23andMe Holding Co. (ME) 2024 Q1 法說會逐字稿

Hello, and welcome to 23andME Fiscal Year 2024 First 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 Katie Watson, Vice President of Communications at 23andMe to lead off the call. Thank you. Please go ahead.

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 first 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 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 Interim Chief Financial and Accounting Officer; Kenneth Hillan, our Chief Therapeutics Officer, will join us for Q&A.

I'd now like to turn the call over to Anne.

Thank you, Katie. During our first fiscal quarter of 2024, we continue to make progress on advancing our therapeutics business and executing on our consumer strategy by providing additional customer value and expanding our product margins. 23andMe concluded the exclusive drug discovery phase of our GSK collaboration in July and we now look forward to opportunities to work broadly with a number of therapeutics partners to enable genetic-based drug discovery.

The collaboration was a large success combining the unique skills, resources and scientific expertise of both companies to generate more than 50 therapeutic programs. We will continue to advance a number of ongoing programs, both collaboratively and independently. 23andMe is now focused on partnering with multiple therapeutics companies for target discovery. During the GSK partnership, we validated the enormous potential for 23andMe to aid with therapeutic discovery and we feel confident in our ability to work both independently and with a number of partners going forward.

We are now actively pursuing new opportunities with pharmaceutical and biotech companies. Details on future collaborations will be shared as available.

With the end of our GSK drug discovery period, it was important for the company to reassess our overall therapeutic strategy and resourcing. Over the last 5 years, we have built a large infrastructure to support the work of the collaboration and we recognize the need to rightsize and realign the business to set us up for long-term success. Based on this, today, we significantly restructured our therapeutics organization, which included a reduction in workforce. 71 employees or nearly 50% of our therapeutics organization were impacted. To remind our investors, in June, we announced that we reduced the size of the consumer and G&A team by 9%. Overall, we have reduced head count by nearly 200 people since April 1, 2023.

We have a clear and focused plan for the therapeutics business, one that will enable us to focus in 2 areas where we believe our data insights provide us with the greatest strategic advantage. The first is to focus on continuing to advance our wholly-owned immuno-oncology assets. We continue to be pleased with the progress of patient enrollment in the Phase IIa portion of our Phase I/IIa clinical trial for 23ME-00610 and hope to share additional scientific information on the program at a medical conference later this calendar year.

We are also excited to announce today that we are progressing a second I/O antibody asset, one that targets solid tumors through a novel mechanism that enhances natural killer cell mediated antitumor activity. We intend to provide an update on this program at a later date and continue to explore various options, including potential partnerships.

The second area is to tailor the therapeutics discovery organization to focus on the immunology and inflammation therapeutic area. We are excited about the strength and breadth of our data in immunology and inflammatory diseases and are looking to position a number of our leading immunology therapeutics programs to advance them towards the clinic. A smaller, more focused therapeutics organization allows us to reduce our cash burn and provide the overall business with a longer cash runway.

In addition, effective today, Kenneth Hillan will be stepping down as Chief Therapeutics Officer with the intention of retiring from 23andMe on February 8. He will continue to provide support through the transition. I'm pleased to announce that Bill Richards will be stepping up to lead our discovery organization as Head of Therapeutics Discovery and Jennifer Lowe will continue to serve as Head of Therapeutics Development as we advance our pipeline. Both will be reporting directly to me.

Shifting to our consumer business. We remain focused on increasing product margins and delivering long-term customer value. In May 2023, we increased the price of our 23andMe+ subscription for new members and we are seeing positive results. Last month, we also increased the price of our PGS kits. These updates are part of our ongoing strategy to improve product margins through higher average selling prices and marketing efficiency.

We continue to grow our customer base and expand our unique crowd source platform of genetic and phenotypic data contributed by our engaged customers. This past quarter, we added to the value of our 23andMe+ subscription by launching 3 new polygenic risk score reports for depression, lupus and panic attacks. We now provide subscribers with 38 reports on important conditions that have an impact on millions of customers. We remain focused on delivering member exclusive premium insights and features that allow our subscribers to take action to improve their overall health.

