Q2 2024 23andMe Holding Co Earnings Call

November 8, 2023

Hello, and welcome to the 23 and me as fiscal year 2024 second quarter financial results Conference call. As a reminder, this call is being recorded at this time all participants are in a listen only mode.

After the prepared remarks, there will be a question and answer session.

I would now like to turn the call over to Anne Cooney Senior director of Investor Relations at 23, and me to lead off the call. Thank you. Please go ahead.

Thank you before we begin I encourage everyone to go to investors about 23, <unk> dot com to find the press release, we issued earlier today reporting our financial results for the second quarter. A replay of today's webcast will also be available on our website.

Please note that certain statements made during this call regarding matters that are not historical facts, including but not limited to management's outlook or predictions for future periods are forward looking statements. These statements are based solely on information that is now available to us.

We encourage you to review the section entitled forward looking statements in our press release, which applies to this call also please refer to our SEC filings, which can be found on our website and the Sec's website for a discussion of numerous factors that may impact our future performance.

Also discuss certain non-GAAP measures.

Important information on our use of these measures and reconciliation to U S. GAAP may be found in our earnings release.

Joining us on our call today are and what Jackie our Chief Executive Officer, and co founder and Joe South average, our interim chief financial and accounting Officer.

Bill Richards, our head of Therapeutics discovery, and Jennifer Lowe, our head of therapeutic development will join us for Q&A.

I would now like to turn the call over to Ann.

Thank you Anne.

To kick off the call I would like to start with an update on our strategy.

<unk> mission has always been to help people access understand and benefit from the human genome.

The <unk> brand is most known for how we transformed access to genetic information and enabled over 14 million people to learn about themselves.

Three and their health risks.

Over the last five years, we have increasingly put more effort and resources into how customers will benefit from the human genome.

Over 80% of our 14 million customers trust and consent to using their genetic information and phenotypic insights for research, creating the world's largest set of re contactable genotypic and phenotypic data in the world.

We have a world class team of statistical geneticist.

And for Madison, computational biologists and data scientists leveraging the data to create consumer products and discoveries for therapeutics development.

As a reminder, we have three main businesses powered by our database and creating a new future for healthcare powered by DNA.

First our consumer business.

Where we are taking a precision health approach and generating insights to help customers improve their health and health span based on their unique genotypic and phenotypic profile.

We are moving toward a more subscription based longitudinal model. So we can have a positive impact and help our customers take action to improve their health over time.

The subscription business also offers a much more sustainable and attractive operating model for us to create value for our customers and investors.

Second our research business.

This is where we are in discussions with collaborators in pharma biotech and adjacent industries to solve them licenses to our database.

They can then come up with their own insights to help make drug discovery and development more efficient or care delivery more effective.

And third our therapeutics business, where for the past seven years, we have interrogated our database to pursue targets and develop therapeutics that will hopefully one day help many of our customers directly.

We currently have one immuno oncology assets in the clinic in phase, one or two a with encouraging early efficacy activity.

Another io assets with a particularly exciting profile and a pipeline of molecules targeting immunology and inflammation in the discovery phase.

We focused the business on creating value from our dynamic data data asset and expect to continue to do so in the future.

As we move toward building a model that helps our customers take action from their genetic and health data, we aimed to meaningfully increase the percentage of subscription based offerings. So we can provide long term value and insights to our customers.

As therapeutics assets develop we expect a partner then out to create near term and longer term value inflections for our shareholders. While also getting them in the best hands to develop through approval and commercialization for the eventual benefit of our customer.

Moving to the second quarter and recent events yesterday, we launched a new subscription membership called total health a continued effort to be the world's best at risk prediction.

Total health is our most advanced prevention based health membership.

It includes clinical grade exome sequencing.

By annual blood testing and access to clinicians with unique training in genetics.

Members of total health will also receive all the reports and features offered in our existing 23 in the plus membership.

Through the combination of comprehensive genetic data blood Biomarkers personal and family health history, and genetics trained clinicians total health will provide members with personalized guidance for ongoing disease prevention and early detection.

This membership is for the consumer looking for access to advanced genetic risk testing. So they can focus on ongoing health management do direct access to mitigate or prevent disease.

This is a precision health with the support of a clinician who specializes in genetics.

In addition to the launch of total health, we continue to add more value to our 23 plus membership.

Last month, we introduced twenty-three any health action plan, a new digital feature that draws on your personal personalized genetic report.

Health history of survey data as well as blood and biomarker data to provide tailored bite sized health recommendations for subscribers to take action.

In addition to suggestions on altering activities like Sweet diet and exercise eligible members may also receive recommendations for further clinical actions like getting a blood test, which now can be ordered directly through 23 and me.

We also recently launched 23 and me help track a digital health tool aimed at driving behavior change by integrating lifestyle and genetics until a single model for the first time.

In July we launched a new FDA cleared Pharmacogenetics report for 'twenty, three plus number on a commonly prescribed statin called Sim simvastatin.

In 2020 about 8 million people in the U S were prescribed simvastatin, making it among the most prescribed medications in the U S.

This new report allows people to understand how their genetic may impact, how they respond to the statin and whether or not they may experience side effects.

We had another milestone FDA clearance in August to report additional BRCA variance for all 23, any health plus ancestry customers.

This will allows us to report 41 additional variants in the Bronco, one and brackets Eugene known to be associated with higher risk for breast ovarian prostate and pancreatic cancer.

Many of these additional variance occur more often in populations that have traditionally been underserved by genetic testing, including the African American and Hispanic Latino communities.

As part of the FDA clearance. We were also granted the first ever FDA pre determined change control plan, allowing us to update our broker report with additional validated variance without additional premarket review.

You can begin to see the significant investment we've been making in our product and report innovation within our consumer business over the last few months.

This includes continuing to provide value in the form of membership services, while expanding margins.

We've seen better than expected results after increasing our kit and subscription pricing with higher margins, partially offsetting reduced kit sale volume.

Transitioning to therapeutics, we completed the restructuring of the organization with a clear focus on the areas, where we believe our data insights provide us with the greatest strategic advantage. This includes continuing to advance our immuno oncology assets.

Certain programs stemming from the GSK collaboration as well as focusing on the immunology and inflammation therapeutic areas.

