23andMe Holding Co. (NASDAQ:ME) Q3 2024 Earnings Call Transcript
23andMe Holding Co. (NASDAQ:ME) Q3 2024 Earnings Call Transcript February 7, 2024
23andMe Holding Co. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Hello, and welcome to 23andMe's Fiscal Year 2024 Third Quarter Financial Results Conference Call. As a reminder, this call is being recorded. At this time, all participants are in a listen-only mode. After the prepared remarks, there will be a question-and-answer session. I would like to turn the call over to Ian Cooney, Senior Director of Investor Relations at 23andMe to lead off the call. Thank you. Please go ahead.
Ian Cooney: Thank you, Valerie. 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 third quarter. A replay of today's webcast will also be available on our website. Please note that certain statements made during this call regarding matters that are not historical facts, including, but not limited to, management's outlook or predictions for future periods are forward-looking statements. These statements are based solely on information that is now available to us. We encourage you to review the section entitled Forward-Looking Statements in our press release, which applies to this call. Also, please refer to our SEC filings, which can be found on our website and the SEC's website for a discussion of numerous factors that may impact our future performance.
We also discuss certain non-GAAP measures, important information on our use of these measures and 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 Joe Selsavage, our Interim Chief Financial and Accounting Officer; Jennifer Low, our Head of Therapeutics Development; and Bill Richards, Head of Therapeutics Discovery; will join us for Q&A. I'd now like to turn the call over to Anne.
Anne Wojcicki: Thank you, Ian. The third quarter was busy and productive at 23andMe. We made meaningful strategic progress across our three businesses. We introduced our first integrated care offering with Total Health, signed a non-exclusive research agreement with GSK and filed our second IND in Therapeutics. I am extremely proud of the effort put forth by our team as we work towards creating a new future of healthcare powered by genetics. Starting with our Consumer business. The third quarter saw the company execute on our strategic shift towards actively engaging with our customers on managing their health based on their unique genetics and lifestyle. In November, we introduced a new membership called Total Health, a personalized preventative care service.
It includes clinical grade exome sequencing, biannual blood testing and access to clinicians from our Lemonaid acquisition with unique training in genetics. Members of Total Health received all the reports and features offered in our existing 23andMe+ membership along with personalized guidance for ongoing disease prevention and early detection. This is an exciting step in our vision to bring accessible genetics-driven preventative care to millions of our U.S. customers. In addition to the introduction of Total Health, added more value to the 23andMe+ membership with the introduction of 23andMe Health Action Plan and 23andMe HealthTracks. These personalized action plans are part of our broader effort to help our customers take action based on their genetic insights and other data.
Over time, we will continue to add more dynamic recommendation content and intuitive ways to track phenotypic inputs with the ultimate goal of helping customers improve their health span. 23andMe HealthTracks is a digital health tool that helps customers gain a more holistic picture of the risk for developing a particular condition by integrating lifestyle and genetic factors into a single model for the first time with the goal of motivating behavior change. Health Action Plan helps customers take the next step to improve their health by drawing on genetics, health history and blood and biomarker data to provide tailored bite-sized health recommendations. We will continue to innovate in this area to create a dynamic, meaningful experience to help our customers optimize their health.
We also continue to refine and improve our genetic reports and insights. Our updated BRCA test allows us to report 44 additional variants in the BRCA1 and BRCA2 genes known to be associated with higher risk for breast, ovarian, prostate and pancreatic cancer. Many of these additional variants occur more often in populations that have traditionally been underserved by genetic testing, including the African-American and Hispanic-Latino communities. As part of our August FDA clearance, we were granted the first-ever FDA predetermined change control plan, allowing us to continue to update our BRCA report with additional validated variants without additional pre-market review. As we continue to invest in our personal genomics service business, we also focus on creating value for our customers through the uptake of membership services.
