Is 23andMe a Buy Before Its SPAC Merger Is Done?

23andMe, the genetics company best known for its in-home DNA testing kits, is set to go public through a merger with special-purpose acquisition company (SPAC) VG Acquisition (VGAC). In this Fool Live video clip, recorded on March 15, Fool.com contributor Matt Frankel, CFP, and Industry Focus host Jason Moser discuss why the company has so much long-term potential and why investors might want to take a closer look.

Jason Moser: And the first one here, it's VG Acquisition Corporation. Ticker is VGAC. Tell our listeners what VG acquisition is going to be bringing to the public markets for investors here soon.

Matt Frankel: Sure. Well, first of all, VG stands for Virgin Group in this case. This was Virgin Group's SPAC. Richard Branson himself was very involved with this one. They announced they are acquiring 23andMe, the DNA testing company. After the merger, the ticker symbol will change to ME. It is currently VGAC. But it'll be really easy to remember, just ME.

Moser: Yeah, it sounds somewhat selfish.

Frankel: So, expect that to happen in the next few months.

Moser: Yeah.

Frankel: 23andMe, everyone knows it for their genetic testing kits. I did one of those, it told me no big surprises. I already knew where my family came from. But for people like my wife, who you don't really know their family history too well. It can really be an interesting thing, and it's not just the DNA testing, is that it could tell you if you're genetically predisposed to certain diseases, things like that, that's where the real value is here. First of all, just to give you an idea of the scale of 23andMe, because it hasn't been a public company. A lot of people don't know the details of the operations. They have 10.7 million genetic tests done so far. Just to put that in perspective, that is more than any other major competitor. Regeneron (REGN 0.80%), for example, has done one million. Big scale, they're estimating that that's going to get to over 16 million within the next four years. They're protecting a pretty steady flow of genetic dosages. About 80% of those customers have consented to let 23andMe use genetic material for research purposes. That's really the key statistic right there.

Moser: That's something I was actually going to just jump in there and ask you about because that to me seemed like it could be a big risk. But the way you framed it there, it actually sounds like it could turn out to be a real big advantage for this company.

Frankel: Right. They have more genetic material to use for research purposes than any other company out there, and people are letting them use it. They are not only going to get it for free, but people are paying for these genetic testing kits. It's really cool, economics are really cool. They have a partnership with GSK, GlaxoSmithKline (GSK 1.60%) to develop therapeutics based on their genetic material. They have already identified eight potential candidates. As we know, other than the COVID vaccine, it takes a while to develop drugs. The government is not going to fast track and throw billions and billions of dollars at every drug. It takes time, about 10 years in most cases from start to finish.

I think the first of 23andMe's drugs they're developing is in phase 1 trials. This is a viable path going forward. The partnership with GSK, it's a 50-50 cost and revenue split for research on the drugs. Anyone who has followed the pharmaceutical industry knows that 50% of the revenue on a successful drug, one successful drug, can be in the billions and billions of dollars, so that's really where the potential is here. 23andMe, It's not projected to be profitable for at least the next five years, that's where they projected out. But that's not really the point, they're getting a ton of cash in this deal. They're getting $759 million of cash to fund their growth in this deal, including that cash, it values their business at $3.5 billion. A lot of their worth will be in cash that they can use to really expand and grow on these pipelines of products that they have going on. $3.5 billion for a company that has the most impressive collection of genetic material in the market, could turn out to be a really small price to pay.

Moser: Yeah. It really could. We live in a world now, I mean, obviously, privacy is a big topic of discussion for a lot of folks. Obviously, that's been more internet-related, social media-related, and whatnot. In a case like this, I mean, a company like 23, they're explicit about what they are doing with this data. They are very explicit in regards to what they're doing, they clearly are getting buy-in from the folks that are purchasing those tests. It really does, it seems like initially, it seems like they saw around this corner, so to speak, and really have been approaching it from the right perspective. Because once you get buy-in from someone, the consumer says, "Yes, you can use my genetic data to help research causes into advancements in medicine." That right there, that really seems like the biggest hurdle to clear, almost.

I'm not sure that there is a bigger hurdle unless maybe it's from a capital perspective. I mean, a business like this is going to really need to invest, I think a lot in R&D in the coming years. I mean, you noted they are not going to be profitable for the next five years. Possibly longer, you never really know. I mean, maybe they'll surprise to the upside, but creating that expectation upfront is, I think, crucial in a case like this, because if you get investor optimism, if you get investor buy-in at the beginning, even after creating those expectations, it sounds like maybe they've really got something here.