This allows us to pursue the most impactful programs in the most efficient manner in terms of capital and resources.

In Q1, we discussed pursuing non exclusive collaborations with pharmaceutical companies for target discovery.

We continue to pursue these collaborations across an array of structures and are excited about the opportunity to attract multiple and varied partners in this business.

Last week, we announced progress in this area with a new one year non exclusive data license with GSK, which extends our collaborations.

Under the agreement, we will receive a 20 million upfront payments, which enables GSK to conduct drug target discovery and other research using the 23 in the database.

The license also includes access to certain research services such as further analyses of the 23 and me dataset not provided in the core data release.

The collaboration with GSK has been hugely successful in this collaboration extension validates the power of the 23, new database to consistently produce novel insights for therapeutic development rooted in human genetics.

As part of this agreement we have made the strategic decision to take the royalty option in lieu of the opt in on three programs. We previously initiated together.

Which will help us reduce our cash burn and allow us to focus on our wholly owned programs.

We also continued to advance our pipeline of clinical and preclinical programs.

Last week, we presented positive safety and preliminary efficacy data from the phase one flashed Iia clinical trial of our wholly owned immuno oncology program 23, and me 610, and antibody targeting CD 200 or one.

In two presentations at the society for immunotherapy of cancer and annual meeting we showed the therapy is well tolerated at our highest dose level.

We also reported stable disease, and 52% of response Evaluable participants in our phase one dose escalation portion of the study.

This includes preliminary clinical activities of 23, and me 610, and a patient with neuro endocrine cancer, showing a maximum reduction of 19% and target lesions with a single lesion, achieving a sustained 58% reduction in the longest dimension.

The participant continues on study drug past 40 weeks with stable disease at the time of data cutoff.

Overall, we demonstrated that twenty-three music's 10 is well tolerated and shows promising preliminary efficacy in patients with advanced solid malignancies, we are continuing to enroll the phase Iia portion of the trial and anticipate reporting further data next calendar year.

We are also continuing to advance a preclinical program P zero 2014, and investigational antibody that has dual mechanisms.

Getting you all BP six five and two to restore anti tumor immunity through NK and T cells and inducing FC receptor mediated killing of U L. B P 256 expressing cancer cells.

With these programs advancing the extension of our GSK collaboration and our streamlined focus on immunology and inflammation. We're excited about the progress and direction of our Therapeutics group.

In closing I'd like to provide a brief update on the ongoing cyber security investigation that we initiated early last month.

Detailed information can be found in the in an 8-K, we filed with the SEC and on our blog.

At this time, we do not have any any indication that there has been a data security incident within our own system.

Data privacy and security remains a top priority. We have recently required all customers you'd have utilized two factor authentication and we will continue to invest in protecting our systems and data.

And with that I'll turn the call over to Joe to review, our financial results for the quarter.

Thank you Anne and Hello, everyone.

We remain well positioned to continue advancing our consumer and therapeutic schools are margin expansion momentum continued this quarter.

The impact of PGS kitten subscription price increases to date have been better than expected as Dan mentioned earlier.

Revenue for the quarter was $50 million, representing a decrease of 34% on a strong prior year comparable.

Year over year decrease in revenue was primarily due to the conclusion of our exclusive discovery term under our GSK collaboration in July providing one months of collaboration revenue in the quarter compared to a full three months in the prior year.

As well as nonrecurring payments from other research partners in the prior year.

It also reflects our continued focus on driving improved product margins through higher average selling prices and marketing efficiency.

Faulting and lower overall volume PGS, CIT and telehealth quarters. These.

These decreases were partially offset by continued growth in our subscription services.

Looking at the composition of our revenue consumer service revenue represented approximately 97% of total revenue for the three months ended September 32023.

And research services revenue, which was primarily derived from the GSK collaboration accounted for approximately 3% with total revenue for the same period.

Our gross profit for the second quarter was $22 million, representing a 43% decrease over the same period in the prior year.

The decrease in second quarter gross profit was driven primarily by the decrease in research services revenue.

While subscription revenue and improved PGS <expletive> selling prices helped to offset through continued margin accretion within their respective categories.

Turning to expenses.

Total operating expenses for the quarter were $101 million compared to $106 million in the same period in the prior year.

The improvement in operating expenses.

Primarily driven by reductions in marketing advertising spend came to boost efficiency as noted previously.

This improvement also reflects lower personnel related expenses following the reductions in force in June and August earlier this year as.

As well as the disposition of eliminate limited in the U K also in August.

This decrease was partially offset by continued investment in therapeutics portfolio advancements and also includes one time severance and related charges related to the workforce reductions and transaction related expenses from the UK disposition.

Looking at the bottom line net loss for the quarter was $75 million compared to a net loss for the same period in the prior year of $66 million.

The increase in second quarter net loss was driven mainly by the lower research services revenue mentioned previously partially offset by our improved operating expense profile and an increase in interest income from cash held in money market funds.

Next our adjusted EBITDA.

For details on how we defined adjusted EBITDA as well as the corresponding reconciliations to GAAP. Please see our earnings release.

Total adjusted EBITDA deficit for the three months ended September 32023 was $45 million compared to $30 million deficit for the same period in the prior year.

We ended the quarter with $256 million in cash and cash equivalents compared to $387 million as of March 31 2023.

As always we are actively evaluating the use of our capital for both the consumer and therapeutic businesses, including responsibly opting in or out of therapeutics programs based on opportunity potential and timing of returns.

As appropriate given market conditions.

Now turning to our guidance as a reminder, the company's full year 2024 guidance is based on a conservative approach recognizing current uncertainties of consumer sentiment the macroeconomic environment and geopolitical conditions.

Our focus within the existing lines of the PGS and telehealth consumer businesses remains unchanged we.

We continue to prioritize margin expansion and progressing towards cash flow profitability.

These efforts include ongoing value additions to our current services like the recently announced <unk> and action plan features within <unk>.

These swaps.

The newly launched total health membership, our most advanced and comprehensive precision health service.

And the reorganization of our consumer segment streamlined our expense profile.

Within the therapeutics business, we continue to invest in programs, we believe our most strategically and financially valuable.

With the end of the exclusive discovery term under the GSK collaboration in July we decided scenario.

Our discovery and development efforts to areas that best align with our core strengths.

