Update on Recent HIMS News, MAMA Q3'24 Earnings, and Other Portfolio Changes

Hello investors,

Today I’m going to keep it limited to just updating you all on recent Hims & Hers Health (HIMS) news regarding the FDA and the pricing changes we saw on Friday as well as our take on the recent Mama’s Creations (MAMA) Q3’24 earnings and a brief portfolio update.

We’re looking to end the year with a bang and given that HIMS is one of our larger, more “at risk” positions, we felt a more thorough update was warranted.

With that, let’s get started.

First and foremost, if you’re reading this, then you’ve already been up-to-date with my commentary as a paid investor. I’ve been very vocal about how I’ve viewed Q3 earnings, Martin Makary as the FDA appointment by Trump, having no idea why the stock was well above $30, and how the shortage for Tirzepatide will be marked resolved by the FDA.

Well, we got just that on Thursday. The FDA stood by its ruling (after a 1-month delay in November) that Tirzepatide supply is able to meet demand and can officially come off the shortage list.

The stock tanked ~15% in pre-market before ending the day down 7 and change. Additionally, when I found out Friday night, it looked like HIMS is now discounting their 12-month GLP-1 subscription offering from the $199/mo price to $165/mo (a $34/mo decrease).

For today’s update, I want to talk about both these events and what I believe each means in their respective ways, and how that translates to future considerations.

When the FDA was sued by the Outsourcing Facilities Association (OFA) about their decision to remove Tirzepatide from the shortage list, the original date for an update for reconsideration was supposed to take place on November 19th. However, this date came and went with the FDA delaying the decision for one month.

Many investors read this as a positive for HIMS and that the FDA needed more time to re-evaluate their decision perhaps because the data supported insufficient supply capacity. HIMS rallied >10% just on that news.

On December 10th, I shared the note (below) of an analysis using Ro’s GLP-1 self-serve supply tracker for GLP-1 medication.

Utilizing web archives, I was able to piece together rough data that suggested the shortage of Tirzepatide was not as bad as the OFA alluded to. This coupled with calling various pharmacies across the country to ask about the availability then reassured me that the shortage WAS likely over.

The most recent public nail in the coffin came from Ro’s partnership with Eli Lilly (LLY) where Ro would be another DTC channel to offer and prescribe (if applicable) Tirzepatide vials on behalf of LLY.

Coincidentally, this came out the day after the report above regarding the supply tracker.

My view on this was that if LLY was willing to partner with arguably a competitor to LillyDirect (their telehealth channel), the supply must not be an issue if they’re expanding distribution channels.

Lastly, I was talking to Hunterbrook Media regarding what the Ro news meant and my views on the GLP-1 shortage. They publicly released their findings on Wednesday (12.18) and agreed that the shortage was over.

The FDA decision came in pre-market the following day and now we know about Tirzepatide and that HIMS will not be able to add a compounded version of this active ingredient. This I feel was in the stars despite Andrew on the Q2’24 conference call saying they’d launch it in the near future.

What happened to all the “precedents” that Andrew was talking about over the last two quarters? The only response was his Twitter post which seemed to be calling on the new administration for help.

Clearly there’s self-interest here because precedent would label what he’s trying to do after a shortage is close to stealing IP but that’s another topic of discussion.

What’s also interesting, aside from the ruling, is that the FDA gave an update on Dulaglutide, Semaglutide, and Liraglutide. Marking each either fully available or in limited availability.

While this is an update from October and from the manufacturer, it’s still important to note as we continue to monitor the progress of the shortage.

Before I talk about why this is important, I want to quickly talk about point #2 and then share my thoughts on them because I believe they’re interlinked at this point.

What shocked me last night was HIMS decision to lower the cost of their compounded Semaglutide 12-month subscription (image in the beginning). Mind you, depending on the state, HIMS is allowed to send patients medication in either 1-month, 3-month, 6-month, or 12-month cadences.

The most common is 3-month so if the patient signs up for any subscription past what they’re able to receive, then the remainder of the revenue is deferred until it can be recognized. This creates a large deferred revenue line item on the balance sheet (below).

GLP-1s are a big driver of this line item recently but I have to remind you all that multi-month subscription offerings are also naturally growing for other product lines which flow into this financial item.

Here’s where points 1 and 2 come together. I also held a Twitter space on Friday but that was just for the FDA news before my knowledge of the price reduction.

I think that because the FDA decided to stand firm on marking Tirzepatide resolved, this means,

If you remember, I also alerted you all in my pre-Q2’24 earnings announcement that if Eli Lilly were to pick up the excess demand caused by the Semaglutide shortage, then that would be able to expedite the imbalance of supply between the two and the FDA could take both off faster than anticipated.

This is what seems to be happening in real time and don’t forget, Wednesday morning, Novo Nordisk (NVO) announced the completion of the $16.5 billion Catalent (CTLT) acquisition.

The bold part is key because it’s not really the active ingredient that is in shortage but rather the pen that’s causing the shortage.

So we have Eli Lilly taking pressure off of Semaglutide and now being marked as resolved. Novo is about to significantly ramp up production of pens to help bring themselves off shortage which were marked available on the FDA website back in October.

All of these developments are leading me to believe that the light at the end of the tunnel (a train) is closer than it appears (Semaglutide coming off shortage).

This is where the pricing comes in. I think this move is two-fold.

