Hims&Hers: Disrupting the $4T Healthcare Market

Deep Dive

Hello! Today I bring you my deep dive on $hims. I have really enjoyed learning about the US healthcare market and in turn, about the potential of the company. I believe this deep dive will also give you a solid overview of the sector and how to potentially disrupt it, which I hope will be of benefit to you going forward. As always, skip to any section of your interest:

1.0 The Problem

1.1 The Trillion $ Opportunity

2.0 Understanding HIMS 0.00%↑

2.1 Source of Value, 2.2 Towards the Inflection Point, 2.3 Supply Side Considerations and Risks, 2.4 Healthcare Quality, 2.5 Generics vs. Branded Drugs

3.0 Competitors

4.0 Financials

5.0 Conclusion

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1.0 The Problem

The $4.2 US healthcare market is fascinating. It is arguably the world´s largest subsidizer of pharmacological innovation and simultaneously, perhaps the most dysfunctional market in the US. Regardless, it is of vital importance to the nation and despite the burdensome regulation, this market is ripe for constructive disruption. $HIMS is a formidable opportunity in this sense. Let me explain.

The US healthcare market is a monopsony, which means there is only one buyer - insurance companies. Almost everyone in the US has healthcare insurance, so almost no one pays medical bills out of their pocket. This gives participants in the supply side (practitioners, hospitals etc) the freedom to charge patients as they please - both in terms of the prices charged and the items included in the final bill.

In effect, the monopsony yields a highly inelastic demand. Historically, patients have not cared much about the increase in prices or the confusing billing, because insurance companies would take care of it. In turn, insurance companies have been raising their premiums year over year without any individual patient feeling too much pressure. Eventually, the high prices have effectively locked customers in, with the one-buyer situation perpetuating itself.

The above is not the result of some evil plan, but rather of the very well intended movement that started after WW2 which saw companies offer their employees (private) health insurance, just as certain innovations made healthcare actually effective for the first time in history. As corporate healthcare expenses became deductible, the trend gained steam and before we knew it, most of the US population was covered.

Over time, this has translated into a great business for practitioners, very high prices for consumers and a suboptimal healthcare quality. Why would such a dynamic affect healthcare quality, you may ask? Because the monopsony gives practitioners the incentive to default to the most expensive treatments, even if they are unnecessary. Patients often end up over-medicated and over-processed, with not enough focus on the end result.

Generally, this has shifted the industry´s attention from the patient´s health and satisfaction to profit - although the two cannot be entirely disconnected. This seems to have equated into the relative under performance of the US healthcare compared to other countries as you can see in the graph above, with overall costs rising anomalously faster than life expectancy.

The US government has done its fair bit to try and fix this, but historically it has not been able to, because it largely involves either eliminating the monopsony, which would be too disruptive per its size, or curtailing market dynamics that underpin the very essence of the country. The government cannot (and should not) stop capitalism and so, even though Medicaid and Medicare have helped democratize access, the demand inelasticity continues to see prices rise.

Whilst on paper the above system abstracts patients away from the underlying complexity, there are a number of mechanisms that bring it to the surface, mainly copays and deductibles:

• A copay is the amount of money a patient has together with the insurance company, to cover a specific healthcare bill.

• A deductible is the amount of money a patient must pay before the insurance company starts paying at all, which is then reimbursed by the latter.

The insurance policies are quite complicated, so for the general population it is hard to tell when copays and deductibles are required and how much they will be. This happens in many other countries, but healthcare costs are not so high and the uncertainty presents far less of an issue.

You can see in the graph below that out-of-pocket spending for families was $3,020 in 2018, when the employer-premium contribution (the part of the insurance the employer pays for) was $7,067 in 2003. In other words, in 2018 families spent out-of-pocket roughly half of what their employer paid for them just 15 years ago. You can draw similar comparisons from one year to another, across the different cost components, but the conclusion remains - prices are going up fast.

The point is the complexity that emerges from the monopsony eventually reaches end consumers in terms of out-of-pocket spending and not just in the form of suboptimal care. This is not only a result of the dynamics I have explained above, but also of the fact that the different components of the supply chain are continuously looking for ways to increase their margins, bargaining with each other. Eventually patients have been drawn in as a buffer too.