Resulted in a workforce reduction in August as we realigned our resources to the revamped structure and the more recent decision to take the royalty option on separate programs initiated together with GSK.

Which will allow us to reduce cash burn and focus on our wholly owned programs.

We expect these decisions to yield meaningful economic benefit in future periods.

While we're pleased with this year's progress and excited for the launch of total health, we remain prudent with our outlook given current uncertainties in the macro environment.

Similarly, although the new GSK data license announced last week serves as further validation of our database is value we expected deals $20 million revenue to have minimal impact on this year's results with a majority of landing in fiscal year 'twenty five given the terms of the agreement.

The company is partially adjusting its full year guidance for fiscal year 2004, which ends on March 31 2024.

In terms of revenue we are updating our fiscal year 2020 for guidance to be in the range of $240 million to $250 million with net loss reaffirmed to be in the range of 325 million to $345 million loss.

Full year adjusted EBIT. The deficit is reaffirmed to be in the range of $160 million deficit to a $180 million deficit for fiscal year 2024.

This updated outlook as a result of run.

<unk> commitment to delivering critical insights and values to our customers.

Tactful, new services, while improving our cash flow through better you cannot unit economics and cost discipline.

Also a reminder, that adjusted EBITDA is our best proxy for cash flow.

And now I'll turn the call back over to Ann.

Thanks, Joe.

I'm optimistic as we head into fiscal year Q3, we've made incredible progress through the innovation happening within the consumer business, both by increasing the value of our 23 plus membership with new features and reports as well as launching total health a new comprehensive subscription offering that positions us to be the world's best.

At risk prediction.

Our therapeutics team continues to demonstrate progress advancing our pipeline of clinical and preclinical programs.

And our new GSK Nonexclusive collaboration extension demonstrates the value of our database as we continued to pursue new opportunities with pharmaceutical and biotech companies.

With that let's open it up to questions.

Thank you and as a reminder to ask a question press star one on your telephone weight.

Wait for your name to be announced until withdraw your question simply press Star One again, one moment for our first question.

Comes from Chad, what Rusky with TD Cowen. Please proceed with your question.

Hey, this is Chad on for Stephen.

I just wanted to see what type of impact you expect from the cyber attack on revenue and costs and did that contribute to the lower guidance and if so what steps should be taken to resolve it.

I can take that question.

Haven't really seen any impact on the stock from the cyber security incident on revenue.

We're continuing to pursue on the cyber security incident investigation, and we don't have any specific guidance on cost estimate of that yet or the insurance recoveries, but well be updating in the future in future quarters.

Yes.

Okay.

Yes.

One thing I wanted to add was just we've had a very intentional push on revenue.

Expansion, so again I just want to be able to push that to you as well as that are not on the cyber security side, but it's been very intentional for us as a company to be disciplined with our marketing disciplined with our cost and really focusing on the margin expansion, which is why we took down the top line because we are not focusing as much.

On that top line acceleration, but really on margin.

Got it and yeah on the point on the higher price point of total health can you speak to some of the market Research you guys spent time on how did you come to the price point and what gives you confidence that our customers are going to be willing to pay that premium versus.

Most cheaper 23 and me plus that's obviously, having some expanded product offerings attached to it.

Yeah. So I can obviously I can take the other bands. So I, there's a there's a whole world I think that is out there where people are looking for access and ease of use for ways that they can make themselves.

Healthier and I think you'd see an explosion of whether it's a watch or is the wearable of some sort or an MRI serve it where people want to get.

Get the focus on being proactive so total health is all about.

During our customers to really hobby operating headset.

Settlement of themselves with their genetic blood with medical guidance.

And those costs are obviously higher like that is very different than the 23 and need help.

Health and ancillary products that we have but this is an ongoing.

So I anticipate with the customer that we're going to have an ongoing relationship with them, where we can really get involved we can coach. They can have interactions with health care providers, we're going to keep following them up with one making sure that they're getting a level of care about themselves that's going to be optimal for prevention. So we did do a fair amount of water.

Search on that you did do a fair amount of assessment of the you know.

What our pricing flexibility could be there are obviously more costs associated with this product, but I believe there is a significant bucket at this price level.

Thanks for the questions.

Thank you one moment for our next question.

Okay.

It comes from the line of David Lebowitz with Citi. Please proceed with your question.

Thank you very much for taking my question.

With respect to the increase.

<unk> pricing.

Could you comment if it's if it's had any impact to this point on your marketing strategy or how it might change your what you plan to do into the holiday to holiday season.

So this is Ann so I assume you mean, the base pricing on the health and ancestry and not so it'll help.

Lee.

Yes.

I think that's definitely been a priority for us our customers see incredible amounts of value from the subscription product a tremendous amount of value.

The health and ancillary service.

So it was absolutely and if you think back on how long we had up at $8 99, or 199 basis points.

It had been a long time since we have raised those prices. So we're quite happy to see that the response from customers. The continued uptake on our subscription part of the product that obviously as we have increased.

Margin from all of our products, but absolutely allows us the opportunity to do more with our working spend in particularly top of the funnel marketing spend where we can have more brand awareness. So you should definitely be looking for us to do more.

More with T V.

More marketing in especially for holiday season and in going forward.

Got it.

Given the nature of the total health product.

Is there.

It primarily going to be a direct to consumer or is there.

Consideration for looking into alternate approaches may be coming from the health care providers themselves.

To try to grow the <unk> product.

Yeah. That's a great question I think we're in the earliest days of launching.

It is really.

<unk> launch so far Mi we see we see demand we see that there is.

There are absolutely clinicians who are out there who would like to offer a comprehensive.

So June their patients, but don't necessarily have that interpretation experience. They don't necessarily have the genetics training and that's where we could potentially partner in the future. So I would look for us to focus on direct to consumer and the short term.

But absolutely we are exploring what are those additional opportunities.

As the product continues to grow and I, just Wanna site and I don't have the specific numbers in front of me, but we did talk about in the past the Medicaid surveys that we get where there is 90 plus percentage of physicians.

That are interested in integrating genetics into their practice and so we see ourselves as that global leader in the delivery of genetic based preventative care. So how is it that we can enable all of those clinicians who are eager to do more to actually be able to do that so.

