Hims & Hers Health Post Q2 Earnings – Compounded GLP-1 Ploy Faces New Threats (NYSE:HIMS)

Investment Overview: Hims and Hers Stock Gains On Compounded GLP-1 agonist Drugs,

When I last covered Hims & Hers Health (NYSE:HIMS) for Seeking Alpha in late May, the company’s stock had just jumped ~25% in value, to ~$18 per share, valuing the business at ~$4bn.

The company describes its business as follows in its Q2 2024 quarterly report/10Q submission:

The Hims & Hers platform includes access to a highly-qualified and technologically-capable provider network, a clinically-focused electronic medical records system, digital prescriptions, and cloud-enabled pharmacy fulfillment.

Our digital platform enables access to treatments for a broad range of conditions, including five core specialties: sexual health, men’s and women’s dermatology, mental health, and weight loss.

Hims & Hers connects patients to licensed healthcare professionals who can prescribe medications when appropriate. Prescriptions are fulfilled online through licensed pharmacies on a subscription basis, making accessing treatments simple, affordable, and straightforward.

The catalyst for gains in May was the company’s announcement it was in position to offer compounded GLP-1 agonist weight loss drugs to customers, for a fraction of the price they can expect to pay for the branded drugs Wegovy and Zepbound, developed by Novo Nordisk (NVO) and Eli Lilly (LLY) respectively.

These two drugs are expected to dominate a GLP-1-driven weight loss industry that is forecast to easily surpass $100bn per annum in peak revenues, with GLP-1’s becoming the best-selling drug class in history.

As Novo and Lilly scramble to manufacture enough GLP-1 product to satisfy demand, the FDA has declared global shortages of both drugs.

According to the Food and Drug Agency (“FDA”):

Drug compounding is often regarded as the process of combining, mixing, or altering ingredients to create a medication tailored to the needs of an individual patient. Compounding includes the combining of two or more drugs. Compounded drugs are not FDA-approved.

When a drug is in shortage, compounders may be able to prepare a compounded version of that drug if they meet certain requirements in the Federal Food, Drug, and Cosmetic (FD&C) Act. As of May 2023, Ozempic and Wegovy are both listed on FDA’s Drug Shortages list.

I gave Hims and Hers stock a “buy” recommendation, despite the substantial overnight gains following the announcement, noting that:

Hims and Hers has partnered with a manufacturer that is registered as a 503b outsourcing facility, meaning it is fully compliant with the FDA’s good manufacturing procedures.

The company says that “prices start as low as $199 a month”, which represents an ~85% discount to the branded drugs Wegovy and Zepbound, and unlike these two branded drugs, Hims & Hers does not face any supply shortages.

Customers will require a prescription before buying the product, which Hims & Hers will likely be able to arrange via a consultation with one of its partnered physicians.

I estimated that the opportunity could be worth an additional ~$300m in revenues to Hims and Hers in 2024, but cautioned that we would have to wait until Q2 2024 earnings were released before knowing what the true figures would look like.

Hims and Hers stock did initially keep climbing, reaching a value of ~$25 per share in mid-June – up nearly 40% since my “buy” call, and appointing a former President and Chief Operating Officer (“COO”), Kare Schulz to its board of directors, but on July 26, shares began to slip in value as the FDA announced that it had:

… received reports of adverse events, some requiring hospitalization, that may be related to overdoses due to dosing errors associated with compounded semaglutide injectable products

The FDA does not regulate compounded drugs and speculated that patients may be administering the self-injected therapy wrongly, leading to adverse events. Hims and Hers stock sank in value to ~$18 in response, before the company reported its Q2 earnings, which failed to reverse the bearish sentiment.

Hims and Hers Q2 Earnings Overview – GLP-1 Discussion Dominates Solid Quarter With Raised Guidance

Hims and Hers reported revenue of $315.6m in Q2, up over 50% year-on-year, adjusted EBITDA of $39.3m, and net income of $13.3m, versus a net loss of $(7.2m) in the prior year period.

Management also adjusted its 2024 full-year guidance, to $1.37-$1.4bn of revenues, up from $1.17-$1.2bn guided for when announcing Q423 earnings, suggesting my calculations around GLP-1 compounding revenues may be accurate, although during the Q2 earnings call with analysts, company co-founder and CEO Andrew Dudum suggested:

The primary driver of our growth continues to be the expansion of our subscriber base. We ended the quarter with nearly 1.9 million subscribers adding more than 155,000 net new users to the platform.

