by 

July 28, 2024

TL;DR

– Why I got into PE

– Scaling Hims to be the next Big Pharma biz

🧠 The Takeaways

We’re going to buy Hims, get its financials in check, turn it into a cash machine and ride it to become the next Big Pharma giant.

Cut Marketing as a % of Rev from insanely high to high levels.

Get Customers to buy more products + Services from Hims.

Cut costs even more to open the mass market.

+ Why I got into Private Equity

LBAB Community – Why I Got into PE

The whole reason I got into PE was because, as I analyzed the best ways to build wealth for yourself,  the insight I  came to is that you need to have a couple years in your life where your income exponentially (20-100x) exceeds your expenses or have ~10-15 years where your income is substantially greater (5-10x).

There’s only a few ways that’s possible for most people: win the lottery, get a massive bonus for years in a row, or inherit a large sum (7-figs+) from a relative. 

Otherwise, you have to exit a business/have a massive equity event.

I don’t play the lottery.

I have never been at an org that offers 7-figure bonuses.

And I’m definitely not looking for an inheritance anytime soon.

So, exiting a biz or having an equity investment with a massive payoff is my path forward. It’s the best way to accumulate a significant amount of $ in a short period of time.

Just kidding.

I spent 3 years doing the Venture Capital side of equity investments. I realized 2 things:

When it works it’s a 10-15 year time horizon with all the income at the end.

There’s 0 income on the journey.

If there are distributions in the earlier years it usually means it didn’t work out.

On the other hand Private Equity, the time horizons are significantly shorter.

Usually, you’re looking at a 3–5 year time horizon from acquisition to exit, and if you’re an Operator/provide services, you can make income while the equity value grows.

I wanted to transition from being a high earner at venture-backed SaaS startups with high income but few/low equity outcomes to high income with frequent equity outcomes.

I want a considerable exit in a shorter period of time and have income in the meantime.

With PE, I can have my stake and eat it, too.

Let’s Examine This Biz

Hims, the cool kids’ generic drug biz, is scaling to the moon slinging the Millennial knock-offs of Viagra, Zoloft, and Ozempic.

Trading at $19.42/share with a $4B market cap, it’s +98% since its SPAC in Jan 2021. Hims is rolling into a monopoly-dominated field with the P&L of a biz that has enjoyed a monopoly for a long time.

Today we’re going to buy Hims for 5.2B to create the Tele-J&J. Even at a multiple of Rev. I know.

Financial Summary

2023 Financial Statements (YoY Comparison)

Sales: $872m (+65%) 😍

COGS: $157m (+33%) 😓

Gross Margins: 82% (+6%) 😍
Gross Profits: $714m (+75%) 😍
SG&A: $249m (+42%) 😬
OPEX: $744m (+56%) 😬 

Net Income: -$23m (-64%) 🤢

EPS: -$0.11 (-66%) 🤢

Link to Him’s earnings

TLDR Analysis: Basically a Software biz

Gross Margins ARE 82%!! 🤯

Marketing is 51% of their Rev!!! 😰

Rev grew by 65% LY. That’s an additional $345m in Rev in 1 year.

Hims’ financials are firing on all cylinders other than spending 51% of Rev on Marketing (for the 3rd year in a row). They’re growing like a weed, and the most important piece: their gross margin is expanding as they’re growing. 

In 2021, their Gross Margin was 75%. Today, it’s 82%. Their new product categories are more popular and profitable. 1 of the ultimate signs of success for a brand.

Let’s Scale This Biz!

Here are the 3 moves we’re taking Hims to a $100B Big Pharma biz.

1) Cut Marketing to 40% of Rev.

This one is simple. Hims would be insanely profitable if it kept Marketing in check. I’m not saying turn Marketing off, but stop spending like a drunken sailor.

It doesn’t need to put 1 out of evert $2 it makes into Marketing. Decreasing the Marketing budget to 40% of Rev flips this biz from losing 3% last year to making 8% next year.

The other crucial reason to make this flip is because it’s getting more expensive to acquire a customer.

In 2022, Hims spent $272m to add $255m in Rev. Essentially it cost $1.07 to add an additional $1 in Rev.

In 2023, it spent $446m to add $345m in Rev. AKA it cost $1.29 to add an additional $1 in Rev (+21% YoY).

Proj. $1.2b in 2024 sales (Maintaining 50% of Rev MKT budget), they’ll spend $600m to $328m. $1.89 to add $1.

At their 2021 level, spending $1.07 to acquire $1 in Rev is already the wrong balance for this formula, but can be explained away with high retention and making that up in year 2,3,4. At $1.89 that becomes a lot more difficult.

At the end of the day, this all really comes down to how fast the biz wants to grow. Because they have a strong repeat biz + balance sheet, they can keep over-investing in aggressive growth for the day when their massive repeat biz is a cash cow. (Classic VC-SaaS investing mindset).

My only real question: will Hims really grow that much slower at a MKT budget of 40% of Rev? 40% is already incredibly high. Especially for a biz already doing $800m+ in annual Rev.

Hims is the last holdout of the Blitzscaling philosophy, which I understand. When you believe destiny is staring you in the face, why wouldn’t you put every last dollar into realizing the future faster?

But what if the biz doesn’t continue to grow at 50%+ YoY? What if the biz needs to extract more profits faster? 

Why not take some cash out + build the discipline to be profitable as it grows? 

