Preliminary disclaimer: In order to continue being completely transparent with you all, I need to disclose that I was previously an employee of Roman Health Ventures (“Ro”), a direct competitor of Hims & Hers Health (HIMS). While I have not been an employee of them for several years, I’m still very knowledgeable about the inner workings of this industry and still hold shares as a previous employee.
While I may drop in publicly available information about Ro for this particular research, I am not speaking for or on behalf of Ro nor do I have any inside information about anything since I left that position. This research will be strictly focusing on Hims and why I believe it’s a multi-year success story.
Hims & Hers Health (HIMS) has been on my radar for quite some time. As a previous employee of Ro, part of my job was to keep track of the competitive landscape and HIMS happened to be within that scope.
When the company first went public via a SPAC in early 2021, I was very open on Twitter about my pessimism about it being overvalued which inevitably was true and led to its nearly 80% decline.
It bottomed in May of 2022 and has slowly been climbing its way back up ever since by showing strong underlying fundamentals and eventually becoming GAAP profitable for the first time earlier this year. While it made no sense for me personally to increase my exposure to the space by double-dipping with Hims (since I already had my Ro shares), Ro’s public comments about not focusing on an IPO at the moment changed my mind on things.
In an effort to possibly reward myself with a competing company’s growing fundamentals and liquid nature, I ended up taking a very large position in Hims which I disclosed to you all on May 12th.
However, as sell-side reports claimed that Hims was getting too far ahead of itself and Andrew (CEO) decided to make some pretty unnecessary Twitter comments about the Israel/Palestine war, the stock dipped another ~10% after an already ~15% decline from the earlier SS reports.
Despite all that, Hims was able to show another strong earnings report (Q1’24), upbeat guidance, and a new compounded GLP-1 offering which has led the stock to return just shy of 85% since bottoming out in early May. My position alone is up >70% since the end of March.
As I mentioned in past posts, the positions that I hold are meant to be held for a while. I'm not good at trading for the short-term and the added stress of that does not interest me, especially when as an investor you need to consider the tax implications of such a strategy. Something I learned from Ron Baron.
But while the stock is up >560% since May 2022, and 133% year to date, I do not think that this means the story is fully played out. Trading at 3.4x EV/Sales and 33x EV/EBITDA with no debt, an >$200 million cash war chest, and positive FCF over the last 5 quarters (and growing), I think the execution of Hims and market potential is still very much in the early innings.
Below is why it’s (now) my second largest position and why I’ll look to continue sizing up as the opportunity presents itself. My valuation model is included at the end.
Thinking about if it’s worth it? Click here to see past work.
The (Quick) Backstory
For those of you who don’t know, Hims operates a men’s and woman’s (Hers) telehealth platform that connects patients (and consumers) to licensed healthcare professionals in the U.S. and U.K. These licensed professionals are only able to help patients with conditions that Hims treats and is not a replacement for your PCP — at least not yet.
You can see how the telehealth process works here.
Now just like Ro, Hims started out by creating a platform to tackle a few key pain points affecting patients nationwide.
Being able to see a doctor quickly — via their platform, patients can typically speak to a doctor in ~24 hours, which is a stark comparison to the average 26-day wait to make an appointment with your regular doctor.1
Addressing highly stigmatized conditions, like erectile dysfunction, hair loss, and premature ejaculation that makes patients feel less about themselves.
Providing top-notch treatment services and prescription medication at an affordable, non-insurance cash pay alternative. They currently do not take insurance but their products are offered at a significantly reduced cost of 50-80% off retail prices.
Delivering it discretely to your door in a few short days without ever needing to leave your home.
These 4 key business offerings are what helped convince patients to start addressing their conditions and seek treatment finally. As you can imagine, this platform offering paired with COVID propelled Hims to be a category leader in telehealth services, with over 1.7million subscribers in just a few years.
Source: Company Financials.
