Digital Transformation — Strategy Report for 23andMe — Biotech Industry
This report comprises two parts: a literature review-based analysis of business models enabled by digital technologies in the health sector, focusing mainly on the company 23andMe, a consumer genetics and research company disrupting the healthcare industry. Secondly, it proposes a digital transformation strategy for 23andMe to successfully capture the value of its innovative digital products and services.
1. Literature Review
Digital transformation is enabling new business models in unprecedented ways. New digital technologies change how organisations create and capture value (Chang, 2022). The convergence of digital technologies is enabling new value propositions and value creation opportunities across industries whilst creating new sectors (Cambridge IfM and IBM White Paper). One industry that is becoming completely transformed by digital technologies is healthcare. According to Gehde et al., (2022) digital health is the incorporation of digital technologies in form of devices, information and communication technologies and data, as a main element in a business model to improve human health, healthcare services and wellness for individuals and society.
Digital transformation impacts the incentives and constraints for entrepreneurial activity by lowering costs. The healthcare industry is prone to be affected by digital technologies such as Cognitive and AI, Mobile and IoT to drive costs down in a disruptive way (Cambridge IfM and IBM White Paper). This industry has seen several digital ventures emerge in the last decade (Gehde et al., 2022) thanks to the convergence of increased performance and reduced cost in computing and synthetic biology, especially genome sequencing, which has reduced its price in the last twenty years, falling even faster than Moore’s Law predictions (Wired, 2022)
Digital technologies decrease costs in multiple dimensions inducing transformations in business incentives (Vannuccini, 2022). Replication costs fall close to zero in digital services; for example, a big data analysis can be performed in a different database with almost no additional costs enabling scalability and a business model based on a mass scale of users, enabling lower prices for users. Other costs lowered are tracking consumer preferences boomed thanks to prediction algorithms and big data, lower experimentation cost, and hence allowing personalisation of services by leveraging data. Finally, experimentation becomes easier because of the lower costs of replication and interconnection between digital products/services with the possibility to experiment with new forms to extract value (Vannuccini, 2022).
The enabling nature of digital transformation is what Nambisan et al. (2019) refer to as generativity, i.e., the capacity exhibited by digital technologies to produce unprompted change through blending or conceptual integration, leading to consequences that are not always linear or predictable from the inputs. Since the human genome project, which decodified the whole human DNA, the cost of genotyping and computing has been decreasing enabling a range of opportunities for the healthcare industry that are not yet fully foreseen.
The human genome, once genotyped, can be understood as any other database, but an exceptional one that summarises the information that makes us unique as humans. A total of 3 billion base pairs compose the genome, however only 0.5% explains the genetic variations among humans; if that data is harnessed, it becomes a rich strategic resource that could help to approach health in a personalised manner, changing the paradigm of one-size-fits-all healthcare and allowing drug discovery and many other innovations based on larger samples of data.
One company attempting to seize this opportunity is 23andMe, a consumer genetics and research company founded in 2006 that provides the only FDA-approved direct-to-consumer genetic testing service that generates customised reports on customers’ ancestry and genetic predisposition to illnesses. In order to provide that information, the technology relies on matching the DNA sample received to its database which implies that the larger the database becomes, the more accurate the results will be (C, 2019) ; this network effect is the fundamental for a successful monetisation strategy
The access to their customers’ data enables a business model that can be understood as a two-sided market, in other words, a market in which two different user groups interact via an intermediary economic platform, known as a “two-sided platform” (Rochet, 2003). In this case, a user group is the people who want information about their own genes for multiple purposes, and the other group is researchers and others who want access genetic, web behaviour and self-reported information, creating value for both sides and producing an exchanged that otherwise would not have occurred.
Platforms can be successful models as they can appropriate the value generated by key ingredients of digitalisation: economies of scope, increasing returns to scale and are prone to monopolisation and concentration, and are impacted by network externalities. (Vannuccini, 2022). However, creating a successful platform business is not always easy. The next section explores a strategy to extract value from 23andMe platform model.
2. New Digital Transformation for 23andMe
Current Status of 23andMe
23and Me have built the world’s largest crowdsourced platform for genetic research gathering a database of 13.4M genotyped customers, with 80 percent of customers participating in opt-in research allowing the use of the information for several research purposes. The two main revenue streams are consumer services (home genetic kits and memberships) accounting for 82% of the revenue and research services accounting for 18% of the revenue, with a total revenue of $272M during the financial year of 2022 (23andMe, 2022)
The “platformisation” of its service can be compared with any platform, however, instead of receiving the service for free like in most cases, customers pay to help build the 23andMe database driven by the curiosity and insights about their ancestry and health. The price for customers to receive a genetic test and, once it’s sequenced, access their genetic information is about $99 (what previously used to cost $999); this is a one-off price. Additionally, customers that want to access further health insights can subscribe to a membership priced at $20 annually. External sources suggest that this price does not cover the logistic and operational costs involved in the transportation of the genetic test and the genotyping (Axial, 2020). Therefore, is inferred that as a business strategy to realise network scale effects, the price has been subsidised to reach a critical mass that can enable accurate results for the customers and a substantially extensive database for research purposes.
