HIMS Q2 2024 earnings review

[wpr101]

Hims & Hers Health reported earnings on August 5, 2024. Highlights of the shareholder letter and investor presentation include,

Guides vs Actuals

• guided Q2 rev was 292-297M → actual 317M (+52%)
• guided Q2 adj EBITDA 30-35M → actual 39.3M (last year was 10.6M)
• guided full year 2024 revenue 1.2-1.23 → revised up to 1.37-1.4B
• guided full year adj EBITDA 120-135M → revised up to 140-155
• next quarter is guided for 375-380M revenue (+65-68% yoy)
• next quarter adj EBITDA guided for 35-40M

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• net revenue increase in the quarter was 39M (compared to 31M quarter ago)
• net income 13.3M vs -7.2M last year
• subscriptions are up 43% yoy to 1.86M (last Q was up 41% yoy)
• “monthly online revenue per average sub” was $57 (has gone in last quarters from 55 → 53 → 54 → 53 → 55 → 57)
• average Order Volume (AOV) was $121 up from $95 year ago (previous numbers look like 90 → 95 → 99 → 103 → 109 → 121)
• net orders up 20% yoy
• wholesale revenue of 8.8M, 31% yoy (product sold in stores)
• gross margin 81%, slightly down because of spending for GLP
• “net income provided by operating activities” was 53.6M, up from 16.8M last year and 25.8M last quarter
• FCF of 47.6M up from 10M year ago and was 11.9M last quarter
• Net income margin of 4.2%, EBITDA margin 12.5%

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From the shareholder letter,

• GLP-1 is already incremental to revenue in Q
• Positioned to get over 100M of revenue in four separate categories
• GLPs helped drive revenue growth in the quarter, revenue would have been +46% yoy without GLP sales
• New specialities for HIMS would usually take 18-24 months to get up to 100k subscribers, but weight loss did it in just 7 months
• Added more than 155k net subscribers in month, compared to 172k last quarter
• 785k subscriptions are using a customized solution, up 160% yoy
• personalized treatments are driving growth across longer tenured specialities
• new form factor of gummies, will treat a variety of conditions
• signed agreement to acquire own FDA-registered 503B outsourcing facility (this will replace the company mentioned in the short report against HIMS, and now HIMS will completely control the sourcing)
• “will invest in multiple sources of supply”
• consumers will get a COA (certificate of analysis) for compounded GLP-1s
• lowest cost GLP is pill form at $79/month for annual sub, $199/month otherwise
• verticalizing supply chain with acquiring 503b outsourcing company
• incorporating robotics and specialized software into supply chain
• reinvesting cash flow into initiatives that accelerate ability to scale
• stock repurchase up to 100M approved because company believes they are undervalued to intrinsic value
• existing infrastructure is 355k sqft, have fully automated packing machinery, 90% of fulfillment done through those facilities
• 85% long term retention of users on platform (measured over two year period)
• strong unit economics with payback period less than one year
• new product launches at multiple wholesale retailers
• GAAP numbers on spend, G&A 13% of revenue vs 15% last year, Tech & Dev 6% vs 6%, Ops and Support 13% vs 14%, Marketing 46% vs 51%
• marketing leverage: efficiencies related to new product launches and improving organic customer acquisition trends
• 227M cash, no debt

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Notes from the conference call,

CEO - Andrew Dudum

• rapidly accelerating in fulfillment of our mission including speed, convenience, transparency, affordable pricing, and a personalized experience
• 4 out 5 specialities now carry at least 10 personalized solutions
• expanded into weight loss category with launch of GLP-1s
• revenue 316M +52% yoy, 39M of adjust EBITDA
• primary driver of growth is expansion of the subscriber base
• 1.9M subscribers, 155k new in Q
• over 40% of subscribers were using a personalized solution
• new form factors will have a “profound impact on the value we can provide to consumers”
• new form factors are expected to arrive in the second half of the year
• signed an agreement to purchase a FDA registered 503b facility
• the facility “will present additional opportunities across specialities such as hormonal therapy and other treatments that require sterile compounded medications”
• further enhances supply chain for compounded GLP-1s and positions to improve accessibility as we vertalicalize operations
• started offering GLPs in 21 states in Q2, but now servicing 30 states and anticipate “nationwide availability before year end”
• within just 7 months, GLPs scaled to a run rate of over 100M
• recently launch “personalized dosages for compounded semaglutide.”
• providers can change dosage in response to side effects and desired level of weight loss based on patient feedback