I could pretty much write a book on this topic, but I hope I have managed to get the picture across. The US healthcare market is on an inflationary hamster wheel and has thus far been immune to the same forces that have disrupted adjacent industries. Whether a disruption of the market is possible or not remains to be seen, but due to its size, the matter is worthy of attention.

1.1 The Opportunity

Moving on, please note that I believe the supply side participants in this market are generally caring and loving and the system also subsidizes healthcare innovation like no other in the world, with plenty of dollars flowing to problem solvers. Yet, fixing the overall underperformance relative to other countries is something that would greatly benefit consumers and in turn, would be quite a business opportunity, which as I will explain in the coming sections, HIMS 0.00%↑ is nailing.

This is a complex problem, but I believe solving it starts with defining a new (digital, preferably) customer experience / demand funnel. As adoption grows, eventually the supply side is forced to succumb to the resulting new set of expectations generated by the new experience on the consumer side, effectively collapsing subsequent layers of complexity in the system for decades to come.

Such a demand-side experience would make access to healthcare convenient, affordable and predictable, to address today’s key painpoints. In the US today, once you manage to get an appointment, you never know how much a visit to the doctor is going to cost, how much you are going to have to pay yourself versus how much the insurance will pay and overall and how long you will spend in the waiting room, for instance. Some of these painpoints apply to the rest of the world too and for the younger generations, the overall experience is just outdated.

Over the last decade, we have seen Uber do this with taxis, for instance. Healthcare is a far more complicated industry with plenty of regulatory risk, but the same principles abide. It is all about popularizing a customer experience that is better and that sweeps through the market, changing the way things are done on the supply side. $HIMS is doing just this and whilst the risks abound, the company is worth taking a deep look at.

The implications of this in the long term would be not only be making the system better for consumers, but generally much more efficient, due to the nature of a digital demand (patient) funnel versus an analogue one. Think of it this way: when you visit the doctor and he/she types away, that data is basically gone forever or confined to your doctor´s computer at best. If data is collected via a digitized form that gets stored in the cloud safely, it persists through time, making it much easier to obtain insights as you evolve as a patient.

In general, the medical industry has progressed from intuitive medicine to precision medicine because of this ability to obtain better insights. We previously treated many illnesses in all sorts of esoteric and ineffective ways, but now we understand an increasing set of them right down to the molecular level, which makes us much more efficient at curing them. This has been made possible by simply generating more data and processing it better, thanks to scientific advancements.

If you have been reading me for a while, you will know that I believe most of today´s top companies are exactly about this: laying down infrastructure that enables vast data generation within a specific scope of business, turning the game of business into an electron management one. Business then becomes a function of what can you do with electrons (that codify data) to drive insights that translate into better operations: and medicine is no different, yet far behind other industries in this sense.

Once you go from getting a little information on a patient to vast longitudinal amounts of data on him/her, you can effectively move into predictive medicine, using the data to make predictions about the patient´s health. In this format, the patient no longer has to wait to be sick to receive medical care, which is part of what makes the overall experience terrible. This inverts the health care system, which is currently reactive and turns the default experience into patients not getting sick in the first place.

One can only imagine what the system would look like then and almost needless to say, this is a trillion $ opportunity.

The point is, however, that a digital demand funnel for healthcare cannot only provide a better experience from scratch, but also help evolve medicine to the next frontier, in which patients will be so much better off. In a way, this transition has been happening for a long time - just before WW2, hospitals were a place were the sick would go to die. Now people go there to get cured and in a few decades time, there will not be as much of a need to go there in the first place.

I have mentioned regulatory risk a number of times already and the matter of the fact is, the healthcare industry is a minefield in that sense. For the demand side innovation in question to be sustainable, it must not dabble too much in areas that may trigger the wrath of incumbents. Instead, it must focus on delivering a great customer experience. Onto the company itself now.

2.0 Understanding $HIMS

HIMS 0.00%↑ is a tele-health platform that connects patients with medical providers, via a streamlined concierge experience, that makes access to stigmatized areas of healthcare very convenient, for both men and women. Such areas include erectile dysfunction, hair loss, acne, anxiety and depression, genital herpes and more. For Hims is the company´s segment for men and For Hers, the segment focused on women.

The company focuses on conditions that require ongoing treatment, managing and facilitating the interaction between patients and providers, whilst providing patients with the necessary medication fulfillment throughout the duration of the treatment, with a tentative focus on generic medications (section 2.5). HIMS 0.00%↑ charges a subscription fee for these services and generally, the service is much cheaper than the legacy alternatives.