Both of which are not bullish in the slightest, hence my Twitter comment. Everyone knows, at least if you took an intro to econ class in your life, that you almost never need to lower prices unless you’re trying to front-run a door closing or if demand is dropping and you need to reinvigorate sales.

The easiest real-world example here is Tesla consistently raising prices during COVID because demand was outpacing supply and then having to cut prices dramatically because demand was falling off a cliff.

While I don’t believe that demand is falling off a cliff - not even close - I do believe that they are trying to front-run that inevitable decision regarding compounded Semaglutide. A “cash/patient grab.”

They can market that they have super low medication prices (appetizing) which can get patients through the top-of-funnel flow and hopefully convert them to that particular offering (12 months at $165/mo) or another offering in general.

I do not believe it’s because HIMS is trying to be a “good company” and “pass on the savings to patients” considering that even Yemi admitted that gross margin would continue to decline.

So the bottom line here is this, I think the rose-colored glasses that retail consistently has on is ending with a TBD on when that will occur and management is aware that the headwinds are not a late 2025 or early 2026 problem but perhaps within the next two-quarters problem.

If you want to see how the shift from compounded to branded would change things, you can take a look at my 1-pager (below) from October 7th that I sent you all.

To be honest, when the stock was above $35/share, I would have dumped the entire position without skipping a beat. If you recall from my most recent HIMS report, I marked fair value at $27/share on a 2025 P/E basis or $30/share via a FCF view.

However, given an open PUT / CALL strategy we had open at the time, I could not execute that trade without incurring a loss (I’ll speak more on this in our Q4 letter).

If the stock becomes a part of the Santa Rally, or any other rally and touches those levels again before the next earnings release in February, then I’ll most likely sell. As a paid investor, you’ll obviously be alerted.

The risk of a double-digit selloff when Semaglutide comes off shortage is just too great in my opinion, even if you’re a long-term investor.

If you have any questions, you can comment below or message me. If you think someone could benefit from this HIMS commentary, please share it with them.

Mama’s Creations announced earnings last week and needless to say, the results were far from impressive which resulted in a drop of ~25% over the last 4 trading days.

The largest detriments to the negative reaction were regarding the 400bps decline in gross margin y/y from the delayed construction completion at the Farmingdale facility and increased commodity cost (i.e. chicken).

While I’m not surprised that the market had a negative reaction, this re-rating of the stock, at least in the short-term, is probably more a function of the stock price getting ahead of itself post-election (can see above) than the fundamental hurdles at the company.

There’s a saying that you can bet on the jockey or the horse. I think the company is already a good horse but Adam Michaels (CEO) is an excellent jockey who’s turned Mama’s Creations into a great horse.

Continuing to hold the name after Q3 earnings is a continuation of betting on the jockey, which I am currently doing. Part of that support comes from a few areas.

First off, having your CEO accept responsibility for the planned capex (construction) delays I believe speaks volumes.

I think we’ve all seen plenty of examples where management seems to blame everyone but themselves for hiccups or delays. The weather, technology, their customer, and even the tooth fairy if they think they can convince you of it.

Additionally, the -400bps to gross margin has already fully reversed and the facility is back on track.

Adam also seems very optimistic about the future for increased trade spend, marketing, additional capex improvements (particularly in the Rutherford facility), and M&A.

The thing main thing that I like about Adam and this management is the approach to responsible and strategic growth as opposed to recklessly spending on R&D and perhaps not value-additive projects.

This cautious but active approach has worked well over the last few years and I would like to continue seeing more of it.

If you recall from my last update, M&A needs to be a part of the story here, otherwise, the organic growth potential can only get you so far. Adam has stated that while others in management will be able to focus on M&A (since too much of this time was spent on the construction fiasco), he’s already spent more time analyzing the M&A pipeline in Q4 than he has in prior quarters.

I’m not going to bore you with repeating all the highlights from the earnings call but the takeaways I want to leave you with are,

I think the future is still bright though I will admit, the road there will not be as linear as many investors are used to with other names this year.

We’ve been very active this past month with hedging the portfolio and realizing gains in various special situations.

We’ve liquidated several positions to realize gains/tax losses.

Our cash position is near ~20% of our entire portfolio’s market value after closing the positions above. This will allow us to reallocate capital in existing positions and start new positions from our watchlist that we’ll share with you on Christmas Eve.

One callout that I want to make, and which I’m very proud of, is strategically hedging our book into uncertainty and “frothy” times of the market. Given that we’re not a Long Only book, hedging is key to reducing overall beta and thus, delivering outsized returns.

If you look at the below, Cedar Grove Capital’s returns since Wednesday have delivered +328bps above the S&P 500 and +535bps above the Russell 2000 through market close Friday.

This is inclusive of the market selloff on Wednesday from the FED decision where we ended the day +207bps in the black vs the SPY’s -298bps and inclusive of the selloff in HIMS on Thursday with the FDA news.

I think this is a testament to the strict market positioning we consistently monitor and the awareness we have of frothy markets and specifically, single-name stocks in the portfolio (ex, HIMS).

With only 9 positions in the portfolio right now, we’re excited for what 2025 has to bring and what the new administration means for micro/small cap investing.

As always, I appreciate your support of my work here. If you have any questions, please make sure to message or comment below. If you think others would benefit from the research/commentary I release, I would greatly appreciate you sharing.

Until next time,

Paul Cerro | Cedar Grove Capital

Personal Twitter: @paulcerro

Fund Twitter: @cedargrovecm