CFO - Yemi Okupe

• expansion of subscriber base continues to be primary growth catalyst behind incredible growth
• long run way of durable growth across most tenured specialities
• adj EBITDA 39.3M, margin of 12%
• gross margin of 81%, slight degradation because GLPs lower margin
• “outstanding execution across the organization is resulting in strong free cash flow”
• FCF 47.6M, exceeding entire amount of free cash flow generated in 2023
• cash expanded 24M quarter over quarter to 227M
• scaling platform as planning to accommodate over 10M users
• acquisition of 503b facility will close by end of year
• market dynamics allowed for purchasing 3.9M shares under $13/share
• “we believe our share price is disconnected from its intrinsic value”
• up to 100M authorized possibilities of buybacks
• yearly guide of 1.2B to 1.23B “was in our view already ambitious”, and new guidance of 1.37-1.4B is a “meaningful revision”
• expectation of having more than 1M subscribers with a personalized solution by the end of the year
• expect rapid growth across entire portfolio of offerings in the weight loss category
• long term retention of users expected to remain above 85%

Q&A

• CFO says, “we did see very strong momentum”
• 503b facility will unlock additional specialties in the future
• facility will help optimize the cost structure
• maintaining a 1-year payback period on GLP acquisitions via advertising
• CEO on product offering says very establish precedent on compounding and personalization
• no one size fits all dynamic for the customer with treatment options
• sees demand as really robust whether the Ozempic and Wagovy shortages continue
• compounded exception is clear and decades of established guidelines on personalization
• clinical necessity of personalizing medication is really well established
• MEDMATCH AI system can identify right dose and right adjustments for patient
• data shows that MEDMATCH provides “world class experiences”
• have not seen any meaningful degradation in the consumer during macro economic issues
• diversity and breadth of the consumer across different income levels and different geographies is broad based
• customers reticent to let their products go in times of economic turmoil
• making investments in the future for increasingly strong unit economics
• GLP gross margins will continue to improve as product matures
• vast majority of growth on the platform continues to come from subscriber growth at “increasingly stronger and stronger levels”
• pricing on GLPs are “very attractive for the overall market”
• strong value proposition of the platform is helping with retention and acquisition of users
• expect huge evolutions in the platform and expansion of offerings in the GLP category
• “thousands of patients coming every single day saying that they can’t get their access to these medications”
• establish precedent in the market now that everybody is in want of personalization
• brought on executive from Novo to the board, 25 years at Novo as VP
• looking to get durable supply, available in volume for GLPs
• analyst suggests, “getting low to mid-50% gross margin on the GLP-1 offering”, response from CEO that they are not ready to break this metric out
• CFO says there is a degradation of margins for the GLP but there are a multitude of different levers to pull for improving unit economics
• mentions that customers can get branded medications, generics, or compounded/personalized
• no concentration among the groups of different medications, some want brand name only because they trust the Pharma brand
• GLP-1s “have really changed the cultural conversation around obesity management”
• different levels of experience and comfort amongst users, some are okay with an injectable form of GLP, others want a basic low dose pill, chewable, or dissolvable, see entire spectrum of customers
• “overwhelmingly majority of the consumers opting for longer duration cadences” (on subscriptions)
• very much in the early days for less than a month of GLP sales only in the quarter
• confident retention will be strong on GLPs
• Lilly able to reach capacity and produce is already a scenario baked into guidance

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I thought this was a phenomenal quarter with the GLP medications really starting to take off. Revenue is up to 52% yoy and they guided to 65-68% for the next quarter, or nearly 55M of sequential revenue add.

