Spruce Point Capital Management Announces Investment Opinion: Releases Report and Strong Sell Research Opinion on Hims & Hers Health, Inc. (NYSE: HIMS)
NOTE TO EDITORS: The Following is an Investment Opinion Issued by Spruce Point Capital Management
Provides Evidence That HIMS Operates on Tenuous Grounds Related to Corporate Practice of Medicine Regulations Designed to Minimize Commercial Conflicts of Interest in the Provision of Healthcare Services
Expresses Concerns About the Quality of Healthcare Provided by HIMS Given the Subjugation of the Company’s Treatment Model to its E-Commerce Revenue Growth Imperative and its Weak Customer Data Protections
Identifies Serious Operational Risks Related to Several Third-Party Pharmacy Partners That Have Been the Subject of a DEA Investigation and FDA Inspections for Safety Violations
Questions the Company’s Sustainable Advantages Given (1) its Sale of Premium-Priced, Generic Products as More E-Commerce Players Enter the Market, (2) OTC Substitutes Threaten its Core Sexual Health Franchise, and (3) Spruce Point’s Finding That Customers Can Game the HIMS System
Provides Evidence That HIMS Has Failed to Deliver on Touted New Growth Opportunities
Questions the Company’s Customer Churn Disclosures, Understated and Increasing Customer Acquisition Costs, and Lack of True Operating Leverage in Light of Discontinued Metrics and Other Disclosures
Sees 25% to 40% Long-Term Downside Risk to HIMS’ Share Price and Urges Investors to Visit www.SprucePointCap.com and Follow @SprucePointCap on Twitter for the Latest on $HIMS
July 13, 2023 09:00 AM Eastern Daylight Time
NEW YORK--(BUSINESS WIRE)--Spruce Point Capital Management, LLC (“Spruce Point” or “we” or “us”), a New York-based investment management firm that focuses on forensic research and short-selling, today issued a detailed report entitled “Bald Criticisms of HIMS” that outlines why we believe shares of Hims & Hers Health, Inc. (NYSE: HIMS) ("Hims & Hers” or the "Company") face up to 25% to 40% long-term downside risk to $5.20 – $6.50 per share. Download or view the report by visiting www.SprucePointCap.com and follow us on Twitter @SprucePointCap for additional information and exclusive updates.
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Spruce Point Report Overview
Hims & Hers is a health and wellness e-commerce company that came public in January 2021 through a SPAC merger. The Company provides online access to prescription and OTC products, primarily for chronic conditions whose treatment is generally elective, not covered by insurance, and a source of social stigma. The Company’s big win was capitalizing on the explosion of demand for generic versions of erectile dysfunction (ED) medications (Viagra and Cialis), which it supplemented early on with men’s hair loss treatments. Hims & Hers has since expanded into dermatology, mental health, and women’s sexual health. The Company uses an affiliated telehealth operation staffed by contract physicians to provide patient consultations and issue prescriptions.
The concerns we outline in our report include:
- Hims & Hers’ physician operating structure and practices operate on tenuous grounds related to corporate practice of medicine (CPoM) provisions, findings of which Hims & Hers’ disclosures could have a material adverse effect on its business. We demonstrate that the commonly used Friendly Professional Corporation (PC) structure implemented by Hims & Hers operates on shaky ground because it appears to violate two key tenets of the CPoM. First, physicians do not own the affiliated medical groups (AMGs), as they have no equity ownership, voting rights, or financial claims. In fact, we believe they are “figureheads” who can be replaced at the whim of Hims & Hers management. We find that just two physicians currently “own” all AMG entities and supposedly manage the entire physician network of more than 600 physicians – however, one of these physicians has questionable credentials and the other lists three other current jobs on his LinkedIn profile but not his role at Hims & Hers. Second, we have found clear evidence from former employees and physicians, a past Business Insider investigation, and even the Company’s disclosures that Hims & Hers exercises excessive control over medical practice by the AMGs. Our analysis of state AMG entity filings highlights numerous problematic submissions as well as the results of a practice reorganization, which we believe may have been precipitated by CPoM issues that faced SEC scrutiny during the Company’s process of coming public. We also found that Human Health of Nebraska, the key entity for Hims & Hers’ provision of mental health services, has had its corporate registration suspended in its home state of Nebraska. Finally, we found that Hims & Hers struggles to describe the financial flows that result from the Friendly PC structure and that the consolidation of these variable interest entities obfuscates numerous key revenue and expense items. While some investors may argue that other telehealth operations employ the Friendly PC structure, those providers – unlike Hims & Hers – are not e-commerce companies with a strategic product revenue imperative creating conflicts of interest.
