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Here's Why I Bought Shares of This Genetics Company

By Matthew Frankel, CFP® - Mar 24, 2021 at 6:46AM

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This consumer-facing company could have massive potential.

We recently learned that home DNA-testing company 23andMe will be going public through a merger with special purpose acquisition company (SPAC) VG Acquisition Corp (VGAC). In this Fool Live video clip, recorded on March 15, contributor Matt Frankel, CFP, explains to Industry Focus host Jason Moser why he owns shares of this high-potential genetics company in his personal stock portfolio, specifically in the context of their pharmaceutical development potential. 

Matt Frankel: But no, like you said, that's a really high potential business. Developing a drug is capital-intensive, they are very transparent about that. If you were to take a guess, how much does the average drug cost to develop from start until it's on the market?

Jason Moser: I would just guess a round number of like $100 billion or some just something absurd.

Frankel: $2.6 billion is the average research costs.

Moser: Okay.

Frankel: With that in mind, the average drug, and this is where you said hundreds of billions, that average drug costs $2.6 billion to develop, and there is a 12% probability that it will ever make it to the market. When you want the cost to get one drug onto the market? The costs are in the tens of billions of dollars, so it's a capital-intensive business. Their value proposition is that by having so much genetic information, they can make the process more efficient, more targeted, give their drugs or higher-profitability of success than the average companies drug candidates. There's a lot of potential value to be created here. Like I said, they're getting $759 million, so that gets the pipeline going, that's nice. They are not just focused on that part of the business, they are doing a consumer subscription model as well where you can subscribe to your health updates as they weren't more about genetic information and things like that. Based on your own genetic profile, they soft launched this in October. It already is about 75,000 subscribers that could easily go into the millions based on how many people have already given them their DNA. That's a subscription. So, that's a recurring revenue model which could be used to then really fund and accelerate the drug pipeline. There's a lot of potential ways they can create value in pretty much everything that Virgin and Richard Branson and have their hands in. It's not expected to be profitable in the beginning. If you were to ask me, who is the most forward-thinking investor in the world, I'd probably have to say Branson. When you think of Virgin Galactic (SPCE -5.79%), Virgin Orbit, Virgin Hyperloop, they're very forward-looking and this is no exceptions are really fit in well with his SPAC.

Moser: Yeah. I tend to agree with you there on the forward-thinking part. There are a handful of folks out there that really do that well I mean, clearly Branson won. Love him or hate him, certainly Musk is one. Jeff Bezos. That's a wonderful mentality to have and one for investors. To try to minute, hold yourself to that standard as an investor, try to think forward. And oftentimes it's about looking at these businesses, is not thinking about what the business is doing today, it's trying to figure out what that business might be able to do tomorrow or the next day, or the year later, or five years later, where can that business go? What could it ultimately become, because that ultimately is what the market is doing, is looking to the future. I think that's a really good lesson there from a lot of these leaders out there.

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