My greatest issue with dumping 1/2 of Rev into Marketing at this scale is that their unit economics are getting worse and worse, and there’s no real motivation to fix them. Which will, given enough time, lead to the death of the biz.

Because let’s be honest. 1.5m US consumers (their current base) is nothing. Their market is 100m+ adults in the US alone. But in a couple of years at this pace, their CAC will become comical.

Let’s step in and force 2 key functions:

Constraints to breed creativity.

Patience to let compounding growth do its thing.

This biz could easily be growing 30-40% YoY and be an absolute cash cow. Why wouldn’t we want both?

Takeaway: 50% of Rev on Marketing is never sustainable.

2)  Go Full Tele-Med.

It’ll be limited in scope today, but Hims needs to become its customers’ source for all things cosmetic, mental, and sexual health.

Currently at a $54 monthly order value, Hims has done a really great job convincing consumers to buy 1 product from them. 

To explode its value, we’re going to get those customers/patients back on the phone.

If Women come in for Hair treatment, is there a Skincare or weight loss treatment we can also provide for them?

If Men come in for Hair loss can we also cross sell them sexual wellness products or skincare treatment?

At 18% COGS, the great unlock is adding more items to that box. More pills = 0 weight aka basically free to ship.

Since so much of Hims’ expense is acquiring the customer, any incremental profit we can add to the monthly box is a game-changer.

Now that the subscriber base is at 1.5m, adding even 10% of customers to a multi-product plan is a huge needle-mover, adding millions in profits to a biz this size.

The best way to do that? Acquire/roll up the digital Tele-health service platforms around their key verticals (Sexual Health, Skincare, Mental Health). Then launch an affordable platform to existing customers to meet with professionals regularly.

It’s self-funding lead gen. If a customer is paying to talk to a psychiatrist, it’ll be less friction to prescribe them medication on Hims.

It’s a customer value maximization. X% of the customers taking the Ozempic generic through Hims will also want to talk to a Dietitian/Nutritionist about a permanent weight loss plan.

They don’t need to reinvent the wheel here. Customers who suffer from 1 condition are more likely to suffer from multiple.

If they can replicate regular Dr. check-ins with patients who are willing to pay more to solve their problems, they’ll buy more medications from Hims.

Hims just needs to identify the right mix and have a strong enough retention program that when the customer’s happy with product A, they’re willing to jump back on a call with one of their Tele-experts to get product B.

Takeaway: Premium Service upsells increase AOV & Cross-sell opportunities.

3) Cut the Price point Even more

Because Hims has gone both Vertical (Taking on the roles of Pharmaceutical – Pharmacy) + Horizontal (offering across Pharma categories) they have the ability to actually fulfill on the great DTC promise.

Provide lower cost options by removing the middleman.

Hims’ real opportunity is collapsing the cost structure of Big Pharma + Dr.’s Offices + Pharmacies + Insurance.

This is finally a true use case where Technology has disrupted a long, bloated supply chain where too many players have their hands in the cookie jar. By cutting them out, Hims can take a classically unaffordable product, slash the price, and make it affordable to the masses.

That plus they’re copying drugs that are no longer protected under patents.

When you combine the cost structure, the real key here is removing all the friction around getting more medications.

Don’t need to go to the Dr.

Don’t need insurance

Can get Dr. approval + purchase on the phone.

The key is becoming the affordable option for all to replicate the playbook in every hot market. As soon as the drug patent ends for a hot drug, release the insanely affordable version of it.

By continuing to consolidate the Service provider + pharmaceuticals around Hims’ Tele-health technology, they’ll be able to continue to provide more service to more customers at greater scale. Collapsing the massive, slow, profit extracting healthcare industry drug by drug, and market by market. 

🤞Diabetes medications are coming next.

As more consumers see them as the low cost alternative with easy access to the solutions they’re looking for, new customer acquisition and LTV will both explode as customers are continually priced out of the legacy system.

(That’s the ultimate CAC Hack.)

Takeaway: When everyone’s extracting peak profits, collapsing pricing is the fastest way to grow.

Final Thought

In a decade, Hims might be the best DTC biz to come out of this era. For 1 simple reason + 1 insanely brilliant insight.

The reason: the best use of technology is to reduce costs and make hard-to-acquire products more accessible in an enormous market.

+ 1 insanely brilliant insight: They can clone other biz’s hit products, knowing how well the products perform.

When you combine those 2 insights, the insane idea that Hims could be a $100B biz isn’t that insane. They need the patience to wait for hit drugs to roll off patents, clone them, slash the price point, throw some Zillenial marketing on it, and collect the $$$.

A repeatable playbook they can leverage for decades.

All of the Top 10 largest Pharma bizs have 12-fig market caps. Pfizer’s the smallest, at $169B.

Hims has the platform to continue to go horizontal (adding more categories of drugs), or vertical (Services, insurance, etc). Either way, there’s considerable profits to be made.

But the real true insight that set Hims apart from the rest of the DTC crowd is they took the playbook into a highly disruptable industry.

The challenge that everyone else faced is the incumbents were slow to adapt, but eventually did.

Retailers moved more hybrid Online/Offline.

Legacy brands acquired or launched their way into DTC.

Manufacturers + Retailers went vertical into each other’s camps.

But Pharma was too big and too slow to adapt. They still haven’t. 

Hims has the ability to run over Big Pharma because Hims’ tiny $870m in annual rev isn’t that worrying today.

But as we’ve seen with many other industries before, those are the market dynamics where, with enough time, the challenger becomes the dominant player.

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