Hims & Hers stock has been surging since May, but has its valuation gotten too rich?
Healthcare stocks don’t have to be making weight loss drugs to be hot buys due to the rising demand for glucagon-like peptide 1 (GLP-1) treatments. A good example of that is Hims & Hers Health (HIMS -12.85%). Up more than 140% this year, the telehealth company has been a hot buy with investors not only for its impressive growth but also for its ability to help connect patients with GLP-1 drugs.
However, the company’s strategy is potentially a risky one. Here’s what you need to know if you invest in the business.
Hims & Hers is using compounded drugs
Due to the shortage of GLP-1 drugs, companies can offer compounded drugs to help meet demand. (Compounded drugs are a combination of two or more drugs.) But the U.S. Food and Drug Administration (FDA) hasn’t approved compounded drugs.
They’re not identical to the drugs that underwent clinical trials and testing. While drugs such as Wegovy and Ozempic from Novo Nordisk are proven to be safe and effective options for patients, compounded drugs aren’t necessarily suitable alternatives.
Hims & Hers has partnered with a generic drugmaker to make compounded GLP-1 drugs and says the drugmaker has FDA oversight. But that’s not the same as saying that the drugs themselves are FDA-approved. Earlier in the year, the FDA warned people about taking compounded semaglutide — the active ingredient in both Wegovy and Ozempic — as it says it has received reports about adverse events when people have used altered versions.
In May, just before Hims & Hers announced it would give its customers low-cost GLP-1 injections for as little as $199 per month, the stock was trading at around $14. Last week, it closed at more than $22 — rising by more than 50% in just a few months.
Why the strategy could be risky for investors
Hims & Hers’ use of compounded GLP-1 medications has generated considerable interest and bullishness from investors. However, there are a couple of problems to be aware of before buying the stock.
The first is that compounded medications are acceptable when a drug is in short supply. But once that shortage is over, regulators will no longer permit the manufacturing of those drugs. Hims & Hers plans to offer the branded version of the drugs when they become more widely available, but when that happens, it will lose its advantage in offering the drugs when they’re in short supply.
When patients can obtain the treatments from anywhere, there won’t be as big of a need to go through Hims & Hers. While demand for GLP-1 drugs could give the company’s sales a boost in the short term due to its recent move, it’s not likely to be a significant source of revenue growth. And that could eventually lead to a drop in sales.
Second, compounded drugs potentially may lead to adverse effects in patients, which could open up Hims & Hers to legal risks. There have been some alarming side effects related to GLP-1 drugs, including gastrointestinal issues. And on compounded versions of the drugs, there’s the possibility that patients may experience more severe side effects.
A costly lawsuit could be devastating to Hims & Hers as the company doesn’t have the deep pockets that other large healthcare companies have. As of the end of March, it reported approximately $204 million in cash and short-term investments on its books. And it has only recently been generating profits (at modest margins).
While Hims & Hers may not end up with a big legal bill due to offering compounded drugs to its customers, it’s a risk investors need to be aware of, as the company’s financials aren’t that strong.
Should you buy Hims & Hers stock?
Hims & Hers stock has been soaring this year, but the risk for investors right now is that the GLP-1 hype may prove to be short-lived. With the stock trading at more than 13 times its book value, investors are paying a bit of a premium to own shares of a company that isn’t on strong financial footing right now.
The stock is a risky option, but if you’re bullish on its long-term prospects, it could still be a good buy. Investors, however, should be careful not to base their investing thesis solely on the company’s GLP-1 strategy, as that may only offer a short-term boost for the business and could open the company to some significant legal liability.