What makes For Hims unique (together with its immediate B2C competitors, which I will analyze in section 3.0) in the tele-health space is the concierge experience it delivers to patients, in effect creating a new front door for the healthcare sector. Per management, its three core pillars are:

1. A leading concierge service

2. Provider messaging

3. Branded content

These three pillars lay the foundation for a hypothetical new healthcare demand funnel, like the on I described in section 1.1. Pillars 1 and 2 enable the novel experience itself to be delivered and pillar 3 serves as an amplifier, helping the company reach more customers at a marginal cost. Nowadays the combination of software and content can yield fantastic economics and these pillars seem to be designed accordingly.

At a higher level of abstraction, the company is a marketplace, bringing supply (medical providers) and demand (patients) together. This particular business model has an endless amount of particularities and I will be exploring some of them (section 2.3) in what remains of the deep dive. I have ample experience with this business model and generally, if well executed, it can turn into a wonderful cash machine. Else, it can quickly become a nightmare.

For Hims was only founded in 2017 and so the company is just 5 years old. Consequently, we are dealing with a startup that happens to trade in the public market, with plenty of risk. Today, For Hims is focused on stigmatized conditions because that is where it can penetrate the market with least friction. Yet, as I have already explained, it will likely make its way through the industry with the passing of time, as it onboards more patients and continues to redefine expectations - in case of success, of course.

Also, whilst other healthcare markets around the world do not present a situation like the one we see in the US, the demand for an overall better patient experience seems to be universal. Hence, the runway ahead is large.

2.1 Source of Value

The company´s core value is its ability to develop trust with a growing number of patients, through time, in a cost-effective way - via the development of its concierge experience and the resulting brand equity. Whilst the company is in fact more than a demand funnel (section 2.2.2), the latter is its fundamental component. As such, the company becomes an investable asset if and when it shows signs that it can grow its user base organically. Varying degrees of allocation can also make sense, as the company tentatively reaches that point.

So far, the metrics look very solid. The user growth has been phenomenal with revenue following along and with a cohort payback time that sits at around 1 year.

This is all fueled by advertising, however. For the past five years, the company has been investing very heavily in performance marketing, paying for ads to attract new users. Throughout its public filings, the company makes explicit mention of its allegedly excellent marketing abilities, which management says are resulting in a stable user cost acquisition (CAC) over the years. Meanwhile, SG&A continues to drag the company´s bottom line into the red.

“No, we've actually seen CACs overall across the portfolio remain relatively stable, and that truly is to power and position ourselves for long-term growth and again, just the long-term [outlook]” - Q1 2022, ER CC

“As Yemi said, you know, our efficiency on marketing has continued to remain incredibly strong, remaining with payback period sub one year, which we've been able to keep consistent relative to last quarter, very much stable. I think a big part of this is the omnichannel presence, the strategy around kind of that retail distribution, building brand partnerships, brand awareness. I think what is very unique about Hims & Hers is we started as a consumer brand, this is something that has been entrenched, in our business and our values and what we believe is a strategic asset from the day that we launched this company.” - Q1 2022, ER CC

According to management, 90% of the company´s revenue is recurrent, which seems to be translating into not that terrible of an income statement, despite heavy marketing expenditures. Indeed, if and when organic growth comes into play, the resulting financials could be spectacular, due to a healthy gross margin profile - 74% in the TTM.

$HIMS revenue by year ($).

$HIMS gross margin per year ($).

Further, a reasonably strong retention rate adds a margin of safety to the hypothetical investment, since it would enable the company to toggle the marketing on and off, according to spot ad prices - value investing style. If retention remains as healthy as it has been, the company can invest heavily in advertising when prices are down and be more reserved when they go up.

“There´s an 85% YoY revenue retention from customers who have maintained a subscription for at least 2 years.” - Q1 2022 ER CC

“We also did see operational efficiencies as well as higher retention rates. That did result in and for the economics across the cohorts. Given the fact that we have seen this not just occur with just the Q1 2021 cohort, but several repeated cohorts since then, we do have the conviction that this is a sustainable trend -- a sustainable trend on a go-forward basis” - Q4 2021 ER CC

However, whilst we do figure out whether the company is really a marketing star or not, the value creation game continues to be an uphill run until organic network effects kick in - when existing users clearly begin to bring in more users, which then use the app, stick around and bring more users themselves and so on. Paying money for attention is a loser´s game.

