SPAC Review: Potential, 23andMe Acquisition of VGAC, Artificial Intelligence & Genetics

LinkedIn: Mike Biber, Jeremy Boddy | Avaliam ~ United States ~ United Kingdom ~ India

Keywords: Genetics, SPAC, VGAC, 23andMe, Stock Trading, Equity Trading, Data Science, Artificial Intelligence, Machine Learning, Emerging Technologies, Innovation, Investment Management, Wealth Management

Important Notice: The content in this article shall not be construed as tax, legal, insurance, engineering, financial advice, or other & may be outdated or inaccurate; it is your responsibility to verify all information.

23andMe is raising capital in the public market from a small portion of the company’s shares to get market focus

In the past few years, the Millennial generation has been investing heavily in research to decipher the needs and values of their specific health requirements. They self-educate, tend to avoid annual checkups, opting instead to seek care after understanding treatment options as the symptoms arise. Today, 23andMe is heavily focusing on marketing direct-to-consumer (DTC) genetic testing services.

Our background, comes from a decade and more experience in genetics, developing and bringing to market consumer genetic products. Our team continues to evaluate potential opportunities and revisits potential ventures in this domain. There are different ways to approach this particular market. From preventing cancer, to weight loss programs, targeted package food programs, diets and supplements, educating people on health risks to disease management just to name but a few.

The advances in CNN and RNN machine learning techniques have demonstrated themselves to be particularly well suited for the analysis of genomic data [1]. Natural learning models are used to mine research papers, alongside access to large DNA biobanks [2], potentially providing the training datasets necessary to deliver the accuracy needed. The most lucrative revenue opportunities are in drug development and pharmacogenomics.

23andMe is evidently headed in the same direction

It’s unfortunate for many others who entered the market, but did not have the investment or lobbying capacity to get their genetic panels approved by the FDA. The main barriers of high costs, technology limitations, and not to mention the FDA stopped companies from selling consumer genetics for a number of years.

The good news is sequencing genome costs continue to drop year-over-year with a massive plunge in the past several years allowing direct-to-consumer genomics to be a practical and profitable enterprise [3].

Figure 1: The progress of sequencing technology.

1      The Market

The Consumer Wellness Genomics Market is set to be worth around US$ 9 Billion by 2026 and today 23andMe is set to be a real challenger [4]. For our part we started in the early part of 2003, investing and building predictive consumer genomic products, platform based on using single-nucleotide polymorphisms (SNPs) technology to identify genetic markers associated with specific diseases. The founder’s vision, to encourage people to take proactive measures and improve their health through information and informed prevention.

In the early days, there were a dozen or so competitors, before 23andMe stole the lead, true market competition. The edge is having owned one of the only licensed laboratories, and being able bring to market dozen genetic panels. Revenue at the time topped out monthly at ~300 test kits at a average cost of $100 per each kit across the United States. This was via online distribution and retail network. This generated a little under $USD half million per year while supporting the administration of 5,000+ sample kits.

2      The Technology

The core technology developed was in gene sequencing and genomic data analysis (DNA & RNA) with taxonomy matching engine. The tools performed automatic sequence matching of data to specific known diseases, then provide interpretations, observations and recommendations.

The business challenge was the ability to provide personal DNA testing based on test kits designed for analysis across a large number on factors. These included athletic wellness, stroke, obesity, thrombosis, osteoporosis, age related, among others with test panels to determine a test subjects’ predisposition to certain indicators. An objective was to create an online platform, both interactive and anonymous for the presentation of genetic profile information back to the customer. A key to the success story was the security model of the platform to handle anonymity management, barcoding, a plug and play API gateway, with an overlaid machine learning modeling chassis and knowledge manager. We partnered with universities and colleges, were able to explore and identify genetic associations between variants, diseases and/ or traits faster. This allowed the long-term development of creative partnership and royalty opportunities.

Critical success factors were primarily (1) the long-term product vision, and (2) the methodology in designing genetic panels and algorithm models, using approaches with the latest science. We aimed to interpret personalized DNA analysis using rules and machine learning methodologies, while continuously updating the latest genetic information with particular relevance to genetic variations. We had to design algorithms to discover factors in, and develop understanding of the probability and pre-dispositions to certain diseases.

We added risk assessment tools for personal/ family history, eating habits and environmental factors to optimize the results and produce mitigating factors. New algorithms were developed to determine the content to be displayed in reports to customers. Features allowed the expansion of the revenue model by building nutrigenomic supplements, meal programs, etc.

