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spk01: Good day and thank you for standing by. Welcome to the 23andMe's fiscal year 2023 second quarter earnings conference call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during this session, you will need to press star 1-1 on your telephone. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your host today, Wade Walks, Vice President, Investor Relations. Please go ahead.
spk02: Thank you.
spk09: 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. The 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 Ann Wojcicki, our Chief Executive Officer and Co-Founder, and Josel Savage, our interim chief financial officer and accounting officer. Kenneth Hillen, our chief therapeutics officer, will join us for Q&A. And now I'd like to come and call over to Anne.
spk04: Thank you, Wade. In this last quarter, we continue to make progress on building a foundation to deliver personalized healthcare to consumers. Our genetic database is now at 13.4 million genotype customers. It is the world's largest recontactable database for genetic research, which makes us best positioned to unlock the potential of the human genome to treat and prevent disease. We received FDA clearance to provide interpretive drug information for simvastatin, a commonly prescribed cholesterol medication. With this clearance, we now have three FDA-cleared pharmacogenetics reports. These reports are some of our most highly actionable genetic reports. They provide information on how individuals may process certain commonly prescribed medications based on their genetics. They can help individuals working together with their healthcare providers to determine medications and dosing that will be most effective for them. For example, we know that in certain ethnicities, up to 38% of people have a genetic variant, which can be identified in this report that increases the risk of certain adverse events associated with simvastatin. By providing information on how people's genetics may influence their response to this commonly prescribed medication, we are furthering the potential to shift healthcare towards personalized healthcare. We also added three new genetic risk reports for our 23andMe Plus subscribers on anxiety, fibromyalgia, and seasonal allergies. In total, we have over 60 health reports in our personal genome service. 23andMe is the only company with multiple FDA authorizations for direct-to-consumer genetic health risks. We are the only company the FDA has authorized to provide, without a physician involvement, genetic cancer risk reports and medication insights, similar to the one I just mentioned. These personalized reports help people access and understand many of their genetic health risks and predispositions. However, we know that this is just the beginning of efforts to help people benefit from this information. In this regard, we continue to work on building a genetically informed health service that focuses on prevention and wellness. We believe that the integration of genetic health information with telehealth and digital pharmacy services has the potential to revolutionize the diagnosis, prevention, and treatment of human disease. We further believe that 23andMe is best positioned to accomplish this at scale with a direct-to-consumer service. To help us achieve this goal, we recently brought on board Dan Chu as Chief Product Officer. Dan brings over two decades of experience in product management, design, and strategy. as well as expertise with navigating complex and highly regulated industries. Dan joins us from Waymo, where he served as Chief Product Officer and launched the world's first commercial fully autonomous ride-hailing service. Before Waymo, Dan led the Google Maps platform product team. Turning to our therapeutics programs, we continue to use our research platform to advance our pipeline of more than 50 targets. Therapeutic antibodies of two of our genetically validated targets are currently in phase one clinical trials. Today, we announce details on the next stage of the phase one study for our wholly owned 23andMe 610 program targeting CD200R1 in cancer patients. The trials in progress poster being presented this week at the Society of Immunotherapy of Cancers annual meeting provides details on the indications for the expansion phase of the study. These include specific tumor indications for 23 and meeting extent will be targeted for anti-cancer activity. These indications are listed based on preclinical and published data of the activity and the spread of target, CD200R1, and its ligand, CD200, together with immune cell and two tumor characteristics that have the potential to increase the likelihood of a response to CD200R1 inhibition. The progress we are making with our therapeutics programs demonstrates the potential promise of our drug discovery rooted in human genetics using the world's largest crowd-sourced platform for genetic research. I'm pleased with the progress of our consumer and therapeutic teams have made this last quarter, and I look forward and enhanced personalized health offering we are working to deliver for our customers. And with that, I'll turn the call over to Joe to review our financial results for the quarter.
spk02: Thanks, Anne.