I think this is a product that will.

Absolutely have a direct to consumer appeal as well as a potential health care provider appeal.

Thank you and on the <unk>.

$20 million payment are we to assume that it's basically going to be.

Paid are amortized over the year, so kind of $5 billion per quarter type thing.

From a cash perspective, we expect to receive.

$5 million.

Q3, and the remainder in Q4 of fiscal year 'twenty four from a revenue perspective, there's only a small amount in fiscal year 'twenty four.

Will be amortized over the period of the agreement.

The majority of bulk land from a revenue perspective in fiscal year 'twenty five.

Got it.

And just jumping over to the other side of the world.

We recently reported data to see.

Could you I guess characterize the 52% greatest had stable disease.

Give us a sense of how that might translate ultimately into clinical response. When you are in your phase Iia.

I think the way to interpret that data this is a phase one.

All solid tumor cancer patients. The primary goal was for wasn't safety.

We were very pleased to have.

Some patients who did have.

A longer time on study and so we wanted to communicate that but we are really happy that the monotherapy.

These are patients who generally do not have a lot of options who have multiple prior lines of therapy. In this group. It was one nine.

Also during the dose escalation in so many patients from receiving a therapeutic doses.

Yes.

I think this really sets us up well for the upcoming phase <unk> data that we're hoping to present that we've been enrolling this year and you know and I think it's just it's really also a sort of a proof that twenty-three Mb therapeutics.

We've created a really solid molecule.

With TK.

Basically that is consistent with the mechanism.

You can find yourself.

One last follow up here.

With respect to the candidate.

Is there any mechanistic rationale you can provide for what cancers you might ultimately choose.

<unk> two <unk> target.

So the nice thing about the targets that we've chosen to give you $200 one and it's like M. C. D 200. It is expressed in a wide variety of tumor types.

These tumors.

That expression will probably play a role in and which patients we chose to move forward with but for the phase Iia the disease areas that we chose to do our expansion cohorts and was primarily driven by CB 202 hundred or one expression and the.

Likely populations you would have in the <unk>.

<unk> stage phase one two population.

In other words.

Watson.

Happy.

Thank you for taking my questions.

Thank you and now I'll turn it over to Ian for any further questions.

Thank you Carmen I will now read the top shareholder questions from Aerospace <unk> technology platform.

This one's for and what are you doing to increase the value of the company.

That is a great question.

This is obviously a top priority for all of us within 23 and me.

I just want to remind you all we are all shareholders I am a large shareholder.

It is a top priority for us to be able to demonstrate.

And get the value that we think that we do.

We all should be should be getting from this company, so first and foremost.

The consumer business is full of incredible opportunity.

And that is why we you know obviously, we have the health and ancillary products, we have been pivoting into a subscription product more and more for all of our customers.

Total health I think is the future of where we are thinking about everything.

There is absolutely an opportunity to be able to have more and more people getting access to <unk>.

<unk> access to their blood access to.

Clinical care.

That is focused on prevention.

So I absolutely believe there's incredible opportunity for all of us on the consumer side on partnerships you can see that we already did our GSK partnership, which we all know there is a real opportunity for 'twenty three need to be helping the entire therapeutics and research business.

World about how they can recruit better how they can potentially promote how could they get leveraged genetics.

<unk> their drug discovery and be more efficient and more likely to be successful because of the utilization of genetics. So by being at the end of the GSK collaboration we really have any significant opportunity now or.

And doing those types of collaborations.

Laughs.

I am thrilled about our therapeutics team and our opportunities that we have here at the Io programs as Jennifer just stated I think our full of opera full of potential <unk> data I think shows that we.

We have our pizza or 14 assets.

Which is slated to violent I M D.

Sure as we said shortly.

As long as we have the opportunities for all of our discovery.

That will be wholly owned now by twenty-three knee. So we have previously stated we focused on inflammation immunology, we have a team that has been working for years with GSK on moving from data.

To the end process of actually having a program in the clinic with human filing the ideas ourselves actually going from against the very beginning all the way actually into humans and I think that there's a huge opportunity for us there.

And then lastly, I just wanted to conclude with the fact that genetics.

It's a critical part that needs to be part of everyone's life their health care, how they are actually making decisions in their health as well as part of the therapeutic process and we have we just want to reiterate that.

The fact that if you start with human genetic information you are more than twice as likely to be successful with your discovery. So again genetics should become an integral part of our lives whether it's in our personal life and our health or in our therapeutics like and how we are taking medications and developing medications.

Okay.

Thank you and next question is for Joe what is the company's plan to address liquidity and decreased cash burn.

Thank you Dan I mean first and foremost the company is trying to increase its revenue and you know basically as Ann mentioned really focused on the gross margin.

For us that means less promotions and we increased prices on our kidney subscriptions, which has been well received by consumers and really we've seen better than expected results there.

We've also launched new products basically we talked a little bit of help now think total health, which we launched yesterday.

And then we actually announced the GSK deal.

<unk> also provided $20 million in additional cash for the company.

Corporate development team is continually working on additional central deals as well.

And then on the cost structure.

<unk> taken significant efforts.

Fiscal year.

To reduce our cost structure first we announced previously done reductions enforced to rebalance.

We have jobs.

Next as we are also working with our therapeutics game and making sure we're utilizing the capital on the assets that really will drive shareholder value there.

And.

Help us also reduce our cash and cash flow.

All of these efforts will help us.

Our cash burn and extend our current cash runway.

He used to be equity average to date.

Hey, Joe This is on for Jennifer can you explain the historical lack of transparency.

Around your drug development efforts and do you plan to be more transparent and moving forward.

Thank you.

We help them and continue to be somewhat constrained in what we can talk about with our GSK collaboration programs.

And largely those.

We do not talk about.

However, we are.

As you can see we've been publishing quite a bit on <unk>.

We will like many other companies continue to announce scientifically relevant data scientific congresses.

We do have.

All the information that we're planning on.

This whole thing just like the agenda since you last week.

We're also excited to be talking more about R&D programs will feature a 14th program. It's an NK cell activator and you're going to hear more from us about that mechanism and and our plans moving forward and finally, we are updating our therapeutics website to be launched within the next few months and that will.

Also provide more information that we have in the past.

Okay.