In response to an analyst’s question on the revenue contribution from GLP-1s in the second half of 2024, Chief Financial Officer Yemi Okupe commented as follows:

With respect to GLP-1 specific contributions, I think we’re very much in the early days of the GLP-1 launch being less than three months out from the launch. In the second quarter, we did see very strong momentum.

I think it’s too early at this point to provide definitive guidance around a specific specialty or product, but we’re very pleased off of the initial launch and the confidence in the momentum for that specific vertical is very strong as we roll out the product nationally.

Perhaps unsurprisingly, GLP-1 questions dominated the earnings call, the primary questions being around the likely size of the revenue contribution – which management did not disclose – whether the company could continue to offer compounded GLP-1s when supply of semaglutide and tirzepatide (the underlying ingredient in Wegovy/Zepbound) is restored, what percentage of new health plan members are accessing GLP-1 products as opposed to other products offered, and whether the company expected to add Wegovy and Zepbound to its suite of product offerings in time.

Management was relatively coy in response to a succession of questions around the same theme, however, to the best of my understanding, it seems as though Hims and Hers believes the personalised dosage plans it develops for compounded GLP-1 patients may help extend its use of this supply long after the Zepbound/Wegovy shortages have been resolved. CEO Dudum commented as follows:

I think there’s really established precedent with regard to the compounding exception, which allows for this level of personalization that we’ve spoken about for patients that need it.

And I would expect that the clinical necessity of that will be really clear with these medications as people know, there are real side effects. There are really no one size fits all dynamic. But we think there’s a really robust platform that extends well beyond the shortage across a number of these avenues.

Hims and Hers arguably seems to be in a win-win situation. Management says thousands of customers unable to access supply of Wegovy or Zepbound are flocking to its platform – this must be having a positive effect on purchases of other products, notably the companies own oral weight loss pills, which the company may be aggressively cross-selling – come for the promise of compounded GLP-1, stay for our oral weight loss pills!

CEO Dudum told analysts in relation to that product that:

It has been incredibly successful. Within less than a year, it has scaled to a run rate of $100 million in annual revenue, becoming our fastest specialty ever to do so.

Moreover, the surge in users demanding weight loss solutions may ultimately attract the attention of Novo and Lilly. Dudum told analysts that:

So we, I think, like many others, if not almost everybody, are trying our best to source supply. I think what we can tell you is that it’s not easy. There’s not really any available in volume, but we are doing our best to try to aggregate some and have a durable supply of that for our customers.

Should supply become available, it’s possible that Hims and Hers would be first in the queue for Wegovy/Zepbound product, as it has massive pent up demand that would be attractive to the Big Pharmas.

Equally, as the CEO noted, there may be four or five new GLP-1 products approved in the next few years, given mid-stage studies are being conducted not only by Novo and Lilly on next-generation products like retatrutide/orforglipron/amycretin, but also other Pharmas and Biotechs – Amgen (AMGN) Roche (OTCQX:RHHBY), Viking Therapeutics (VKTX), Structure Therapeutics (GPCR), which may be a good fit for Hims and Hers’ platform in time.

A New Threat Emerges – Big Pharma Owned DTC Platforms

So far in this post I have mainly focused on the positive aspects of Hims and Hers business and GLP strategy – growing revenues, massive demand for compounded GLP-1, leading to growing demand for other product offerings – a virtuous circle, if you like.

The fact remains however that Hims and Hers stock is down over 35% this month alone, so clearly there are some cracks appearing in the business model.

One that was brought into stark focus was Pharma giant Pfizer’s (PFE) announcement that it will be launching its own digital platform for consumers, Pfizerforall. According to a press release:

The new, end-to-end experience will support the millions of Americans affected annually by common illnesses like migraine, COVID-19 or flu, and those seeking to protect themselves with adult vaccinations.

PfizerForAll helps individuals and their families cut down on the time and steps needed to take important health actions like getting care, filling prescriptions, and finding potential savings on Pfizer medicines.

Pfizer is working within the existing U.S. healthcare system and partnering with a growing network of healthcare organizations to launch and develop PfizerForAll.

Patients will be able to use existing insurance and pharmacy programs and will also benefit from new direct services from partners including UpScriptHealth, Alto Pharmacy and Instacart.