With Lemonade, we offer pharmacy and medical services in 50 states and continue to meet the demand of customers looking for help with ED, hair loss, mental health and other conditions. Lemonade is a key part of our future strategy that integrates 23andMe genetic information with medical services, allowing customers to take actionable next steps.

Over the past quarter, we also added finer ancestry composition details for our PGS customers, including indigenous American and indigenous Caribbean populations. Our ancestry service now offers ancestry composition for 2,500 geographic regions.

Last week, Science Magazine featured a cover story on groundbreaking research led by our 23andMe research team, along with collaborators at Harvard and the Smithsonian on ancient DNA collected from the Catoctin Furnace site in Maryland where enslaved and free African-Americans labored in the 18th and 19th centuries.

Using the ancient DNA and the 23andMe database, 23andMe and Harvard researchers were able to find connections between the Catoctin individuals and more than 40,000 of their living relatives. This research demonstrates the power of DNA to fill in gaps previously erased by atrocities like the slave trade and the benefit to living individuals to learn of potential connections to their past relative.

In addition, this past quarter, our research service group launched a sickle cell carrier status awareness program with Morehouse School of Medicine, Sickle Cell Foundation of Georgia, aiming to increase access to information on sickle cell carrier status and offer resources to individuals with sickle cell trait and sickle cell disease.

We would be remiss not to talk about AI, large language models and our strategy at 23andMe. We are well-positioned to capitalize on AI advancements given our unique database of human genetic and health information. 23andMe has the largest recontactable database of human genetic data with self-reported genotypes with over 14 million customers and growing annually. We believe AI is going to play a significant role in the future for both the consumer and therapeutics businesses. At 23andMe, we have always recognized that genetic data serves as the cornerstone for a deep and meaningful understanding of health. Our growing database has reached a scale that can truly empower emerging AI models.

In the same way that we led the charge in large-scale consumer genetic testing, we are now positioned to bring AI to bear into health care and research. We see opportunities in uncovering completely new patterns and relationships that can help prevent, diagnose or treat a range of conditions in making genetics and preventative health far more accessible and scalable to our customers through the application of large language models.

And with that, I'll turn the call over to Joe to review our financial results for the quarter.

Thanks, Anne. Our first quarter of fiscal year '24 was in line with our guidance. We have also made headway on improving our adjusted EBITDA deficit for our consumer and research services and therapeutic segments through margin and operating expense discipline, which we expect to continue during fiscal year 2024. We increased our prices of our PGS kits and subscriptions. And to date, these have been accretive to margin.

Our revenue for the 3 months ended June 30, 2023, was $61 million, representing a decrease of 6% over the same period in the prior year. The year-over-year decrease in revenue was primarily due to our focus on driving improved product margins through higher average selling prices and marketing efficiency, resulting in lower overall volume of PGS kits and telehealth orders. These decreases were partially offset by continued growth in our subscription services and GSK's election to extend its exclusive discovery for a fifth year, which provides greater revenue than prior years.

Looking at the composition of our revenue, consumer services revenue represented approximately 78% of total revenue for the 3 months ended June 30, 2023 and research services revenue, which was primarily derived from the GSK collaboration, accounted for approximately 22% of total revenue for the same period. Our gross profit for the 3-month period ended June 30, 2023, was $31 million, representing a 20% increase over the same period in the prior year. The increase in the first quarter gross profit was driven primarily by the increase in research services revenue, subscription services revenue and improved PGS kit selling prices mentioned previously.

Operating expenses for the 3 months ended June 30, 2023, were $140 million compared to $115 million for the same period in the prior year. The increase in the first quarter operating expenses was primarily driven by a $22 million noncash stock-based compensation expense associated in connection with the departure of an employee with an accelerated vesting of an equity grant under the terms of our relinquishment agreement, along with continued investment in therapeutics portfolio advancement, partially offset by reductions in marketing, advertising spend aimed to improve advertising efficiency as noted previously.

