23andMe: Predisposed to Bankruptcy

Welcome to the 181st Pari Passu newsletter!

Today, we are exploring the saga of 23andMe, one of the world's first and largest direct-to-consumer DNA testing providers. Since its founding in 2006, the company has become widely known for its saliva testing kits shipped to people’s homes, allowing them to uncover stories about their ancestry and health. As we will uncover, the company was not just focused on selling testing kits; it had a higher goal of monetizing customer DNA data through proprietary and collaborative drug development initiatives. This long-term goal drove investor optimism, culminating in the company going public in 2021 and achieving a valuation of $6bn.

However, the story that followed showed that this investor optimism was largely unjustified. The business model quickly proved unsustainable, and the stock fell 98% in just 2 years after the peak valuation. When things were already looking grim, the company’s DNA database was compromised by a hacker, resulting in a large class-action lawsuit. The story becomes more interesting because it deals with genetic data, perhaps the most private information about a person. As investor confidence evaporated, the company was left without access to outside funding and with no choice but to file for Chapter 11 to address litigation and liquidity issues. 

We will explore the company’s rise, the investor hype surrounding its ambitious vision, the weaknesses in its business model, and the events that ultimately led to its Chapter 11 filing. The bankruptcy process is no less interesting, and we look into how the 23andMe DNA database was sold via a dropdown transaction to bypass state and customer policy regulations on genetic data transfers.

23andMe is a pioneer in direct-to-consumer genetic testing, providing people with insights into their ancestry, genetic traits, and health risks. The company is well known for its saliva collection kits that are sent to customers’ homes, allowing them to gain insights into their genetics without stepping outside. The testing process was fairly simple: the customer receives the testing kit, spits into a special vial, packs it up, and drops it at any US Postal Service mailbox (the package is pre-addressed and prepaid). Depending on the test type the customer bought, they would receive their results back in 4-6 weeks via the 23andMe website.

23andMe built one of the world’s largest crowdsourced platforms for genetic research, with more than 15 million user DNA profiles by 2025, of which 80% opted in to participate in research. The company analyzes data from consenting users through machine learning and other analytical techniques to discover new biological insights [2]. This data allows the company to identify genetic relationships across human populations, identify genetic and non-genetic factors behind illnesses, and use the insights for drug development. 

The company was founded by Anne Wojcicki, Linda Avey, and Paul Cusenza in 2006. In May 2007, 23andMe secured funding from multiple companies, including Google, which invested $3.9mm in exchange for a minority interest [4]. A year later, 23andMe began selling its DNA testing service, called the Personal Genome Service (PGS), for $999 each, allowing customers to learn about ancestry and health risks. These health reports were returned to customers alongside their raw genetic data and ancestral breakdown, detailing their genetic predisposition to certain health conditions. In 2007, a New York Times journalist wrote an in-depth report on their DNA testing experience with 23andMe, which helped raise awareness of the company.  

In 2008, the company reduced the price of its genetic test from $999 to $399, making it more accessible to a wider audience. Despite the lower price, customers were still slow to sign up, as direct-to-consumer DNA testing was novel and prompted many privacy questions. However, over the next 5 years, as people became more health-conscious and started using new gadgets, such as smartwatches, to track their health, consumer trends began to align with 23andMe’s proposition [3].

In 2012, 23andMe secured a $50mm investment at a $290mm post-money valuation in a Series D round, after which the company lowered its DNA test price to $99, which still holds to this day. By September 2013, the company had 400,000 genotyped customers. However, Wojcicki sought to achieve faster growth and reach up to 1 million genotyped customers by the end of 2013, so she hired a new marketing team that conducted a series of focus group tests to evaluate the behaviour of their potential customer base. The results of the research indicated that the company will most likely encounter friction in obtaining new customers within segments that may reflexively reject the idea of genetic testing and those who fear the unknown. As a result, the company decided to target a health-conscious crowd with a tendency to take control of their health [3]. 

However, just a month later, in November 2013, the company faced serious issues when the FDA required it to immediately discontinue sending health-risk reports to customers who had taken their tests. While 23andMe was forced to suspend those health-related reports, it was still permitted to provide ancestry information and raw genetic data. The FDA considered the Personal Genome Service a medical device, which requires FDA clearance. The core concern was that the health risk reports could prompt customers to seek medical treatment, take medications, or pursue preventive measures based on results that had not been reviewed or approved by regulators. To support this concern, a group of Dutch scientists claimed that the tests did not yield accurate results [5].