The necessity of needing to speak with a doctor, huge stimulus, and cash savings allowed Hims (and others) to pull forward years of demand and time to build trust in just a matter of months.
That’s the short backstory on the company but why do I believe that there’s to be more reward in the future for investors? It starts with what I believe are the 4-pillars of success.
The Core Pillars of Continued Success
When it comes to making decisions to take a position in a company and then determining the size of each position, the easier it is to understand the company the better it is for you, me, and anyone else that’s reading this to feel confident that they know what, with a degree of confidence, is under the hood.
Despite being in the telehealth space, the business is not hard to understand which has made it quite successful over the last 2-years, returns-wise. Since Hims is in the business of diagnosing, prescribing, and fulfilling delivery of medication (only if applicable) via an online platform, the company runs on a few KPIs that will be reinforced as I break down my pillars.
They are listed below and lightly explained.
Now while there are plenty of other KPIs that go into running the business and providing excellent and fast service, etc., the above are the core ones to making the business widely successful.
In no particular order, let me go into what I believe are the key pillars that you as an investor should care about and why.
1) Multi-Month Offerings
One of the keys to any successful DTC business is improving your AOV and extending how much supply your customer purchases at a single time, hence contributing to the higher AOV. With each customer being able to tack on more products (hopefully more expensive ones too) and opt-in for longer duration supply (right now the default is a 1-month supply subscription), you immediately improve your retention and reduce your payback period.
The only way this works is if customers understand the value being offered to them and are willing to fork up more money upfront in the name of getting a better deal. Hims has done an excellent job offering products where customers are choosing to select a longer-duration subscription for a slightly better price.
Source: Company Financials.
Source: Company Financials.
Currently, the % of subscribers who have opted for a multi-month product offering stands at just under 83%, increasing 1,440bps from 68.3% over the last 2 years. As multi-month subs continue to command a larger share of subscriptions, this has allowed AOV to grow, directly affecting Hims payback period to be < 1 year.
Source: Company Financials.
As more conditions continue to be offered on the platform and more treatments are available for prescription/purchase, we should see both positive trendlines continue to contribute to the company’s overall margin expansion.
2) Personalization Through Compounding
This one is probably the most important when it comes to the success of Hims. Comparing early Hims and my experience with Ro, compounding wasn’t top of mind. In order to gain the trust of patients to a new concept — seeing a doctor online — we typically only carried branded or generic drugs. That way patients didn’t think we were selling horse pills or random concoctions of drugs to help with their condition.
This had a few positives. It created trust with new customers and allowed us to make inroads with pharma companies looking to partner with online telehealth providers for existing and future drug launches.
Over time though, custom products started making their way into the product offering, mainly on the OTC side. Formulated with the help of licensed doctors and clinicians (to add legitimacy), Hims soon discovered that personalization through compounding was going to be a smart strategic move that set itself apart from many other telehealth providers.
From a science and care perspective, one of the main benefits of compounded medications is that they can be customized to meet the specific needs of a patient. For example, a compounding pharmacist can create a medication in a different dosage form, such as a cream or a lollipop, to make it easier for a child or a senior to take. They can also change the flavor of a medication to make it more palatable for patients who have difficulty swallowing pills.2
Another benefit of compounded medications is that they can be made without certain ingredients that a patient may be allergic to. This is particularly useful for patients with multiple allergies or sensitivities, as it allows them to receive treatment without the risk of an allergic reaction.
The CFO also called this out in a recent earnings call.
“A lot of customers will cancel overwhelmingly because the treatment itself is not perfectly personalized to them, right? Maybe the form factor is not a form factor that they love using, right? Maybe it's a topical spray and it makes their hair sticky. And so they prefer an oral solution, or maybe vice versa.
Or there might be a side effect component, which is common among different treatments that the customer is trying to balance. And so I think the way you can think about it is that we like to dive deep into the data of understanding why customers are canceling and try our best to address them directly with the next level of personalization launches.