3      Regulation

In 2010, the Food and Drug Administration (FDA) notified all genetic testing companies, including 23andMe and Illumina, that they required approval for the -genetic test panels. 23andMe went ahead, submitted their first applications for FDA clearance in July and September 2012. Due to scaling costs, new FDA restrictions and difficulty finding capital we had to cease operations with consumer genetics now relegated as medical devices, with federal approval required to market them.

By late 2013, the FDA halted sale of consumer genetic health testing, even shutting down 23andMe’s sales operations for not acting in accordance with federal law [27]. Their health-screening products stayed off the market for two years, before being granted FDA authorization in 2015. It was not until 2017 that the FDA gave approval to others to begin selling personal genome kits back in the market.

In addition, the FDA started making it lot easier for DNA Health Tests to hit the Market [5]. As reference, a US Food and Drug Administration statement from Commissioner Scott Gottlieb, M.D., on implementation of the agency’s streamlined development and review pathway for consumer tests that evaluate genetic health risks [6]. We were excited, received invites, reached out to our network, capital providers and discussed opportunities to bring panels back to the market. Criticism was levied that 23andMe and Ancestry had already taken the majority of the market share.

A Google versus DuckDuckGo situation was not viewed kindly A niche ability by emphasizing anonymous, in protecting people’s privacy and avoiding unethical use of their DNA stored in a repository. It’s more of a Google versus Yahoo. Google and Genentech heavily invested in 23andMe. CEO Anne Wojcicki was married to Google co-founder Sergey Brin and Susan Wojcicki, Anne's sister, was one of Google's earliest employees and now CEO of YouTube, possibly gave them a distinct advantage [7]. 23andMe demonstrated a solid lead in building the political influences, with the size of their DNA database continuing to grow. Once they got FDA approval, they invested heavily in advertising to Millennials.

Recent news, pitches the reverse merger of 23andMe Inc., a Delaware corporation into Virgin Group’s VG Acquisition Corp (VGAC) to access public capital with options of PIPE funding [8] [12]. Virgin Group’s Sir Richard Branson, and Anne Wojcicki each will be receiving 2.5 M shares for each investing $25 M (20% of the total $250 million PIPE for acquiring 25,000,000 shares of New 23andMe Class A Common Stock going to VGAC at $10.00 per share. Not much of the pie, VGAC at post money will have ownership of 11% where the exiting 23andMe shareholders still own 81% of the combined company [11]. Still a very close controlled company.

Figure 2: Pie chart showing post transaction ownership from 23andMe Investor Presentation page 37.

Prior 23andMe has raised just under $1 Billon in capital from Google, Genentech, Sequoia Capital, GlaxoSmithKline, Pegasus Tech Ventures, among others [9] [10].

4      The Bust

Before the coronavirus virus of 2020, 23andMe showed signs the sales of their $99 consumer tests slowing dramatically in 2019. The slowest growth rate within the DNA test industry with no clear justification of why consumers stopped buying test kits [13]. Revenues have also been dropping dramatically. Their investor presentation is showing $441 M in 2019, $305 M in 2020 and projecting $218 M in 2021, with operating income continuing to increase [11].

Figure 3: Financial Summary from 23andMe Investor Presentation page 34.

In reviewing the Alexa (www.alexa.com) global ranking, that shows a website's popularity for www.23andme.com you will find their rating has been dropping since Feb 2019 with cylinder bump ups. This supports, is correlated with 23andMe’s FY19A and FY20A Financial Summary. The Alexa rank is calculated using a proprietary methodology that combines a site's estimated traffic and visitor engagement over the past three months.  

5      Future Growth

23andMe is considered to constitute a two-sided market strategy [14], 1) being people seeking DNA analyses, wanting information about their own genes (for multiple reasons); and, 2) the development of data structures for those seeking information, such as researchers and others who want access to genetics, behavior and self-reported information.

Figure 4: Showing two-sided data-banking market model

A part of this strategy is decreasing the kit price over time to increase the DNA databank size. Drug development programs in partnership with GlaxoSmithKline, also an investor in the company, demonstrate this. In 2018 GlaxoSmithKline invested $300 million, sharing (50-50) the costs and profits for drugs developed in the partnership [15]. As a result, 23andMe has over 30 therapeutic programs in the pipeline targeting areas like oncology, respiratory, cardiovascular and more.