Still, the company is pushing every day to reach such an organic inflection point, by investing in making the overall experience delivered to customers better, increasing operational efficiencies and achieving wider brand recognition, which brings me onto the next section.

2.2 Towards the Inflection Point

The company is doing 4 fundamental things to reach an eventual inflection point, after which the business may be financially sustainable. I will be reviewing one by one in this section and they are the following:

1. Adding new healthcare categories, with similar unit economics as existing ones.

2. Making medication fulfillment seamless, via the deployment of new proprietary fulfillment facilities.

3. Constantly iterating the front-end concierge experience, as evidenced by their recent mobile native app launch.

4. Adding new retail locations, via partnerships with consolidated retail players.

Further, the above core actions get For Hims closer to achieving economies of scale and branding power: the two power modalities that I believe this business can tap into, to ultimately produce lasting returns for shareholders. Also, just to clarify, power is what a company needs to capture and maintain a sufficiently large market share together with a healthy margin. Businesses that do not achieve power at some stage eventually get eaten up by the market and there is only a very finite number of power types.

Now, I will review each core action the company is taking.

2.2.1 New Healthcare Categories

The platform has to become a place where current and future patients spend a lot of their time on, for the business to be truly succesful. Patients will spend more and more time on For Hims / Hers if the company continues to pick new categories well. Per the current shape of top half of the I/S, the company has so far done a good job.

According to management, we can expect the company to carry out “one to two major category expansions every couple of quarters. This is what we've done essentially since we launched the company 4-plus years ago, and I think this is the strategy on I think a go-forward basis”. Eventually, the company will likely hit a critical category density that will enable it to become a large part of its customer´s lives, which could ultimately boost retention.

As it does, HIMS 0.00%↑ is effectively decreasing the size of the critical user base mass it needs to achieve some form of sustainability, by increasing the monetization depth per customer. This is actually quite a pervasive trend throughout marketplace businesses and I have analyzed a couple of interesting examples, like BOX 0.00%↑ (deep dive) and SPOT 0.00%↑ (deep dive). As marketplaces gradually add new verticals that stick, the user lifetime value expands healthily and the financials are quickly transformed.

This trend is in fact what has enabled Hims to prosper in terms of the metrics I exposed in section 2.1 despite running mostly on paid marketing. This ability that the company seems to have, greatly increases the odds of success going forward.

2.2.2 Proprietary Fulfillment Facilities

The end goal of a consultation is to receive a succesful treatment. The legacy system has great friction in terms of getting a consultation in the first place and in turn, the part when the patient has to get the medication is outdated, if measured against other industries. People are used to pressing a button and getting what they want.

For Hims is gradually able to get medical fulfillment to that level of expectation, by deploying and operating its own facilities and embedding their operations seamlessly with its front-end concierge. According to management:

One of the largest areas of focus was our verticalization efforts in Ohio and Arizona, or our affiliated pharmacy, compounding and fulfillment centers. These facilities are now filling the majority of our monthly treatment orders with pharmaceutical and over the counter. This transition away from third party pharmacy fulfillment centers has taken years of rigorous focus and is now helping to deliver improved operational efficiencies and a major beat to adjusted EBITDA. - Q1 2022 ER CC

Although EBITDA has been overused over the last few years and is now on the contrary considered a heresy to use it, the evolution of the metric denotes a company that is taking some meaningful steps forward. This gradual increase in operational efficiency, together with the addition of new verticals is likely to compound into a great experience for customers and very interesting business. As always, take my words with a probabilistic grain of salt, which is the mindset from which they emerge anyway.

2.2.3 Mobile App Launch / Concierge Experience Iteration

I personally have not had the opportunity to use For Hims, so I have a blindspot here. However, there are some interesting datapoints that I find revealing:

1. The app was only fully launched during Q1 2022.

2. Despite that, 60% of the user base seems to have adopted it by quarter´s end, which according to management contributed to the “breakout” growth the company saw during Q1.

3. The app (For Hims, not For Hers) has made it into the top 18 medical apps on the App Store:

   

As with the rest of the company, our analysis of the app is very limited with the short time horizon and resultingly low volume of datapoints. Still, like the rest of the aspects that I am going through in the deep dive, this is looking quite promising.