Thank you Jennifer this one has already been asked in a way, but it was a tough question online. So I'll ask it again, maybe for and while their recent security and a customary counter effect future business opportunities in any way.

A couple of things I want.

To just point out how we did just sign a.

Our new partnership.

Accessing.

The 23, and me dataset being able to leverage that for drug discovery.

With our partner GSK, who has been obviously a long standing partner for us. So I think that it is something that obviously, we we have notified individuals without we have commented on them.

I think it's very important about how we react as you can see we also have implemented two factor authentication. So.

So I think that we are learning we are taking the necessary steps forward to adapt to a environment, where things like credential stuffing.

It's happening more and more.

Being very proactive about how we are thinking about data security.

And I think you can see based on collaborations that we are entering now that there is still an enthusiasm.

And I think based on our BD calendar and the meetings that we're doing there is absolute enthusiasm or the projects you're doing.

No it does not.

But the the incident has not diminished the opportunity for genetics gene still really revolutionize healthcare for consumers or for the industry.

Great. Thank you last one.

Again for in.

You recently announced another subscription business in the consumer business to you.

Expect to continue to move in the subscription model direction or how should we think about the future of the consumer business the.

The future of the consumer business is absolutely about subscription and the reasons for that is that we see from our customers and their behavior. We've had over the last 17 years is that our customers are eager to get more eager to engage and they're eager to keep learning about themselves so for us to be able to financially support.

That kind of innovation and additional data that our customer is looking for we need to evolve from a onetime payment to a subscription model and I think that both the.

The needs of the company is actually having a sustainable consumer business or rather a thriving consumer business as well as hits, our customer goals of being able to get affordable direct access to meaningful information, but continuously innovate and evolve and continuously enabling themselves.

More through their genome as well as the additional data that you provide back so yes, the future of subscription and we're very enthused about 23, new bus as well as total health offerings and I think you can look to us to continue to put more products in the subscription and add more features there.

And thank you all for participating and joining US. This concludes today's conference call and you may now disconnect everyone have a great day.

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Hello, and welcome to the 23 in the fiscal year 2024 second quarter financial results Conference call.

Minder. This call is being recorded at this time all participants are in a listen only mode. After the prepared remarks, there will be a question and answer session.

Now like to turn the call over to Ian Cooney Senior director of Investor Relations at 23, and me to lead off the call. Thank you. Please go ahead.

Encourage you to review the section entitled Forward looking statements in our press release, which applies to this call also please refer to our SEC filings, which can be found on our website.

The Sec's website for a discussion of numerous factors that may impact our future performance.

I'll also discuss certain non-GAAP measures.

Important information on our use of these measures and reconciliation to U S. GAAP may be found in our earnings release.

Joining us on our call today are and what Jackie our Chief Executive Officer, and co founder and Joe South average, our interim chief financial and accounting Officer.

Bill Richards, our head of Therapeutics discovery, and Jennifer Lowe, our head of Therapeutics development will join us for Q&A.

I would now like to turn the call over to Ed.

Thank you Anne.

To kick off the call I would like to start with an update on our strategy 2000, <unk> mission has always been to help people access understand and benefit from the human genome.

The <unk> brand is most known for how we transformed access to genetic information and enabled over 14 million people to learn about themselves their ancestry and their health risks.

Over the last five years, we have increasingly put more effort and resources into how customers will benefit from the human genome.

We have a world class team of statistical geneticist.

Informatica computational biologists and data scientists leveraging the data to create consumer products and discoveries for therapeutics development.

As a reminder, we have three main businesses powered by our database and creating a new future for healthcare powered by DNA.

First our consumer business.

Where we are taking a precision health approach and generating insights to help customers improve their health and health span based on their unique genotypic and phenotypic profile.

We are moving toward a more subscription based longitudinal model. So we can have a positive impact and help our customers take action to improve their health over time.

The subscription business also offers a much more sustainable and attractive operating model for us to create value for our customers and investors.

Second our research business.

This is where we are in discussions with collaborators in pharma biotech and adjacent industries to sell them licenses to our database.

They can then come up with their own insights to help make drug discovery and development more efficient or care delivery more effective.

We currently have one immuno oncology asset in the clinic in phase, one or two a with encouraging early efficacy activity.

Another io assets with a particularly exciting profile and a pipeline of molecules targeting immunology and inflammation in the discovery phase.

We focused the business on creating value from our dynamic data data asset and expect to continue to do so in the future.

As therapeutics assets develop we expect to partner them out to create near term and longer term value inflections for our shareholders. While also getting them in the best hands to develop through approval and commercialization for the eventual benefit of our customers.

Moving to the second quarter and recent events yesterday, we launched a new subscription membership called total health a continued effort to be the world's best at risk prediction.

Total health is our most advanced prevention based health membership.

It includes clinical grade exome sequencing.

<unk> annual blood testing and access to clinicians with unique training in genetics.

Members of total health will also receive all the reports and features offered in our existing 23 in the plus membership.

This membership is where the consumer looking for access to advanced genetic risk testing. So they can focus on ongoing health management do direct access to mitigate or prevent disease.

This is precision health with the support of a clinician who specializes in genetics.

In addition to the launch of total health, we continue to add more value to our 23 million plus membership.

Last month, we introduced 20, <unk> health action plan, a new digital feature that draws on your personal personalized genetic report.

<unk> survey data as well as blood and biomarker data to provide tailored bite sized health recommendations for subscribers to take action.

We also recently launched 23 and me help track a digital health tool aimed at driving behavior change by integrating lifestyle and genetics into a single model for the first time.

In July we launched a new FDA cleared Pharmacogenetics report for 23 million plus members on a commonly prescribed statin called Sim simvastatin.

In 2020 about 8 million people in the U S were prescribed simvastatin, making it among the most prescribed medications in the U S.

This new report allows people to understand how their genetic may impact, how they respond to the statin and whether or not they may experience side effects.

We had another milestone FDA clearance in August to report additional BRCA variance for all 23, and me health plus ancestry customers.

This will allows us to report 41 additional variants in the Bronco, one and brackets Eugene known to be associated with higher risk for breast ovarian prostate and pancreatic cancer.

Many of these additional variance occur more often in populations that have traditionally been underserved by genetic testing, including the African American and Hispanic Latino communities.