23andMe believes their DNA database and research abilities can solve drug development problems. Its CD96 is in Phase 1 trials, which the company thinks can hit the market in the next 4 years compared to a 7-year average for approved drugs, as well twice as likely to be successful compared to 90% of trial drugs that fail [16]. DNA banking is big business and there is a rush to acquire DNA sequencing data, which may prove to be the organic and molecular equivalent of a gold mine. The potential gene market in 2030 is estimated to be worth as much as $100 billion.

For people seeking DNA analyses, 23andMe is focusing on their Plus subscription service which was launched in October 2020. As of January 2021, they show they have over 75,000 subscribers, providing a yearly subscription revenue stream of $29 per customer. In comparison, is peanuts to bringing new drugs to market. 23andMe see this growth continuing, forecasting its cumulative customer count growth to be $11.2 M in fiscal 2021, and then reaching $16.4 M by fiscal 2024 [11].

Figure 5: Future growth from 23andMe Investor Presentation page 33.

5.1    Covid-19 pandemic

23andMe emerged, in early 2020 and showed that ability to quickly launch a study to determine whether any genetic factors are associated in those cases in which the virus is particularly severe. Within 5 weeks, they enrolled almost 500,000 people, including several thousand confirmed cases, people who’d been hospitalized with Covid-19. 23andMe demonstrated they can quickly respond and add additional services [17] [18].

6      Competition

Ancestry (www.ancestry.com) is considered the leader in this domain. They offer their own consumer genetic tests, intensifying rivalry with 23andMe, but has chosen a very different strategy. The main difference being Ancestry’s tests are ordered by a physician, falling under Centers for Medicare and Medicaid Services rules for physician-ordered diagnostic tests [19]. These are not regulated by the Food and Drug Administration, that does regulate 23andMe. Ancestry markets to new customers, as well the 15 million people whom have already ordered kits to find out about their family history [20].

FamilyTreeDNA (www.familytreedna.com) focuses on consumer genetics that includes those ordered by a physician model, encompassing 1000+ health categories and conditions, medication effects, and health traits. This isn't your ordinary health report. More expensive test can screen 356+ severe or debilitating diseases, disease risk, organ system diseases, 59 secondary or incidental conditions. In addition, it can screen for 12+ types of cancer variants.

Living DNA (www.livingdna.com) focuses on the European ancestry market and has smaller United States market share. They are worth mentioning because they have a half dozen consumer genetic panels focused on wellbeing that discovers genetic variants that can impact the way your body metabolizes vitamins, minerals, and food. Genetic makeup and what best supports your body in exercise and recovery, with nutrition ideas.

7      VG Acquisition Corp (VGAC)

VG Acquisition Corp, is a special purpose acquisition company sponsored by Virgin Group have entered into a definitive merger agreement with 23andMe [26]. VGAC is a public shell company registered in the Cayman Islands with minimum capital registered. It was formed by acquiring Bleecker Street Acquisition Corp what looks to be principal amount $250,000 under Promissory Note [21].

VGAC’s initial public offering is for 48,000,000 units at $10 per share, completed on October 6, 2020 to gross $480 Million and the subsequent sale of an additional 2,855,000 units upon partial-exercise of the underwriter’ over-allotment option. The underwriter being Credit Suisse Securities (USA) LLC [22].

8      Privacy

Experts say you shouldn't assume your DNA data will stay private forever [23]. Even with large pools of anonymized genetic data it can theoretically be tied to an individual. Researchers have demonstrated that by comparing large sets of supposedly anonymous DNA data with public datasets, from example censuses, voter lists or criminal databases, they could correctly identify between 40% and 60% of all genetic testing participants [24].

9      Observations

23andMe brings value to the consumer market with affordable consumer genetic testing kits and ever-growing portfolio of panels. Just in the short-term VGAC may not bring value to investors hedging the consumer genetics market.

The 23andMe two-sided business model is considered an interesting investment use case. It raises important ethical questions about genetic testing, DNA banking and research relating to the autonomy, ownership of the body, data obtained from the body, and informed consent.

We need to keep an open mind. 23andMe’s DNA databank and using it for drug development programs with GlaxoSmithKline is key for long term. Just the first drug CD96 is only in Phase 1 trials, meaning years before revenue.