spk08: I'm pleased to report that we remain on track to meet our fiscal 2023 guidance following a second quarter with positive revenue growth and results with other financial metrics that were in line with our expectations. Overall, we are well positioned to continue to advance on our goals, both in our consumer segment and in our therapeutic efforts. Our revenue for the three and six months ended September 30, 2022, was $76 million and $140 million, respectively, representing an increase of 37% and 22%, respectively, over the same periods in the prior year. Second quarter and six-month revenue growth was primarily due to the addition of telehealth revenue from the acquisition of Lemonade Health last November, higher revenue in our research services segment, and continued growth in our subscription service. The increase in the research services revenue was primarily driven from increased revenue from GSK and partially from non-recurring payments of $4 million from other partners. These increases were partially offset by lower personal genome service revenue. Looking at the composition of our revenue, consumer services revenue represented approximately 75% and 80%, respectively, of total revenue for the three and six months ended September 30, 2022. And research services revenue, which was primarily derived from the GSK collaboration, accounted for approximately 25% of total revenue in the three-month period and 20% in the six-month period. Our gross profit for the three and six-month end of September 30, 2022, was $38 million and $64 million, respectively, representing a 37% and 9% increase over the same periods in the prior year. The three- and six-month year-over-year increase was driven primarily by the previously discussed increase in revenue, offset partially by lower margin from the telehealth revenues, as well as increased supply chain logistics and labor costs. Operating expenses for the three and six months end at September 30, 2022, were $106 million and $221 million, respectively, compared to $74 million and $147 million for the same periods in the prior year. The increases in operating expenses for the three and six months periods were primarily attributable to increased labor costs and the addition of sales and marketing expenses from the previously acquired telehealth business. These increases were partially offset by lower R&D expenses due to the decreased spending on the GSK 608 program targeting CD96 following the company's election to adopt the royalty option instead of continuing to share in development costs. Looking at the bottom line, Net loss for the three and six months ended September 30th, 2022 was 66 million and 156 million, respectively, compared to net losses for the same periods in the prior year of 17 million and 59 million. The increases in net loss for the three and six month periods were primarily driven by a benefit from changes in the fair value of warrant liabilities of 30 million for the three months ended September 30th, 2021, and by the previously noted higher operating expenses in the current period. These were partially offset by higher revenue. Next, let's look at our adjusted EBITDA. For details about how we define adjusted EBITDA, as well as the corresponding reconciliations to GAAP, please see our earnings press release. Total adjusted EBITDA for the three and six months ended September 30th, 2022, was a deficit of $30 million and $79 million compared to a deficit for the same periods in the prior year of $30 million and $57 million, respectively. The increase in adjusted EBITDA deficit for the six-month period was driven primarily by the increase in operating expenses mentioned earlier and offset by increased revenue. We ended the quarter with $411 million in cash and cash equivalents, compared to $553 million as of March 31, 2022. We received a $50 million payment from GSK after the close of the second quarter, so this payment will not be reflected on our balance sheet or statement of cash flows until the third quarter of our fiscal year. Our second quarter results continue to be in line with our expectations, and thus, we are reconfirming our previous full year 2023 guidance. As a reminder, our full year guidance included revenue in the range of $260 to $280 million, a net loss in the range of $350 to $370 million, and adjusted EBITDA deficit of $195 to $215 million. And now I'll turn the call back over to Anne.
spk04: Thank you, Joe. We continue to make significant strides in our mission to help people access, understand, and benefit from the human genome. We've now added another FDA approval for a report that can provide critical information on how a person's genetics can affect the processing of Simvastin, one of the most commonly prescribed medications for controlling cholesterol. We also continue to advance our therapeutics efforts as demonstrated by the announcement this week regarding our plans for the expansion phase of the 23andMe 610 Phase 1 study. We are excited that that program has advanced to this stage and eagerly await the results of the study in cancer patients. I look forward to telling you more this summer about the progress we are making in our efforts with genetics-based healthcare and therapeutics. Now let's open up for questions.
