Surprisingly, one of the most talked-about US stocks of 2024 has nothing to do with AI (artificial intelligence), chips, gold or cryptocurrencies.

It is a small tele-health company based in San Francisco called Hims & Hers Health (HIMS:NYSE), which provides prescription and over-the-counter medicines as well as personal care products through its online platform.

When we say small, its market cap is just $4 billion, which is miniscule in comparison with stocks like Alphabet (GOOD:NASDAQ) and Microsoft (MSFT:NASDAQ), but its shares have left these giants eating its dust with a 95% gain year-to-date.

So why all the excitement? Read on to find out.

AFFORDABLE AND ACCESSIBLE

Hims provides affordable and accessible direct-to-consumer solutions for sexual health, mental health, dermatology, hair loss and weight loss by connecting customers with licenced healthcare professionals for personalised consultations and treatments from the comfort of their own home on a subscription basis.

In the relatively short period since it was founded in 2017, Hims has built a leading and trusted brand in health and wellness which suits consumers who increasingly rely on the internet and social media for health advice and information.

This was never more true than during the pandemic, when public trust in doctors and hospitals fell and increasing numbers of people turned to the internet for health information from trusted sources.

In a survey of nearly 500,000 Americans, trust in doctors and hospitals fell from 72% in April 2020 to 40% in January 2024.

Analysts at US research firm Needham believe this sharp fall in trust in public healthcare combined with a demographic shift towards ‘digitally native millennials and GenZers’ has driven more consumers to look for health solutions online.

A survey by eMarketer in late 2023 indicated that over 80% of respondents used the internet for health-focused research, with 65% of that group looking for information on medications, treatments and healthcare services.

This has created ‘a favorable market dynamic for the growth of Hims, which has effectively built a brand via marketing that is extremely visible across the channels consumers utilize, and once on the site, Hims makes it easy to get the care as consumers can access 24/7 treatment via virtual visits and receive medication shipments, on average, in less than 24 hours from the point of care’, say the analysts.

In addition, Hims’ cash pay model makes the buying process simple and affordable for customers, more of whom have what are known as HDHPs (high-deductible health plans) which actually raise the cost of treatment, making it more likely people will pay out of their own pocket than claim on their plan.

THE OPPORTUNITY IN OBESITY

The real kicker to Hims business, and the reason why so many US investors are talking about the stock, has been the development of GLP-1 weight-loss drugs.

When demand for these drugs exploded earlier this year, firms like Eli Lilly (LLY:NYSE) and Novo Nordisk (NOVO-B:CPH) couldn’t keep up with demand so the FDA (Food & Drug Administration) added them to its list of treatments in short supply.

That meant generic drugmakers were able to produce compounds which combined the key ingredient in the patented versions with other drugs and sell them at a lower price.

In May, Hims launched both compounded oral and injectable versions using the same active ingredient as Ozempic and Wegovy and was inundated with subscribers with almost no marketing spend.

Almost 40% of Americans are defined as obese, and another 30% are considered overweight, meaning the weight loss category is a massive opportunity.

Needham puts the annual US market for weight loss drugs at $37 billion and argues Hims is ‘well positioned to take advantage of this market opportunity as cost and access have been identified as the two primary barriers to usage of the drug’.

Although Eli Lilly’s and Novo Nordisk’s drugs are no longer on the short-supply list, Hims is using its scale and ‘flywheel effect’ to keep prices low including lowering the cost for customers who choose longer-duration treatments.

Asked by an analyst on its second-quarter conference call in August how it was able to offer weight-loss drugs way below Eli Lilly and Novo Nordisk, with compounds starting at $79 per month and GLP-1s at $199 per month, the firm said pricing was ‘just a reflection of the benefits from the scale that we have today, which enables us to negotiate across the supply chain and place it at these price points’.

STRONG SUBSCRIBER GROWTH

In less than a year, weight loss has scaled to an annual run-rate of $100 million of revenue, becoming the fastest specialty to do so, but there is much more to Hims – the rest of the business grew its sales by 46% in the second quarter to over $300 million.

The primary driver of this growth is the expansion of the firm’s online subscriber base, which grew 44% to two million in the third quarter, attracted by the evolution of its personalised solutions and their affordability.

As it offers more multi-condition solutions and customised dosages, so an increasing number of customers are switching to personalised treatment (55% of new subscribers in the second quarter opted for an individually-tailored solution, with a strong uptake among sexual health users).

Group revenue for the third quarter rose 77% to $401 million, way above market forecasts, lifted by both the increase in subscriber numbers and by average monthly online revenue which rose by 24% from $54 to $67 per subscriber.

That translated into a 40% increase in its average order value from $99 to $148, as more than a million customers chose a personalised solution.

The gross margin dipped slightly but was still a remarkable 79%, while EBITDA (earnings before interest, tax, depreciation and amortisation) rose more than four-fold from $12.3 million to $51.1 million and free cash flow increased three-fold from $19.3 million to $79.4 million.

The firm raised its full-year guidance once again, as chief financial officer Yemi Okupe explained: ‘Our model is rapidly gaining scale, driving accelerating top line growth, improving profitability and strong cash flow. We are seeing this strength across our business.

‘Our ability to unlock access to high-quality, personalised care continues to expand, further instilling confidence that our model is positioned to help tens of millions of individuals over time.’

‘THE NETFLIX OF CONSUMER HEALTH’

Besides the opportunity in weight loss drugs, there are huge addressable markets in Hims’ other areas of expertise.

Needham estimates the annual market in sexual health to be around $33 billion, while dermatology could be over $90 billion and mental health in the region of $25 billion, giving the firm ‘an expansive runway for growth for the foreseeable future’.

There are multiple other verticals the firm could expand into such as testosterone, menopause, fertility, eczema, rosacea, PTSD and insomnia.

In total, its addressable market represents annual revenue of $525 billion - if it were to take just a 1% share by 2025, that would mean sales of $5.25 billion against the current Stockopedia consensus of $2 billion.

As one UK investor who has watched the Hims story unfold this year put it to Shares, ‘The best way to think of it is like the Netflix (NFLX) of healthcare: they’ve built a platform that makes getting care more accessible, more personalised and cheaper.

‘They currently have close to two million subscribers – who pay a monthly fee plus extra for any drugs they are prescribed by the physicians they connect to online – and the company thinks there are over 100 million people in the US alone who could become customers.’

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