And so very often, they are directly attacking some of the side effect concerns that we see or some of the form factor concerns we see et cetera. And so I probably can't speak to the magnitude, but definitely something that we've seen pretty consistently and would expect to continue.”
Compounded medications can also be used to address specific medical conditions that are not well-served by commercially available medications. For example, a compounding pharmacist can create a medication that combines multiple active ingredients to target multiple symptoms of a condition. This can be particularly useful for patients with chronic conditions that require multiple medications to manage their symptoms.
In addition to providing better patient care, compounded medications can also help to reduce healthcare costs which Hims whole business model on affordability strives to be. By creating customized medications that are tailored to the specific needs of a patient, compounded medications can be more effective at treating a condition and may require fewer dosages or visits to a healthcare provider.
This flows into what Andrew consistently reiterates as how they’re able to pass on savings to the customer through cost efficiencies. Based on Hims reporting, customers/patients are taking a liking to the personalized strategy.
Source: Company Financials.
Source: Company Financials.
As shown in the most recent earnings release, over 1/3rd of subscribers are now on a personalized product plan, up from 14.3% just under two years ago. The results come as no surprise, personalized products typically lead to higher retention because customers/patients appreciate that a product/drug is better tailored to them.
“We are receiving signals across several specialties the retention for personalized products is higher alongside a stronger user preference for them relative to generic alternatives. This does not come as a surprise to us, as feedback from user interactions and behavior is one of the key ingredients and development of our offerings.
We expect continued placement of personalized treatment options at increasingly mass market prices to compound this benefit.” - Yemi Okupe, CFO, Q1’24 EC
But while offering personalized products on the front end has been very popular, Hims went the added step and built its own compounding pharmacies to control the supply chain. The added benefit here is the unit economics of not just owning your own pharmacy but also having it be a compounding one.
Based on the Professional Compounding Centers of America (PCCA), retail pharmacies can typically expect around 3% net profit.3 Based on the data collected, many high-performing, compounding-only pharmacies operate with 20% net profits. Hybrid types of pharmacies’ net profits are typically in the range of 8-12%.
Considering that Hims pharmacies now support over 80% of medication/product distribution, you can see these efficiencies and cost savings partially being reflected in the margins.
Source: Company Financials. Note: SG&A expense starts at Q3’22 since prior periods loop in other technology and support functions.
Y/Y we’re seeing a 200bps rise in GM, a 400bps decrease in marketing spend, and a 400bps drop in G&A. Further efficiencies on the pharmacy side can be met as capex continues to get allocated toward further improvements in both technology and capacity at their locations.
The compounding strategy is what I’m paying attention to the most.
3) New Product Innovation, With An Emphasis On Hers
What was once founded as an ED medication provider, Hims continued to expand into other highly stigmatized conditions that men wanted help treating. Conditions like hair loss, premature ejaculation, and anxiety.
Not long after, Hims wasn’t just treating men’s health conditions but expanded into women’s conditions as well under the Hers brand name.
These product expansions weren’t executed based on TAMs. They were very strategic and methodically thought out, though I will admit many of Hims OTC offerings were pretty bad in the beginning (see protein powder).
At Ro, my job was to help the company understand not only how to get to points A, B, and C but think how by going through those first 3 letters, can we position ourselves to be set up for success to tackle D, E, and F.
The first natural thought was to continue addressing highly stigmatized conditions with a large base that can be more affordable through cash pay only. Naturally, there are only so many conditions that fit that bill.
However, the smart move was to address conditions that could benefit through multi-treatment offerings.
“And so I think as a business, we're not really focused on cross-category conversion as much as personalized, human-centric treating an individual holistically.” - Andrew, CEO
Hims, just as Ro had thought, was looking to not just offer multiple treatments via separate products, but rather through a singular offering. Between March’22 and April of this year, Hims launched 7 new products. 6 of which can help in more than one area.