spk05: Before that, actually, I'm told that there was some distortion with the audio when I was speaking about our therapeutics programs earlier in the call. So I just want to repeat what I said for those of you who may not have heard it clearly. I was speaking about our trials in progress poster being presented this week at the Society for Immunotherapy of Cancer's annual meeting that provides details on the indications for the expansion phase of the study. These indications include specific tumor indications where 23andMe 610 will be tested for anti-cancer activity. These indications were selected based on preclinical and published data of the activity and expression of the target, CD200R1, and its ligand, CD200, together with immune cell and tumor characteristics that have the potential to increase the likelihood of a response to CD200R1 inhibition. So with that, now I can really open it up for questions.
spk01: Thank you. If you have a question at this time, please press star one one on your telephone. One moment while we compile the Q&A roster. And our first question comes from the line of Tiago Favre with Credit Suisse. Your line is open. Please go ahead.
spk00: Hey, thanks for taking the question. Just two quick ones for me. So the first one is on 610. And again, knowing that the expansion cohorts are likely going to be in indications where there's a higher likelihood of seeing activity, I'm curious how your framing and how investors should think about the dose escalation portion versus the expansion portion in terms of monotherapy activity or any other indicative biomarkers that you'll be measuring across those two stages. And again, if you could provide... any progress on where you are on this study. I know that that's a little trickier. And the second one is just any new updates on 23andMe Plus. I know there was a relatively smaller portion of the business, but I'm curious how the membership is growing, if there are any metrics that might be worth following more closely over time and how that's expected to grow. Thank you.
spk05: So, for the first question, let me hand it over to Kenneth.
spk07: Yeah, thanks, Anne. I'm hoping everybody can hear me okay. Kenneth here. Yes, thanks for the question. Yeah, we continue to make good progress on the dose escalation phase of the study and are pleased to make the announcement this week with the press release and then with the poster presentation at CITSE on the Phase 1b part of that study. We will be obviously selecting a dose when we get to the end of the dose escalation, moving that dose forward as a monotherapy to assess activity of 610 in five tumor cohorts, so specifically clear cell renal cell carcinoma, epithelial ovarian cancers, neuroendocrine cancers, which will include small cell lung cancer, tumors that have either microsatellite instability high or high tumor burden mutations, TMBH, and then a cohort of adolescents with locally advanced unresectable or metastatic malignancies. So, as I said, we will move forward with the dose escalation. We'll select the dose, go forward as a monotherapy, and we'll continue to update as we make progress there.
spk05: Thank you for your second question on 23 Meets Plus. We do not update the subscription numbers, except for annually. So we'll be updating that, obviously, in a couple quarters then. So in terms of the, you know, genetic checkup and other areas that we have been talking about, we are, again, we hired Dan Chu, our chief product officer, excited about the areas that everyone's moving forward with, but planning to update more in-depth the street sometime in the summer.
spk00: Thank you.
spk01: Thank you. And one moment for our next question. And our next question comes from the line of Steven Mott with Cowan. Your line is open. Please go ahead.
spk06: Oh, great. Thanks, operator. And congrats on the quarter. So, a follow-up question on ME610. So, Kenneth, yeah, you mentioned, you know, the five tumor-specific expansion cohorts. Is the 15 patients per cohort, is that powered enough to get some sense of efficacy, or is this more of an exploratory effort to guide the Phase II study? And then a follow-up question, is that phase two study, is that also going to be in multiple cancer cohorts or in a single cancer?
