What's the story behind HIMS, which grew fivefold in a year?

In the ranking of the stock market's performance over the past year, in addition to AI-related stocks, several consumer stocks with popular products have also emerged, such as Roman and Deckers, both riding the wave. However, there is also an internet company selling medicine that stands out, with a fourfold increase in value within a year.

This company, named HIMS&hers, focuses on online pharmacy business, specializing in addressing common but difficult-to-discuss issues such as hair loss and erectile dysfunction. For patients, it can be awkward to get a prescription from a hospital or buy medicine offline, as they might run into someone they know. Due to the various scenarios involving the use of these medications, difficulties in obtaining and purchasing them have led to issues with compliance. Many patients struggle to take their medication on time due to the difficulty of access, and this is where HIMS' solution perfectly bypasses the step of obtaining medication, earning high favorability among consumers.

From the business model perspective, it seems like an internet pharmacy's blow to traditional pharmacies has contributed to the success of this company. However, the logic behind the success is far more complex than it appears.

1. Starting from Difficult-to-Discuss Issues

Founded in 2017, the company's founder, Andrew Dudum, noticed the dilemma in the male care industry: contemporary men often find it difficult to discuss common issues such as hair loss, skincare, and sexual health, as they are reluctant to see a doctor and find branded products too expensive. Therefore, he decided to establish HIMS, a platform that provides preventive healthcare advice and personal care solutions for men, helping them overcome this embarrassment.

Initially known for selling male hair loss products and ED medications, HIMS later expanded its business to the men's skincare sector, offering targeted products for moisturizing, anti-wrinkle, acne treatment, and more. With successful entry into the male health market, HIMS ventured into the female health market, launching a health and personal care brand called Hers tailored to women's needs.

For consumers, the brand not only provides delivery services but also offers consultation on diseases and personalized medication plans. Adjusting medication dosage, delivery frequency, and packaging based on the patient's condition, the company's customized solutions for consumers are rapidly gaining popularity.

From the relevant data, it is evident that the company's user data is growing rapidly, and as it gradually establishes its scale, the company is expected to achieve a decent level of profitability starting in 2024. With the catalyst of turning losses into profits, the company's stock price has soared this year. As of now, the company's revenue growth rate is 40%, and the PE valuation based on free cash flow is around 40 times. Despite the sharp increase in value this year, the valuation can still be considered reasonable

Behind the sharp rise, it was also found that the company's development was not smooth sailing. At the end of last year, it experienced a sharp decline, with a market value of less than 1 billion, which led to such a large increase.

Last year, the company was shorted by an institution, and the short-selling view was basically questioning the mainstream logic of the market. Concerns included the quality of doctors, pricing, and treatment procedures. However, with high revenue growth and profitability, these concerns have also turned into a driving force for rebound.

These negative logics represent the contradiction between traditional pharmacies and medical systems and the new medical system model. The current rise in stock price does not completely eliminate these concerns, and these issues will be discussed in the following sections.

2. Seemingly a pharmacy, actually a pharmaceutical factory

From the services covered by HIMS, the company is by no means a simple online drug sales company, but more precisely a pharmaceutical company that covers the front-end chain.

The company's biggest innovation lies in reshaping the form of generic drugs. For example, in terms of design, the company has designed finasteride and minoxidil drugs into more easily acceptable shapes, such as candy-like finasteride, further reducing the psychological burden on patients. In terms of delivery, it also pays more attention to packaging, completely concealing personal information, thereby reducing the psychological burden on patients.

The company focuses on difficult-to-talk-about hidden tracks, whether it's hair loss, erectile dysfunction, or mental illness. Mainstream treatment options are mostly mature drugs, such as minoxidil for hair loss and sildenafil for erectile dysfunction These drugs have several significant characteristics. Firstly, they have been on the market for many years, with both original and generic drugs coexisting. The cost of generics is extremely low, but due to years of promotion, the original drugs have deeply rooted brands. When it comes to these drugs, it is inevitable to associate them with the original drugs. However, due to the long time on the market, from a consumer goods perspective, they lack iteration, are not very user-friendly, and are expensive.

Secondly, while cheap generic drugs do exist, it is not easy to do business in this area. The low barrier to entry and fierce competition make it difficult for generic drugs to establish a brand. Additionally, the efficacy varies, making it hard for consumers to choose.

The drugs distributed by HIMS are all generic drugs produced by some generic drug factories. However, they are branded by HIMS, with auxiliary ingredients, packaging, and tablet design all completed by HIMS.

This is the core of its business model - using its own drug appearance redesign, customized treatment plans, and delivery services to establish a brand in the fiercely competitive generic drug market.

The company's drugs are relatively cheaper than the original drugs, but compared to a large number of competing generic drugs, they are considerably more expensive. In last year's short report, one argument was that the company's drugs are more expensive than over-the-counter generic drugs offline, making it unsustainable and bound to face competition.

However, if you think about it carefully, isn't delivery + consultation + customization + design + branding also a new form of value? Consumers are still willing to pay for it for a reason. This bearish view is too hollow. If it's considered expensive, how do you explain that the sales of original drugs still hold a large market share?