Source: Hims Q1’24 Investor Deck.
That’s nearly 2 new launches every year with 2024 already seeing two with the announcement of compounded GLP-1s (more on this later).
To give you an example of what I mean about the market opportunity for multi-treatment offerings, take just ED for an example.
For instance, did you know that
About 40% of men with ED will have hypertension, while 35% of all hypertensive men will also have ED.4
Hyperlipidemia is in about 42% of men with ED.
Undiagnosed diabetes is up to 3 times as likely in men with erectile dysfunction (28%) compared to non-diabetic men with normal erections (10%).
One-third of diabetic men will have hypogonadism, which may partly explain the high correlation between diabetes and ED.
Obesity is associated with a 50% increase in ED compared to men of normal weight.
These are just a few to name but the list is quite extensive and now compound that with other health conditions that overlap. You’re talking about a massive opportunity here for patient care.
So when it comes to being a pillar of success, new product innovation, which management is aiming for 1-2 launches each year, is going to be critical for the future growth of Hims.
Source: Hims Q1’24 Presentation.
*This broader addressable market is something I will follow up on in a separate post.*
However, while I largely attribute this pillar to general new product innovation, I also attach it to Hers for a few reasons.
Hers has been labeled by Hims as one of the fastest if not the fastest growing parts of the business.
75% of Hers dermatology customers are already opting for personalized treatments.
Women typically seek medical treatment from their providers more frequently than men.5
When it comes to women’s health, sexual health is an example, women have a lot more issues and conditions that could be addressed through telehealth.
One of my friends and former co-workers at Ro even launched her own telehealth startup called Allara Health, where women can find medical treatment for conditions like PCOS and Endometriosis.
While the broader addressable market usually skews towards men and generally shared conditions, there is a large market for women’s health. While the below graphic is a bit dated, I show you this to highlight just how wide the addressable market is for Hers.
I think in the future, allocating resources to the Hers brand is a really underappreciated part of the long thesis of Hims that I feel no one talks about. Don’t sleep on that part of the business.
4) The Yellow Brick Road. Weight Loss.
I won’t deny that much of the recent rise in the stock has been on the heels of announcing their compounded GLP-1 product offering. Having introduced their own compounded weight loss pill in late 2023, they finally decided to join the GLP-1 crew but from a compounded approach (do you see the trend here?).
This isn’t the first time I’ve written about GLP-1s. I wrote a quick primer on it in July of last year and it also was a factor in why I inevitably shorted WW International (WW).
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July 10, 2023
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January 15, 2024
It’s no secret that the market opportunity for GLP-1s is massive. With more and more people becoming overweight or obese, weight loss drugs are becoming hotter than when Viagra first came to market decades ago.
The market is so massive that Goldman projects that anywhere between 10 million to 70 million Americans will be taking weight-loss drugs by 2028 and that the market could be worth ~$130 billion by 2030.
Given the current demand and capacity constraints of the drugs, Ro even launched a GLP-1 tracker in order to help patients find pharmacies that even have it in stock. In February, Novo Nordisk agreed to buy contract drug manufacturer Catalent for $11.5 billion in cash to boost its production capacity via different manufacturing facilities.
But here’s where I believe Hims is attacking the problem in a different way that will benefit them more in the near term at the very least which could indeed be sticky for the long term.
While others are trying their best to get branded GLP-1s from LLY and NVO, Hims took the approach of compounding the medications to address the shortage. This allows them to capture patients desperate to get access to the medication and saves them money by doing so.
In comparison, Wegovy costs about $1,400 a month in the US (vs $199/mo for Hims), a price that so far falls mainly on patients: Only 20% to 30% of privately insured patients have coverage for the drugs, and the Medicare insurance program for the elderly doesn’t cover obesity drugs at all.
Source: Singlecare.com
Given that these medications are meant to be taken for the foreseeable future to have the weight stay off, the financial burden and side effects suggest that few would be able to use obesity drugs for life.
