Hims(HIMS) - Innovative, Differentiated, Consumer Health Care Brand Stock Analysis
We look at an innovative vertically integrated consumer health care brand with high growth, a long runway for growth, and a wide competitive moat
Disclaimer: The information provided is not financial, investment, tax or other advice. Nothing contained constitutes a solicitation, recommendation, endorsement or offer to buy or sell any securities or any other financial instruments. For more information read the disclaimer.
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Mission
Our mission is to make healthcare accessible, affordable, and convenient for everyone.
I love this simple mission from Hims, they want to provide affordable and convenient healthcare to everyone. I believe it is so simple that their employees can easily decide what decisions will allow them to achieve their mission.
Hims People and Culture
As of March 31, 2021, Hims had 225 full-time employees across various functions. Hims is a remote-first business that has invested in the software, tools, and culture. Hims work environment is one of mutual trust, confidence, and inclusion to provide an opportunity for growth and recognition, with the ultimate goal of delivering better healthcare to more consumers.
Industry
In the United States, healthcare spending is projected to exceed $4.0 trillion in 2020 and grow to $6.2 trillion by 2028, according to the Centers for Medicare & Medicaid Services.
The current healthcare system is broken for most people in the U.S.
Despite the vast spending on healthcare in the United States, the current system frequently fails the average consumer. According to the Centers for Medicare & Medicaid Services, per capita spending on healthcare in the United States has doubled in the last 20 years with total spending near $4 trillion; however, United States life expectancy and health indicators are falling behind those of other developed nations.
The existing healthcare system is highly fragmented and inefficient, lacks transparency, and is unfriendly to the consumer. In addition, myriad issues related to insurance coverage and other cost barriers stand in the way of too many Americans getting the treatment they need and deserve. The legacy system does not allow patients to receive proper care in a timely manner and ultimately drives poor health outcomes.
Telehealth is the future and consumers are demanding it
Supported by increasing deregulation and broad societal shifts, demand for and provision of telehealth services is surging. Telehealth enables more efficient allocation and utilization of existing clinical resources that could otherwise go unused. With an aging population requiring more complex care and a younger generation that is accustomed to digital technology, telehealth offers an efficient way to leverage finite resources.
Business Overview
Hims is building brands that represent the front door to the healthcare system for a new generation of healthcare customers. From the beginning, Hims brands have stood for de-stigmatization and access. Hims has been designed to encourage customers to engage with and seek treatment for conditions that are often embarrassing or stigmatized. This strategy has allowed Hims to engage with customers who may not otherwise be willing to or want to engage in their healthcare needs. Hims has been positioned itself as a trusted guide and partner for customers as they explore, learn about, and seek treatment for their health and wellness needs.
Hims designed and built their digitally native, cloud-based technology centered around the consumer, and design everything with the consumer in mind. Hims’ platform has websites, apps, telehealth platform, electronic medical records system, pharmacy integration, and mobile accessibility combine to provide consumers with a seamless, easy-to-use, mobile-first experience. The majority of Hims customers are millennials, a brand-conscious and high-value generation poised to expand its purchasing power. Customers embrace Hims convenient, digitally native and mobile-first product, driving organic growth through word of mouth and user-generated content.
Hims & Hers has built a comprehensive and vertically integrated solution that empowers people across the country with direct access to qualified healthcare providers and reliable treatments. They offer an integrated telehealth solution combining access to a distributed provider network, clinically-focused EMR system, digital prescriptions, cloud pharmacy, and innovative consumer engagement strategies, all delivered through simple and intuitive mobile and web interfaces.
Hims core offerings fall into four categories—sexual health, hair loss & dermatology, primary care, and behavioral health. Erectile dysfunction and hair loss were the first offerings, proving the strength of the model with strong unit economics and patient outcomes. Hims category expansion strategy leverages existing knowledge and strong unit economics from these initial cohorts.
Affiliated Medical Groups and Providers
Hims has contractual arrangements with the Affiliated Medical Groups to enable their provision of clinical services to customers. The Affiliated Medical Groups are separate professional entities owned solely by licensed physicians. The Affiliated Medical Groups contract with or employ physicians, nurse practitioners, physician assistants, and licensed behavioral health services providers to provide telehealth consultations and related services on Hims platform.
