Earlier this year, biotech company 23andMe filed for bankruptcy. The harsh reality was that its business, while enticing to people who wanted to learn about their backgrounds via DNA testing kits, wasn't sustainable and its losses were simply mounting.
On May 19, Regeneron Pharmaceuticals (REGN 2.27%) announced that it was the successful bidder for substantially all of 23andMe's assets, agreeing to pay $256 million for them. The deal is still needs approval, but is expected to close in the third quarter of this year. Regeneron is a large pharmaceutical company with a market cap of more than $60 billion; its acquisition of 23andMe could unlock some attractive growth opportunities over the long haul.
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A modest purchase with a lot of potential
With a purchase price of $256 million, some investors might think the valuation is a bit rich for a business in such a dire position as 23andMe, but it won't put a huge dent into Regeneron's financials. During the past four quarters, Regeneron has had free cash flow of nearly $3 billion.
What I like about the move is that it gives Regeneron access to DNA data on 15 million customers. And while the company will continue to protect consumer privacy, about 84% of 23andMe customers allowed their data to be used for research purposes. In an era in which artificial intelligence makes it easier to analyze large amounts of data, this presents Regeneron a huge opportunity to dig into information that could aid drug development.
Last year, in an interview with CNBC's Jim Cramer, Regeneron Chief Executive Officer Leonard Schleifer said that "associating genes with disease" may become critical for the healthcare industry to improve outcomes and minimize risk for patients. Genetics is clearly a key part of Regeneron's growth strategy, which is why its 23andMe acquisition could be a good fit.
Regeneron could use a catalyst
A big challenge for Regeneron these days is expanding its operations. First-quarter sales declined 4% year over year, falling to just over $3 billion. Its leading drug, Eylea -- an eye treatment, for wet age-related macular degeneration -- experienced a 26% drop, as competition has been increasing. Overall product sales were down by 20% this past quarter; strong collaboration revenue helped Regeneron avoid a bigger dip in its top line.
The good news is that the company has dozens of therapeutic trials underway that may lead to future product launches, and can bolster its growth prospects. Acquiring 23andMe could lead to even more drug candidates for Regeneron to pursue. Although it could take some time for the acquisition to pay off (assuming that it does), I think it could benefit the company, and its investors, in the long run.
Should you buy Regeneron Pharmaceuticals stock?
23andMe wasn't a good business to invest in because while its services were popular, DNA test kits didn't generate recurring revenue that would give it a path to long-term profitability. Regeneron's vast research and development capabilities, however, could leverage 23andMe's data and put it to good use, potentially leading to some significant advancements in the healthcare industry.
Although Regeneron still plans to continue offering 23andMe's consumer genome services, I don't believe that they were a key reason for the acquisition. And it wouldn't surprise me if it eventually shuts those services down, especially if they prove to be a drag on its overall operations.
Regeneron Pharmaceuticals hasn't been a great stock to own this year; its shares are down 17% as of May 28. But they're trading at a modest 15 times trailing earnings (the S&P 500 average is just under 24). With a strong pipeline and the acquisition of 23andMe potentially enhancing its long-term growth prospects, this could make for a good stock to hold in your portfolio for the long haul.