- Despite the Company’s claims of “clinical excellence,” we believe Hims & Hers’ physician operation has been finely tuned to generate prescriptions in high volume rather than provide quality healthcare. In contrast to Hims & Hers’ attempts to position itself as the “front door” to the medical system and a Company that is building deep, high-trust physician-patient relationships, we believe that nearly all Hims & Hers’ physician interactions are asynchronous, ‘check-the-box’ affairs where physicians spend just a few minutes reviewing pre-screened patient questionnaires before issuing a prescription. We find it troubling that Hims & Hers’ founding medical director not only received a disciplinary order for “gross negligence” and “repeated negligent acts” related to telehealth from the Medical Board of California but also went on to co-found the mental health company Cerebral, which has been the subject of both DOJ and FTC investigations. In fact, we contend that Hims & Hers’ physician operations are inherently unstable and likely to provide suboptimal medical care. The Hims & Hers physicians are contractors with other full-time jobs who often work simultaneously for numerous telehealth platforms and review patient questionnaires during their off hours. Thus, we believe they are not exclusive to (or necessarily committed to) Hims & Hers, potentially not engaging with patients under the best circumstances, and unlikely to build a consistent relationship with any given patient (a core tenet of the primary care model). We believe the Hims & Hers model is ill-suited for successful expansion into new treatment areas. As evidence, we note that customer reviews by women, who are largely using the Hers platform for mental health and other more consultation-intensive issues, are dramatically lower than those for men, who are arguably seeking the easiest path to ED pills. Moreover, we find that Hims & Hers does not conform to treatment guidelines for ED issued by the American Urological Association, which recommends in-person exams even for young men since ED is often a precursor for other health issues. We also find Hims & Hers’ terms and conditions as well as its data practices highly troubling as they (1) require customers to indemnify the Company against any legal liabilities and (2) alert customers that the Company is not subject to HIPAA medical data privacy protections. We believe many customers may find it a shock that an investigation by The Markup and STAT found that user website activity related to mental and sexual health was passed along by Hims & Hers to facilitate ad targeting by Facebook, Snap, and others.
- We believe Hims & Hers is exposed to material operational and reputational risks from the third-party pharmacies that comprise nearly 50% of its current pharmacy supply chain. Pharmacy fulfillment provider Truepill potentially faces existential risk from an ongoing Drug Enforcement Agency (DEA) investigation into its involvement in the unlawful dispensing of controlled substances. Even if Truepill survives the DEA Order to Show Cause, its business has arguably been permanently impaired by poor management, financially unattractive deals, and massive layoffs. Furthermore, an FDA inspection of Hims & Hers’ supplier ITC Compounding uncovered such severe violations, including some that could be “injurious to health,” that it forced a shutdown of their pharmacy compounding facility. Similarly, compounding pharmacy Curexa has received three inspection letters from the FDA that identified numerous operational and product deficiencies. Also, Cosmetics manufacturer Fareva has received environmental violations from the EPA and State of Virginia over the past two years. Although HIMS has attempted to move more production in-house, we find that the Apostrophe business it acquired to bring a compounding pharmacy in-house not only contracts with ITC Compounding and Truepill but also has relatively modest capabilities.
- As a seller of commoditized prescription and OTC treatments, Hims & Hers has little sustainable competitive advantage and is poorly positioned to face numerous competitive threats. Hims & Hers has made its name selling completely commoditized generic medications at massive premiums to competitive products. Our analysis shows that direct competitor Ro has grown web traffic faster than Hims & Hers for eight of the past ten quarters and has added nearly as many site visitors as Hims & Hers over the past 15 months despite their smaller size. Moreover, emerging vendors such as RexMD, Rocket Rx, and Lemonaid are also expected to increase competitiveness for sexual health medications even further. In addition, broad-based discount players like Mark Cuban’s Cost Plus Drug Company are growing rapidly, while retail and e-commerce behemoths such as Amazon Pharmacy (with its new Clinic offering and One Medical transaction), Wal-Mart, and Costco could shake up the landscape overnight. Hims & Hers has a reputation as a high-priced supplier, and our analysis shows that customers have significantly cheaper options if price were a motivating factor, which we believe it increasingly will be if the economy weakens. On an annual basis, these price discrepancies can be hundreds or thousands of dollars and have the potential to more than offset any Hims & Hers advantages that stem from the inconvenience and stigma associated with in-office doctor visits. Interestingly, both former Hims & Hers employees and physicians admitted to us that the Company’s products are commoditized and overpriced and that the Hims & Hers model can be easily gamed by customers, presenting a material business risk. Customers can use the Company’s consultation process to obtain easy access to prescriptions and avoid Hims & Hers’ unjustifiable price premiums by obtaining the medications from lower-cost pharmacies. We believe Hims & Hers’ most differentiated offering is easy access to prescription medications, but even that is now at risk with the recent introduction of Eroxon, an OTC erectile dysfunction medication. Thus, we believe it is only a matter of time before prices compress and Hims & Hers’ revenue ramp and/or margins deteriorate.