As of March 31, 2021, approximately 285 medical providers located throughout all 50 states in the U.S. provided services on Hims platform through medical groups affiliated with Hims & Hers (the “Affiliated Medical Groups”). These medical professionals adhere to a rigorous set of assessments and all credentials, licenses, and qualifications are cross-checked against federal, state, and other agencies. The Affiliated Medical Groups implement comprehensive processes, including written testing, to ensure adequate clinical skill and quality. Testing results are reviewed by an advisory board of physicians, with only the most qualified applicants approved by the Affiliated Medical Groups to provide consultations on Hims platform. This rigor in provider selection ensures a strong culture of high standards focused around improving healthcare outcomes for customers.
Partner Pharmacies
Hims has contractual arrangements with three licensed pharmacies, PostMeds, Inc. (dba TruePill), EHT Pharmacy, LLC (dba Curexa Pharmacy), and their affiliated pharmacy that provides services exclusively for customers, XeCare LLC, for fulfillment and distribution of certain prescription and non-prescription products available through Hims platform.
Hims Business Model
Hims offers a range of health and wellness products and services available for purchase on their websites/apps directly by customers. These offerings generally focus on chronic conditions, where treatment typically involves the use of prescription medication on a recurring basis and ongoing care from healthcare providers. Hims also offers over-the-counter drug and device products and cosmetics and supplement products, which are primarily focused on wellness, sexual health, skincare, and hair care. These curated over-the-counter products include vitamin C, melatonin, biotin, collagen protein and teas in the wellness category, moisturizer, fragrances, face wash and anti-wrinkle cream in the skincare category, condoms and lubricants in the sexual health category and shampoos, conditioners, scalp scrubs and topical treatments such as minoxidil in the hair care category. The over-the-counter drug and device products and some of the cosmetics and supplement products are “white-labeled” products, where Hims sells the manufacturer-developed product under Hims brand name or co-branded along with the manufacturer’s brand.
Most of the offerings on Hims are sold to customers on a subscription basis. Subscription plans provide an easy and convenient way for customers to get the ongoing treatment they need while simultaneously providing the company with predictability through a recurring revenue stream. The subscription plans offered through Hims give customers an affordable, simple, all-inclusive price for their treatment. For subscription plans, customers select the desired cadence to receive products, which can range from every month to every two to twelve months, depending on the product. The customer is billed on a recurring basis based on the selected cadence and a specified quantity of product is shipped at each billing. Customers can cancel subscriptions in between billing periods to stop receiving additional products and can reactivate subscriptions to continue receiving additional products.
Hims integrated technology platform allows Hims to serve customers efficiently from start to finish: initially from customer discovery and purchase of offerings on Hims, to connecting customers with medical providers for telehealth consultations, to the fulfilment and delivery of customer orders, and finally through ongoing clinical management by medical providers. This technology-driven efficiency provides cost advantages that allow Hims to offer customers affordable prices and to generate robust gross margins.
Hims acquires new customers and drive brand awareness through various marketing channels, including social media, online search, television, radio, and other media channels.
Hims TAM
Hims TAM in their core categories is ~$350B, they plan to expand in adjacent categories and nearly double their TAM over the long term. The following images give a nice summary of their current and future TAMs.
Hims Growth Strategies
Expand brand awareness and generate viral promotion from current subscribers. The above image provides an insight into this.
Acquire more customers, cross-sell and upsell other products for other chronic conditions
Category expansion into new chronic conditions like sleep disorders, infertility, diabetes, cholesterol and hypertension
Leverage existing capabilities to penetrate new sales channels and further improve operations
Expand into new geographies - Check out the acquisitions section of this post for Hims moves here
Hims Financials
Following is the income statement for 2020.
Following is the balance sheet for 2020.
Following is the cash flow statement for 2020.
Revenue 2020 - $148M
Revenue Growth - 80% for 2020
Current TAM - $350B
Gross Margin - 77%
Free Cash Flow as part of Total revenues - (-1%)(2020) (Not Profitable yet)
Total Debt/Equity - 0.06 (Strong Balance Sheet)
Net Cash - $27M(2020)
EV - $1.57B (Assuming $1.59B market cap, $0.015B total debt and $0.027B cash)
EV/Revenue 2020 - 10.6x
EV/Revenue NTM(Assuming 30% growth) - 8.1x
EV/Revenue 2021 from Guidance(Assuming 49% growth) - 7.1x
Insider Ownership
Hims has high insider ownership at 38%. The Founder and CEO Andrew Dudum owns 14% of the outstanding shares. The management is highly invested in their own business, so we can see that they have a long-term vision and focus.
Revenues
Hims monitors two financial results, Online Revenue and Wholesale Revenue, to track total revenue generation.
