Hims & Hers: Unparalleled Efficiency

This is company breakdowns from Turpentine, a deep dive on a compelling tech company's strengths, TAM, business model, and potential for market domination. On company breakdowns today, William McDougall joins us to examine hymns and hers, the publicly traded D2C pharmaceutical company. For this episode, Lorenzo Bartolini takes over as host. His background in strategy consulting and private equity investing brings valuable insight into how major investments are evaluated. You'll be hearing more from Lorenzo in the coming weeks, so let us know what companies you want us to cover next. Hey, well, thanks so much for coming on the company breakdowns podcast. I'm Lorenzo, and say we're going to be talking about hymns and hers. I know the company definitely from there. Subway ads all over New York City, at least a couple of years ago. It was hard to miss them, and even today I think I get a ton of their YouTube advertising. But I kind of always thought they were just, I assume it may be they were a simple white labeled medical company, but obviously it's a lot deeper than that. I've been doing some learning and reading through some of your work, so really excited to have you here to talk through it and understand a little bit more about why there is the more behind the covers than maybe first needs the eye, but thanks again for making the time. Of course, Lorenzo, of course, appreciate being alone. Thanks for having me. It's nice to know that somebody values my opinion enough to listen. Yeah, I think I've been mostly seeing all their ads on Instagram and things of that nature where it's, I'm kind of upset that I'm getting that many erectile dysfunction ads on my timeline. I'm hoping it's not too too targeted. I saw me, actually, that was like all the male advertising for him is about ED and all the female advertising is for depression, but I'm sure they're releasing a wider product line than just that. But maybe give a quick intro on yourself and then we can kind of jump into a quick overview on what the company does and just why it's even worth spending, spending the time so they're talking about it. Okay, so for the people that don't know me in the audience, I have a very, I would say non-specified experience profile, non-specialized. So I started off getting an engineering degree and then in systems and industrial in systems. And so a lot of what I, a lot of how I conceptualize problems is usually from a systematic perspective, very broad, kind of like looking for inflows, outflows, things of that nature. And then I went into a technology consulting where it was a lot more operational operations based. I'm dealing with a lot of ERPs, reporting tools, things of that nature. And so luckily being on shifting clients every six to nine months or so, I've seen the underbelly of a lot of different corporate organizations in America so far. And I would say between an engineering background and an IT work experience, I think I've gotten a pretty well-rounded perspective on a lot of the issues dealing corporate America today. So that's kind of a good background for my perspectives, kind of how I think about these problems and the type of analysis that I do. Great, great, very macro outside in which I think will be helpful for it. So obviously you've done a bunch of work digging into H and H. So just want to understand, yeah, at a high level what, what piqued your interest. Well, what piqued my interest was honestly the top line growth, which sounds stupid, but I run a lot of screens across global equities. And him and hers just kept always coming up at the top of the list for growth. And then it also simultaneously had one of the lowest valuations. And so after a certain point, I just had to look into it a little bit further. One of my good friends on Twitter basically was in my ear telling me to keep looking at it for about a year or so. I kept putting it off because it was cash flow negative. And I wasn't interested very much. And then I ended up looking into it. And so wait, it started interrupt you here, but let's set the scene. What growth are we talking? How much burn do they have here? Is this today, is this like 10 years ago? Because I know there's been a bunch of evolution definitely in the company since let's bench market. So I guess or go or we can go back to the original thesis. What's the pitch? I would say basically what a hymns and hers operates a direct to consumer health care platform in which it is able to prescribe and then ship and deliver pharmaceutical drugs to end consumers with a variety of conditions, which as we touched on earlier today include things such as hair loss for both men and women, dermatology, weight loss. And in 2025, we will be getting another set of conditions such as mental health, right? Mental health is active right now, but we will get conditions such as what a hormone replete or what a hormone target of the ones such as TRT testosterone replacement therapy. And so in essence, if you were to try to picture this business, you're essentially logging on to an app, you're going to get matched up with a doctor medical professional. That's from a third party provider. So hymns and hers is not, hymns and hers is not does not have