Uncle Sam Hooks Up 23andMe
23andMe is a personal genomics and biotechnology company founded in 2006 and based in Mountain View, California. As you may recall from middle school science class, normal human cells have 23 pairs of chromosomes. It is from this biological fact that the company derives its name. They were the first to offer autosomal DNA testing as a means of determining ancestry, and that method has since become the standard practice of all major companies in the industry.
Right out of the gate, the company received numerous accolades, including the enviable designation as Time Magazine’s “Invention of the Year” in 2008. At that time, though, 23andMe wasn’t even close to being fully cooked. At the beginning, anecdotes around the topic of 23andMe ancestry kits revolved largely around people who were finding long-lost relatives or, more commonly, discovering siblings they never knew they had. Unfortunately for a handful of others, decades-old marital infidelities were revealed when some adults learned the unexpected identities of their biological parents. The interesting tales varied widely, and they only became more interesting in 2009 when 23andMe started including tests for genetic markers of specific medical conditions. This expansion into a new frontier would dramatically change the nature, and the reputation, of the service this company provides.
The testing kit stories transitioned from cute, Reader’s Digest content (or divorce court drama) to more sobering, and often lifesaving, topics. A user learned of an increased risk of emphysema, and he was able to take preventative action. One woman discovered a previously unknown BRCA1 genetic mutation, which puts patients in a higher risk category for breast and / or ovarian cancer, and the blood test that followed came out positive. Early detection saved the woman’s life. Last March, 23andMe told CNBC that it is upgrading its $99 and up at-home DNA test to include a report on diabetes, with an explanation on both the genetic and lifestyle factors that influence who’s likely to get the disease in their lifetimes. Considering that about three million Type 2 diabetes cases are reported annually in the United States, this enhanced diabetes segment has a strong likelihood of significantly expanding 23andMe’s customer base.
A recent ruling put forth by the U.S. Internal Revenue Service will add even more fuel to this anticipated proliferation of 23andMe’s sales. While healthcare regulators are known to maintain a narrow definition of what can be classified as “medical care” when it comes to over-the-counter testing products, the IRS has decreed that the health facet of 23andMe’s offerings fits the bill. According to 23andMe, customers can now claim almost 60% of the $199 cost of a “complete” kit (which includes ancestry and health testing) as medical care for tax purposes, and that this should apply to any 2019 purchases.
The tax break applies to purchases made with Health Spending Accounts (HSAs) and Flexible Spending Accounts (FSAs). Holders of such accounts often conduct shopping binges for eligible medical items like denture cleansers, antacids, and first aid kits in December. The end-of-year spike is the result of these tax-advantaged accounts’ policy of reclaiming unused funds at year’s end. It remains to be seen to what extent the new IRS policies will truly pump up 23andMe’s sales now that the DNA testing kits can be included in these shopping lists. It is likely to make a meaningful difference in the company’s bottom line.
Of course, as a private enterprise, 23andMe doesn’t have to show this bottom line to outsiders. That’s the responsibility of publicly traded companies who are required to issue quarterly reports to all who wish to see them. On that topic, Rock Health is “the first venture fund dedicated to digital health”. In other words, they are a fund that is dedicated to supporting entrepreneurial efforts that reside in the intersection of healthcare and digital technology. Rock Health has 23andMe on its “watch list” of twenty-three startups that might be among the next to conduct an IPO. When that public debut happens, we will all be given a good look at how things like tax breaks and product scalability propel sales for this innovative company.
We at Iron Edge VC are proud to have pre-IPO access to 23andMe shares. If you would like to learn more, or if you know of anybody else who would, please do not hesitate to contact us by clicking “Get in Touch” below.
As always, shares are available on a first come, first served basis.