Adding insult to injury, in a Reuters report last year, only 1/3rd of patients taking GLP-1s were still taking it a year later.6 While many surveys show that factors other than just price have something to do with why patients stop taking them, price is still a factor.
Not to mention that because of the demand, states health insurance plans are fed up with having to fit the bill. As more doctors and patients become aware of the medications’ potential, the costs are climbing for states and once patients start taking GLP-1s, doctors typically recommend they take them indefinitely.
In 2022 alone, Medicaid spent $7.9 billion for GLP-1 drugs before manufacturers’ rebates, a number that’s more than doubled since 2020. That’s equivalent to 8.6% of the program’s total, pre-rebate prescription spending for the 85 million Americans it covers, based on Medicaid and CHIP Payment and Access Commission data.
It’s putting such a strain on state budgets that Connecticut introduced a trial lifestyle-management program for state employees seeking the drugs for weight-loss treatment in July, after spending on the class rose 50% annually since 2020. Virginia tightened restrictions on which Medicaid enrollees can receive them for obesity.
So Hims has the advantage here in two distinct places.
They can compound the same drugs for much cheaper allowing patients to get access and bring them onto the platform to incorporate them into the broader flywheel, potentially.
They’re already cheaper on a cash-pay basis and comparable to insurance-covered plans so price shouldn’t be an issue if it comes to that.
The weight loss business for Hims is doing so well, that they were already guiding to eclipse $100 million in revenue by the end of 2025 even before the GLP-1 announcement.
It’s widely understood why Hims entering weight loss treatment in general is a positive but you need to understand the forces at play here that make it so. Broader tailwinds are further reinforced by Hims approach to overcome and better position around headwinds.
Valuation
There is a lot of future potential but a lot of it has already been baked in which I’m not even going to dance around. With future potential coming from execution, I think any pullback in the stock would be a welcome buying opportunity in the name.
While I absolutely hate valuing companies on a sales basis, the company is in a land-grab mode by going after the weight loss market in its own way while improving efficiencies to drive further optimization. Management has already guided to 20-30% EBITDA margins by no later than 2030 with gross margins in the mid-70s.
Because of the emphasis on market share capture, I’ve gone on to value Hims on an EV/Sales basis and assume that they can grow topline a little over 22% between 2025 and 2028.
Source: CGC Calculations.
Factor in the no debt and heavy cash balance, HIMS capital structure is also fit to withstand any negative impacts of delayed rate cuts or even additional hikes.
Risks
With any investment, I would be amiss to not highlight the risks that I believe are realistic.
1) Regulation on telehealth
One of the concerns that we always had when I worked at Ro was government agencies coming in to ruin the party because bad apples (see DEA going after Cerebral) decided to push the limits of what healthcare needs to be and operate a pill mill. This meant that guardrails and tiered approval systems were put in place to make sure we didn’t do anything stupid.
While I don’t believe anything, there’s a cause for concern at the moment; never say never.
2) Compounding
The biggest concern I have is around the FDA coming after compounding. Because of the shortage of GLP-1s, more pharmacies have opted to compound the medication. However, the FDA expressed its concern about these compounded formulations because you don’t know where you’re getting them from and how safe they are.
While no immediate regulation is in place right now to stop it, any regulation that comes through will significantly impact Hims approach to their weight loss treatment offering.
Closing Thoughts
The story is there. The bricks are laid and are continuing to be arranged in order to build the house. While much of the upside has already been captured, I wouldn’t downplay the ability for Hims to continue capturing more of the market with new treatment offerings and really expanding Hers brand.
I look forward to seeing what Hims can accomplish in the future and at the moment, I’m a proud owner of the stock.
Until next time,
Paul Cerro | Cedar Grove Capital
Personal Twitter: @paulcerro
Fund Twitter: @cedargrovecm
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