After two years of work between the company and the FDA, 23andMe officially became the first company to provide DTC genetic testing and FDA-approved health reports. These approvals were granted for each condition separately, and by 2018, 23andMe was authorized to report health information to customers regarding a wide range of conditions, including Alzheimer's Disease, Parkinson's Disease, and cancer [6]. 

Now that the company was positioned to scale with FDA-approved reports and low test prices, Wojcicki identified a “north star”: leveraging 23andMe’s unique, expansive DNA database to monetize partnerships with governments, hospitals, and pharmaceutical companies. In 2015, the company also launched its drug discovery segment, marking an even bolder push to use its database to identify genes responsible for various diseases and develop drugs. Under this segment, 23andMe would perform proprietary research and invest in R&D to discover new treatments for various diseases. This vision would soon become the reason for the investor hype that would follow.

In September 2017, the company raised $250mm at a $1.75bn valuation, and in 2018, 23andMe received a $300mm equity investment from GSK (a global biopharma company) as part of a deal that would allow GSK to access 23andMe’s customers' genetic data to support drug development. Under the deal, 23andMe and GSK were to equally split profits from drug discovery projects. This marked the company’s first successful monetization of its data and demonstrated that its database had tangible commercial value.

The company was also performing strongly in its Personal Genome Service segment, as FDA approval of its health reports drove rapid growth. In 2017, the company had approximately 2 million genotyped customers; that number increased to 4.5 million in 2018 and nearly 8 million in 2019, effectively doubling year over year.

Things took an even bigger turn when 23andMe went public in June 2021 at a $3.5bn valuation through a merger with a SPAC owned by Richard Branson (founder of Virgin Group). The existing shareholders retained an 80% stake in the company, and the IPO raised $559mm in fresh proceeds, which were set to fund the growth of the PGS and drug discovery segments [7]. At that point, the company continued its attempt to unlock value by shifting into drug development using its vast DNA database. 

In November 2021, 23andMe acquired Lemonaid Health, an on-demand platform providing access to medical care and pharmacy services online, for $400mm. This acquisition created the company’s Telehealth segment and was funded by $79mm in cash and $321mm of 23andMe’s common stock. The acquisition reflected Wojcicki’s broader vision of building an integrated healthcare platform, where 23andMe could eventually combine its genetic data with telehealth services to guide personalized treatment. With the announcement of the transaction, the company’s market cap reached a record $6bn valuation in November 2021. At the time, 23andMe had LTM revenue of $254mm, which represented a staggering 23.6x revenue multiple. 

Now that we know the company’s story, let’s pause the timeline and discuss the business in more detail. As we already mentioned, the company did not just want to make money by selling testing kits; there was a broader goal: monetizing its DNA data and research through drug development. As a result, the company had four segments, which we will explain below. 

Personal Genome Segment (PGS): The PGS segment was the company’s original segment, which sold saliva testing kits to customers. However, over the years, it expanded to offer multiple tiers of subscriptions, testing, and research report types. When it comes to DNA tests, 23andMe offered two test types: (i) Ancestry Service ($99), which was a test that only provided customers information about their genetic ancestral origins and how genetics may influence over 30 traits, and (ii) Health + Ancestry Service ($199), which built upon the Ancestry Service to provide reports about the customer’s health risks and predisposition to certain conditions. To tie back, those are the reports that the FDA banned in 2013 and officially approved in 2015.    

On top of offering the testing services, 23andMe provided memberships that enhanced the customer’s access to additional health reports and additional features. The company had two memberships: (i) 23andMe+ Premium, which provided customers with additional health reports, and (ii) 23andMe+ Total Health, which was the most comprehensive membership providing access to third-party independent clinicians practicing genetics-informed care with a focus on early risk detection. To enroll in the premium membership, the customer takes a Health + Ancestry test ($199), after which they would pay $69 annually for access to enhanced health reports and ancestry tools. For Total Health, the customer first took an initial test that included both spitting and collecting blood ($499), after which the customer paid $199 per year in exchange for access to even more health and ancestral reports, as well as access to a clinician who analyzed the customer's tests and developed a health plan. The company launched the premium membership in October 2020 and the Total Health membership in November 2023 to provide 23andMe with a continuous revenue stream and to hedge against the one-time-purchase nature of its testing kits. In total, this segment generated $203mm in revenue and accounted for 75% of total revenue in FY2022. 