The average profit margin of generic drug companies in the US is less than 10%, while even original drug companies whose patents have expired can achieve profit margins of 20-30%. If the company aims to achieve a profit margin between these two, it is a successful generic drug business model.

Three, The Exaggeration of Diversification Expansion

The recent surge, which is several times higher, has factors such as the elimination of negative news, turnaround in performance, but also some storytelling elements. A few weeks ago, HIMS announced the launch of a new weight loss drug, comparable to Novo Nordisk's semaglutide, priced at only 15% of the original drug. Riding on this huge market, the company's stock price surged again, rising by 27%.

The background is that the treatment tracks the company focuses on are mostly chronic diseases, including weight loss. In addition, weight loss drugs currently meet the conditions of being expensive and needing price pressure. However, the optimism is a bit excessive in the market's reaction.

Firstly, the US patent for semaglutide expires in 2032. Can generic drugs be produced now? Obviously not. Currently, there is a shortage of weight loss drugs, and the FDA has opened a back door, allowing the use of composite drugs with equivalent components like glp-1 in the short term. But what if there is no shortage? This is clearly not a sustainable business within 8 years.

While semaglutide is prescribed by doctors, although expensive, it can be covered by US medical insurance, namely FSA and HSA. HIMS' model, on the other hand, means it will not be covered by medical insurance. So, in reality, it doesn't save much money.

On the other hand, Semaglutide itself is a diabetes drug. Before the outbreak of the weight loss trend, the demand for diabetes treatment has been continuous and huge. However, has the company captured the diabetes drug market? No, this has made the demand for the weight loss drug market become hollow.

Diabetes is the number one chronic disease. The online treatment, branding of generic drugs, consultation on treatment plans, and medication compliance observation related to diabetes are very prosperous. Most communities and pharmacies also provide related drug delivery services, and diabetes or obesity are not difficult to talk about.

It can be said that the reason why HIMS cannot make it is because it has no place in this race anymore. Many big bull stocks in the US stock market are just a small part of the diabetes industry chain. For example, DXCM, which solely focuses on blood glucose monitoring, has a market value of over 40 billion. Companies like PODD and TNDM, which provide drug delivery devices, also have larger market values than HIMS. HIMS indeed lacks professional advantages compared to them. Based on this, the performance in the diabetes field is like this, and naturally, weight loss can be inferred as well.

Therefore, the short report believes that it is correct to criticize HIMS for hyping growth opportunities in the past. The company's current growth still relies on those not-so-difficult-to-talk-about issues, in the slow disease track with low specialization in the industry chain.

IV. Gray Area

The company's development still remains in the gray area for the long term, facing various policy risks, which is also very important in the bearish logic. This will also suppress the company's valuation for a long time.

For example, as mentioned in the short report, there are issues with the relationship between the company and doctors. According to the law, commercial entities cannot replace medical institutions, doctors cannot be employed by platforms, and the company's services cannot be considered as treatment. How to rearrange the business structure between doctors and the company is a long-term issue. For example, in online drug sales in China, additional fees are paid to physicians for prescribing services to rationalize this process.

The company's model skips diagnosis and treatment, provides online consultations, and delivers medications. Although convenient, skipping diagnosis and treatment will lead to some problems. For example, erectile dysfunction (ED) may be a precursor to heart disease. Skipping comprehensive examinations and directly using erectile dysfunction drugs will overlook long-term health risks. If patients using HIMS develop more serious illnesses in the future, there will inevitably be doubts.

Based on these issues, the company's valuation cannot be particularly high unless there is sustained high-speed growth in performance. However, as seen in the income statement, the growth rate in recent quarters is slowing down.

If the significant short-term stimulus from GLP-1 cannot boost the company's growth rate, a valuation correction is very likely. Even if GLP-1 brings short-term performance growth, it is just making quick money. The current growth of the company is probably still relying on the penetration of those patients with hidden health issues who have not yet used the company's platform The key point is that the contribution of the new business to the company's performance is unclear. It is crucial to disclose the growth rate of business excluding erectile dysfunction (ED) and hair loss, which is key.

In the long term, what is more crucial in suppressing valuation is the FDA's qualitative assessment of this medical model and the clearance of legal risks, including whether it can be covered by medical insurance, which is very important. Once these factors are eliminated, the company should see a significant increase, rather than just a 20% increase based on a weight loss drug.

V. Conclusion

The company's greatest hope lies in continuing to expand the high-end generic drug sales model based on its current advantages. After all, the current generic drug industry is really poor. Is there no better way for companies to make money in such a crucial sector?

Currently, HIMS has accumulated a large number of consumers and brand recognition. Therefore, in the future, when exploring new competition in generic drugs, such as facing Huizhi or Teva, it can also have a brand premium ahead of others. There are many chronic disease generic drugs to profit from, and there are competitors with similar models. However, looking at the performance over the past few years, it has indeed left imitators far behind.

Based on policy concerns, the company's valuation should not be very high in the long term. However, as a conceptually leading high-profit margin generic drug brand in the long term, the current market value is too small. With a market value of 4 billion, even if it triples, it is not considered high. Having long-term vision is valuable, so the company is still a high-risk investment target. Looking at the company's growth experience, it is also evident that the future lies in the branding of generic drugs and humanizing medical care.