited about. Are there new exciting things in the research pipeline that you're excited about?
spk06: Yeah, you know, I already answered a question about P006. It's a wholly owned program from 23andMe. We identified the target for this program based on our immuno-oncology signature, which we believe predicts important genetic risk or genetic factors that drive the immune response against tumors. We have an antibody targeting this P006 and will be, you know, entering, we hope, clinical studies reasonably soon, certainly before the end of March of next year. And we're really excited to come out and talk more about the target, to talk about the antibody, to talk about the biology, So really something that I'm excited about and look forward to being able to share in the not too distant future.
spk05: Thank you. The next question is, does 23andMe plan on acquiring genetic companies moving forward?
spk01: We are definitely in the thick of it with integration with Lemonade. But at the same time, we have a big vision, and we absolutely continue to evaluate in a number of different areas where we want to build ourselves or where we potentially want to buy. So we're enthused to see the quality of various companies that are out there, and we are definitely mindful of opportunities that are out there.
spk05: The next question, how important is subscription revenue to your growth plans and what metrics around the current size and trajectory of this revenue stream can you share?
spk04: Want me to take that in?
spk01: Yes, all right, Steve, that's all you.
spk04: Okay, great. So you'll notice that we referred in our prepared remarks a couple of times to subscription as a factor in the you know, in the numbers for the quarter in particular, because it's a 100% margin business, you know, it actually does really help our margins to, you know, to continue to expand our gross margins and continue to expand. That said, as an absolute size matter relative to, you know, the company's current revenue base, it's not material enough to talk about individually, and that will become even more um, pronounced as we get, um, you know, into the era of, of consolidation of, you know, lemonade's activities into the full company, um, the top line will be bigger. And so, um, you know, we wouldn't anticipate spending a lot of time anytime soon talking about the specifics of that, but it's important, um, beyond what I just talked about on the, on the margin front, it's important as a platform to,
spk05: um for enabling what comes in the future in the way of of recurring revenue relationships um you know we now have that platform built the next question what do you think makes you stand out from other companies and what do you think will be most successful part of your business by 2025 well i think what is what's so different about 23 is the
spk01: the direct-to-consumer component of the company, that we empower individuals to get direct access to their genetic information, and we also give them that choice and transparency about participating in research. And I think what is really exciting, I mean, the reason why we started the company was really about unlocking the potential of the human genome and what can that mean for the individual as well as what does that mean for research overall. And I think we, you know, whether it's in three years or five years or 10 years, there's absolutely a better data-driven healthcare world out there that is both about how you're going to manage a health condition, but also really about helping you stay healthy. And I think genetics will play a key component of that. So I think we're very different than other companies out there in that One, we have this direct recontactable access with our customers and it's always customer first. And second, we have a very different type of data set because it is, again, it's based on your genetics. It is a size and scale that is unlike anything else. And it is, you know, has this opportunity to really go back directly to our customers and translate either into the world of therapeutics or translate into the world of helping our customers have better insights in themselves.
spk05: Our next question, can you add testing for all cancer markers?
spk01: We do not test for all cancer markers right now, but we are very proud of the two FDA authorizations that we have, one for the BRCA two BRCA mutations for breast cancer and one for hereditary colon cancer. We absolutely think about more ways that we can help our customers get access to meaningful cancer-related information. And I would say just personally, one thing I'm very proud of is because we are affordable and it's direct access, we have thousands of customers who found out that they are BRCA positive and never would have otherwise qualified for traditional screening paid for by their insurance. So again, part of the mission for 23andMe is really enabling broad access for people. So while we don't test for everything, we find that we are finding lots of individuals who otherwise never would have gotten any kind of screening.
spk05: Great. The next question relates to the partnership with GSK. The question is, what's the latest status on the drug you guys have been working on, and what are your plans to bring new transformational medicines to us as patients?
spk06: Yes, Kenneth, I can take that. Thanks again for the question. So the partnership with GSK, you know, I think it really speaks for itself. It's been very productive. In less than four years, we have one collaboration program in the clinic. That's the anti-CD96 antibody. And another that, you know, as well as our P006 program that doesn't come from the GSK collaboration that we anticipate being in the clinic before the end of March. We've had more than 40 programs come from the database and that we've been working on. Sometimes it's GSK working on those as unilateral targets on their own. Sometimes they're part of the collaboration, but ultimately advancing those to the clinic. We also spoke in our SPAC deck about the fact that we've had 18 targets come from the database which have been validated. That means they've gone through the biological and the genetic validation. That was as of the end of December 31st, 2020. So it's been very productive. The other thing I would point out, you may have seen on clinicaltrials.gov and GSK has spoken about this, they have an antibody GSK1070806, which targets IL-18. It's an antibody they've had in the clinic, I think, for two or three years now, but had been tested in a number of indications, but it wasn't clear what the right indication might be for that program. And one of the really exciting things about our database is they were able to identify a unique genetic signal, so unique to 23andMe in atopic dermatitis, also known as eczema, And they've recently posted on clinicaltrials.gov initiation of a phase one trial of that antibody in patients with atopic dermatitis. It's a forearm study proof of concept. And so I think it's not just about the target that we discover in advanced therapeutics. It's that ability and that potential to repurpose existing therapeutics to the right indications based on human genetics.
spk05: Thank you. Our last question that we have time for today is about, well, here's the question. Will 23andMe be doing extensive research about African genetics since African Americans are the main group of people who do not know where they come from?
spk01: And I'll take that last one. We, 23andMe, it's always been a priority for us to make sure that genetic information is applicable to all, to everybody. And in our earliest days, I think it was around 2010, we launched a program called Roots into the Future, where we gave away 10,000 kits to African Americans, specifically with the plans of how can we actually do replication studies and find associations and whether or not they replicate in the African American population. That was really the beginning of some of the research that we've done, and we've done a number of initiatives since that have gone into our ancestry composition features, meaning people can better understand which parts of Africa they came from, to additional research studies that are helping improve the 23andMe report experience, as well as replicating studies, as well as, you know, just research. So most recently, we actually, we did have a grant years ago from NIH looking at doing sequencing in in African American populations that has now led to a new reference base that we, you know, again, did in partnership that will enable, you know, a better analysis in African Americans for genetics research. So it's definitely a priority for us, I would say, for all communities and everybody out there to make sure that genetic research is applicable to them and that 23andMe is a product that serves everybody.
spk05: Thanks, and with that, we're done with our Q&A session, and I'll turn it over to you to wrap it up.
spk01: Great. As always, it is a pleasure to hear from our customers. It's a pleasure to hear from our investors, and we enjoy updating you about how we're doing, and we look forward to future calls. Thank you.
spk03: This concludes. This concludes today's conference call. Thank you for participating and have a wonderful day. You may all disconnect.
Disclaimer

This conference call transcript was computer generated and almost certianly contains errors. This transcript is provided for information purposes only.EarningsCall, LLC makes no representation about the accuracy of the aforementioned transcript, and you are cautioned not to place undue reliance on the information provided by the transcript.

Q2ME 2022

-

-