Customer and shareholder panic attracts industry criticism.
The popular genetic testing company 23andMe has filed for Chapter 11 bankruptcy as its stock price plunges to under a dollar and states’ attorneys counsel citizens to delete their sensitive DNA and personal data. The dramatic legal maneuver draws scrutiny of potential industry risks to the security of personal information and the viability of the company’s business model. However, deeper inquiry suggests the company will likely resume operations as it strips liabilities through bankruptcy, with no effective change in ownership of its DNA database.
Testing Saliva
23andMe is a prominent leader in the popular genetic testing field. Companies including MyHeritageDNA, LivingDNA, LetsGetChecked, and Ancestry.com sell kits that allow consumers to spit in a tube or provide a cheek swab and send it in to a lab for robotic testing that creates a DNA data file used to trace their genetic history. 23andMe, once valued at $6 billion, was a leader in the fad until a data breach caused customers to balk – and sue. The company also collects detailed personal background information, making customers concerned about losing private information when nearly seven million files were hacked.
Yet this is part of the 23andMe brand: it bills itself as “the world’s largest contactable genetics community” because it can tap into its customer base post-spittle collection to solicit willingness to participate in drug and other trials. It employs the catchy motto “Tomorrow’s medicines are in our genes,” making its business model unique within the saliva testing industry:
“We provide large-scale genetic evidence from an engaged participant community to support the drug development lifecycle. Biopharma partners collaborate with 23andMe to understand disease biology, identify novel targets, boost clinical trial success, and engage people in their care.”
23andMe used this additional data to sell beyond its individual consumer base. It offers services to researchers seeking participants for studies, including drug trials. Indeed, the vision of company founder Anne Wojcicki was to revolutionize the future of genetics and healthcare, including research and drug development. Some 15 million customers have provided the company with their spit for testing, but a 2023 hack of that sensitive data put the brakes on sales. Concurrently, income from vaunted projects to sell data access to other private sector companies did not yield sufficient profits, partly due to the self-reported nature of the non-DNA data, regarded in the industry as less reliable than doctor-reported records.
Consumer Anxiety
Much media coverage has concerned the possible abuse of sensitive data by potential suitors who could use it for nefarious purposes. Criminal investigations, illicit intrusions into people’s private lives (customers even provide details of drinking habits), or misuse by marketers, social media manipulations, or the life insurance industry all have raised their hypothetical heads as possible threats to consumers who submitted their saliva for testing and their private lives for cataloguing. The bankruptcy process includes assurances that existing privacy guarantees will bind potential purchasers, shallow comfort when 23andMe already lost its grip on security.
However, the company’s most likely suitor is Anne Wojcicki. 23andMe’s independent directors resigned en masse when internal negotiations for Wojcicki to buy the company and take it private broke down, and she has indicated an intention to bid now that the bankruptcy filing has held creditors at bay while the company continues its operations. Though the company was incurring destructive losses, filings indicate its $277.4 million in assets exceed its $214.7 million in debts.
The Chapter 11 bankruptcy process is not a simple liquidation in which all assets are sold, but a reorganization process by which struggling companies can get help to continue operating and “come out the other side” as viable businesses. In the case of 23andMe, the company had already laid off some 200 employees (40% of its workforce) and shuttered its unprofitable therapeutics division. It is using the reorg to terminate burdensome commercial leases that were strangling its shrinking profits, seeking court approval to reject lease contracts in San Francisco and Sunnyvale, California. Tellingly, 23andMe also faces a $30 million settlement of a class action lawsuit for its 2023 loss of data, which also is under threat of reduction or erasure as part of a reorganization. JMB Capital provided an interim $35 million in debtor-in-possession financing to support its efforts to reboot.
Leaning Down for Business
This appears to be a classic “lean-stripping” maneuver whereby Wojcicki can create a new corporate entity to purchase the existing assets of 23andMe, including the valuable personal DNA and data files, while forcing a write-down of creditor liabilities and escape from high leasing contracts. This creates a fresh balance sheet and a fresh start, leaving creditors with losses – but less so than in a chapter 7 liquidation that would extinguish the company as a going concern and offer creditors mere pennies on the dollar.
This restructuring appears the most likely outcome for 23andMe, which would leave customer data in the same hands that lost grip on that information in the past, not a Chinese spying entity or other feared nefarious actor. Even without irate customers foaming at the mouth over the allegedly negligent loss of their private data, submitting saliva for testing is a short-term profit model for lack of recurring customer purchases. Whether selling personal and DNA data to pharmaceutical companies is a viable long-term business model remains to be seen. 23andMe will likely survive another day to try; its valuable tradename will most likely be sold to Wojcicki if she buys the stripped-down venture out of bankruptcy.
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