medical professionals on payroll so that you get a very un, you get a very objective unbiased basically prescription from a doctor. And then from there hymns and hers put you on to a subscriber model for a lot of their, for a lot of their products that are multi month lifetime style products. And then you are able to get these pharmaceutical drugs in a lot of customized forms, shipped directly to your door. And so that is what they're doing. And so with this business model, you've essentially eliminated a lot of the fixed costs that are very prevalent within the healthcare system. You don't have any physical locations. You don't, or you're able to go directly to distribution of agreements. You don't have the fixed locations for either the hospital that you get diagnosed at. And you don't have the prostrate, the fixed costs associated with an actual pharmacy, whether that be in a grocery store independent pharmacy or one that's located within a hospital provider. Yeah, that makes a lot of sense. It's like a verticalization play, you know, cut, cut out a bunch of steps in the healthcare delivery supply chain. Presumably has an impact, a positive impact on margins versus the traditional model. And then based on, you know, a lot of this stuff just looking on their website and what you'd mentioned from their product category, it's basically consumer friendly tree mints that can target the long tail. Maybe doesn't require a lot of intensive clinic time. And then, you know, that's probably where their operating model is less effective. But from that sense, they've found a niche within healthcare that, as you say, basically allows them to do this cost cutout. Yeah, yeah. And that's a great point there that they did have this great wedge into pharmaceutical sales, which was originally ET because it was the best, it was the best wedge for him to utilize because you don't want to go to a doctor. Like, there's a lot of friction in being a guy going to the doctor and saying, "Hey, my penis doesn't work. Can you please?" You actually have to drive to the hospital, tell a doctor that, get prescribed it, and then also you're going to be dealing with drugs that are not over the counter generally. You can get over the counter options, but if you're going for a non-over the counter options, you might also end up paying three to four times what hymns and hersch price is for a much more convenient solution. And so that's a large part of the thesis there too, is that the total cost that you as a consumer are paying are relatively similar between the traditional and hymns and hers. However, the total cost after insurance a lot of times is about four to five times higher than hymns and hersch. That's a really, that's a really crystal clear ROI. Hey, everybody, Eric here with a word from our sponsors. So maybe it's worth zooming out and we can kind of talk about the quote-unquote traditional healthcare market model of service, how that works. Obviously, it's super complicated and I'm sure there's a lot more detail that we won't get into even today. But yeah, maybe it's helpful just to give a little bit of background there on what the traditional system is and how hymns and hersch comes in and at least addresses some of it. Yeah, that's fair. So I think the problem is also like with a complete disclaimer on this, the US healthcare system is massive. Like, I think in my articles for one point that I utilized was United Health Group, UNH is a $500 billion insurance healthcare insurance company and it's only 15% of the market within the US. Like, the United States GDP, 17% of it is associated with healthcare spend. Yeah, clearly talking trillions already. Yes, yes. So it's very large. Typically, if you were to think about going to the doctor, what the process would be is you need to first drive to the hospital, which, who knows, for your own individual situation that could be between 15 minutes to an hour within the US, the Europeans listening to this caller probably freaking out right now about who would drive for an hour. But then the US, it's a prevalent issue. But so sure enough, just getting to the hospital is a fun little issue and then you wait in the way. rating room for 15, 20 minutes until a, what, until a doctor can see you. And you're sitting around a bunch of very sickly, I mean, people that need to be in a hospital, which is usually not the healthiest of people in the population. And then from there, you go into a, you go into a room, which, which within this large hospital, you have a nurse that comes and sees you, they take up whatever information that you need. And then that's put into a health record that the, that the healthcare of the hospital is utilizing to make sure that the doctor can see all the results of the nurse inputs. The nurse has someone in charge of her or her in this case. And then so sure enough, that's called a charge nurse. And so you've got layers upon layers of bureaucracy, systems, software, IT, infrastructure, that is utilized. And layers and layers of margin, ultimately, yeah. Exactly. Before the, and that's before the doctor even sees you. And so sure enough, doctor sees you, says, yeah, your penis, in fact, does not work. Congratulations. Let me diagnose, let me put in this