First and foremost, if you haven’t heard about the spaces that I held the other week on HIMS, you should do so. Over 1,200 people tuned in and it was a great conversation with Andy (HIMS Co-Founder) who chimed in and shared his thoughts on things.

But for today’s research, there’s been a lot of chatter on Twitter regarding the expectations of compounded GLP-1s on the Hims & Hers Health HIMS 2.91%↑ business. It’s a product offering that everyone is excited for and despite analyst estimates not reflecting forward guidance on the GLP-1 business, it is priced into the stock.

But with all the chatter comes a lot of unrealistic expectations brought on by what GLP-1s “could be” vs what the reality would end up being.

This has led many to claim that the current market valuation isn’t pricing in the move at all or is partially recognizing it. I think both are incorrect. Before the announcement of the GLP-1 offering and post-Q1 earnings, the stock was already up 25%.

Factor in the announcement of the GLP-1s and from post-Q1 ER to today, the stock is up ~78%. So yeah, any rational person would assume that the market is baking in the GLP-1 announcement well in advance of earnings revisions.

Despite this, I wanted to take the time in this post to lay out the math behind what I believe are realistic business assumptions, which should help give you a better picture of revenue expectations.

What I’ll go over is

If you haven’t already, you can read my more in-depth research on HIMS via the link below which includes my holistic projections.

Given how this type of modeling was quite literally part of my job at Ro, I’d say that I’m equipped to model this out for HIMS with basic assumptions and knowing nothing else about the minutiae of the product lines.

I need to emphasize the last part because there’s quite a lot of nuance when you’re doing a top-down modeling approach to a new product offering that I don’t have access to (and shouldn’t).

Regardless, let’s jump into the research.

First off, we need to understand the limitations of a compounded GLP-1 offering. For starters, which is honestly the biggest pain point of it all is that the product offering isn’t even available in all the states.

So when it comes to the modeling aspect of the numbers, we need to take that into consideration. I’ve seen numbers as low as only 30 states so consider that when it comes to the ability to service patients.

Secondly, there’s still a trust factor. Because compounded GLP-1s are not FDA approved, and must be marketed as such, the trust amongst an antsy patient base might not be so quick to put themselves at risk.

Even when you look at a 2023 Statista report for adults who think branded GLP-1 prescription drugs are safe, only a third of them thought so.

There’s plenty of reason to believe that this is a headwind tied to the launch since consistent news and headlines have come out highlighting the risks of compounded offerings. According to even a Novo Nordisk company statement,

Adding insult to injury, when it comes to online compounding pharmacies, the National Association of Boards of Pharmacy, which represents the state regulators, has found more than 40,000 online pharmacies operating illegally or in a way they don’t recommend.

However, when we look at BPI Labs, LLC, the manufacturer that HIMS has partnered with to make the compounded semaglutide, does show up as both a registered pharmacy with the FDA, and the Florida Department of Health.

I will also note that according to the Florida DoH, the compounding pharmacy has not had any public complaints at the time of my pulling the info. Meaning, that no public administrative complaint has been filed, or an administrative complaint was filed and later dismissed.

Not saying this can’t change in the future but historically speaking, two execs at the Belcher Pharmaceutical company were sent to prison for Healthcare Fraud.² This was outlined in Hunterbrook Media’s short report the other week.

Takeaways:

Very quickly, I wanted to nip a claim in the bud that HIMS will somehow be generating an incremental $1 billion in sales through their GLP-1 offering as early as FY’25. This makes no sense and I want to explain why, beyond the obvious.

The short answer is that the marketing spend needed to acquire said patients is way too expensive to make that a reality so quickly on top of compounding that much medication in such a short amount of time. Responsible growth is needed in order to correct bugs and pain points on the platform while also still delivering high-quality support to patients. They aren’t mutually exclusive.

But hypothetically, what would that need to look like to become a reality? Something that just isn’t possible in the next 18 months. Let’s first take a look at what HIMS is charging its customers.