Going back to the analysis of marketplaces in general, one of my key learnings after analyzing SPOT 0.00%↑ is that the company is an optimization machine. Last quarter alone, it ran 2000 tests to try and figure out which modifications of its app made sense and which did not. Spotify has made it to where they are against all odds, defeating competitors like Apple and Amazon, because of this focus and this incessant iteration.

For HIMS 0.00%↑ to succeed going forward, it must adopt an organizational culture that is obsessed with trial and error - assuming it has not done so yet. This, together with signs of organic growth of its user base, is perhaps the most important aspect to monitor going forward. A company´s DNA is its fate.

2.2.3 Retail Partnerships

At the end of Q1 2022, the company had 20,000 retail locations. According to management, initiating and operating these partnerships is not very expensive:

*[the] fulfillment center in Ohio enables simple logistics, so it´s relatively low cost to get the retail partnerships going.”

Secondly, despite the fact that the partnerships do not generate much revenue in relative terms ($7.2M during Q1), management considers them to great increase brand equity. As an example, the company begun its partnership with Walmart during Q1, rolling out to 1,900 stores. This makes sense because as a prospective or current customer of For Hims, seeing the company´s offerings in a Walmart location is further validation point.

At scale, this can translate into a meaningful force, that enables HIMS 0.00%↑ users to feel more comfortable on the platform. It naturally also aids the acquisition of new users and management claims that the overall multichannel approach, including retail, has facilitated a stable CAC through time.

2.2 Supply Side Considerations and Risks

In most of its public documents the company somewhat glosses over what I think is a very tricky part of the business - managing the supply side. It is clear to me that the demand side sticks around and pays dollars to obtain a better experience. Whilst the path forward is somewhat clear on that side of the marketplace, this is a greatly deflationary force, which is bound to upset some part of the supply TAM.

The problem that I outlined in section 1.0 is a great business for practitioners. You show up to their clinic and from then on it is basically a free buffet for them (in relative terms). When you turn the experience into a predictable and affordable one, Uber style with taxis, that all goes away.

Basically, according to the law HIMS 0.00%↑ cannot hire its physicians directly. Instead, it hires “affiliated medical groups”, owned by physicians themselves and they join the platform as independent contractors. I picked up the following nugget from the company´s 10-K:

“The Affiliated Medical Groups may not be successful in defending the independent contractor status of providers in some or all jurisdictions in which we and/or they operate.”

This looks like the same battle that UBER 0.00%↑, $ROO and others have been fighting with their “independent contractors”. The only difference here is that the healthcare industry is far more consequential and incumbents seem to be even more fortified than in the transport industry. Not an easy battle.

Further, there is all sorts of regulations that For Hims can avoid because it does not include insurance providers in its platform and customers pay out-of-pocket. According to management, it plans to do so soon and this opens the door to a whole regulatory mine field which at this time I do not understand - I am yet to do a legal deep dive of the healthcare system. From their 10-K:

Additionally, the Affiliated Pharmacies will provide an opportunity to incorporate insurance reimbursement into our system, which we intend to do as early as this fiscal year, ultimately enabling drug coverage and allowing us to provide access to treatment for a broader range of conditions with enhanced treatment flexibility and personalization for customers.

“We currently accept payments only from our customers—not any third-party payors, such as government healthcare programs or health insurers. Because of this approach, we are not subject to many of the laws and regulations that impact other participants in healthcare industry. If we begin accepting reimbursement payments from insurance providers or other third party payors such as a government program as we intend to do, we will become subject to some of these additional healthcare laws and regulations.”

Generally, whilst patients seem to continue to demand tele-health after COVID19, physicians are not so onboard. This is naturally due to considerations about its effectiveness, which I will discuss in the next section, but also likely due to the fact that they are the ones getting disrupted. A lot of them naturally have “concerns about its effectiveness”:

2.4 Healthcare Quality

There are two key aspects I think about when considering the healthcare quality delivered via HIMS 0.00%↑ :

1. Whether telehealth is effective or not, across each of the respective categories.

2. The fact that the treatments offered are antiquated, in relative terms.

About the effectiveness, I believe that as we move into the molecular dimension of medicine, curing conditions will increasingly be about diagnostic tests done outside of the doctor´s office, with the results in turn being interpreted by doctors afterwards. All illness really does stem from cellular dysfunction, so as our technology improves, digital consultations should be increasingly effective.