spk07: Yeah, so thanks for the question. I can obviously take that, Steve. So thanks. In terms of the powering, we have pre-specified criteria for, you know, what we would be looking for from each of these cohorts for us to make a decision about continuing to move forward into either you know, a phase two study or potentially depending on what we observed into a registrational study. So we haven't shared that information, but we certainly have internally pre-specified criteria for decision making purposes. Exactly what would we do in phase two that will really be dependent on what we observe in the phase one B and also the phase one study that's currently ongoing. We also have a biomarker program. You know, we have some specific hypothesis that we're testing in each of these different groups. And so I think that could also help to inform future decision making. So in terms of the phase two study, we haven't made any predictions or comments on what that might be. Clearly, with the signal seeking we're doing in phase 1B, we think these are tumors, as you mentioned, with a potential for, you know, more likely to respond to therapy that targets a specific pathway. In addition, we also will be considering in the future not just monotherapy, but potentially combination therapy as well. So, you know, we're excited where we are. It's still early stages on the program, but we continue to make very good progress and have high investigator engagement. So, for the moment, that's really all I can say.
spk06: Okay, great. Thanks, Kenneth. And then a follow-up question on the 23andMe Plus. You know, and I appreciate you're only giving annual questions. numbers here, but could you give us any sense, is the growth slowing from or staying the same versus end of fiscal year 2021 versus end of fiscal year 2022? Could you give us any color on the growth? Is this more of the early adopters of your existing customers switching over to 23andMe Plus, or is this new new customers that are ordering the kit and the subscription?
spk05: Yeah, I'm actually going to hand you to Joe to answer some of those.
spk08: Great. Thank you, Anne. We are continuing to see, you know, adoption of our 23andMe Plus program and generating additional revenue, recurring revenue for us. So we're, you know, so excited about the program and we'll be providing more detail, you know, in our fourth quarter results.
spk06: Okay. Yeah, I appreciate that. And then maybe one last question for you, Joe. On the increased research services revenue, I know you said there was a contribution from GSK and also some non-recurring payments, but how should we think about the GSK revenue going forward as we get closer to their exclusivity expiration mid-next year? Is that expected to increase? like we saw this quarter, or is it going to wind down or, you know, any sort of call you can give us would be great. Thanks. Sure.
spk08: The GSK exclusivity ends in July of next year, and we're just evaluating all of our options right now of additional partnerships that we'll be engaging in, and we're providing more information, you know, on those partnerships and upcoming calls.
spk05: Stephen, I can just emphasize there, that's, I mean, we, it's an active area for us to be pursuing. Like we have this opportunity now to look beyond, um, GSK partnerships and there's a lot of other, you know, there's no shortage of interesting opportunities with the database that we're exploring. So, um, nothing specific to really guide you on, but, um, that, that, you know, those payments will go away. Um, and we are definitely looking at ways to sort of maximize value long-term for the company.
spk06: Okay. Appreciate the color.
spk02: Thank you.
spk01: Thank you, and I'm showing no further questions on the phone lines at this time.
spk09: Thank you. We have a few questions from investors through our Q&A platform that we use through SAIT Technologies. And so I'm going to ask those top questions that we got on that platform for the management team to answer. The first question is, what is the future of 23andMe?
spk05: The future of 23andMe. Well, that's a very broad question and always enthused to talk broadly about the future. Two aspects. One, absolutely enthused about the continued evolution of direct access healthcare and a genomic-driven primary preventative world. So this ability for somebody to get care that is affordable, that is easily accessible, and integrates genetic information and delivers true personalized care. And I look at that from the whole angle of prevention as well as the angle of treatment and management going forward. Second, there is a spectacular opportunity with really pioneering and innovating on how we are developing therapeutics. And having a genetics-driven approach is something we've talked extensively about, about the likelihood of success increases when you have a genetic foundation. And as the database continues to grow and as our therapeutic team continues to execute, we look forward to bringing more and more of those programs forward and completing the loop ultimately for our customers that they're able to access, understand, and then truly benefit from the human genome.
spk09: Thanks, Anne. The second question is, you've recently added capabilities with the acquisition of Lemonade. What are your plans to translate this into shareholder value?