HIMS advertises that you can get their compounded GLP-1 medication for as little as $199/mo. This is true, you can. However, you need to pay for it as part of an annual plan which costs the patient ~$2,400 upfront.

This pricing strategy is in part to help with retention, which boosts overall LTV and helps drive down payback. While the cheapest option is also the most expensive (up front), the options change depending on the cadence you end up picking once approved for treatment.

Depending on what plan the patient ends up choosing will have an effect on the EoY retention (M11 for modeling purposes) and the AOV.

For the point of this exercise, I’ve modeled out the path to $1 billion in revenue if only patients used the monthly, quarterly, semi-annual, or annual plan.

None of these graphs you are about to see reflect any other metric like

These are strictly just revenue assumptions based on AOV, monthly net new subs, and retention rates associated with each monthly cohort. Let’s start with first identifying how I’ve modeled out retention.

An example of how I decided these retention rates were modeled off of released data regarding those who were still using Ozempic a year later. Based on the report, only 1 in 3 were still using after a year,³ implying a ~33% retention rate by the 12-month mark. From there, I estimated how each other plan would perform.

Obviously, longer-duration cadences will yield higher retentions on the retention curve because while the initial intent is to save money, the upfront cost of this opportunity is steeper. This means those who take advantage might financially be more off but also more inclined to stay on the treatment than say, a monthly paying patient.

Not to mention that refunds as part of the HIMS T&C which makes sense so people don’t take advantage of lower prices in order to game the system.

You can also find in the Reddit thread a bunch of patients annoyed that they couldn’t get a refund once the charge for longer-duration subscriptions was processed.

For the sake of this exercise, I also started all scenarios by attracting 15,000 net new subscribers in the first month and compounding from there. Clearly, with the launch having just happened, I’d say that’s also unrealistic but alas, this is to prove a point.

So let’s take a look at the first example which is analyzing growth at the monthly level ONLY.

In order to capture $1 billion in revenue within a year at a $399/mo AOV, we need to compound monthly net new subs at a 28.22% rate assuming the retention figures I highlighted above. I’d say that’s pretty unrealistic.

Now let’s take a look at the other 3 (quarterly, semi-annual, and annual) before I go into what I realistically think will happen through the end of 2025.

Share

Analyzing the quarterly ONLY plan, in order to meet the same $1 billion revenue target in one year, monthly compounding of net new subscribers would need to be at 31.1%. At a $299/mo payment ($897 billed 4x a year), this model would need to produce ~20% more net new subs than the monthly plan.

For the semi-annual plan, total net new subs would only need to be 15.1% more than monthly net new subs (compounding at 30.45% monthly) but at the same time, 4% less than quarterly. This is due in part to the retention curves having more of an effect on total revenue as overall AOV only declined 20% from quarterly ($299 → $249) vs -25% from monthly to quarterly ($399 → $299).

Given higher retention on annual plans but lowest AOV ($199/mo), the net new subs to reach $1 billion need to compound at a staggering 33.63% monthly rate and generate 40.7% more subs than the monthly model, 17.3% more than the quarterly and 22.2% more than the semi-annual plan.

As you can see, to add $1 billion in revenue on either of these plans in a year is unrealistic besides the fact that to command that kind of annual revenue would mean that HIMS would have 0.8% of the $130 billion market (by 2030) today.

Hopefully, the math above crushes the notion that $1 billion in revenue is what investors should price in. Full stop.

Now let's look at what I realistically think HIMS compounded GLP-1 business can generate through the end of 2025.

When it comes to what I believe HIMS can achieve through 2025, I need to explain what it has going for it and what headwinds it’s going to face.

With this accounted for, the model below visually represents what I think are reasonable expectations for what the business can obtain through 2025.

First of all, let me point out how WW International (WW) has been doing since they’ve been in the branded GLP-1 business for over a year now.

While they are dealing with shortages of branded GLP-1s, they are able to generate ~20,000 net adds (not net new) every quarter. Mind you they have been in the business for a year now and because they only offer branded medications, they need to deal with the supply chain issue.

