Investing in Hims and Hers Health - Does Telehealth Have Potential?
Updated: Jan 24, 2022
Could Hims and Hers Health Be Here To Stay?
The COVID-19 pandemic forced a major shift in global lifestyle. The so-called "stay at home" trade popped, seeing companies like Zoom Video and Peleton skyrocketing in their share prices. An often overlooked part of this trade was the telehealth segment, a nascent space which relies on video calls with medical professionals to execute basic/routine consultations, often at a cheaper price than going to a doctor's office, sitting in a paper robe for thirty minutes only for the doctor to hand you an Advil. Telehealth has exploded, seeing companies like Teladoc, the leader in the space, forming big-time strategic partnerships with companies like Aetna to provide telehealth services to company employees. It's also seen existing companies like CVS start their own competition. But there's a new game in town, and they bring erection pills to a telehealth fight. Introducing: Hims and Hers Health.
Market Capitalization: $1.49 billion
Full Year 2020 Revenue: $148.76 million (+80.18% YoY)
Q1 2021 Revenue: $52.31 million (+74.01% YoY)
Q1 2021 Net Income: -$51.4 million (-752% YoY)
How Did Hims and Hers Health Get Started?
As with all great startups in young industries, you'll find the beginning of the story located in the sleepy town of Silicon Valley. Founded as "Hims Inc," it began in 2017 when Andrew Dudum and Hilary Coles founded the company to sell sildenafil, better known as the generic version of Viagra. The company piloted this business model of using video conferencing between a patient and a medical professional to be able to solve an embarrassing problem (erectile dysfunction) discreetly and from the comfort of the patient's own home. Using this same logic, they extended their product catalog to minoxidil and biotin, both used in preventing and restoring hair loss. In 2018, they launched their new brand, "Hers," in order to expand into the birth control market. With their success expanding into multiple markets, they were able to raise $100 million in their Series C private equity funding, giving them unicorn status at a $1 billion valuation. This new cash infusion allowed them to expand into Europe, capturing the attention of oh-my-god-this-is-so-awkward business partners Alex Rodriguez and Jennifer Lopez. A couple at the time, they threw themselves into the partnership, working on new products for the company including multivitamins and "self-care treatments," and serving as spokespeople for the business. This in turn saw the legendary investor Howard Marks jump into the business with his hedge fund Oaktree Capital Management. Oaktree took the company to the public markets via a Special Purpose Acquisition Company (SPAC) in January 2021.
What's The Business?
I'm going to say this because I'm a child: they sell boner pills! In all seriousness, they sell products that are typically embarrassing to talk about, especially so when you're sitting in a sterile room under halogen lights trying to tell a person in a white lab coat that you're losing your hair or can't perform like you used to. This company is actually attempting to remove societal stigmas one pill at a time, and largely pioneered the telehealth industry in the process. They still require a medical professional and a patient to be linked, but it's virtually and allows the patient to be more comfortable in his or her own living quarters. I also mentioned above that they expanded into "self-care" which involves things like vitamins and mud masks, and even men's makeup. Effectively, they're in two distinct markets: telehealth and recurring revenue health with one hell of a markup. Let's take a look.
Will I Invest In Hims and Hers Health?
First, let's visit the telehealth part of this business. As previously stated, they are working to remove the stigma of getting your problems fixed, even if you perceive these problems as "embarrassing" or "wrong." Their first earnings report as a public company back in March of 2021 shows that they are making incredible headway in this department. They conducted over 2 million telehealth sessions in 2020. For comparison, it took Teladoc, their largest competitor, three years to get to this number, though Teladoc boat-raced Hims last year clocking in at over 10 million sessions. 2020 was also one hell of a catalyst. With COVID ensnaring the planet, people didn't want to leave their homes. Do you have a sniffle? Better hop on the telemedicine app du jour and chat with a doctor so they can convince you it's probably not brain cancer and no you shouldn't go to WebMD anymore.