prescription for you. So then you leave the doctor at that point. You go to the end of it, you go to your pharmacy, which in this case, it can be a pharmacy associated with the hospital or not. It needs to. And then at that point also, you need to see what your insurance will cover. Is that doctor that prescribed you within your insurance network? Is, like, is your insurance going to help you out? Is this a proved case that they are handling? So are you going to go with the generic or the brand version that the insurance will cover? Well, the insurance will. Yeah. And, and I think you actually kind of touched on this in your article as well of the end, the end, I mean, not the end user, but the true customer in this case is that, is actually the insurance company, right? Like, that's the, that's the real source and money bags in the billing process. Yes, exactly, exactly. And if that, and if that whole explanation there, what your current process sounds confusing, annoying, or if you're setting here saying that I'm leaving out parts within a description that takes three to four minutes, like that in and of itself is a problem. Like, I mean, it's self-park even came out with an episode under navigating the US healthcare system. That's an all time great episode. Yeah. It was an all time great. But like, the thing is about is that humor is it really did highlight how complicated the US healthcare system is in, is even, is even the grass. Even to somebody that's been like, I mean, I've been studying or saying, you're like, nursing subject matter in my, in my spare time and all this farm, in all the pharmaceutical requirements. And it's complicated. It is not. And so from a consumer perspective, it's not an easy process. Yeah. So what does that look like? What, you know, we, we kind of talk through the doctor visit. And then so clearly there's a lot of pain points. Some of them are maybe more structural than others. But then obviously this is what you were alluding to earlier, but really spell it out for me. Like, which ones are the pain points that him and her soften? How is it that like, you know, if I'm not super familiar with their product and process? How is it simplified? Yeah, that's fair. So the simplification, I'm going to get to your cost point in just a second after I get through this one. So if you were to compare how you would be treated as a Hens and Hers customer, let's change, let's change the dynamic. If you were, if you saw an ad on your Instagram feed or the subbook for the Hens and Hers with the specific condition that you want to treat, you would download the app. You would, within the app, you would create a profile, you, and you can get partnered up with an independent medical provider. Again, not leaving your home, logging on to your phone, meeting up with, meeting with a doctor and they can prescribe you drugs. And then it is shipped to your home within a few days of shipping time. So you've never left your house. It was a straightforward process where you logged on to one electronic software system as a consumer. The doctor had all of your health information on file from previously if you're an existing customer. You didn't have to have a nurse come in, double verify your electronic health records. You've got, and so a lot of it being in its own independent, vertically integrated system takes care of a lot of the friction points. You don't need to have a software that's connecting the supply chain from one company or from one medical provider hospital to a pharmacy like ATI, pretty much in IT, the more points of connection that you have, the more difficult it is to maintain. Think about maintaining, because it requires another API. It requires to make sure that every time you go through quality, you don't break something when you go into production systems, proud strike, learn that the hard way, and proud strike is one of the better ones. And then also, if something does wrong, you need to hire somebody to fix it from a new tea perspective, and a lot of these systems that these companies are utilizing are older. Oh my gosh, so antiquated. I couldn't tell you some of the things I've looked at for sure. Exactly. And a lot of them are utilizing on-premise software that's customized or not connected to current supply chain. Then you require somebody with a spreadsheet somewhere to be able to upload orders on the day to day basis. Friction, and so the amount of friction points that have been removed by creating an independent modern cloud system is simply me. And so, from that, and so with that point, that allows NZNHERS to operate a lot more cost effectively than its competition. So yeah, there's a lot of friction points between that legacy provider and what NZNHERS offers today. Just from a system's perspective, NZNHERS by creating that independent system of the current healthcare providers allows it a lot of efficiency because it doesn't have to deal with this system that was never efficient in the first place. So that's one part of it. It's the fact that NZNHERS similar to Netflix or Amazon before it created a new distribution model that is more efficient than the legacy system. Whether that be lockbuster, having these physical locations to sell you a DVD and it's create more