Hims & Hers Health Inc (NYSE: HIMS) soared nearly 50% this morning after announcing a landmark settlement and partnership with the Danish pharma giant – Novo Nordisk (NYSE: NVO).
This meteoric run erased losses triggered by last month’s patent litigation, but HIMS stock remains down some 38% versus its year-to-date high.
More importantly, while the dismissal of the lawsuit de-risks the firm’s legal standing, there’s still reason to believe that this rally is somewhat of an overreaction, unlikely to sustain the test of time.
Margin crush could hurt Hims & Hers stock
When Hims & Hers sold its own compounded GLP-1 versions (like the discontinued $49 pill), it controlled the entire supply chain and kept nearly all the profit.
But now, they’d essentially be a “middleman” for Novo Nordisk.
The telehealth firm will be selling branded Wegovy and Ozempic at NVO’s self-pay prices ($149 – $299).
After paying Novo Nordisk for the drug and covering their own overhead, their profit per customer is expected to shrink significantly compared to the “wild west” era of compounding.
This margin crush remains a major headwind, potentially making it increasingly difficult for Hims & Hers stock to sustain today’s gains over time.
Intense competition remains an overhang for HIMS shares
HIMS no longer has a unique low-cost product to hide behind.
In January, Amazon started offering the Wegovy pill – and it has a massive logistical advantage and a built-in user base of millions.
In fact, every major telehealth name, including Ro and Noom, is now fighting for the same GLP-1 customers.
Without the cheaper compounded alternative as a hook, Hims & Hers must spend much more on marketing (which already accounts for about 40% of their revenue) just to keep their market share.
Such intense competition could see HIMS shares retreat again over the next few days.
Hims & Hers isn’t free from regulatory scrutiny
Investors should also note that the Novo Nordisk lawsuit may be gone, but the government is still watching.
The SEC is still investigating HIMS for their public disclosures and statements about compounded semaglutide.
This could lead to fines or mandated changes in how they report their business.
Plus, the FDA has signalled it will continue to restrict “mass-marketed” compounded drugs.
If the NYSE-listed firm tried to pivot back to compounding in the future, it would face direct federal intervention, not just corporate lawsuits
HIMS stock faces supply chain dependency
By partnering with Novo Nordisk, San Francisco-headquartered HIMS is now at the mercy of its production capacity.
If NVO faces another manufacturing shortage – which has happened repeatedly over the past two years – Hims & Hers will have no “branded” product to sell.
Put it together with the valuation overhang, and it looks like Hims & Hers shares, following a 50% rally on Mar. 9, price in all the “good news” but ignore the slow growth reality of being a standard pharmacy distributor.
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