Published: 28 Jul 2024
HIMS - Short
Hims & Hers (NYSE: HIMS — $4.72B) - Hims & Hers portrays itself as a trailblazer in addressing stigmatized health conditions, offering everything from hair loss treatments to erectile dysfunction pills and, more recently, weight loss drugs. However, the reality is far less glamorous. The company is simply selling overpriced generics in a crowded market, competing against established players with far stronger brand recognition. Their recent foray into off-brand GLP-1s, a knockoff version of Ozempic, raises significant red flags—especially since it lacks FDA approval.
The Business
Hims & Hers connects consumers to over 300 U.S. licensed providers and offers discreet home delivery of medications for stigmatized conditions. Their target demographic includes Millennials and Gen Z, primarily men. They sell branded and generic HIMS-branded medication for sexual health, hair loss, dermatology, mental health, primary care, and weight loss, with sexual health comprising the majority of their product mix. Recently, they entered the weight loss market in Q4 2023 and began offering semaglutide in Q1 2024, capitalizing on the growing popularity of weight loss drugs.
Lack of oversight
The company’s telehealth platform makes it incredibly easy to sign up—so easy that users don’t even have to speak to a medical professional. In our experience, we were able to navigate the website, manipulate the forms, and qualify for GLP-1s without any direct interaction with a healthcare provider. This lax process is reminiscent of Cerebral, the mental health telehealth platform that continues to face DOJ scrutiny and lawsuits for enabling substance abuse.
Patent Infringement
Hims & Hers is treading on thin ice with its compounded version of semaglutide, exploiting an FDA loophole that might soon close. It’s only a matter of time before pharmaceutical giants like Novo Nordisk or Eli Lilly target them for patent infringement. The FDA has already issued warning letters concerning adverse events linked to compounded GLP-1s, with reports of dosing errors raising serious concerns. Additionally, the FDA warns that the active ingredients in these compounded versions are not identical to those in branded drugs like Ozempic, Wegovy, or Mounjaro.
Novo Nordisk has aggressively defended its patents, filing 21 lawsuits since June against companies selling copycat semaglutide. The FDA is clamping down as well, issuing warnings to firms peddling adulterated and unapproved versions of the drug. Compounding the pressure, both Novo Nordisk and Eli Lilly are expanding their manufacturing capacity, with new infrastructure expected to come online by 2025. This expansion could lead to the end for companies like Hims & Hers, effectively shutting down their ability to sell compounded semaglutide.
Competition
Hims & Hers is competing in an overcrowded market with no distinct edge. While they’ve enlisted high-profile celebrities as brand ambassadors, it appears these flashy endorsements are doing little more than eroding margins. The company operates in a highly competitive space, facing not only primary care physicians who traditionally prescribe these medications but also other direct-to-consumer (DTC) companies like Ro, Lemonaid (23andMe), and BlinkMD. To make matters worse, major pharmaceutical players like Eli Lilly are also moving into the DTC market, further intensifying competition.
Despite Hims & Hers leading in web traffic, this comes at an enormous cost. The company spent a staggering $447 million on marketing in 2023, with the cost per new client estimated to be around $800. While this aggressive marketing strategy might help secure short-term market share, it’s an unsustainable approach as more established pharmaceutical companies begin entering the fray.
Overvalued
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Hims & Hers appears to be deliberately obfuscating its churn rate, which is a concerning red flag. We believe this is intentional, as the company likely faces a churn rate similar to DTC brands like Dollar Shave Club—businesses heavily reliant on marketing to sustain growth. Unlike telehealth platforms such as Teladoc (TDOC), Hims & Hers operates more like a consumer brand, with marketing propping up its user base. Our estimates suggest a churn rate of around 15%, which may actually be conservative given the massive marketing expenditures.
Another glaring issue is the company's runaway marketing spend. According to our analysis of their annual reports, Hims & Hers is spending an estimated $876 per subscriber—a figure we expect to rise, not moderate, as competition heats up. With rivals from both the DTC space and big pharma entering the arena, this high burn rate on marketing is unsustainable.
Table1: Revenue Build
While the company’s revenue is currently growing at a mid-20% rate into 2024, we expect this to drop sharply to around 11% in 2025 as competitive pressures from both DTC and pharma companies increase.
Table2: Income Statement
Despite these fundamental issues, the market does not seem to account for this. At the current stock price of $22.05, we believe Hims & Hers is significantly overvalued. Based on our DCF valuation, the stock should be trading between $13.55 and $16. The market has not adequately priced in the elevated marketing costs, patent infringement risks, increasing competition, or the lack of oversight—all of which pose substantial risks to the company’s future.
Conclusion
While Hims & Hers may have started as an innovator in stigmatized health conditions, the company faces significant challenges beneath the surface. Operating in an overcrowded and fiercely competitive market, it relies on unsustainable marketing strategies to attract and retain customers, raising concerns about long-term viability. Additionally, their entry into the weight loss market with a compounded version of semaglutide further heightens the risks, particularly given the legal uncertainties and regulatory scrutiny surrounding the product. These issues cast doubt on the company’s ability to sustain its growth and competitive edge moving forward.
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Note1: We do not hold or have ever held stock in HIMS or competitors
Note2: This is solely an opinion and should not be considered as investment advice