inventory on hand, whereas Netflix created centralized inventory and distributed customers across the entire nation. Similar to Amazon with books where it's hard to handle the skew count that you need within a bookstore, whereas Amazon is able to centralize that. NZNHERS essentially created a centralized healthcare distribution model. Yeah, there's like a degree of business model innovation is what you're saying, but that's not it. Yeah, yeah, yeah. Which that's centralization. If you think about it also, let's use the blockbuster example. These are a really good one. Imagine if 10 people wanted to rent one specific move and then you got 10 different blockbusters. If you have two people go to one individual blockbuster, then that means that unless all of the stores are carrying double inventory, then they're going to have a supply outage, which is an interesting concept. However, think about that from a centralized perspective. You've got 10 users going into one system. You're able to manage the variation in traffic and you're able to deliver a better product while also being much more efficient from an inventory handling perspective and type of centralization perspective, type of centralization will always statistically be more efficient than just aggregate model. Yeah, like Econ 101, economies of scale, but crazy no one thought to try it before with this kind of model. I guess like maybe that raises the question and I know we're going to talk about insurance in just a second, but like, it's a very innovative scaled platform. Is that something that's hard to build and is there a reason they're the only ones who did it? They're more into competitors, but that's kind of my curiosity based on what you're just saying. Oh, well, you're not wrong. I mean, think about how complicated healthcare is from a regulation perspective, making sure that your manufacturing standards are up to par the IT association with brand name drugs. IP creates another legal implication of it. You've got lawsuits from potentially providing healthcare. You've got HIPAA requirements, which are, I mean, there's some companies that can't even stay up to date with HIPAA requirements alone. And so just being able to stay up to a quality level of service is already a difficult task. If you look at hymns and hers, their organizational structure, they have to have, they have a different head of medical for both the hymns and then the hers now. Like they've got two different doctors for both men and women at this point and for those different, for those two platforms. And I feel like that highlights the specialty and the expertise that's required for this. They just brought on. And so I think you need to be able to have a strong operational focus from supply chain, IT. you need to have a strong legal focus, you need to have a strong medical focus, and then also, all of this needs to be packaged in a way that the end consumer actually resonates with. And so if you like, look at a lot of the companies that are trying to do this, a lot of them didn't have all those pieces, that wasn't their expertise, they had a terrible name, so no consumer would sign up for it. I mean, which sounds stupid, but I mean, it looked at all the offshoots of Hens and hers, you wouldn't remember the name if you were given an hour not thinking about it. Like they're just, I mean, there's just simple things like this where it's so it's like, it seems like a Y-Widd nobody have done this before, but like, this is also one of the first few instances I feel like of the internet actually improving the healthcare experience for the end consumer. So it was natural that it was going to happen at some point. I think that the, I think it's just a lot simpler to deliver DVDs than it is to provide quality healthcare for an individual with a top personalized requirements. Right. Yeah, my push is always like, you know, if I had a billion dollars or choose your number, like, can I go build this and the simple answer here is no, because you can't just hobble, you can't just do a buy and build PE play, it actually requires intense levels of knowledge for every single component that goes in, you know, you mentioned compliance. Obviously, there's a whole world of just like compliance service providers, but they have to have that locked in as just one one part of the flywheel where if even one cog falls out of place, it doesn't work. So yeah, no, super clear on on what their mode is and, and, you know, maybe going a little backwards, but yeah, where do insurers fit into all of this? That's a great question. It's a great question. This is like one of the few things that I think I really like dialed in on when I first started looking at analyzing the company. So I think the system or how I covered it in my blog, which I know you read, that was kind of possibly a probing question, who's to say maybe leading, but the essentially what the diagnosis and the thesis that I came to was the fact that the end consumer in the modern US healthcare system is not the end consumer is not the is not the individual being treated. The real customer per say in the met in the healthcare industry is the insurers, the people that are providing healthcare insurance. So let's just back up let's back up from