HIMS: Pre-Earnings Commentary and Updated Model

Hims and Hers Health (HIMS) is reporting earnings on Monday (tomorrow, after the market closes) and it seems that many investors got quite the reality check on Thursday when Eli Lilly (LLY) announced that their tirzepatide shortage would be ending soon. Despite the notice, many weren’t expecting that by Friday (the next day) the shortage would be marked over, though not officially by the FDA yet.

This news sent the stock down ~18% over 2 days before settling at $17.58 by the end of market close Friday. What puzzles me is why so many retail investors initially thought the market wasn’t pricing the future of GLP-1s despite the incredible run-up it had post-earnings and post-GLP-1 announcement.

Even pulling a chart directly from my HIMS GLP-1 post from July 9th proved it right there that it was baked in. You don’t just add an additional $1 billion in market cap after a 25% jump after earnings for no reason.

Despite my calls for realism, I should also note that my initial report from June 12th highlighted that I was bullish on HIMS overall but implied that the valuation seemed fair considering the pricing-in of compounded GLP-1s into the overall valuation post-earnings.

The title of my research report highlighted that point and the stock closed at ~$24/share that day.

However, with the recent pullback that the stock has had, I think the margin of safety has significantly improved for long-term investors who see HIMS as more than just another GLP-1 telehealth provider.

While many would like to just hear information that is generic, only positive, and there-in just confirmation bias, I don’t do that and have no desire to do that. The research that I share with you all is meant to help you with your decision making but to be completely frank, it’s to not feed you bullshit you want to hear.

In the below post, I’ll go over

As I’ve mentioned in the past and will mention in every HIMS research I publish, 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 strictly focusing on Hims and why I believe it’s a multi-year success story.

With that, let’s get to it. First, what the recent LLY news actually means to the HIMS business, and why every investor should adjust their future expectations.

When HIMS first announced its launch into GLP-1s through a compounded semaglutide injection, it was safe to assume that eventually, the likelihood of the FDA expiring the compounding loophole was super high.

It’s no secret that the FDA is not a fan of compounding medications in general let alone for compounded GLP-1s. According to a new public alert, government health officials have received a worrying number of dosing mistakes related to injectable semaglutide.

At the end of last year, America's Poison Centers said they received 15 times more calls related to semaglutide than they did in 2019. The situation was so bad that the FDA recently put out a warning about patients overdosing and that compounded drugs pose a higher risk than the FDA-approved ones.

On top of the rise in overdoses, a study came out that revealed ~42% of online pharmacies that sell semaglutide are illegal. Operating without a valid license and selling medications without prescriptions.1

While HIMS is using a larger compounding pharmacy, they aren’t necessarily immune from such risks which I also outlined in my previous report.

I’m confident in assuming that there is an expiration date coming to end the FDA compounding loophole, though we don’t know exactly when. This assumption brings me to my next point on why the market sold off when LLY made the comments about the tirzepatide shortage ending soon.

For context, my last role at Ro was specifically helping them build out their GLP-1 offering years before HIMS did. I’m very familiar with what makes weight loss work from a treatment perspective via a telehealth lens, not by actually being a provider. That means building a platform that leads to success and thus, a growing business.

What I learned from the years I worked there is that the weight loss success of a patient is unbelievably difficult no matter how efficacious the medication is. However, patients will always want the quickest, fastest, and cheapest way to an end objective.

Now while the FDA is the only one that is allowed to officially mark a drug out of shortage, the comments from LLY confirmed two things.

To point #1, which is the most critical, the shortage ending for tirzepatide could mean that NVO aggressively ramps up the capex to not lose share to LLY. They’ve already started to do this, for instance, the company revealed plans for a $4.1 billion investment in a new manufacturing facility in North Carolina for obesity drugs and chronic diseases, and a 200-acre expansion in Denmark to also address the shortage issue. Unfortunately, both won’t be done until after 2027 which means the current capex isn’t moving the timetable that much closer.

Despite the ramp-up, Novo Nordisk has recently advised the TGA and the Ozempic Medicine Shortage Action Group (MSAG) that supply will remain limited for the rest of 2024.3 So, we can safely assume that the shortage will still continue into 2025, but I believe there’s a flip side to this.

Here’s where it matters → This supply offset creates push-pull effects on demand because due to the lack of one drug, many others will move towards the available one which in theory could alleviate supply pressure on semaglutide capacity.

Monthly keyword search results via SEMRush for Zepbound are ~301k vs Wegovy’s ~550k and that spread is narrowing.

The keyword searches above aren’t perfect but it’s to paint you a picture.

This narrowing brings me to point #2 where it’s no secret that Zepbound is highly in-demand. Pulling from GS research, the exponential growth of Zepbound (FDA-approved for weight loss) has far exceeded the prescriptions from Wegovy and Saxenda is pretty immaterial at this point.

When given the option of choosing an FDA-approved medication that helps you lose more weight in a shorter amount of time and is possibly covered by insurance, I promise you that patients will choose that option.