As part of the FDA clearance. We were also granted the first ever FDA Predetermine change control plan, allowing us to update our broker report with additional validated variance without additional pre market review.

You can begin to see the significant investment we've been making in our product and report innovation within our consumer business over the last few months.

This includes continuing to provide value in the form of membership services, while expanding margins.

We've seen better than expected results after increasing our kit and subscription pricing with higher margins, partially offsetting reduced kit sale volume.

Certain programs stemming from the GSK collaboration as well as focusing on the immunology and inflammation therapeutic areas.

This allows us to pursue the most impactful programs in the most efficient manner in terms of capital and resources.

In Q1, we discussed pursuing non exclusive collaborations with pharmaceutical companies for target discovery.

We continue to pursue these collaborations across an array of structures and are excited about the opportunity to attract multiple and varied partners in this business.

Last week, we announced progress in this area with a new one year non exclusive data license with GSK, which extends our collaboration.

Under the agreement, we will receive a $20 million upfront payment, which enables GSK to conduct drug target discovery and other research using the 23 in the database.

The license also includes access to certain research services such as further analyses of the 23 and me dataset not provided in the core data release.

As part of this agreement we have made the strategic decision to take the royalty option in lieu of the opt in on three programs. We previously initiated together.

This will help us reduce our cash burn and allow us to focus on our wholly owned programs.

We also continued to advance our pipeline of clinical and preclinical programs.

Last week, we presented positive safety and preliminary efficacy data from the phase one last to a clinical trial of our wholly owned immuno oncology program 23, and me 610, and antibody targeting CD 200 or one.

In two presentations at the society for immunotherapy of cancer and annual meeting we showed the therapy is well tolerated at our highest dose level.

We also reported stable disease, and 52% of response Evaluable participants in our phase one dose escalation portion of the study.

The participant continues on study drug past 40 weeks with stable disease at the time of data cutoff.

Overall, we've demonstrated that 23 million <unk> 10 is well tolerated and shows promising preliminary efficacy in patients with advanced solid malignancies, we are continuing to enroll the phase Iia portion of the trial and anticipate reporting further data next calendar year.

We are also continuing to advance a preclinical program <unk> 2014, and investigational antibody that has dual mechanism.

<unk> <unk> six five and two to restore anti tumor immunity through NK and T cells and inducing FC receptor mediated killing of UL BP 256 expressing cancer cells.

In closing I'd like to provide a brief update on the ongoing cyber security investigation that we initiated early last month.

Detailed information can be found in the in an 8-K, we filed with the SEC and on our blog.

At this time, we do not have any any indication that there has been a data security incident within our own system.

And with that I'll turn the call over to Joe to review, our financial results for the quarter.

Thank you Anne and Hello, everyone.

We remain well positioned to continue advancing our consumer and therapeutics goals or margin expansion momentum continued this quarter had the impact of PGS kitten subscription price increases to date have been better than expected as Dan mentioned earlier.

Revenue for the quarter was $15 million, representing a decrease of 34% on a strong prior year comparable.

As well as nonrecurring payments from other research partners in the prior year.

It also reflects our continued focus on driving improved product margins through higher average selling prices and marketing efficiency, resulting in lower overall volume PGS kit and telehealth quarters. These.

These decreases were partially offset by continued growth in our subscription services.

Looking at the composition of our revenue consumer service revenue represented approximately 97% of total revenue for the three months ended September 32023.

And research services revenue, which was primarily derived from the GSK collaboration accounted for approximately 3% of total revenue for the same period.

Our gross profit for the second quarter was $22 million, representing a 43% decrease over the same period in the prior year.

The decrease in second quarter gross profit was driven primarily by the decrease in research services revenue.

While subscription revenue and improved PGS chip selling prices helped to offset through continued margin accretion within their respective categories.

Turning to expenses.

Total operating expenses for the quarter were $101 million compared to $106 million in the same period in the prior year.

The improvement in operating expenses.

Primarily driven by reductions in marketing advertising spend came to boost efficiency as noted previously.

This improvement also reflects lower personnel related expenses following the reductions in force in June and August earlier this year as.

As well as the disposition of eliminate limited in the U K also in August.

Looking at the bottom line net loss for the quarter was $75 million compared to a net loss for the same period in the prior year of $66 million.

Next our adjusted EBITDA.

For details on how we define adjusted EBITDA as well as the corresponding reconciliations to GAAP. Please see our earnings release.

Total adjusted EBITDA deficit for the three months ended September 32023 was $45 million compared to $30 million deficit for the same period in the prior year.

We ended the quarter with $256 million in cash and cash equivalents.

Third the $387 million as of March 31, 2023.

As appropriate given market conditions.

Our focus within the existing lines of the Pts in telehealth consumer businesses remains unchanged.

We continue to prioritize margin expansion and progressing towards cash flow profitability.

These efforts include ongoing value additions to our current services like the recently announced help track and help action plan features within 23.

These swaps.

The newly launched total health membership, our most advanced and comprehensive precision health service.

The reorganization of our consumer segment to streamline our expense profile.

Within the therapeutics business, we continue to invest in programs, we believe our most strategically and financially valuable.

With the end of the exclusive discovery term under the GSK collaboration in July we decided to narrow our discovery and development efforts to areas that best align with our core strengths.

This resulted in a workforce reduction in August as we realigned our resources to the revamped structure.

Our recent decision to take the royalty option on several programs initiated together with GSK.

Which will allow us to reduce cash burn and focus on our wholly owned programs.

We expect these decisions to yield meaningful economic benefit to future periods.

While we're pleased with this year's progress and excited for the launch of total health, we remain prudent with our outlook given current uncertainties in the macro environment.

Similarly, although the new GSK data license announced last week serves as further validation of our database and the value. We expect the deals $20 million revenue to have minimal impact on this year's results with a majority of landing in fiscal year 'twenty five given the terms of the agreement.

The company is partially adjusting its full year guidance for fiscal year 2004, which ends on March 31 2024.

In terms of revenue we are updating our fiscal year 2020 for guidance to be in the range of $240 million to $250 million with net loss reaffirmed to be in the range of $325 million.

Around $45 million loss.

Full year adjusted EBIT of deficit has reaffirmed to be in the range of $160 million deficit to $180 million deficit for fiscal year 2024.