Looking at the bottom line, net loss for the 3 months ended June 30, 2023, was $105 million compared to net loss for the same period in the prior year of $90 million. The increase in first quarter net loss was driven mainly by the higher operating expenses mentioned previously, partially offset by gross margin improvements and an increase in interest income from cash held in money market funds.

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 3 months ended June 30, 2023, was $15 million, flat to the same period in the prior year. We ended the quarter with $314 million in cash and cash equivalents compared to $387 million as of March 31, 2023.

As always, we are actively evaluating our use of capital for both our consumer and therapeutic businesses, including responsibly opting in or out of therapeutic programs based on opportunity potential and timing of returns as appropriate given market conditions.

Now turning to our guidance. The company's full fiscal 2024 guidance is based on a conservative approach, recognizing the current uncertainties in the general economy and financial markets. Within the existing consumer businesses of PGS and telehealth, the company is prioritizing the minimization of cash burn and margin expansion for those areas of the business expected to drive future growth, which include the 23andMe+ subscription services and therapeutics. The company plans to focus on more strategically and financially valuable allocation of our capital and invest appropriately. Given the company's shift in focus to higher margins as well as the end of the target discovery term of the GSK collaboration, the company does not foresee meaningful revenue contribution from these areas of consumer in fiscal 2024.

Within the first quarter's results behind us, the company is adjusting its full year guidance for fiscal 2024, which ends on March 31, 2024. Revenue guidance for fiscal year 2024 is reaffirmed to be in the range of $255 million to $275 million and more likely to come in the lower end of that range with net loss improving to an updated range of $325 million to $345 million net loss.

Full year adjusted EBITDA deficit is now projected to improve to be in the range of $160 million to $180 million deficit for fiscal year 2024. This updated guidance is a result of us continuing to focus on margin growth through adding value to our products, while at the same time, reducing our cost structure.

The adjusted EBITDA guidance assumes the following that we will continue to advance our key therapeutic assets and that no additional revenue is currently included from new strategic partnerships. Also, a reminder that adjusted EBITDA is our best proxy for cash burn.

And now I'll turn the call back over to Anne.

Thank you, Joe. We remain optimistic heading into the rest of the fiscal year in our ability to execute on the consumer business, advance our current therapeutic pipeline and take advantage of exciting new opportunities in drug development.

With that, let's open it up for questions.

(Operator Instructions) Our first question comes from David Lebowitz with Citi.

I'm on for Daniel Grosslight. First question, with respect to Prime Day in July, did -- was there any adaptation or change in your marketing strategy versus prior Prime Days?

David, we appreciate the interest. Today, we're not planning to talk about Prime Day as it occurred in July, which is part of our second fiscal quarter. We can confirm that the results of the recent Prime Day are reflected in our updated guidance for the year.

Got it. Also, given the recent price increase, has there been any churn in subscriptions?

To-date, we have not seen any churn in subscriptions. We increased the prices for new subscribers and that has been consistent with our projections.

Got it. And then could you just update us as to the status of the Lemonade and 23andMe app, specifically the rollout relating to primary care?

Yes. I'll jump in a little bit just with the app. The app is absolutely something that we deprecated and something that we definitely think about how we're going to integrate the entire Lemonade experience into 23andMe in the future. So again, just to reiterate, the purpose -- the reason why we bought Lemonade was to be able to enhance more and more the demand that we see for comprehensive genomic offerings.

So there's a number of services, obviously, that lemonade delivers. ED, hair loss, dermatology that we are continuing. But what I see is that strategic long-term vision is the ability for us to have the 23andMe experience, a comprehensive genomic experience and really help people have pharmacogenomics, understand the genetics and what to do with their care and really be able to have a partnership with those customers long-term to help them get the best value from their genomic information.

So absolutely something that we are continuing to work on. Joe, what else were you going to say?

I think that covers it, Anne.

And we have a question coming from Gaurav Goparaju with Berenberg Capital Markets.

Just a couple for me. On capital allocation strategy in therapeutics business specifically, given the current macro climate, are you prioritizing later-stage programs more? Or are you able to still focus on newer, earlier discovery stage programs as well?