Having said that, this will vary across categories and even across specific conditions within the categories themselves. Much of the success both in delivering top healthcare quality and in operating a profitable business will come down to management´s ability to pick the right categories - which so far is looking excellent.

I have also spoken to a couple of forward looking doctors and both explained to me that the in person visits are mostly about getting a feel for the patient´s vibe and putting it into context with the symptoms that the patient reports. Apparently (and if there are any MDs reading this, feel free to comment), this can be achieved via tele-health just fine. I still need time and more inputs to see this clearly.

Further, I am a great fan of integrative medicine, which consists in actively improving the health of people so that the body as a whole is able to maintain and restore its balance and health. Once an acute condition has developed, more aggressive treatments are required but integrative medicine is quite effective in preventing and managing chronic conditions, which HIMS 0.00%↑ seems to be going after:

“ … [the] expansion into new chronic and often stigmatized conditions that can be treated safely via telehealth, require ongoing and recurring customer relationships, and for which generic medication has been established as an effective means of treatment”

“According to the Centers for Disease Control and Prevention, six out of every ten individuals in the United States currently suffer from a chronic condition, and four out of every ten individuals suffer from two or more chronic conditions. Given the prevalence of these conditions, we see a large market opportunity for our current and future offerings.”

A lot of these conditions can be fixed by getting a patient to stop eating processed foods, sugars and generally stop putting food into his/her body that is damaging at the cell level, shifting towards an anti-inflammatory diet. However, this is modern medicine (unbelievably) and most of the market is behind in this sense. There are also plenty of entrenched interests in the food industry. Nonetheless, a demand funnel like the one at hand would be quite effective in delivering integrative medicine to the masses too, once there is a general demand for it.

I say this because to a large extent, I like to invest in a better future. The more I study biology and medicine, the more clearly I see the paradox that I have outlined in the previous paragraph. We have gone a long way in terms of extending the average lifespan, but generally we do all sorts of daily things to our body that tame its ability to regenerate itself. As lifespan continues to expand, we need to shift to aiding the body daily, taking a proactive stance against chronic disease, based on a fundamental understanding of what health is.

2.5 Generics vs. Branded Drugs

I also want to bring to your attention how the monopsony outlined in section 1.0 plays out regarding prescription medications. This is very relevant when thinking about $HIMS, because much of the concierge experience seems to be based on making it really easy to access cheaper generic brands, that work just fine compared to the more expensive branded alternatives, that doctors seem to have a tendency to prefer - at the expense of the end consumer.

You can see in the graph below how the per capita prescribed medicine spending has also risen anomalously with respect to comparable countries, because as mentioned, doctors prefer the more expensive stuff.

On its own, this presents a large arbitrage that could in theory be capitalized on. However, the regulation makes it difficult for generics to prosper over brand drugs, in that generics will be removed from the market for some time by law if a patent is issued for an equivalent branded drug. A mere litigation on behalf of the firm pursuing a given patent halts the sale of generics.

The above generic vs branded dynamic is actually quite complex in practice. In theory, once the patent of a drug expires, generics are more than welcome into the marketplace legally speaking - drug patents last 20 years. However, it seems that patents can be filed for novel forms of a drug, so that a new patent could be issued if the drug iteration is considered sufficient. Despite its apparent dark side, the regulation in this sense greatly promotes innovation.

Going back to HIMS 0.00%↑ , the company can tentatively exploit the resulting arbitrage if it picks generics well, much like its categories. I am not a legal healthcare expert, so there is only so much I can comment on, but I do consider it relevant to bring up the complexity of the task. Again, so far so good from management.

3.0 Competitors

There seem to be a number of companies that are relatively similar to Hims, with a B2C focus. Among them, Roman, Nurx and Lemonaid. In this sense, the competitive landscape is not so clear and in fact, it looks like Roman could potentially be ahead of Hims today in terms of monthly sales growth, per the last comparative dataset that I can access. Regardless, it looks like this may turn into a two horse race between Roman and Hims.

Looking relatively undifferentiated.

The telehealth B2C space is young and so perhaps more time is required to fully understand the competitive landscape. Per the nature of this business, however, it may evolve into a winner takes all, with the company that first achieves

1. Economies of scale

2. and wider brand recognition

taking most of the prize. This is because the fundamental aspect of the business, as discussed, it the digital demand funnel, which is not subject to constraints of the analogue space.