This updated outlook as a result of Orion.

Commitments and delivering critical insights and value to our customers through impactful new services, while improving our cash flow through better economics unit economics and cost discipline.

Also a reminder, that adjusted EBITDA is our best proxy for cash flow.

And now I'll turn the call back over to Ann.

Thanks, Joe.

At risk prediction.

Our therapeutics team continues to demonstrate progress advancing our pipeline of clinical and preclinical programs.

And our new GSK Nonexclusive collaboration extension demonstrates the value of our database as we continued to pursue new opportunities with pharmaceutical and biotech companies.

With that let's open it up to questions.

Thank you and as a reminder to ask a question press star one on your telephone and wait for your name to be announced until we draw. Your question simply press Star One again, one moment for our first question.

Comes from Chad, what Roski with TD Cowen. Please proceed with your question.

Hi, This is Chad on for Stephen.

I just wanted to see what type of impact you expect from the cyber attack on revenue and costs and did that contribute to the lowered guidance and if so what steps will be taken to resolve it.

I can take that question, we haven't really seen any impact on the stock from the cyber security incident on revenue to date.

We're continuing to pursue on.

On the cyber security incident investigation, and we don't have any specific guidance on cost estimates of that yet or the insurance recoveries, but what we updated in the future in future quarters.

Yes.

Okay.

Yes.

One thing I wanted to add was just we've had a very intentional push on revenue and <unk>.

Expansion, so again I just want to be able to push that to you as well as that are not on the cyber security side, but it has been very intentional for us as a company to be disciplined with our marketing disciplined with our cost and like really focusing on the margin expansion, which is why we took down the top line because we are not focusing as much.

On that top line acceleration, but really on margin.

Got it and yeah on the <unk>.

On the higher price point of total health can you speak to some of the market Research you guys spent time on how did you come to the price point and what gives you confidence that.

Customers are going to be willing to pay that premium versus.

Most cheaper 20, <unk> plus that's obviously, having some expanded product offerings with test to it.

Yes.

I can obviously I can take that advance so I there is a.

There's a whole world I think that is out there where people are looking for access and ease of use for ways that they can make themselves.

Healthier and I think you'd see an explosion of whether it's a watch or is the wearable of some sort or an MRI service.

People want to.

Get the focus on being proactive. So total health is all about empowering our customers to really have a comprehensive.

Settlement of themselves with their genetic blood.

Medical guidance.

And those costs are obviously higher like that is very different than the 23 and need.

Helping ancestry product that we have but this is an ongoing we absolutely anticipate with the customer that we're going to have an ongoing relationship with them, where we can really get involved we can coach. They can have interactions with health care providers, we're going to keep following them up with one making sure that they're getting a level of care about themselves.

Optimal for prevention. So we did do a fair amount of market research on this we did do a fair amount of assessment of the.

What our pricing flexibility would be there are obviously more costs associated with this product, but I believe there is a significant bucket at this price level.

Thanks for the questions.

Thank you one moment for our next question.

May come from the line of David Lebowitz with Citi. Please proceed with your question.

Thank you very much for taking my question with respect to the increased kit pricing.

Could you comment if it's if it's had any impact to this point on your marketing strategy or.

How it might change your what you plan to do into the holiday to holiday season.

So this is Ann so I assume you mean, the base pricing on the health and <unk> and not so it'll help.

Julie.

Okay.

I think that has definitely been a priority for us our customers see incredible amounts of value from the subscription product a tremendous amount of value from the health and ambulatory service.

So it was absolutely and if you think about on how long we had us at a 99% or 199 basis points. It had been a long time since we have raise those prices.

So we're quite happy to see the response from customers.

<unk> uptake on our subscription part of the product that obviously as we have increased.

Margin from all of our products are absolutely allows us the opportunity to do more with our marketing spend and particularly top of the funnel marketing spend where we can have more brand awareness. So you should definitely be looking for us to do more.

More with TV.

And more marketing in especially for holiday season and in going forward.

Got it given.

Given the nature of the total health product.

Is there.

It primarily going to be direct to consumer or is there.

Consideration for looking into alternate approaches may be coming from the health care providers themselves.

To try to grow the <unk> product.

Yeah. That's a great question I think we're in the earliest days of launching this it is really.

A soft launch so far.

Me neither.

We see demand we see that there is there.

There are absolutely clinicians who are out there who would like to offer a comprehensive.

But absolutely we are exploring what are those additional opportunities.

As the product continues to grow and I just want to cite I don't have the specific numbers in front of me, but we did talk about in the past. These netscape surveys that we get where there is 90 plus percentage of physicians.

I think this is a product that will help.

Absolutely have a direct to consumer appeal as well as a potential health care provider appeal.

Thank you and on the <unk>.

$20 million payment are we to assume that it's basically going to be.

Paid are amortized over the year, so kind of $5 billion per quarter type thing.

From a cash perspective, we expect to receive.

$5 million.

In Q3, and the remainder in Q4 of fiscal year 'twenty four from a revenue perspective, there's only a small amount in fiscal year 'twenty four.

We amortized over the period of the agreement.

The majority of the land from a revenue perspective in fiscal year 'twenty five.

Got it.

And just jumping over to the other side of the world.

We recently reported data.

Could you I guess.

Or is the 52% greatest had stable disease.

Give us a sense of how that might translate ultimately into clinical response. When you are in your phase III.

Okay.

I think the way to interpret that data this is a phase one.

All solid tumor cancer patients.

Mary goal was or wasn't safety.

We were very pleased to have some patients who gen Hal.

A longer time on study and so we wanted to communicate that but we are really happy that.

Monotherapy. This is these are patients who generally do not have a lot of options who have multiple prior lines of therapy. In this group was 109. This was also during the dose escalation, but many patients from receiving the sub therapeutic doses.

Yes.

This really sets us up well for the upcoming phase Iia data that we're hoping to present that we've been enrolling this year and.

And I think it's just it's really also a sort of a proof that <unk> therapeutics.

We've created a really solid molecule.

That's.

With PK and safety data is consistent with the mechanism of this drug.

And then try to sell them.

One last follow up here.

With respect to the candidate.

Is there any mechanistic rationale you can provide for what cancers you might ultimately choose.