that statement. That's the that's the thesis. Why would that be? If you go into a hospital and you get prescribed a drug, the what the hospital then does is they negotiate your total service that you received from the hospital with their own individualized billing pricing and whatnot and they negotiate with the insurance company to try to get the largest dollar amount from the insurance company to settle your transaction with the hospital. And so that and so that plays in with drugs as well from pharmaceutical drugs. If you are going if you're going to get an entire the healthcare company that's providing you service wants to sell you the brand name drug because then that means that they're total the toll system between the pharmaceutical distributor and the hospital is going to be able to bill the insurance company for the entire amount. And the int and most people in the US as you know, Lorenzo, most people have health insurance. A lot of people have it through their company. They don't even know a lot of people don't even know what they're spending on healthcare insurance per year. If you try to do it independently, it's almost how to reach for a lot of people in the US. And so there's a weird system where everyone is required to have healthcare insurance. And so the hospital and pharmaceutical providers understand that. And so they're able to build an insurance company. However much they're able to get away with. And so then it's a weird system where you are no longer the customer in this legacy model. The insurance company is the customer. The incentive is to get as much service out of you. You're you're more like a rock component in the situation. Like you're you're a raw unfinished good. And then they're trying to sell they're trying to mark you up as much as possible and sell you to someone up. Yeah, preferably building that HML right. Yeah. Exactly. Exactly. And so Hens and hers kind of removes that dining. Mostly it's like if Hens and hers treats you better, they're going to get better op store rating. They're going to get new customers. And you're starting to see it. 54% of new telehealth users opt for Hens and hers. 54% that's powerful. That's powerful. And like and so the note in and of itself is replicatable or replicable. But is it replicable when the largest player is taking the majority of the market share and is able to create those what the systematic fly wheels for better vertical or better manufacturing. They've acquired a lot of the prior day 503 B facility. I was going to say and maybe you're going into this like are there some network effects that would make it you know more long standing once you've gone to whatever you know whether they're critical scale today or or whatever scale they'll be at two three five years from now. Yeah. The I would say the network effects obviously the more users that you get there's there's network effects there there's cost there's cost advantages. So the scale the scale advantages you're going to be able to distribute via supply chain. The supply chain ownership feels like a real unlock to me more than anything right like once you have that distribution unlocked you you really just cannot serve any other new competitor exactly. And it's like it's today I've went into what hymns and hers there's two or before we go into too much into that. I think there's a few areas where I think that there's a large advantage that the first mover will have from a platform perspective. Like you'll one you'll you'll get scale advantages from supply chain. You're going to be able to invest in manufacturing and then you're also going to be able to increase your skill. So that's a that's something that we haven't really got into yet is the fact that hymns and hers realize that a lot of people want alternate ways or maybe are new to alternate ways of utilizing firm suitable drugs whether that be a spray, a gel, a new customized thing that combines hair loss and erectile dysfunction. I don't know if anybody's ever actually going to use that but the option is available now due to the fact that the hymns and hers was able to create centralized advantage where they were able to hold that inventory. Right. So what you're saying is like the product and delivery innovation is at least in some part of function of the fact that they actually own top to bottom or at least a good number of the steps there because that allows them to. I imagine there's like supply chain constraints and distribution. I don't know kind of as you say like a spray on one medication or another how much that actually gets used but they able to provide that flexibility which at least from an end user perspective obviously makes them more attractive than the next guy. Exactly and then yeah it's kind of the centralization you're able to hold inventory of extra skews. I mean whereas like I think so cost goes the exact opposite of that where they realize they have a lot of locations they distribute a lot of product they had to minimize their skews in person to operate more efficiently. In this instance hymns and herpes by having the centralized model is already able to offer more skews very efficiently much much more efficiently than a disaggregated distribution model would. And so very good. So