Does the 23andMe Acquisition Make Regeneron a Buy Now?

Have you ever wondered if an established drugmaker could do better at genetics-guided research than a consumer-focused diagnostics business? Well, we could find out.

Recently, Regeneron (NASDAQ: REGN) entered an agreement to acquire 23andMe for $256 million, which is a tiny fraction of its previous market value. You might remember that the genetic testing company filed for Chapter 11 bankruptcy protections in March.

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Regeneron's purchase is still subject to court approval. If it gets a green light, as expected, the company could gain access to genetic data from more than 15 million 23andMe customers worldwide.

Is Regeneron a good stock to buy now in light of a potential 23andMe acquisition? Here's a quick look at what it's paying for to find out.

Image source: Getty Images.

What Regeneron could get for $256 million

23andMe's market cap peaked at $5.8 billion a few months after its stock market debut in 2021. While its Personal Genome Service was popular, most of its market value was based on the hope that it could turn all that genetic data into new blockbuster drugs.

A few years before 23andMe became a publicly traded company, GSK partnered with it to leverage genetic insights for the development of new drugs. At the time, GSK made a $300 million equity investment in 23andMe, which is more than the amount Regeneron could end up paying for the entire company.

Before getting too excited about what looks like a terrific bargain for Regeneron, you should know that GSK and 23andMe amended the terms of their collaboration in 2023. Instead of a multiyear deal with a 50/50 split regarding expenses and profits, GSK paid $20 million for a one-year license and will completely own any new drug that arises from the collaboration. In other words, Regeneron will gain access to data valued at $20 million annually in 2023.

Regeneron shareholders will be glad to learn that the drugmaker's $256 million bid does not include Lemonaid Health, the telehealth operation that 23andMe acquired for $400 million in 2021.

A drop in the bucket

Don't let the low value of Regeneron's bid for 23andMe confuse you. 23andMe is still open for business. If the deal is completed as intended, the personal genomics company will continue sending out and processing test kits as a Regeneron subsidiary.

The third quarter of 2024 is the last period for which 23andMe reported results. During the three months ended last September, revenue reached $60.1 million, or $41 million if we ignore a non-recurring $19.3 million payment from GSK.

Every bit helps, but revenue from 23andMe's gene testing business is hardly significant compared to Regeneron's pharmaceutical business. The drugmaker has four treatments that generate over $1 billion in annual sales.

A reason to buy?

Regeneron's $256 million bid for 23andMe could lead to billions in annual sales if it elucidates a new treatment. That said, the discovery stage is only the first step on a new drug candidate's path to commercialization. It could be over a decade before this investment begins to pay off in ways that are visible on the company's income statement. The potential acquisition makes Regeneron interesting, but it isn't a reason to buy the stock now.

While the 23andMe acquisition isn't a reason to buy Regeneron, the stock's recently depressed price makes it worth a closer look. The company's former top-selling treatment, Eylea, is losing ground to biosimilar competition. Luckily, a next-generation version, Eylea HD, is picking up some of the slack.

First-quarter Eylea HD sales surged 54% year over year to an annualized $1.2 billion, and it isn't the only blockbuster with surging sales in Regeneron's lineup. Revenue received from its Dupixent collaboration partner, Sanofi, surged 30% year over year to an annualized $4.7 billion.

Long-term investors could see a lot more commercial-stage products from Regeneron in the years ahead. The company has about 45 candidates in clinical-stage testing.

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Cory Renauer has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Regeneron Pharmaceuticals. The Motley Fool recommends GSK. The Motley Fool has a disclosure policy.