Most biotechs don't have a diversified business model. They typically develop hardware, diagnostic tests, or drugs, as well as some of the associated platform technologies. But a few competitors, like 23andMe (NASDAQ: ME) and Fulgent Genetics(NASDAQ: FLGT), are pioneering a somewhat different strategy.
Both 23andMe and Fulgent provide genetic testing and diagnostic services as well as perform drug development. The idea is that there's probably a competitive advantage of some kind in drug development, lurking somewhere in the reams of genetic information that the companies generate via their testing services.
So which company is more likely to pull off the diversified biotech strategy more effectively in the long term, given that neither is profitable at the moment?
Image source: Getty Images.
23andMe easily wins the big-data battle
You've probably heard about 23andMe's consumer genetics business. Customers get a sample collection kit in the mail, spit into a tube, and then send it back to the company to learn some of the secrets of their genome. Thanks to that segment -- which in Q3 of its 2022 fiscal year accounted for around 80% of its $67 million in total revenue -- the company has extensive genetic data on more than 13 million people.
Sales of 23andMe kits generate revenue. So does its "personal genome service," which sends customers reports describing the latest research-backed findings about their predispositions and other traits, for a subscription fee. And as if that weren't enough, it's also offered a limited telehealth service since 2021.
In theory, its data trove could help to reduce the time it takes to develop medicines, and management implies that the data could also help to cut down on failure rates as well as costs. Though those capabilities are technically unproven, having all of that information makes it a natural collaborator with larger pharma companies doing drug development, like GSK, which it's working with on several programs.
Aside from its collaborations, 23andMe currently claims to have more than 50 programs; however, it only has one wholly owned program in clinical trials, its immuno-oncology candidate in phase 2.
The catch with this company is that its core consumer business isn't growing by much right now. Over the past three years, quarterly revenue only rose by 39%, which is unimpressive for a growth-stage enterprise. Still, if it can commercialize even a fraction of its pipeline programs over the long term, this period will be a distant memory, and its top line could soar.
Fulgent's near-term trajectory looks a lot better
Fulgent Genetics also has a consumer-facing genetic testing business. But for the most part, it sells its testing kits to genetic counselors and oncology clinics to screen people for hereditary diseases, cancers, and other conditions. That means that its base of revenue isn't as exposed to fickle trends in consumer consumption, and also that its inflow of genetic data is a trickle in comparison to 23andMe. Nonetheless, its actual testing business appears to be capable of growing much faster at the moment.
In Q1 of 2023, this business brought in $66.1 million in total revenue, down from $320.2 million a year prior. That's due to the erosion of its coronavirus diagnostic segment, which was never intended to be part of the company's core long-term business.
In the same period, however, its core testing segment exploded by 150%, from just over $25 million to $62.7 million. Management credits high demand for its precision diagnostic and pharma services segments, which are its largest target markets and focus points for its expansion efforts. By next year, it'll likely return to steady top-line growth.
But Fulgent's drug development capabilities are nascent in comparison to 23andMe's efforts. It has one pipeline program, FID-007; this is being investigated in a trio of phase 1 clinical trials to see if it's safe in patients with head and neck cancer, as well as pancreatic cancer and immune checkpoint inhibitor-resistant cancers.
The one thing Fulgent has going for its pipeline is its novel nano-encapsulation drug delivery platform -- basically, a very tiny capsule that protects the drug’s active ingredients while they get to where they need to be metabolized. While the platform is unproven, 23andMe doesn't have anything similar. Thus, it wouldn't have similar opportunities down the line.
A close call, and it might change over time
23ndMe's core testing business isn't expanding at the same pace as Fulgent's, and so its near term doesn't look as favorable.
However, if you're looking for a long-term investment in a biotech stock -- and the long term is where you should be focusing in general -- 23andMe is the better option given its potential future revenue from drug development and collaborations.
Of course, a lot could change over the coming years, and both businesses still need to prove core elements of their diversified strategies. So while there's a good argument to make for buying both stocks, there's also no rush, and they're both a touch risky at the moment.
10 stocks we like better than 23andMe
When our analyst team has a stock tip, it can pay to listen. After all, the newsletter they have run for over a decade, Motley Fool Stock Advisor, has tripled the market.*
They just revealed what they believe are the ten best stocks for investors to buy right now... and 23andMe wasn't one of them! That's right -- they think these 10 stocks are even better buys.
*Stock Advisor returns as of May 15, 2023
Alex Carchidi has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Fulgent Genetics. The Motley Fool recommends GSK. The Motley Fool has a disclosure policy.