Beyond the immediate B2C comparisons, there are some interesting competitive dynamics that can evolve going forward. Firstly, AMZN 0.00%↑ made its move into the pharmacy industry in 2020, to effectively eliminate the uncertainty around subscription medicine price differences. (Following what I explained in section 1.0, when the time to come a prescription med comes, you never know how much it will cost, depending on the location you buy at.)

Amazon, in line with its other ecommerce verticals, eliminates this uncertainty and makes the shopping experience highly convenient and predictable, touching on some key components of Him´s value proposition. On the other hand, Amazon does not offer a concierge experience and that remains the key difference between the two companies today. Of course, there remains the risk that one day Amazon decides to move in that direction.

As with many other companies that I actively study, Hims´ 100% focus on delivering a better experience for patients is something that Amazon may not be able to match, for it has to attend to its other business segments. Over the past decade, I have seen this dynamic evolve succesfully for the underdog in the case of SQ 0.00%↑ and SPOT 0.00%↑ , which have both fought off big competitors, including Amazon, through an un-relentless focus on their scope of business. I have written detailed thoughts on this on my Substack too.

Looking a bit further out, then we have a whole set of legacy incumbents like CVS 0.00%↑ and WBA 0.00%↑ that in turn, make most of their money from their pharmacy business. They already have economies of scale, brand recognition and a lot of cash. What they maybe do not have is the innovative culture that would enable them to pivot on time to a modern B2C offering.

Take CVS, for instance. As you can see, selling meds is a big deal for them and they operate at tremendous scale. If you have spent some time in the US, you will know that their brand recognition is superb too.

$CVS revenue break down by segment (%)

$CVS prescription volume.

4.0 Financials

The most fundamental financial aspect of the company, as I have mentioned, is that whilst revenue is growing phenomenally and user retention looks strong, the dependence on paid marketing is bringing the company´s bottom line into the red.

In general, Hims is heading in a very good direction but depending on paid marketing for growth is a relatively precarious situation to be in. I still do not see clear signs of organic growth and until I do, the I/S is quite high risk for me.

The balance sheet itself is quite healthy, with $48.3m cash in hand, no long term debt and $3.8m in capital leases. In turn, cash from operations is negative and the annual burn rate is not too far off in terms of magnitude from their current cash reserves.

This will likely make the company prone to search for outside financing in the near future, which is nonetheless to be expected of such a young company. Remember that Hims was only founded 5 years ago, so it is more of a VC play than anything else.

As Hims now runs its own facilities, inventory levels are something to watch out for. So far, I do not see any unhealthy dynamics here, since the spike we see below seems to be correlated with the overall advancement of the rest of the business:

$HIMS inventory levels per year ($)

5.0 Conclusion

The optimism that once surrounded the stock now seems to be gone. The company is trading at a market cap of $933M, at around 3 times sales. Given its growth rate and its future potential, it seems like a potentially attractive buy, bearing in mind the risk involved.

I need to continue learning about the healthcare sector and about the company to develop a conviction, or finally discard the investment. I do have a conviction, however, on the fact that the US healthcare market will get disrupted eventually and probably in the next few decades and that it is best to do so via a soft demand funnel.

Whilst I continue to learn about the company, I walk away from this deep dive with an understanding of the healthcare market that I previously did not have. I hope you do so too and that it serves you well.

Until next time!

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These are opinions only of the individual author. The contents of this piece do not contain investment advice and the information provided is for educational purposes only and no discussions constitute an offer to sell or the solicitation of an offer to buy any securities of any company. All content is purely subjective and you should do your own due diligence.

Antonio Linares makes no representation, warranty or undertaking, express or implied, as to the accuracy, reliability, completeness or reasonableness of the information contained in the piece. Any assumptions, opinions and estimates expressed in the piece constitute judgments of the author as of the date thereof and are subject to change without notice. Any projections contained in the Information are based on a number of assumptions as to market conditions and there can be no guarantee that any projected outcomes will be achieved. Antonio Linares does not accept any liability for any direct, consequential or other loss arising from reliance on the contents of this presentation. Antonio Linares is not acting as your financial, legal, accounting, tax or other adviser or in any fiduciary capacity.