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23andMe is a pioneer in consumer drug development. Relying on the Internet for unique distribution of its genetic-testing kits, the company’s sourcing of patient samples is an incredible moat. The company is one of the few healthcare companies to have a direct relationship with patients. Moreover, 23andMe’s direct-to-consumer (DTC) engine generates some amount of cash ($10Ms annually) providing a different pathway to create new medicines. Most drug companies have a binary cash-flow whereas 23andMe has been able to design a business model with steady cash flow and an increasing ability to develop drugs. As a result, the business ought to have cash as a buffer and ideally valuable options that might provide very large amounts ($10Bs) later on.
The over-the-counter (OTC) model for drugs is much older and worth studying to understand how the DTC model 23andMe is pursuing will likely play out. Companies selling aspirin and tylenol don’t rely on IP to maintain pricing power — they create and maintain brands to attract customers. Instead of making large capital investments up front to make drugs then brand…