However, after 16 years of operation the viability of the business model is in question. According to Seeking Alpha 23andMe has been a money losing investment since it went public through a special-purpose acquisition company in 2021. From 2017 to 2019 the home testing industry had a boom but by 2020 it had started to decline during the COVID19 pandemic. In terms of financial results, 23andMe is seeing its revenue decline as operational expenses accelerate. Reaching profitability and adapting to the economic recession is an imperative for the company. The next section explores strategies for 23andMe to achieve this ambition through digital transformation lenses.
Strategy
The biggest assets of 23andme are the possession of the largest DNA database of genotyped users (13.4M) and 30,000 health-related surveys from users in their web and mobile platform, which gives them a competitive edge as the “Google of personalised health care”. Indeed Patrick Chang, one of the board members have stated that the long game is not to make money selling kits, although the kits are essential to get the base level data. He stated that “Once you have the genetic data on a massive scale it could become an extremely valuable commodity to pharmaceutical companies, hospitals, and even governments. This is where the real growth potential is.” (Fast Company, 2015). However, capturing the value of this potential commodity has not been fully seized yet, therefore in this section strategies to achieve a successful and profitable business model for 23andMe will be explored.
Successful platforms shift the locus of power and value capture by becoming intermediaries between parties. As observed by Kenney et al., (2021) value creation is accompanied by value extraction that is only possible because it has become a powerful infrastructural component for the entire industry. From this point of view 23andMe must either create a new infrastructure for research and other purposes or make room for themselves in the current health care industry.
One of the reasons why 23andMe has the potential to disruptive the health industry is because it approaches health from a preventive point of view, changing the common paradigm of reactiveness that dominates the industry. This powerful approach suggests that trying to embed themselves through existent infrastructures of patient healthcare might fail, as the incentives of this industry go in contradictory ways. Instead, this strategy suggests the creation of a new infrastructure around preventive healthcare which could combine a series of activities and technologies as described below.
Business Model Configurations
Based on the business model configurations for digital healthcare developed by Gehde et al. (2022), the four activities that 23andMe can do to create value are to take part in 1) Consumer health and wellness 2) Clinical trials, 3) Drug discovery and 4) Therapeutics and disease management. Combined with varied digital technologies such as 1) Big data, which analyses and generates data for research and decision making, 2) AI based supportive technologies based on artificial intelligence software or algorithms 3) Software for a variety of applications and systems, and 4) Wearable devices which track fitness activities and other self-monitoring activities such as tracking chronicle illnesses. These overlap of activities with digital technologies could provide a stronger business model to capture value using their app and platform customer interface.
Consumer health and consumer wellness
Preventive health takes many shapes and links with nutrition, fitness and beauty. By providing personalised advice based on genotypic features, a powerful online health coach can be created. Cross-analysing genetic predisposition, daily habits and health measurements can achieve a more comprehensive coach personalisation. To do so, wearable devices could be integrated with the 23andMe platform to feed additional data, and therefore taking advantage of big data.
Clinical trials
Through the 23andMe platform, which aggregates users highly committed to their health, the recruitment of participants for clinical trials with specific genotype features can be facilitated, saving significant resources to pharmaceutical companies. Through their platform participants could be invited to clinical trials, AI could learn from what participants are more interested or willing to take part in them.
Drug Discovery
Genetic data contains valuable information that can explain rare illnesses and, when well understood, can lead to drug discovery to treat diseases. With the largest genetic database (Big Data) and survey user AI algorithms could discover powerful insights.
Therapeutics and Disease Management
Once a patient has been diagnosed with a disease, a specific treatment is often required, which links with genetic data. By grouping other people with similar conditions through the platform web software further support can be provided. Additionally, health providers can be linked to the platform to enable the treatment of patients for their specific genetic conditions.
Additional recommendations
The above areas suggest activities and digital technologies to accrue new value. However, is also important to highlight key mistakes that should be avoided by 23andMe to make sure they can capture the value of their innovations. A study of more than 250 platforms revealed why most failed (Yoffie, et. al 2019), some of the common mistakes are mispricing on one side of the market and failure to develop trust with users and partners, both areas will be analysed below.
Pricing
As stated by Yoffie et al. (2019) a platform often requires underwriting one side of the market to encourage the other side to participate. In the case of 23andMe, customers are subsided to encourage them purchasing kits and taking part in the platform. If integrated with added services/activities as mentioned above the price facing customers could be increased allowing additional revenue streams. On the other side, the companies wanting access to genetic information for different purposes need to be charged in a price structure that can develop profitability. In this B2B model, the value needs to be capture effectively. For example, by partnering with pharmaceutical companies for drug discovery and sharing the profits of newly discovered drugs or recruiting participants for clinical trials and charging competitive prices that still ensure profitability.
Developing trust with users and partners
Trust is a very important issue for 23andMe, a large number of people feel deterred from joining the platform because of fear of handing their genetic information to a company. Clear terms and conditions, education and transparency are key to lower users’ anxiety. At the same time, investing in strong cyber security systems is very important as all the value could be lost if a cyberattack is to occur.
3. Conclusion
Digital transformation is disrupting the way businesses exist, which, in conjunction with other technologies, such as synthetic biology, creates high levels of complexity. Reaching profitability for digital business models is challenging, and it certainly is for 23andMe. The required initial level of investment is significant to allow experimentation until businesses can achieve a robust strategy for profitability. This report recommended four activities that, in conjunction with digital technologies, can be created to diversify 23andMe revenue streams.
