Here's the Scoop on the Biggest Healthcare SPAC Deal So Far

It seems that special purpose acquisitions companies (SPACs) are coming out of the woodwork these days. Quite a few SPACs have already taken private companies public, and more are on the way.

In this Motley Fool Live video recorded on Feb. 10, 2021, Motley Fool contributors Keith Speights and Brian Orelli discuss the biggest healthcare SPAC deal so far.

Keith Speights: Let's switch to another non-COVID-19 story. This is one that got a lot of attention last week, but it's still something I think important for us to talk about, Brian, because it involves a SPAC. In the previous segment, it's like every 10 minutes you have a new SPAC coming out.

The story on this one is that a SPAC that was founded by Richard Branson, the VG Acquisition Corp (VGAC), and the ticker there is VGAC. This SPAC is planning to take 23andMe public via a merger. Both Richard Branson and 23andMe CEO are going to put in $25 million each. There's going to be a private placement of $200 million in additional capital for this.

They are estimating that the enterprise value of 23andMe will be $3.5 billion. The company will have well over 900 million, approaching $1 billion in cash at the closing, is what they're looking for. You have an interesting story here with 23andMe. I think most people recognize 23andMe as this consumer genomics type of company where you spit in the little vial and send it in and you find out some things about your ancestry and healthcare type of information based on the genetic analysis.

Brian, what do you think about this particular SPAC deal? Is this a good move?

Brian Orelli: I think 23andMe CEO has always said she didn't want to go public because she didn't want to have to deal with being a public company. It's sort of interesting, but I think basically, they just really need to cash. Generally speaking, venture capital money is more expensive than public money. Ultimately, that's probably what it comes down to is that she needs more cash, the company needs more cash, and the only way to get it is by going public.

We've got some data on revenue that was shared when the merger was announced. In 2020, they are looking for revenue of 305 million, and then looking forward to 2021, it's going to drop all the way down to 218 million, and then will get back to 2020 levels about in 2023 when they expect to have 317 million in revenue. Then we should be going up from there, according to the company's estimates 2024. In 2024 estimates will be closer to 400 million.

The company has really been moving into drug development. In 2018, they did a deal with GlaxoSmithKline (GSK 0.12%), ticker there is GSK. It's a 50-50 partnership where 23andMe does the legwork on the genomics side and then Glaxo does the legwork on the drug development side. It's a 50-50 partnership for each individual, drug that comes out of that pipeline. Although each company I think is allowed to cut back their contribution. If the other company really wants to take it forward and they don't, then they can cut back on their partnership. They said they have 30 programs, but only one of them is in clinical stage at this point.

Speights: I think that's the main impetus behind this move. Like you said, the CEO hasn't been a fan of going public in the past. It seems that 23andMe is really trying to pivot from being primarily a direct-to-consumer genomics company to being more of a drug developer in a sense, and using their vast amount of genetic data to help identify pathways that drugs could target to fight cancer and other diseases. It sounds like they're making the shift, and like you said, they need more cash to expand the number of indications they are targeting. Do you think that's probably the main reason behind this?

Orelli: Yeah. If they're going to become a drug developer, they need a lot more cash. Maybe they've had enough to live off of just selling kits because obviously they are bringing in revenue right now, but to be able to fund the drug development portion, I think that requires a heck of a lot more cash than to fund the ancestry or health data genomics part of it.

I think that comes down to the valuation. They can evaluate as a drug company, a very, very early stage drug company or they can evaluate as a genomics company, and I think those are sort of two different valuations. It's hard to tell whether that $3.5 billion enterprise value is too high or too low. I think it depends on where on the scale of pure genetics versus pure drug company you want to land on whether 3.5 billion is too much.

Speights: Do you think this is a good move for 23andMe to make this shift more into drug discovery?

Orelli: I think there's limited growth potential in genetic testing. Most people are only going to get tested once. You're going to buy multiple iPhones. There's a lot of things we can just have recurrent sales. Genomic testing is not something that you are generally going to have very much recurrent testing. You might have testing if you get cancer or something, but beyond that, you pretty much only have to be tested once. It's hard to get recurring revenues. When you don't have recurring revenues, it's really hard to get a growth story going on.

Speights: I can personally attest to that. A few years ago my kids got me a 23andMe test for a gift. I did it and it was interesting information that they came back with, seeing which countries your ancestors were likely from, and getting some interesting healthcare information, but once I saw it, that was it. The company does send you emails regularly trying to get you to look at this latest new report or whatever, but they're not getting any more revenue from me or my family as a result of that. I think what you were saying is exactly correct that they may have a bigger financial opportunity going into the drug discovery.

Orelli: Yeah. I think it's a really a wait-and-see on the drug discovery. I'd like to see a lot more details of their pipeline before I'm willing to figure out what the value of the company should be.

Speights: Yeah. They have over 10 million individuals' genetic data. That's a lot bigger than even some of the big efforts that are under way in Europe where they've been doing population genomics-type efforts, where they're doing genomic analysis of a lot of people in their country. Maybe that data is going to be worth a lot more than an enterprise value of $3.5 billion over the long run. We just have to wait and see.