spk05: Absolutely. Well, the platform with Lemonade brings the ability for us to have care, meaning access to clinicians, to nurse practitioners, and to health care providers, as well as the ability for us to have access to pharmacies. So one thing that was really clear is our customers are learning about their genetic information, and then they have questions, and they want follow-up. And the platform that we get from Lemonade allows us to have a complete loop where our customers now can answer the questions, and they can get access to the care that they're seeking. And I point to pharmacogenomics as one of those key examples where a lot of Our customers now, we have three FDA authorizations related to pharmacogenomics, and we have this ability to help our customers get precision medicine, but it is not commonly integrated in the existing pharmacy system or with most practitioners. So now we're going to have this ability to really help our customers benefit from that information and integrate that into our pharmacy.
spk03: So we absolutely see lots of opportunities for returning shareholder value with the acquisition to limit.
spk09: All right, the next question is, with the forecasted economic challenges ahead and the possibility of a recession, what steps are you taking to ensure the company's resiliency and how do you balance this with growth and profits?
spk08: I'll hand that to Joe. Thank you, Ann. We're in a strong position with over $411 million in cash on the balance sheet as of September 30th, plus the additional $50 million that we received in October for the fifth year GSK partnership. This will just really allow us to have the flexibility to navigate the macroeconomic and geopolitical challenges that we're expecting to face in the near term. We'll continue to be really vigilant about how we really monitor our expenses and really look at how we're allocating capital so we can find the smartest ways that we can have to invest our capital and build the best product for consumers and shareholders in the long term.
spk03: Thanks, Joe.
spk09: The next question is, from what I've seen, 23andMe holds direct-to-consumer as its highest sector to make profit. Do you ever see 23andMe's drug research sector surpassing direct-to-consumer as the largest profit-making sector?
spk05: I'll take that one. I see there's a huge opportunity with both the consumer side of the business as well as the research and the therapeutic side of the business. And I think realistically, with therapeutics, it's going to take many years for us to continue to work on these therapies and bring them to profitability. The consumer business has shorter-term opportunities to think about how we are going to drive that to make that a near-term profitable business. And the size and opportunities for me are significant in both areas. So I don't see, you know, I think there might be times where one is bigger than the other, but I see both consumer and therapeutics as being big opportunities for our shareholders and for the company.
spk09: Thanks, Anne. The next question is, does 23andMe sell or otherwise disclose data to governments?
spk05: Absolutely, we do not sell our data to governments. You know, on the premise of 23andMe is about consumers, you know, empowering our consumers with control and transparency about how we are using the data. As we've mentioned, 85% of our customers opt in for research. They are allowed to download their data on their own. We empower them with their data. They have the right to download it. But 23andMe is not working with disclosing data to any government, and we do not plan to.
spk03: 23andMe is focused on consumer empowerment and on our research mission.
spk09: Thanks, Anne. The next one is, what additional features and products are you exploring or considering adding to plus subscribers, that's 23andMe plus subscribers, to stay?
spk05: Well, I mean, 23andMe Foundational to 23andMe is our research. And one of the things that we can do with our research is make discoveries from our own database that are proprietary to 23andMe. And you already see we have a number of 23andMe Plus reports that came out of our database. So I think what's going to be incredibly unique that 23andMe will do in the future is that integration of our own proprietary data, the combination of Lemonade services, and the ability for us to engage directly with the consumer in an affordable, accessible way. So we absolutely look at all kinds of features that can come specifically from our ability to manage and analyze large data sets. Also, there's a whole new world coming of additional data sets from Apple Watch and medical records, et cetera. So we have this opportunity to develop really interesting data for our customers, and the integration then with Lemonade and Care and Pharmacy allows us to create an incredibly unique service.
spk09: Thanks, Ann. The next question is, will 23andMe need to raise capital in the next three years?
spk05: I'll give that to Joe.