We see repeated engagement by our customers, and they have shown interest in learning more about their genetics and how to apply those learnings for their lives. We are focused on moving to a membership model so that we can meet customer demand for more services as well as develop a recurring revenue stream that will allow us to continue to innovate and grow the business in a way that is most helpful to our customers and shareholders. We continue to prioritize price and efficient marketing spend as we look to move our PGS segment toward cash flow breakeven. We recognize this effort is likely to cause some uneven results in our business in the short-term, and we saw some of that effect in Q3. PGS kit volumes were impacted in the quarter as we entered the holiday promotional period with firmer pricing discipline after raising prices for the first time since 2015.
This, plus an environment of macroeconomic and consumer uncertainty led to lower PGS kit sales volume. We remain confident in our ability to transform our PGS segment into a sustainably growing and profitable business and we are incredibly excited to help build toward a future of personalized preventative health. Transitioning over to therapeutics. We continue to advance our pipeline of clinical and preclinical programs. In November, we presented positive safety and preliminary efficacy data from a Phase I/IIa clinical trial of our wholly owned immuno-oncology program, 23ME-00610 at the Society for Immunotherapy of Cancer Annual Meeting. The study demonstrated that 23ME-00610 is well tolerated and shows promising preliminary efficacy in a number of patients with advanced solid malignancies.
In December, we announced the further expansion of the ongoing Phase I/IIa study to include an additional 30 patients with advanced neuroendocrine and ovarian cancers, above the original enrollment goals. We are encouraged by the progress of 610 and anticipate reporting further data later this year. The company recently announced the U.S. Food and Drug Administration has cleared the IND application for 23ME-01473, a natural killer cell activator intended to treat cancer. 23andMe plans to evaluate 1473 in participants with advanced solid tumors in a Phase I clinical study beginning in the first half of 2024. 1473 targets ULBP6 to restore anti-tumor immunity through NK and T cells. ULBPs are stress-induced ligands found on the surface of cancer cells that bind to the receptor NKG2D on NK and T cells.
Cancers escape immune cell recognition by shedding ULBP ligands from their cell- surface, which acts as immunosuppressive molecular decoys. Blocking the binding of soluble ULBP6 to NKG2D may restore immune cell recognition and killing of cancers. Further, 1473 is Fc-effector enhanced which provides an additional mechanism for NK cells to induce cell death of ULBP6-expressing cancer cells. 1473 also has the potential to address a major unmet need in cancer treatment. Patients who may have or may develop tumor resistance to checkpoint inhibitors. By combining NK and T cell activation, 1473 may initiate a broader and deeper response of the immune system to treat cancer cells and delay tumor resistance seen in treatment with traditional checkpoint inhibitors.
This program validates the power of the 23andMe database for identifying novel therapeutic targets and highlights the team's ability to develop molecules and advance them into the clinic. I also want to highlight that we launched our new therapeutics website at the end of December. We think the new site does a great job explaining how our team turns genetic insights into potential new therapies with a higher probability of success in the clinic and provides a great initial diligence resource for potential partners, collaborators and investors. I encourage everyone to visit the new site at therapeutics.23andme.com. Moving to the research business. In Q3, extended our collaboration with GSK into the sixth year. The new one-year non-exclusive data license pays 23andMe $20 million upfront in exchange for GSK using the 23andMe database to conduct drug target discovery and other research.
Importantly, this new collaboration is a sign of the significant value in the 23andMe database and the potential for continuous new insights and discoveries as we grow in size. The new collaboration is important for 23andMe as it generates $20 million and enables us to continue to collaborate with GSK, but in a non-exclusive way. We are actively pursuing new partnerships with other therapeutic companies. The excitement around AI and data opens up a tremendous opportunity for 23andMe as companies are establishing their data strategies. Genetics is fundamental to the world of AI-driven drug discovery. We look forward to updating you as discussions progress. As I look to 2024, I'm excited about the opportunities for 23andMe. There is a growing recognition about the potential for data and AI and drug discovery, and we have an incredible asset that can accelerate and improve drug discovery for the industry.
For customers, we are getting closer to our ultimate vision of having a complete solution for people who want to actively engage in their wellness and prevent disease. We look forward to an exciting year. With that, I'll turn the call over to Joe to review our financial results for the quarter.