This is why I believe that the key takeaway from the LLY announcement is that if these push-pull effects become a reality, the FDA could be more inclined to pull both active ingredients off the shortage list once supply/demand for both drugs normalizes, thus ending the compounding business and forcing HIMS to either stop or pivot.

At the moment, LLY is taking the lead with near-term capacity expansion which sets NVO behind but there’s no immediate indication that compounding will go away.

WW International (WW) is a company that I wrote about at the beginning of the year specifically calling out the absurdity of their GLP-1 hype and how they were in for trouble. You can read about it below if interested.

I continue to monitor WW because they’re only 1 of 2 other publicly traded telehealth companies that I know of that openly talk about GLP-1s which can be used for directional info towards HIMS.

Their recent earnings on Thursday were not good and sent the stock down double-digits on terrible results and guidance. Here are the takeaways that I took down which I’ve used to update my HIMS modeling forecast.

I’ll spare you grammatically correct verbiage and just cut to the chase related to their clinical business (GLP-1s). I will caveat that they only sell branded GLP-1s. No compounded medications so the business is mostly the same except for the added friction of insurance coverage and supply constraints.

All are very helpful when applying their commentary to model out the HIMS compounded GLP-1 business. The above touches on conversion, retention, margins, and potential cannibalization.

Given what the earnings call told me, this is how I see the HIMS business going forward.

First off, WW wasn’t wrong when they said competition was fierce. Paid search is the highest ROI a DTC company can push marketing dollars through and simple search results surprised me.

I googled three variations to see what popped up: “glp-1 medication”, “weight loss medications”, and “hims glp1”.

Below are the results.

For “GLP-1 medication”, HIMS didn’t even show up in the main search but only on the side under “shopping.”

For “weight loss medications”, HIMS showed up at the top and heavily under the “shopping” section.

For “hims glp1”, it’s a completely different story, as it should be. HIMS shows up in both organic and paid search results at the top.

Besides the search results, NVO themselves said that they

While this was still technically for branded medications, the demand seems to check out when you look at SEMRush’s search results. URLs linked to “Hims weight loss” show over 546k traffic results in total.

My concern however involves WW end-of-period subscriber results from Q2’24 where they actually show a sequential decline in net quarterly adds. The issue that I have with this is that they do branded medications with a behavioral program and insurance assistance to reduce the friction.

So even though they have a solid platform, their commentary on marketing spend and supply chain constraints worries me that HIMS is facing similar issues on a cost basis.

The additional commentary of the average commitment approaching 6.5 months means retention is worse than I initially thought and the fact that only 14% of prospective patients remained interested in treatment after hearing that weight tends to return after stopping.5

Quick napkin math puts 546k searches with a 14% conversion to flow completion at ~76k. Factor in 20% conversion to actual transaction would imply ~15k monthly adds which excludes conversion from existing patients.

While my previous estimates were on the conservative side, mainly because I felt HIMS would take a more strategic approach to avoid coming under fire for potentially being a pill mill or jeopardizing patient experience with critical titration needs once they start.

The below are my updated retention figures for all four plans that the company offers.

Now remember, despite my significant decrease in retention, I have dramatically increased the subscriber count based on

I have not accounted for any medication switches from compounded to branded by the end of FY’25 but have dialed back growth from the push-pull effects that I mentioned earlier.

This leads me to estimate $131.2 million in incremental sales/$22 million in EBITDA in FY’24 — which accounts for the 6 weeks the drug was being offered in Q2 and the increased CAC — and $443.4 million in incremental sales/$58 million in EBITDA in FY’25.

With the added benefits of GLP-1s and a hard Y/Y taper of sales growth starting in 2026 to account for a potential FDA compounding regulation change, the below model should reflect more accurate estimates based on all the data I provided above.

I end with a 2025 PT of $28.38 off a 33x EPS multiple (average over the last 6 months) which is not far from where the recent high of $25.74 hit.

I believe that should HIMS be able to avoid any supply constraints, lawsuits, or FDA changes, the GLP-1 business will contribute heavily to the future returns of the company.

However, this does not discount my views on the broader business and how well they’re doing on execution and expanding into more condition offerings.

My near-term price risk of $0.60 EPS on 20x P/E multiple means a ~32% downside to ~$12.00. While I don’t see the earnings contracting that much, it’s not hard to assume a severe contraction in the multiple should the recent market selloff continue which is primarily where the near-term risk comes from.

I think the recent pullback is a gift for anyone who was kicking themselves for not sizing up earlier. I personally increased by shares held in the company by 20% on Friday when the stock was trading sub-$17.50.

Should the selloff continue Monday intraday, given I view this as a core multi-year investment position, I will most likely continue to buy. Currently, it’s my second-largest holding.

Any questions or comments, please ask and make sure to share this post with other investors you believe could benefit.

Until next time,

Paul Cerro | Cedar Grove Capital

Personal Twitter: @paulcerro

Fund Twitter: @cedargrovecm