spk08: Thank you, Ann. I would point you to two things that we disclosed. First, we disclosed that at the end of the second quarter, we had over $411 million in cash. Plus, we received the $50 million for the third year GSK payment in October. Second, we then reaffirmed our guidance on our adjusted EBITDA of a deficit of $195 million to $215 million, which is our proxy for operating cash flow. This will give you a sense of what our cash runway is, and it's a reasonably good period of time that will give us the ability to execute a lot on the goals on the consumer side and with our portfolio of therapeutics. With that said, we'll continue to look at the markets and be opportunistic and look at and evaluate our options going forward.
spk09: Thanks, Joe. The next question is, what part of the business do you think is being ignored, I think is being ignored by Wall Street, that has more upside potential than Wall Street is giving it?
spk05: That's an interesting question in this kind of macro environment that we have going on right now, because I think a lot of things get missed when you have this kind of global economy concerns. So I would say people still don't understand many aspects of 23andMe, and I think that the direct-to-consumer side and our ability to really engage with consumers and bring them back, keep them engaged with the genetic information, the research that comes with that is not a well-understood distinction. I think a lot of people are still surprised to hear that we have a therapeutics group and that we actually do the therapeutics ourselves, that it's not just that it's a research and we hand it over to GSK. that I have over 100 incredibly talented people in the therapeutics world working in real labs with real pipettes and making progress and doing the real work of translating from a basic discovery into something that is now very proudly in human trials. So I would say many aspects of 23 are misunderstood, but I would say, you know, one, on the consumer side, that ability for us to engage, recontact, that direct ability to, you know, communicate with an individual and that value of that. And I think second, the fact that we have an outstanding therapeutics team that is doing that translation and development work ourselves
spk03: is often totally unknown to many investors.
spk09: Thanks, Anne. The next question is, how will 23andMe profit from novel drug research and development?
spk04: Kenneth, that sounds like you.
spk07: Thanks, Anne. Happy to take that. Thanks, Wade. You know, Luke, our goal as we've spoken about is to advance portfolio of therapeutics programs based on targets that have human genetic validation, something that we think is incredibly important for increasing the overall probability of technical success. So it's really grounded, first of all, in human genetics. The ways that you can generate profits from that, we have the opportunity with royalty revenues from our GSK partnership. And as you know, we've spoken publicly about the fact that we've initiated more than 50 programs from the database with GSK. So hopefully over time, if some of those programs are successful, we'll have the opportunity to have royalty revenues coming back to the business. The second thing with programs like 23Me610 and future products, We have the potential to bring those forwards and commercialize either at 23andMe or, of course, in partnership with others. And so that would be the opportunity for product revenues. And then thirdly, in terms of future partnerships, I think with GSK and with the productivity of targets coming from the database, we've really shown that 23andMe is a partner of choice for the pharmaceutical industry. And so we think that these partnerships could also bring in significant revenues. Those could be target discovery revenues, could be assets that we license out to pharma partners in the future, or could be, for example, if somebody wanted to partner with us in the future with a program like 23andMe 610. So there's absolutely a number of ways that the therapeutics business can generate significant revenues and long-term value for the business that 23andMe
spk09: Thank you, Kenneth. And the last question that we'll take today from investors is, would you consider more mutually beneficial deals with other healthcare companies?
spk05: Absolutely. We are actively discussing, engaging, and talking to groups out there. I mean, we feel like we have... we're all about. We want to maximize our customers' intentions of making their genetic information useful and beneficial to the world. And in order to do that, we have to do partnerships. We need to help understand how we can integrate genetic information more and more into the medical world, how we can make sure that we're maximizing the value of research that our customers have entrusted us to do, and that we are really doing all we can to really benefit from the human genome and the database that we are managing. absolutely think about additional deals. And with the end of GSA coming up in July, it is top priority for us to make sure that we are going to keep thinking about strategic partnerships so that we can, again, maximize that value.
spk09: Thanks, Anne. And with that, that's our last question. I'll leave it to you, Anne, to wrap up the call.
spk05: Thank you. We look forward to hearing from you all again next quarter and probably many of you in between. Thank you. Enjoy the day.
spk01: This concludes today's conference. Thank you for participating. You may now disconnect.
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