The second part of the business is their "subscriptions" business, which entails essentially Step 2 of the telemedicine life cycle. Once you have (and pay for) your initial consultation, you're then approved for the medication or the service you'd like to subscribe to. Hims does an excellent job of capturing people in this recurring revenue, with their subscriptions clocking in at 391,000 in 2020, an 80% increase year-over-year. The price of these subscriptions can vary wildly, as every person is different in the dosage and frequency of their chosen medication. However, the running cost for their generic ED medication is around $4 per pill, which is an crazy markup over running to the drug store down the road where you can purchase it for an average of $1.75. As mentioned before, they also have birth control, hair loss prevention and multivitamins, but are now leaping into the dermatology department with their lines of skin-assisting vitamins and men's makeup. Seriously. They also partnered with Miley Cyrus to develop and promote prescription skincare products, presumably to take on products like Accutane, to their subscription service. Hims own estimation of the skincare/dermatology market puts the market opportunity at close to $44 billion annually, so they're expanding into a sector with plenty of runway.
Finally, they are expanding into the mental health space. This is another medicinal space that has achieved a weird societal stigma, but more and more celebrities are speaking up about mental health. Tennis star Naomi Osaka made headlines for pulling out of the French Open and Wimbledon over mental health concerns. Michael Phelps has been very public about his struggle with depression and now serves as the spokesperson for Talkspace, a competing telemedicine therapy app. Finally, Simone Biles, the greatest gymnast of all time, pulled out of most of the events at what is thought to be her final Olympic Games citing her mental health. This space is growing rapidly as people realize that seeing a therapist is not something to be ashamed of, and the telemedicine approach to therapy can also end up cheaper than laying on the long couch.
The main business risk facing Hims is the sheer volume of competition they face in capturing market share, both in telehealth and product subscriptions. In the private markets, companies like Roman fulfill a very similar, if not identical, business model in terms of the ED services. In the public markets, the competition is much tougher, having to stare down the barrel of Teladoc and Amazon. Hims might need a little of their own blue pill to stiffen to this competition.
Obviously, Amazon is a juggernaut and can expand into any territory it wants, and it apparently wants subscription medication services. Back in 2019, they purchased PillPack for $753 million to lay the groundwork for this type of service, but that's effectively the only true headway they have made so far. They did begin an ambitious healthcare offshoot in conjunction with Berkshire Hathaway called "Haven," but shuttered that service in January of this year due to the service failing to be a "disruptor." For all its might, Amazon has also shown a propensity to fold to smaller competition, previously taking on, and losing, to Shopify and Etsy.
The bigger competition here is Teladoc, a service built from the ground-up to compete with Hims, and it's winning. As I mentioned above, 2020 saw them achieve over 10 million telemedicine consultations, over 5x the amount Hims managed. They also formed a key partnership with Aetna, bringing their telehealth services as an add-on to existing business healthcare programs. Finally, they purchased Livongo Health in 2020, which is the premier service for people managing diabetes and side effects caused, expanding their client pool even further to those with a need for recurring visits. Teladoc has grown into the leader in the space, leaving Hims to be the Pepsi in this situation.
Another risk this company faces is government regulation. Medicine is an extremely highly-regulated industry, especially in Europe where Hims is attempting to expand into. That gets even more complicated when Hims is getting told off for using their existing products suite for off-label uses, like using an antidepressant to treat premature ejaculation. If this continues, the regulatory environment for Hims could get dicey, and expensive.
The Bottom Line
Let's get into the numbers because there's a lot to unpack here. First, this is a small business at less than $2 billion. Looking at Teladoc, their nearest competitor, we find that they are a $24 billion business and briefly reached a peak of $40 billion early this year. This leaves plenty of runway for Hims to grow into, but it might not be immediate.
The first company earnings report showed signs of promise on the public markets. Their adjusted EBITDA (earnings before interest, taxes, debt and amortization) saw Hims effectively lose $8.6 million on the quarter. While that seems like a lot, and was $4 million more than the same quarter in 2020, it still beat the analyst estimates of between $9.5 million and $11.5 million. They also reported loss of 14 cents per share, again beating the 15 cent per share loss estimates from analysts. The loss stems from customer acquisition, marketing and new product lines which are set to serve them well moving into the future.
Gross profit margin was 77% for the quarter, which is pretty exceptional and an 8% jump from the year before. They also grew their subscription service 79% year over year jumping to 391,000 paid subscribers. Finally, there was the 74% year over year revenue growth, attributed to the growth in telehealth visits and the expansion of the "Hers" product catalog.
Overall, I love this company. I do own shares (full disclosure), but I believe in this company for the long term. Will it quadruple your money this year? Probably not. But could Hims and Hers Health be a massive winner if the telehealth trend continues to tick up year over year? You better believe it.
Disclosure: the author of this article owns shares of HIMS and options contracts that expire in December. Please invest at your own risk.