Kenneth, do you want to take that?

Yes, happy to do that. Yes, we absolutely prioritize our therapeutics business into 2 areas where we feel that we have the greater strategic advantage. The first is very much on those most advanced I/O program. So we've talked before about P006 that's currently in its Phase II study. That really is our top priority. And then as Anne shared today, we have a new program that we're excited about that is a potential first-in-class program with a differentiated mechanism of action also an antibody for immuno-oncology. So that's priority area 1.

The second priority area is in immunology and inflammation, so I&I. And as we've gone through the restructuring, the recent restructuring therapeutics, that's going to be our primary area of focus. And we've essentially deprioritized all other efforts in discovery. And so yes, really trim down and focus the organization.

Got it. And then just one quick follow-up. Pending favorable Phase II data on 00610, do you plan to out-license the program for later clinical development? Or are you prepared to take it through commercialization internally?

Yes, I can take that. And Anne, feel free to add anything you'd like. We've always said for our programs, particularly those lead programs, that we see them as providing opportunities to partner with pharma companies. That's because we believe in immuno-oncology. Pharma partners actually have the ability to maximize the total value of their asset given their global reach and their ability to perform combination studies, which, as you know, are really important in immuno-oncology.

So our strategy there would be to look for partnership opportunities. As you will remember, Reza Afkhami recently joined us as our Head of Corporate Development and is leading those discussions with those I/O programs.

Now I'll turn it over to Katie for any further questions.

Thank you. We have a few questions from investors that came in through our Say Technologies Q&A platform. I'm now going to ask the management team to address the top questions that we received through the platform. The first question is, when does the exclusive deal with GSK end and what new partners or deals can you announce now?

So I can take that and then I can have Kenneth jump in some as well. So the GSK collaboration ended in July and it is a collaboration that has many programs that are continuing to mature. So that collaboration, you can imagine, will continue in a different type of form. We will not be doing novel discovery anymore, but we will be continuing to support the programs out of there.

What's really exciting for me in the post-GSK world is the explosion of interest in genomic-based discovery. So there are lots of biotechs, lots of pharma companies that now really see the opportunity with having genetics as a fundamental part of their discovery engine. And what we've really been able to prove out with GSK during this collaboration is the incredible productivity that we can get from our database. So we are incredibly adept and capable with target discovery and leading that through to novel programs.

So we're focusing really on those types of collaborations, data partnerships as well as research discovery partnerships in specific phenotypes. But we see a real demand now for access to the 23andMe database for target discovery. Kenneth, anything to add?

No, Anne. I think that's a great summary. Thanks.

Great. The next question is, when do you expect increased revenue from the maturation of the pharmaceutical and therapeutics pipeline?

I can take that, Katie. Thank you. We are pursuing revenue-generating collaboration with third parties as well as advancing our wholly-owned therapeutics programs. We're also focused on non-exclusive database collaborations as Anne was just referencing earlier and other partnerships for drug discovery with third parties. We'll continue to announce partnerships as they happen and provide updates on our therapeutic programs in the future.

Thanks, Joe. The next question is, is ME looking at share repurchases since the share price is down 83% since IPO?

We have a strong current cash position with $314 million in cash and cash equivalents at the end of the quarter. Our full year adjusted EBITDA deficit is projected to be in the range of $160 million to $180 million deficit for fiscal year 2024. This gives you a sense of our cash position and runway. And it's a reasonably good period of time that will give us the ability to execute upon a lot of our goals on the consumer and as well as the therapeutics portfolio. With that said, we will be opportunistic and evaluate our options as it relates to fundraising.

Thanks, Joe. The next question, please comment more on the 50-plus therapeutics programs the GSK collaboration has yielded.

Thank you. I'm happy to take that. So broadly, the programs, including both GSK and 23andME wholly-owned programs span the following therapeutic areas: immuno-oncology, cardiovascular and metabolic, immunology and neurology. So it's very broad and that really speaks to, I think, the breadth and depth of the 23andME database and then, of course, GSK's interest and capabilities as a large pharma company across multiple therapeutic areas.