“Online Revenue” - represents the sales of products and services on Hims platform, net of refunds, credits, chargebacks. Online Revenue is generated by selling directly to consumers through both the Hims and Hers brands. Online Revenue consists of products and services purchased by customers directly through Hims platform. The majority of Online Revenue is subscription-based, where customers agree to be billed on a recurring basis to have products automatically delivered to them. Subscription billing is preferred by many customers because most of Hims products treat chronic conditions and these product offerings are most effective when taken consistently and continuously.
“Wholesale Revenue” - represents non-prescription product sales to retailers through wholesale purchasing agreements. Hims sells only nonprescription products to wholesale partners. In addition to being revenue generative and profitable, wholesale partnerships have the added benefit of generating brand awareness with new customers in physical environments.
“Net Orders” - are defined as the number of online customer orders minus transactions related to refunds, credits, chargebacks and other negative adjustments.
“AOV” - is defined as Online Revenue divided by Net Orders.
The table below provides a breakdown of total revenue between Online Revenue and Wholesale Revenue, as well as two key metrics that drive Online Revenue (Net Orders and Average Order Value or “AOV”, both defined below) for three months ended March 31, 2021 and 2020, and the dollar and percentage change between such periods (dollars in thousands, except for AOV and Net Orders):
The table below provides a breakdown of total revenue between Online Revenue and Wholesale Revenue, as well as two key metrics that drive Online Revenue (Net Orders and Average Order Value or “AOV”, both defined below) for Hims for the year ended December 31, 2020 and 2019, and the dollar and percentage change between such periods (dollars in thousands, except for AOV and Net Orders):
Hims has grown over 30%+ for the past six quarters. They seem to have some benefit from Covid-19. Check out the image below for their performance for the past six quarters. Increases in Net Orders, AOV, and Gross margins imply excellent unit economics and increasing competitive advantage.
Customer Concentration
Hims is a direct-to-consumer company and there is no concentration risk in this part of the business. But, for the wholesale part of the business, for the years 2020 and 2019, a single wholesale customer represented more than 10% of accounts receivable.
Hims/Hers Brand
Hims is a business powered by its brand. It’s always worthwhile to see what’s up with their brand/marketing on their following social media and their eCommerce/subscriptions website. Click the buttons below to check them out!
And while you are at it, check out my Twitter!
Competition
Currently, there are no direct-to-consumer competitors that offer the full suite of solutions and direct-to-consumer products/services. Competition is largely fragmented and consists of many competitors that are smaller in scale and are niche in focus with the ability to treat only one chronic condition.
In telehealth and chronic disease management, Hims competes with other providers that are larger in scale and generally provide telehealth on behalf of self-insured employers and insurance plans including Teladoc, Livongo, Amwell, and One Medical.
Competitive Advantage
Brand - Consumer-first healthcare brand that has very high Customer and Provider satisfaction(NPS 65+), that is highly trusted.
Switching Costs/Customer Relationships - Hims has built a trusted relationship with Gen-X and millennials who will spend a majority of future healthcare spend with Hims.
Technology - Full-service vertically-integrated telehealth offering
Scalability - Highly extensible business model with expanding unit economics
Network Effects - Hims connects consumers to healthcare providers in a very cost-efficient way and will benefit from more scale on both the consumer and provider sides.
Acquisitions
Hims & Hers Acquisition of Honest Health
The acquisition lays the foundation for future expansion into UK & Europe. Hims plan for geographic expansion is shown in the above image.
Hims & Hers Acquisition of Apostrophe
The acquisition will accelerate the Hims scale in dermatology and fulfillment capabilities with a fully-owned pharmacy.
Risks
Hims is a brand-driven business, they can fail if they cant effectively maintain, promote, and enhance Hims/Hers brand in a cost-effective manner.
Hims recently launched Hers and may not be successful in women’s health and wellness initiatives.
Evolving privacy Laws, Government regulation of healthcare create risks and challenges for Hims.
Hims depends on Affiliated Medical Groups to provide healthcare consultation services and could be adversely affected if those relationships were disrupted.
The activities and quality of healthcare providers treating customers, including potentially unethical or illegal practices, could damage Hims brand
Hims could be adversely affected if healthcare providers were classified as employees of the Affiliated Medical Groups instead of independent contractors.
Hims pharmacy business has additional laws and regulations.
Final Thoughts
Overall Hims is a highly differentiated consumer healthcare brand that is vertically integrated, highly efficient, and creative in marketing, differentiated, and pioneering the pathway towards truly affordable and accessible healthcare. Their competitive advantages for their brand, switching costs, and economies of scale have high barriers of entry for incumbents and new entrants.
Note: A lot of information in this article is compiled from Hims website, SEC filings, and recent presentations/conferences.
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