At present, the arrival of such a platform would not necessarily impact Hims and Hers core business offerings of sexual health, men’s and women’s dermatology, mental health, and weight loss.

Imagine a scenario, however, where a company spun out of Pfizer’s patent expired brands division, Viatris (VTRS), created a platform where customers could rapidly access Viagra, a product it now markets and sells. Or if generics giant Organon began offering its women’s health solutions via a digital platform.

Ultimately, it may be the case that consumers develop deeper levels of trust with the pharmaceutical that makes the most recognised and quality assured product, and would desert Hims and Hers platform if the products they desired were sold directly to them by the pharma company.

A Further Major Headwind – Discounted Zepbound?

Today, Hims and Hers has also been reeling from another significant headwind – Eli Lilly has announced that:

Zepbound^® (tirzepatide) 2.5 mg and 5 mg single-dose vials are available for self-pay for patients with an on-label prescription, significantly expanding the supply of Zepbound in response to high demand.

The single-dose vials are priced at a 50% or greater discount compared to the list price of all other incretin (GLP-1) medicines for obesity. This new option helps millions of adults with obesity access the medicine they need, including those not eligible for the Zepbound savings card program, those without employer coverage, and those who need to self-pay outside of insurance.

Discounted Zepbound – in plentiful supply – could be a major headache for Hims and Hers, as it negates the need for any customer to seek a compounded version of the branded drug. Furthermore, the company plans to sell these vials via the “self-pay pharmacy component of LillyDirect”, its DTC platform. According to Lilly’s press release:

Distributing the vials via this channel ensures patients and providers can trust they are receiving genuine Lilly medicine, building on the company’s efforts to help protect the public from the dangers posed by the proliferation of counterfeit, fake, unsafe or untested knock-offs of Lilly’s medications.

With all that said, Lilly says “a four-week supply of the 2.5 mg Zepbound single-dose vial is $399 ($99.75 per vial), and a four-week supply of the 5 mg dose is $549 ($137.25 per vial)”, while Hims and Hers’ compounded product apparently costs $199 per month – still significantly cheaper than the branded product.

Concluding Thoughts – Hims & Hers Compounded Ploy Remains In Play, But Investors May Need To Ride A Wave Of Fear, Uncertainty and Doubt

On the Q2 earnings call, Hims and Hers management stated it had expanded its compounded GLP-1 offering to 30 states, “covering over 60% of the U.S. population, and we anticipate nationwide availability before year end”. management also rejected the idea that its compounded drugs were unsafe, noting that:

Each of our subscribers have the ability to communicate concerns to a licensed provider and receive a response in a timely manner for no extra charge across all of our specialties today.

And further adding that:

During the same period, less than 10% of customers using our compounded GLP-1 offering have reported side effects that they feel they can’t tolerate.

In summary, it is going to be fascinating to see how this plays out. Lilly and Novo are the two largest pharmaceuticals globally, thanks almost exclusively to tirzepatide and semaglutide.

Lilly’s market cap valuation is closing in on $1 trillion dollars, putting the company in a position – presumably – to crush opposition such as a compounded GLP-1 drugs digital platform. The company is investing over $10bn in new manufacturing facilities to ensure supply of tirzepatide is never compromised, and Novo is making a similar move.

That may suggest that Hims and Hers days supplying compounded product are numbered, however this is a business valued at a market cap of $3.26bn today, therefore if the compounded drug ploy attracts millions of new users and loopholes are exploited so that it can keep being sold for many more years, there surely remains attractive upside to explore.

Big Pharma can punch back with its own DTC platforms and warnings about the dangers of compounded products, but so long as Hims and Hers price point is lower than its Big Pharma rivals, as it remains today, its business may continue to thrive.

There is clearly much at stake for Hims and Hers, but equally, in Lilly and Novo’s +$100bn per annum market, the company is a minnow that is barely taking a percent of the larger companies’ market share. Will Lilly and Novo simply shrug off this minor inconvenience, again, allowing Hims and Hers’ business to thrive under the radar.

For me personally, the level of uncertainty for Hims and Hers shareholders is problematic, and I am adjusting my rating to “Hold”, despite some attractive forward looking metrics, such as a price to sales ratio under 3x, and the promise of profitability to come.

Management appears confident its compounded drug ploy is here to say, Wall Street less so, which creates a possible arbitrage opportunity, but for a less risk-on investor, the best bet may be to sit on the sidelines and see how this fascinating scenario plays out.