The VG Acquisition agreement to merge with 23andMe is not final. It’s estimated to be final the 2nd quarter of 2021. VGAC will then change its New York Stock Exchange (NYSE) ticker symbol, and the combined company’s securities will trade under the ticker symbol “ME”. If the merger is successful, you will need to watch for dangers in share dilution. VGAC will only own a small 11% position, meaning in the short term 23andMe can eastly unload shares.

In the longer-term it should be considered a buy and hold investment at the right price. Investors should be ready to play the long game treating this investment as pharmaceutical play, with a steady consumer genetics revenue model. In putting the puzzle pieces together, using 23andMe’s investor presentation as reference. 23andMe is forecasting, assuming by 2024 their revenue to be $400 M with 58% gross margin, spending $85 M on marketing with $71 M in other expenses (research, etc.) leaving negative -$78 M for the year. Not to mention there is additional $154 M in other expenses (administration, distribution, etc.).

Hypothetically, let’s make 23andMe profitable by 2025 with revenues of $600 M. We keep everything else the same from their FY24E estimations. This would allow them to grow at 50% from 2024 to 2025 to achieve $38 M in profit. Resulting with VGAC (owning 11% or 25 M shares) to get $0.16 per share of earnings. In conclusion, at $16 per share, you as an investor will be paying 100X earnings.

Near term, we foresee VGAC stock volatility with a price target at $20 per share or higher over the next few months. Long term spikes with dips in share prices will be common. After the hype, the share price may slump, especially if they miss target numbers, deadlines we would expect the price per share to fade down from the hype.

Lastly, Virgin Group’s Sir Richard Branson seems to have upset his partners. The law firm Brodsky & Smith just indicated they are investigating potential claims against the Board of Directors of VG Acquisition Corp. for possible breaches of fiduciary duty, alongside other violations of federal and state law in connection with a merger with 23andMe, Inc [25].

Should you have any questions, we would be happy to hear from you and guide you through the concepts and observations.

LinkedIn Mike Biber, Jeremy Boddy

Avaliam Email: contact @ avaliam.com

Keywords..

#SPAC, #VGAC, #23andMe, #StockTrading, #EquityTrading #AI #ML #NLP #Datascience #ArtificialIntelligence #MachineLearning #AIPowered #Automation #EmergingTechnologies #Innovation #DeepLearning #investmentmanagement #wealthmanagement

10 References

[1] Raquel Dias & Ali Torkamani (2019) Artificial intelligence in clinical and genomic diagnostics, Genome Medicine. https://genomemedicine.biomedcentral.com/articles/10.1186/s13073-019-0689-8

[2] Aimin Yang, Wei Zhang, Jiahao Wang, Ke Yang, Yang Han1 and Limin Zhang (2020) Review on the Application of Machine Learning Algorithms in the Sequence Data Mining of DNA College of Science and Yi Sheng, North China University of Science and Technology, Tangshan, China, Mathmatics and Computer Department, Hengshui University, Hengshui, China. https://www.frontiersin.org/articles/10.3389/fbioe.2020.01032/full

[3] Kumba Sennaar (2019), Machine Learning in Genomics – Current Efforts and Future Applications. https://emerj.com/ai-sector-overviews/machine-learning-in-genomics-applications/

[4] Acumen Research and Consulting (2019), Predictive Genetic Testing and Consumer Wellness Genomics Market Size Worth Around US$ 9 Billion by 2026. https://www.globenewswire.com/news-release/2019/06/25/1874052/0/en/Predictive-Genetic-Testing-and-Consumer-Wellness-Genomics-Market-Size-Worth-Around-US-9-Billion-by-2026.html

[5] Kristen V. Brown (2017), The FDA Just Made It a Lot Easier for DNA Health Tests to Hit the Market. https://gizmodo.com/the-fda-just-made-it-a-lot-easier-for-dna-health-tests-1820216695

[6] FDA (2017), Statement from FDA Commissioner Scott Gottlieb, M.D., on implementation of agency’s streamlined development and review pathway for consumer tests that evaluate genetic health risks. https://www.fda.gov/news-events/press-announcements/statement-fda-commissioner-scott-gottlieb-md-implementation-agencys-streamlined-development-and

[7] Alyson Shontell (2015), Google founder Sergey Brin and wife Anne Wojcicki have gotten divorced. https://www.businessinsider.com/googles-sergey-brin-and-anne-wojcicki-divorced-2015-6

[8] 23andMe [2021], 23andMe to Merge with Virgin Group’s VG Acquisition Corp. to Become Publicly-Traded Company Set to Revolutionize Personalized Healthcare and Therapeutic Development through Human Genetics. https://mediacenter.23andme.com/press-releases/23andme-merges-with-vgac/