This quarter was 39M of net revenue add, and the prior quarter was 31M of net revenue add. Previously the company was in a range of adding only 20M net revenue for many quarters in a row.

The estimated EPS by analysts was 0.04 and it landed at 0.06, which is a smaller beat than typical. The net add of subs was 155k compared to 172k last quarter. I’m wondering if the market was trading off these metrics after hours. It is hard to imagine what is not to like in this report.

[mizzmonika]

Agreed that it was a phenomenal quarter.

I think people are very worried about GLPs and Lily and Novo patents now that shortage has been declared to be over (even though we all know it may not be)

By making such a big deal about weight loss for their revenues, they put the worry front and center.

I thought they handled the worry in a B- to C+ way.

The good:

• they spoke to the fact that only 15M came from the injections with potential patent problems this quarter
• they spoke to other options they provide - oral weight loss pills, GLP coming off patent - for this area

The bad:

• They spoke about continuing to be able to provide “unique dosage” options of GLP “patent” solutions even if the shortage ends. While this may have seemed smart, it was not, because it creates worries that a patent fight might ensue.

Here’s what I would have liked to hear:

• We feel confident that even if we had to stop making injectables that tread in Lily, Novo space we would still have a huge market ahead with our oral and off-patent GLP-1 solutions, which, while not producing the same level of weight loss, produce excellent results - 8 pounds in 4 weeks - at a fraction of the brand-name costs.

Instead they sounded like they were ready to try to squirm around patent infringements, by tweaking dosage to create a “loophole.” Not good.

Nonetheless I am a hold because they had a great quarter and I actually believe that they have a great business ahead of them and I do hope they just focus on solutions that are almost as good at a fraction of the costs and offer their alternatives during times of shortage.

I think saying that they would offer the brand names when available helped but overall the message was not nearly as strong as it could be.

[mizzmonika]

A slightly different take, less focused on the patent issue but equally worried on the durability issue, directly from Barron’s:

On an investor call late Monday, analysts asked repeated questions about what Hims & Hers would do if semaglutide exited the shortage list. The company’s CEO, Andrew Dudum, said they will be able to continue to sell compounded semaglutide at personalized dosage levels.

Compounding pharmacies are allowed to manufacture customized prescriptions for patients who cannot use the branded versions of a given medicine, for example at dosage levels the brand manufacturer does not supply. But it’s not clear that Hims & Hers would see significant sales in customized prescriptions.

“The call didn’t answer our questions on the durability of HIMS’ GLP-1 offering, where we view HIMS’ continued compounding activity as somewhat in question as we see how the personalized approach plays out,” Leerink Partners analyst Michael Cherny wrote on Tuesday.

Still, the quarterly report was full of news related to its weight-loss medicine ambitions.

Hims & Hers said Monday it had bought a concern that is classified as a 503B compounding facility, one of roughly 80 manufacturers across the U.S. registered with the FDA under a program that allows them to manufacture and sell large quantities of compounded medicines. A 503B facility can currently compound semaglutide while it is under shortage, but it won’t be able to do so when once the drug is taken off the shortage list.

Hims & Hers already owns a 501A compounder, a different category of compounding pharmacy that can prepare prescriptions only for individual patients, and that potentially could make the personalized doses the company appears to intend to sell if semaglutide leaves the shortage list.

The company said on its investor call that the 503B facility would improve its GLP-1 offerings in the near term, and in the long term “present additional opportunities across specialties.”

“Clearly, by acquiring a 503B pharmacy HIMS is planning for a long duration—we just need to see how that develops,” Leerink’s Cherny wrote.

The company also said it would offer compounded tirzepatide, the Lilly drug sold under the brand name Zepbound.

I am holding as I do believe the drugs will remain in shortage and also there are other avenues for weight loss growth, but I think this will hang over their heads until they prove their story or come up with alternatives that make it unnecessary to address this particular piece of their story.