The stock performance of 23andMe (ME -5.39%) has plunged since it went public last June. But, in this video clip from "The Rank" on Motley Fool Live, recorded on March 28, Fool.com contributors Matt Frankel and Travis Hoium discuss a few of the biotech company's promising business plans that could pay off in a big way over the next few years.
10 stocks we like better than 23andMe Holding Co.
When our award-winning analyst team has a stock tip, it can pay to listen. After all, the newsletter they have run for over a decade, Motley Fool Stock Advisor, has tripled the market.*
They just revealed what they believe are the ten best stocks for investors to buy right now... and 23andMe Holding Co. wasn't one of them! That's right -- they think these 10 stocks are even better buys.
*Stock Advisor returns as of April 7, 2022
Matt Frankel: 23andMe is down about 65% from its SPAC price. Went from about a $4 billion market cap to about $1.5. This company went public through Virgin Group's SPAC backed by Richard Branson. He put his own money into this deal. As a recent SPAC IPO, it has a lot of cash, that's about the best thing it is known for right now because what it's doing is an extensive business.
We all know 23andMe for its home genetic tests. I don't know if either of you have ever taken a 23andMe genetic test, Jamie says, "Yes." It pretty much tells you, based on your genes, where your ancestors are from, if you're prone to any diseases, things like that. Mine wasn't very surprising, I knew my family was of Eastern European descent. No big surprises there. I was hoping for a surprise secretly but didn't get one.
But really interesting business and because of that, it has created a massive library of genetic data on people. It has 12.2 million genotyped individuals in its database. The next closest competitor has one million, that's Regeneron Pharmaceuticals (REGN -0.09%). So big data advantage there.
Here's why their consumer business is great, it makes up 81% of their revenue right now. The real potential is what you can do with that genetic data and to develop pharmaceuticals. There's two pharmaceuticals in Phase I trials right now, one is in partnership with GlaxoSmithKline (GSK -0.92%), one is just 23andMe on their own.
They say they have 40-plus identifiable treatments in early stage research, and here's why that's important. The average drug, I don't know if either of you are biotech people, the average drug cost $2.6 billion to develop and takes 10 years. After that 10 years, there is a 12% success rate. That's a lot of wasted money.
The goal is that by using genetic information to make targeted treatments, you can not only increase the efficiency, but you can reduce the timetable and increase the probability of success for these treatments. So any biotech investor could tell you that one successful treatment is worth several times 23andMe's market cap.
If they can make this into a successful program, this could be a 10x or much more. It could be the next big pharmaceutical company if things go really well. But if things go wrong, not so much. I see Travis has a point to make.
Travis Hoium: No. Question for you, does this fold into things like CRISPR? I'm getting out over my skis with the biotech space. But I know that there's more and more custom therapeutics and things like that. Does this fold into that or is that a competitor?
Frankel: This definitely folds into that. The one in Phase I trials with GlaxoSmithKline is a cancer preventative of some sort. Biotech isn't my wheelhouse. I know good businesses with lots of potential, but I'm not a biotech guy.
Right now the numbers don't look great. They are losing money hand over fist just because of the R&D expenses that go into drug development. Another thing that I could readily tell you about the biotech space, it's very expensive. They are expecting about $270 million in revenue next year. From that, they're going to lose about $210 million and that's because of about $200 million in R&D spending.
They have almost $600 million in cash, so they have the runway to do this for a few years at the current cash burn without diluting shareholders or anything like that. Total binary outcome here, in my opinion, the consumer products are great but are not enough to support the current valuation.
If they shut down the drug development platform, for example, the consumer business would not justify this valuation. So it wouldn't be 0x, but it's definitely a coin flip whether it will be a big success or not.