Telehealth (Lemonaid): 

The telehealth segment was created upon the acquisition of Lemonaid in 2021. Through this segment, the company offered medical visits, prescriptions, and memberships for the treatment of specific conditions, such as depression, sinus infection, insomnia, hair loss, or high cholesterol. There were two payment structures that depended on the nature of the condition. For common conditions, such as sinus infections or asthma, the customer paid per visit, after which the doctor prescribed the medication. For chronic conditions such as anxiety, high cholesterol, or insomnia, customers signed up for a membership. The membership included an initial online consultation with a doctor, who would then approve the treatment plan, after which patients received periodic medication delivery to their homes and ongoing support throughout treatment. Note that the customer paid out of pocket for all of these services, including the prescribed medications. For example, the anxiety membership costs $95 per month, the insomnia membership costs $60 per month, and a sinus infection doctor consultation costs $45.

To perform these services, 23andMe entered into Master Service Agreements (MSA) with Professional Medical Corporations (PMC). All physicians who provide medical services to Lemonaid’s customers are employees of these PMCs. Under the agreement, 23andMe provides business and administrative tasks, as well as the patient information, in exchange for a fixed fee from the PMC. The company also directly pays the doctors for the online visits and consultations. This is a very common structure in many telehealth businesses, as many states limit ownership of medical practices and prohibit corporate ownership [1]. This effectively makes Lemonaid and other telehealth businesses intermediaries that connect patients to doctors online and earn a spread between the fee and costs paid to doctors. 

Overall, this segment generated $45mm of revenue in FY2023, or 15% of total revenue.

Research Services: 

23andMe’s Research Services segment is the company’s attempt to use its more than 15 million customers’ genetic and phenotypic data to create biological insights into the genetic origins of disease and to identify and validate targets for drug development. This research is performed under agreements with universities, research institutions, and pharmaceutical companies, meaning that 23andMe monetizes the customer’s data and genetic research by providing it to third parties. 

Therapeutics:

The Therapeutics segment represented the company’s long-term strategic vision of leveraging its unique, world’s largest DNA data for drug discovery, but it contributes significantly to the company’s unsuccessful business model – more on that later. This segment was created in 2015, when the company appointed Richard Scheller, a previous executive at Genentech, an American biotechnology company. The therapeutics segment aimed to directly utilize the company’s DNA database to identify novel drug targets and develop proprietary therapies in-house. With direct involvement in drug discovery came enormous R&D costs: the segment has not generated any significant revenues, and instead, it accounted for $100mm to $110mm in R&D expenses per year (~50% of total R&D) in the years preceding the bankruptcy. The segment generated ($91mm) adjusted EBITDA in 2024. Despite such large investments, the company was not guaranteed to make any substantial drug discoveries, which made this plan very risky

With a good understanding of the history and the business itself, it is time to reveal the elephant in the room: the business has not generated any profits since its inception. Below are the company’s financials. 

23andMe had no debt and was funded by equity throughout its history. As we mentioned, the company received a $300mm investment from GSK in 2018, which resulted in a large cash balance of $453mm at the end of FY 2019. Later, the company would raise $559mm in proceeds from an IPO in June 2021 (FY2022), marking the last time the company received outside capital. With $553mm in cash at the end of the fiscal year, this would serve as 23andMe's sole source of capital for the next few years.

The company’s successful IPO reflects the optimism that underpinned it at the time, as many believed that 23andMe presented a truly unique combination of a biotechnology company and a direct-to-consumer health platform.

Unfortunately, 23andMe had many things playing against it. DNA testing, since its inception, has been a novelty that many people were not comfortable with. It is easy to imagine that many customers had many concerns about how their DNA sample would be used and how safe their information would be stored. The nature of the business and the handling of DNA posed a continuous risk to consumer behavior. 

Consumer Behavior Risk