Joseph Selsavage: Thank you, Anne, and hello, everyone. I'd like to reiterate Anne's excitement about the future of Precision Healthcare 23andMe, and I'm proud of our ability to execute while maintaining cost discipline amid our shift towards a more sustainable operating profile. Revenue for the quarter was $45 million, representing a 33% decrease on another strong prior year comparable. Similar to last quarter, the year-over-year decrease in revenue was primarily due to the conclusion of our exclusive discovery term under the GSK collaboration in July as well as lower consumer services revenue in our PGS Kit and telehealth businesses. The decrease in consumer revenue was driven primarily by lower sales volume as we entered the holiday promotional period with higher pricing than prior years.
These efforts were intended to increase product margin to improved average selling prices and advertising efficiency, which remain a core focus of the company, but resulted in lower-than-expected unit sales for the quarter as we believe the combination of higher prices and extended macro headwinds placed the temporary damper on demand for our products. These decreases were partially offset by non-recurring payments from other research partners in the current quarter and continued growth in our subscription services. Looking at the composition of our revenue, consumer services revenue represented approximately 96% of total revenue for the quarter. And research services revenue, which was primarily derived from other research partners accounted for approximately 4% of total revenue for the same period.
As a reminder, the new GSK data license announced in Q3 is expected to have minimal impact on this year's results with the majority landing in fiscal year 2025, given the terms of the agreement. Our gross profit for the third quarter was $20 million, representing a 35% decrease over the same period in the prior year. The decrease in Q3 gross profit was driven primarily by the decrease in research services revenue, while subscription revenue and improved telehealth margins following the August 2023 disposition of Lemonaid Health Limited in the UK helped to offset through continued margin accretion within their respective categories. Turning to our expenses. Total operating expenses for the quarter were $301 million compared to $128 million for the same period in the prior year.
The increase in operating expenses was primarily due to a $199 million non-cash goodwill impairment charge taking over the quarter, which was partially offset by lower personnel-related expenses following workforce reductions in prior quarters and the disposition of the UK entity. A non-cash impairment charge for intangible assets in the prior period and lower therapeutics-related R&D spend due to significant IND-enabling activities also in the prior year. Looking at the bottom line, net loss for the quarter was $278 million compared to $92 million in the prior quarter. The increase in the third quarter net loss was driven mainly by the lower revenues and goodwill impairment charge mentioned previously. 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 third quarter was $48 million compared to a $43 million deficit for the same period in the prior year. The increase in the adjusted EBITDA deficit was primarily due to lower revenue, partially offset by lower personnel costs and lower R&D spend described previously. We ended the quarter with $242 million in cash and cash equivalents compared to $387 million as of March 31, 2023. We intend to be judicious with our cash usage and believe the current level of cash supports 23andMe's plans for targeted investment and high ROI growth initiatives. Now turning to our guidance. As a reminder, the company's full-year fiscal 2024 guidance is based on the conservative approach, recognizing challenges in recent performance, continuing uncertainties in consumer sentiment, the macroeconomic environment and geopolitical conditions.
The company is adjusting its full-year guidance for fiscal year 2024, which ends on March 31, 2024. For revenue, we are updating our fiscal year 2024 guidance to be in the range of $215 million to $220 million, with net loss adjusted to be in the range of $520 million net loss to $525 million net loss. Full-year adjusted EBITDA deficit is adjusted to be in the range of $180 million deficit to $185 million deficit for fiscal year 2024. Our focus within the existing lines of the PGS and telehealth consumer businesses remain unchanged. We continue to prioritize margin expansion and progress towards cash flow profitability. These efforts include remaining disciplined with our pricing strategy to realize higher average selling prices, ongoing value additions to our current services like the Health Action Plan and HealthTracks features within 23andMe+, expanding the recently introduced Total Health membership to a broader audience and streamlining the expense profiles of our Consumer and Therapeutics segment.
Within the therapeutics and research businesses, we are investing only in projects we believe are most strategically and financially valuable and continue to explore potential partnerships and collaborations. Wrapping up, we are pleased with the company's strategic progress and improved operating discipline. Given the current operating environment, we are being prudent in our planning and project prioritization, while remaining incredibly optimistic about the future of the company and our ability to help people access, understand and benefit from the human genome. With that, let's open it up to questions.
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