The Company Buying 23andMe Is a Pharmaceutical Giant. Here's How Investors Can Benefit From the Move.

Regeneron Pharmaceuticals (REGN) has agreed to acquire substantially all of 23andMe's assets for $256 million, a deal expected to close in Q3. The acquisition gives Regeneron access to DNA data from 15 million customers, potentially aiding drug development through AI analysis, aligning with Regeneron's strategy of associating genes with disease. While Regeneron's Q1 sales declined 4% due to increased competition for its leading drug Eylea, the 23andMe acquisition could enhance long-term growth prospects, despite shares being down 17% year-to-date.

Analysis

Regeneron Pharmaceuticals (REGN) is acquiring substantially all assets of bankrupt biotech firm 23andMe for $256 million, a deal anticipated to close in the third quarter. This acquisition, while modest against Regeneron's nearly $3 billion free cash flow over the past four quarters, provides access to DNA data from 15 million customers, with 84% consenting to its use for research. This data trove is particularly valuable in an era of AI-driven analysis and aligns with CEO Leonard Schleifer's emphasis on associating genes with disease for improved healthcare outcomes and risk minimization, positioning genetics as a key pillar of Regeneron's growth strategy. The acquisition comes as Regeneron faces challenges; first-quarter sales fell 4% year-over-year to just over $3 billion, driven by a 26% decline in sales of its leading drug Eylea due to increased competition, and a 20% drop in overall product sales, mitigated somewhat by strong collaboration revenue. Despite these headwinds and its stock being down 17% year-to-date as of May 28, Regeneron possesses a robust pipeline with dozens of therapeutic trials. The 23andMe assets could potentially enhance this pipeline by identifying new drug candidates, though such benefits are expected to materialize over the long term. The primary value for Regeneron appears to be in the research data, not in continuing 23andMe's consumer-facing DNA testing services, which were unsustainable. Currently, Regeneron trades at a modest 15 times trailing earnings, below the S&P 500 average of just under 24.

Key Decisions for Investors

• Investors should view the 23andMe asset acquisition as a long-term strategic investment by Regeneron aimed at bolstering its drug development pipeline through enhanced genetic research capabilities, rather than expecting immediate financial returns from 23andMe's former business model.
• Given Regeneron's current valuation at 15 times trailing earnings and recent share price decline of 17% year-to-date, the acquisition could present a catalyst for future growth, making the stock a potential consideration for long-term portfolios, contingent on successful data integration and R&D advancements.
• Monitor Regeneron's progress in leveraging the acquired DNA data for new therapeutic discoveries and the performance of its existing drug pipeline, as these will be key determinants of the acquisition's success and the company's ability to address its recent sales decline.
• Be aware that while the acquisition offers significant potential, the realization of benefits from big data in drug discovery can be a lengthy process with inherent uncertainties.