As Anne shared on the call, the collaboration has really been a large success. It combines the skills and the resources of both companies to generate more than 50 therapeutic programs, which is incredible productivity over 5 years. We will continue to advance a number of ongoing programs, both collaboratively and independently. And importantly, 23andMe has the option to receive royalties from the programs that GSK advances on its own that came from the database. And so there are multiple revenue streams that are still to be realized in the future, we believe, from this collaboration.

In addition to our GSK programs, we also announced that we're progressing a second I/O antibody program, one that targets solid tumors through a really novel mechanism that enhances natural killer cell mediated anti-tumor activity. We believe it has the potential to be a first-in-class program and we intend to provide an update on this at a later date. And we'll continue, as I spoke about with P006 to explore various options, including potential partnerships in the immuno-oncology space.

Thanks, Kenneth. I believe this question is also for you. How is the drug development of your fully owned 23andME-00610 program going?

Yes, thanks for the question. Yes, we continue to be pleased with the progress of enrollment in the Phase IIa portion of the clinical trial for 23andME-00610. It's the first in human. We've completed, as you know, the dose escalation phase. And now we're looking for evidence of objective responses, progression-free survival and overall survival in the expansion cohorts. Those expansion cohorts cover a number of different solid tumor types of patients with advanced solid malignancies, metastatic solid malignancies, including ovarian cancer, clear cell carcinoma of the kidney, tumors with high mutation burden, neuroendocrine tumors, small-cell lung cancers and in addition, a cohort in adolescent patients.

We anticipate that we will be sharing data at a later date at a scientific or medical conference around the seasonal escalation portion of the study and we plan for that later this fiscal year.

Great, thank you. How do you plan to address the current cash burn?

We made headway on improving our adjusted EBITDA deficit from our Consumer and Research Services and Therapeutics segment through margin and operating expense discipline, which we continue to expect to continue throughout fiscal year 2024. We increased the prices of our PGS kits and subscriptions. And to date, these both have been accretive to margins. And we're actively working on non-exclusive database deals and other partnerships.

As announced, we've also restructured the company, including the therapeutics business. A smaller, more focused therapeutics organization and company overall allows us to reduce our cash burn and provide the overall business with a longer cash runway.

Thanks, Joe. The next question, what are your plans to incorporate AI? And what part of the business do you see it providing the most value?

I'll take that, Katie. We are very excited about the opportunities with LLM models and the application of AI. And it's not just in one segment or the other. We really see the opportunity of LLM to be transformative really for the consumer business and how consumers are interacting with their genetic data, how they're potentially getting access to care, the insights that they're getting. We think it can be broadly applicable to the consumer experience and then in drug discovery as well.

It has already been used in important areas like protein folding. And we see that being able to have large genomic data sets with structured phenotypic data, we're really well set up to apply large language models to the incredible amounts of data that we have for drug discovery. So we see, again, broad applications, both on the consumer side and the therapeutic side and we'll continue to keep updating you as we have more announcements on that. But we do have teams dedicated in both areas.

Thank you, Anne. Final question, what new products, services or new income streams are coming? And if you're not able to speak to them, can you provide a simple yes or no that they are on the way?

I can help you, I can take that one, Katie. We continue to invest in the 23andMe+ subscription offering to make it a compelling long-term value service for customers. We're also optimizing pricing and efficiencies in customer acquisition costs to better -- to deliver better margins. We also expect continued growth for this recurring revenue model and a consistent focus on margin optimization as we bring more personally relevant information to our members.

Also, as I previously mentioned, 23andMe is also pursuing new revenue-generating collaborations with third parties. This includes non-exclusive database collaborations and other partnerships for drug discovery and we'll announce these partnerships as they happen.

Great. That concludes the submitted Q&A. We look forward to updating you on 23andMe's progress on both our therapeutic efforts and consumer business.

Thank you for joining us. This concludes today's conference call. Thank you for participating. You may now disconnect. Everyone, have a great day.