Two targets.

So the nice thing about the targets that we've chosen to give you 200 or one and its ligand CB 200. It is expressed in a wide variety of tumor types.

These tumor.

Our next question will probably play a role in.

And which patients we chose to move forward with but for the phase Iia the disease areas that we chose to do our expansion cohorts.

Was primarily driven by CB 202 hundred or one expression and the likely populations you would have in the.

Link stage based upon two population.

In other words.

Watson therapy.

Thank you for taking my questions.

Thank you and now I will turn it over to Ian for any further questions.

Thank you Carmen I will now read the Bob shareholder questions from our technology platform.

This one is for and what are you doing to increase the value of the company.

That is a great question.

This is obviously a top priority for all of us within 20 <unk>.

I just want to remind you all we are all shareholders I am a large shareholder.

It is a top priority for us to be able to demonstrate.

And get the value that we think that we need.

All <unk>.

Should be should be getting from this company, so first and foremost.

The consumer business is full of incredible opportunity.

And that is why we obviously, we have the health and ancillary products, we have been pivoting into a subscription product more and more for all of our customers.

Total health I think is the future of where we're thinking about everything there.

There is absolutely an opportunity to be able to have more and more people getting access to an exome access to their blood access to them.

Clinical care.

That is focused on prevention.

So I absolutely believe there's incredible opportunity for all of us on the consumer side on partnerships you can see that we already that our GSK partnership, which we all know there is a real opportunity for 20 <unk> need to be helping the entire therapeutics and research business.

World about how they can recruit better how they can potentially promote how can they can leverage genetics.

Doing those types of collaborations.

Laughs.

We have our <unk> assets.

Which is slated to file an IND.

Sure as we said shortly.

As well as we have the opportunities for all of our discovery.

That will be wholly owned now by 'twenty three needs. So we have previously data we focused on inflammation immunology, we have a team that has been working for years with GSK on moving from data.

To the end process of actually having programs in the clinic with human filing the ideas ourselves actually going from the very beginning all the way actually into humans and I think that there is a huge opportunity for us there.

And then lastly, I just wanted to conclude with the fact that.

Genetics.

I think as a critical part that needs to be part of everyone's life their health care, how they are actually making decisions in their health as well as part of the therapeutic process and we have we just want to reiterate the fact.

But if you start with human genetic information you are more than twice as likely to be successful with your discovery. So again genetics should become an integral part of our lives whether it's in our personal life and our health or in our therapeutics like and how we are taking medications and developing medications.

Okay.

Thank you and next question is for Joe what is the company's plan to address liquidity and decreased cash burn.

Thank you Ian I mean first and foremost the company is trying to increase its revenue and basically and mentioned really focused on the gross margin.

So that means less promotions and.

Increased prices on our kidney subscriptions, which has been well received by consumers and really we've seen better than expected results there.

We've also launched new products basically we talked a little bit of help announcing total health, which we launched yesterday.

And then we actually announced the GSK deal.

<unk> also provided $20 million in additional cash for the company.

Our corporate development team is continually working on additional potential deals as well.

And then on the cost structure.

Taken significant efforts.

Fiscal year.

To reduce our cost structure first we announced previously John reductions enforced to rebalance.

Please have jobs.

Next as we are also working with our therapeutics game and making sure utilizing our capital on the assets that really will drive shareholder value there.

<unk>.

Help us also reduce our cash and cash flow.

All of these efforts will help us decrease our cash burn and extend our current cash runway and we're pleased with the equity efforts to date.

Hey, Joe This is on for Jennifer can you explain the historical lack of transparency.

Around your drug development efforts and do you plan to be more transparent and moving forward.

Thank you.

We have been and continue to be somewhat constrained in what we can talk about with our GSK collaboration programs and largely.

We do not talk about.

However, we are.

As you can see we've been publishing quite a bit on <unk>.

We will like many other companies continue to announce scientifically relevant data out scientific congresses.

We do have a lot of information that we're planning on just one thing just like the agenda since you last week.

<unk>.

We're also excited to be talking more about R&D program featuring 14th program.

Thank you, Phil activator, and you're going to hear more from us about that mechanism and and our plans moving forward and finally, we are updating our therapeutics website to be launched within the next few months and that will also provide more information that we have in the past.

Yes.

Thank you Jennifer this one has already been asked in a way, but it was a tough question online. So I'll ask it again, maybe for and while the recent security in a customer account affect future business opportunities in any way.

A couple of things I want.

To just point out how we did just sign a.

Our new partnership.

Accessing.

The 23 and me.

Dataset being able to leverage that for drug discovery.

With our partner GSK, who has been obviously a long standing partner for us. So I think that is something that obviously, we we have notified individuals without we have commented on.

It's very important about how we react as you can see we also have implemented two factor authentication.

I think that we are learning.

We are taking the necessary steps forward to adapt to a environment, where things like credential stuffing.

It's happening more and more we're being very proactive about how we're thinking about data and security.

And I think you're going to be based on collaborations that we are entering now that there is still an enthusiasm.

And I think based on our BD calendar and the meetings that we're doing there is absolute enthusiasm or the projects we are doing.

No it does not.

But the incident has not diminished the opportunity for genetics gene still really revolutionize healthcare for consumers or for the industry.

Great. Thank you last one.

Again for Ann.

You recently announced another subscription business in the consumer business to you.

Expect to continue to move in the subscription model direction or how should we think about the future of the consumer business the.

The future of the consumer business is absolutely about subscription and the reason for that is that we see from our customers and the behavior. We've had over the last 17 years is that our customers are eager to get more eager to engage and they're eager to keep learning about themselves so for us to be able to financially support.

That kind of innovation and additional data that our customers looking for us we need to evolve from a one time payment to a subscription model and I think that both the.

The needs of the company is actually having a sustainable consumer business, but rather a thriving consumer business as well as hits, our customer goals of being able to get affordable direct access to meaningful information, but continuously seeing it innovate and evolve and continuously enabling themselves.

More through their genome as well as the additional data that you can provide back so yes. The future is subscription and we're very enthused about 23 in the bus as well as total health offerings and I think you can look to us to continue to put more products in the subscription and add more features there.

And thank you all for participating and joining US. This concludes today's conference call and you may now disconnect everyone have a great day.

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