- We believe that most of the market expansion opportunities pitched by Hims & Hers have failed to materialize or have dim hopes going forward. Hims & Hers previously announced numerous partnerships with brick-and-mortar healthcare systems with great fanfare, yet SEC correspondence reveals these agreements have no economic substance. Additionally, after stringing investors along for two years, Hims & Hers finally acknowledged that it will not pursue the significantly larger insured patient market. Similarly, the Company’s “enterprise” offering it pitched in its SPAC transaction presentation has not been mentioned since going public. While expansion into women’s treatment areas is an obvious strategic vector, we find that the Hers platform has been poorly designed to appeal to women and that women’s ratings of Hers, mostly referencing mental health services, are dramatically lower than those of men. Hims & Hers also likes to pitch that it is targeting a massive international opportunity, but we find that it has grossly inflated the materiality of its tiny UK acquisition and that management has failed to articulate a coherent entry strategy into markets with very different healthcare and regulatory landscapes. Despite much puffery from Hims & Hers management about its massive offline retail opportunity and the incredible demand it is seeing from major stores such as Target, Wal-Mart, Walgreens, and GNC, Hims & Hers’ wholesale revenue growth has turned negative. We believe this signals that the Hims & Hers brand is not strong enough to drive demand for undifferentiated white-label products. Finally, we have serious concerns about Hims & Hers’ oft-touted push into bespoke compounded medications, including market size, scalability, margin profile, and regulatory issues. In fact, while federal regulations clearly state that compounded products are not FDA-approved, we find several examples of ambiguous marketing on the Hims & Hers website where the Company implies that its compounded products are FDA-approved. Given these challenges, it is perhaps not surprising that the Company recently backtracked on the pace of category expansion that investors should expect going forward.
- We question the financial picture Hims & Hers paints for investors and believe numerous key business metrics are either problematic or indicate increasing financial pressures. We see 25% – 40% downside risk to Hims & Hers share price. We believe the Company’s claim that it is a recurring revenue business is unsupportable given how quickly we estimate it churns customers. Hims & Hers deflects a complete picture of the Company’s customer churn by quoting “long-term retention rates” that only capture retention from the end of year two to the end of year three. We find this metric practically meaningless as (1) it cannot be easily compared to others as a non-standard metric, and (2) based on infrequently disclosed monthly churn, we estimate it references just 16% of total customer value generated through year three and so reveals shockingly little about retention. We estimate that Hims & Hers churns well over 50% of customers by the end of year one and nearly 80% by the end of year two. Moreover, our analysis calls into question Hims & Hers’ CEO Andrew Dudum’s claims that the Company’s customers are spending more on a broader set of products on the platform, as subscriptions and orders per subscriber have both declined since early 2021. Moreover, although Hims & Hers claims to have materially increased the percentage of subscribers on multi-month plans, we find it dubious that online revenue per subscriber, per subscription, and per order barely budged from Q1 2021 to Q2 2022 despite an 11% estimated increase in revenue per order. Suspiciously, Hims & Hers no longer discloses revenue mix by product type, further supporting our view that revenue diversification has been modest. We also disagree with management’s claim that Hims & Hers is a low customer acquisition cost (CAC) business and see troubling recent trends. For instance, Hims & Hers fails to include all marketing-related expenses and stock-based compensation (some portion of which we suspect relates to compensation for celebrity endorsements), which adds an average of about $40 million in costs for each of the past two years. We believe that CAC rose year-over-year for much of 2022 and, relative to revenue, remains materially above 2020 levels. And while average order value (AOV) has increased over the past two years largely due to pushing longer term subscriptions, we find that CAC has grown much faster year-over-year in 2022 than AOV. We also question Hims & Hers’ inability to attain operating leverage after stock-based compensation is added back to expenses and note that the Company has not demonstrated that it can temper the marketing expense firehose and still grow revenue. Finally, we are troubled that as pressures have begun to show in Hims & Hers’ business that it has subtly reduced supplemental financial disclosures that would help investors develop a more accurate picture of its business. Valuing HIMS like an e-commerce company yields 25% – 40% downside risk ($5.20 – $6.50 per share).
The research note can be found at www.sprucepointcap.com and updates will be posted on twitter @sprucepointcap.
