(Corrects to say the company filed for bankruptcy in March, not last month, in paragraph 3 of May 19 story)

By Mariam Sunny and Siddhi Mahatole

(Reuters) -Regeneron Pharmaceuticals said on Monday it will buy genomics firm 23andMe Holding for $256 million through a bankruptcy auction, and promised to prioritize the ethical use of DNA data from customers using ancestry testing and other services.

Through the deal, Tarrytown, New York-based Regeneron aims to bolster its capabilities in genomics-driven drug discovery by integrating 23andMe's trove of more than 15 million customer DNA profiles, collected via its popular direct-to-consumer saliva-testing kits.

South San Francisco, California-based 23andMe filed for bankruptcy in March, seeking to sell its business at auction after a decline in consumer demand and a 2023 data breach that exposed sensitive genetic and personal information of millions of customers.

The second-highest bid, for $146 million, was submitted by a nonprofit research institute founded by 23andMe's former CEO and cofounder Anne Wojcicki, according to court documents.

The transaction, expected to complete in the third quarter, puts the spotlight back on data privacy issues sparked off by the data breach. 23andMe, once a trailblazer in ancestry DNA testing, has also faced dwindling demand for its core services.

The transaction "starts to bring about a good conclusion to what otherwise could have been a difficult bankruptcy case," said trial attorney Daniel Gielchinsky, co-founder and partner at DGIM law.

Gielchinsky said Regeneron, with its proven track record, will do a better job in the long run of protecting consumer information safeguarded by privacy laws.  

The hack and subsequent bankruptcy filing have drawn scrutiny from U.S. lawmakers concerned that genetic data on millions of customers could be sold to unscrupulous buyers.

Acknowledging the heightened scrutiny, Regeneron on Monday said it will uphold 23andMe's existing privacy policies and comply with all applicable data protection laws.

Regeneron also committed to working transparently with a court-appointed independent overseer who will assess the implications of the deal for consumer privacy. 

The overseer is expected to deliver a report to the bankruptcy court by June 10. The court is scheduled to consider approval of the transaction on June 17.

The investments in genomics "make good strategic sense" for Regeneron, but might take a decade or more to see a return, Bernstein analyst William Pickering said.

As part of the agreement, Regeneron will acquire all units of 23andMe except its on-demand telehealth service Lemonaid Health, which is being shuttered.

After the transaction, 23andMe will operate as a wholly owned unit of Regeneron.