[9] Crunchbase (2021), 23andMe Company Financials. https://www.crunchbase.com/organization/23andme/company_financials

[10] Docoh (2021) 23andMe Interments registration and prospectus (Total $930.56 M). https://docoh.com/company/1414053/23andme-inc

[11] VG Acquisition, https://vgacquisition.com/ 23andMe Investor Presentation. https://vgacquisition.com/wp-content/uploads/2021/02/23andMe-Investor-Presentation.pdf

[12] Brian Sozzi, Yahoo Finance [2021] Why Sir Richard Branson gave 23andMe millions of dollars to go public. https://finance.yahoo.com/news/why-sir-richard-branson-gave-23-and-me-millions-of-dollars-to-go-public-173707175.html

[13] MIT Technology Review (2020), Is the consumer genetics fad over? https://www.technologyreview.com/2020/01/23/276092/is-the-consumer-genetics-fad-over/

[14] Henri-Corto Stoeklé, Marie-France Mamzer-Bruneel, Guillaume Vogt & Christian Hervé (2016), 23andMe: a new two-sided data-banking market model. https://bmcmedethics.biomedcentral.com/articles/10.1186/s12910-016-0101-9

[15] FierceBiotech, Nick Paul Taylor, (2018), GlaxoSmithKline makes $300m investment in 23andMe, forms 50-50 R&D pact. https://www.fiercebiotech.com/biotech/glaxosmithkline-makes-300m-investment-23andme-forms-50-50-r-d-pact

[16] Georgia Bio (2020), Cancer drug is the first potential therapy to emerge from 23andMe and GlaxoSmithKline collaboration. https://gabio.org/cancer-drug-is-the-first-potential-therapy-to-emerge-from-23andme-and-glaxosmithkline-collaboration/

[17] 23andMe (2020), 23andMe COVID-19 Study Findings Published. https://blog.23andme.com/23andme-research/23andme-covid-study-published/

[18] 23andMe (2021), COVID-19 Dataset Access Program. https://research.23andme.com/covid19-dataset-access/

[19] Bloomberg, Kristen V Brown (2019), Ancestry’s DNA Health Screening to Require a Physician’s Order. https://www.bloomberg.com/news/articles/2019-10-15/ancestry-s-dna-health-screening-to-require-a-physician-s-order

[20] MIT Technology Review, Antonio Regalado (2019) More than 26 million people have taken an at-home ancestry test. https://www.technologyreview.com/2019/02/11/103446/more-than-26-million-people-have-taken-an-at-home-ancestry-test/

[21] Justia, Note Agreements, Exhibit 10.6, Promissory Note issued to Bleecker Street Acquisition Sponsor LLC (as predecessor of VG Acquisition Sponsor LLC). https://contracts.justia.com/companies/vg-acquisition-corp-11172/contract/129055/

[22] Justia, Purchase Agreements, Securities Purchase Agreement between Bleecker Street Acquisition Sponsor LLC and the Registrant (as predecessor of VG Acquisition Sponsor LLC). https://contracts.justia.com/companies/vg-acquisition-corp-11172/contract/129056/

[23] Business Insider, Erin Brodwin (2019), After you spit into a tube for a DNA test like 23andMe, experts say you shouldn't assume your data will stay private forever. https://www.businessinsider.com/privacy-security-risks-genetic-testing-23andme-ancestry-dna-2019-2

[24] The Privacy Report, Dan Vorhaus (2009), Re-identification and its Discontents. https://theprivacyreport.com/2009/10/13/re-identification-and-its-discontents/

[25] Yahoo Finance (2021), SHAREHOLDER NOTICE: Brodsky & Smith, LLC Announces an Investigation of VG Acquisition Corp. (NYSE - VGAC). https://finance.yahoo.com/news/shareholder-notice-brodsky-smith-llc-233600692.html

[26] VG Acquisition FORM 8-K for the acquisition. https://otp.tools.investis.com/clients/us/vg_acquisition_corp/SEC/sec-show.aspx?FilingId=14670295&Cik=0001804591&Type=PDF&hasPdf=1

[27] 23andMe, Anne Wojcicki (2020), 23andMe’s CEO on the Struggle to Get Over Regulatory Hurdles. https://hbr.org/2020/09/23andmes-ceo-on-the-struggle-to-get-over-regulatory-hurdles