I will note that the trust factor is high with WW. Their business is literally to help you lose weight so if you need to trust a telehealth company for weight loss, it’s hard to argue against WW. Points there.

With this taken into account, I’m highlighting the monthly and quarterly net new adds to give you a better picture of how I’m thinking about this.

The overall QoQ growth isn’t that far off but because of the trust factor and the limitation of state approval for compounded medications, I discounted HIMS ability to command the same growth that WW has. I think it would be irresponsible not to.

With that, plus the churn chart that I shared with you above, I’m left with the below.

The above model factors in all different types of plans (monthly, quarterly, semi-annual, and annual) to more accurately assume what the reality is. Reiterating that this is something that I did and do in other roles in my life so it comes from a basis of understanding how to model businesses like this.

An important part that you’ll need to understand too is that there is most likely already a large base of obese patients that will convert to a compounded GLP-1 treatment offering. While this is an obvious plus, HIMS will have to be able to control the demand at the start to make sure there aren’t any issues before launching on a bigger scale. A soft launch if you will.

The model accounts for a controlled ramp from the beginning in order to account for supply and demand imbalances and picks up heavily towards the back half of the year and into the start of 2025 under a “new year, new me” mentality.

Given how much of the patient base will be looking to try out the medication before committing to a large upfront cost, the model estimates ~85% of net new subscribers will indeed be monthly paying patients 10% being quarterly, 3% semi-annual and 2% annual.

Factoring in the various AOVs and retention curves, we arrive at FY’24 revenue of $19.4 million and FY’25 at $147.2 million. I would say this is directionally this is right as HIMS has even commented that their existing weight loss business — pre-GLP-1 announcement — would exceed $100 million in revenue by the end of $2025 (2 years from launch).⁴

To have the compounded GLP-1 business exceed $145 million in just one year, accounting for the aforementioned tailwinds and headwinds, is impressive.

It’s a far cry from the $ 1 billion that people have claimed but if you believe the business can continue growing once the shortage has ended and regulation might force it to switch to branded, it’s still a really good growth driver for the future of the stock and the platform.

I am very excited about this business as much as the next, but realistic expectations need to be shown rather than the moon and the stars. There’s a lot to unpack here in this report but I think it’s some of the better modeling work that I’ve released to you all. If you have any questions you can always private message me or comment below.

I appreciate you being a paid subscriber of my work and if you think others will benefit from this research, I humbly ask that you share this post with them.

Until next time,

Paul Cerro | Cedar Grove Capital

Personal Twitter: @paulcerro

Fund Twitter: @cedargrovecm

^{Disclaimer: All information provided herein by Cedar Grove Capital Management, LLC (“Cedar Grove Capital”) is for informational purposes only and does not constitute investment advice or an offer or solicitation to buy or sell an interest in a private fund or any other security. An offer or solicitation of an investment in a private fund will only be made to accredited investors pursuant to a private placement memorandum and associated documents.}

^{Cedar Grove Capital may change its views about or its investment positions in any of the securities mentioned in this document at any time, for any reason or no reason. Cedar Grove Capital may buy, sell, or otherwise change the form or substance of any of its investments. Cedar Grove Capital disclaims any obligation to notify the market of any such changes.}

^{The enclosed material is confidential and not to be reproduced or redistributed in whole or in part without the prior written consent of Cedar Grove Capital. The information in this material is only current as of the date indicated and may be superseded by subsequent market events or for other reasons. Statements concerning financial market trends are based on current market conditions, which will fluctuate. Any statements of opinion constitute only current opinions of Cedar Grove Capital which are subject to change and which Cedar Grove Capital does not undertake to update. Due to, among other things, the volatile nature of the markets, and an investment in the fund/partnership may only be suitable for certain investors. Parties should independently investigate any investment strategy or manager, and should consult with qualified investment, legal and tax professionals before making any investment.}