that's one area where they're able to skew count manufacturing they're able to do a lot that like C-C players cannot do. You've got let's see so we've covered supply chain manufacturing. Yeah I mean it even sounds like right like as you mentioned the business model innovation points on top of which I think what's really important is that incentive alignment where you know it kind of makes sense that they're going to have you know we haven't talked about NPS and people view it differently you know I'm an X-Bain and Co-consult and so maybe I shouldn't speak against the home team but you know point being it's more likely to actually result in in happier customers right when ultimately the service you're delivering is in service of those people paying you know cut the insurers maybe not out of it but the but the billing incentive is different on top of which they're they're bringing an easier faster go to market that benefits both them and then so no no that's all super clear hey everybody Eric here with a word from our sponsors I guess then my question going going to what I was curious about earlier right like there are other players you know in telehealth is very broad and we can like kind of keep it to the few you mentioned that are that are a little bit closer to what H&H does but yeah like what are they doing are they are they better or worse in any way like where do you see this market and the main players who are then it evolving over the next that's a great question to great question I think it's actually going to be very similar to streaming so I think this is kind of the this kind of my perspective on it I think it's going to be similar to streaming so with the streaming market you had a you had an early player that managed to get to a terminally large a user count where they were able to continue investing to build a new distribution model and then you had legacy players people with IP content people with better distributed people with equally good distribution into the playing field those being Disney Amazon for those so Amazon created prime video Disney had all of their IP available so they created their own app for their own distribution I think I saw a novo nordisk is creating their own app or is creating their own app. I see a lot of the legacy IP pharmaceutical holders create trying to get into a direct to consumer model, if I were to guess. And then Amazon already exists today. Amazon healthcare exists. And so you have a lot. And 23 and me tried to do it isn't doing well. You can look at the find. - A real publicly available. - Yeah, I mean, even just to think about it, it's so funny to think of something moving towards direct to consumer given the last decade and at least on the consumer side. A lot of things are moving away from it. But then actually when you look at healthcare, which for one is also historically always five, 10 years behind the tech curve. But then you look at where the companies are going here. I totally agree with the Amazon health and that what's it called, the buyout that they did, the modern health buyout. It's clear that that's the direction that it's going in and to see that, you know, him and hers was on top of that trend maybe five, six, seven years ahead of one, all the big players came in. So it's clear that they're benefiting from some tailwinds there. - Let's talk about, you know, while we're moving that, maybe it's worth talking about the product strategy a little bit because that seems like another major tailwind, something that, you know, from our initial joke at the start of the episode of ED for men and depression for women, obviously it's more than just those two things. So what's that evolution looks like? Is it what's the strategy behind it? Maybe yeah, talk through those details. - Yeah, that's fair. So, him and hers operates on a subscriber model where you subscribe for a product that you have been obviously prescribed by a doctor. And then you subscribe to him and hers and that will deliver it on a regular cadence to you. And then those being obviously hair loss, ED, menopause, TRT, dermatology. So if you start to think about the common denominators and between these products, all these product ones, today a lot of them are lifelong conditions that aren't necessarily one off treatable. A lot of them are non-life-threatening. That's another big deal. If you need to go to a doctor, you should go to a doctor. It's a nurse logging into the app, won't stop your bleeding. So like any condition that you need to be that is life-threatening is not him's in hers applicable today. - They're going for the most marketable products of, I don't know if my healthcare friends would be allowed to say this on their own dime. But basically the ideal product of customers use it forever, it's recurring, they never die off because they're otherwise healthy. And so you have a long recurring sticky customer. - Yeah, and also I think I, dude, I mentioned it to one of my brother or my brother-in-law, his dad is a doctor. And I mentioned that conditions are being treated. And he said, "Oh, you're talking about the money maker drugs." Look, I was like, "I did like a double tail." I was like, "So you guys knew?" And he, of course we knew. So I can, so, Hems and Harris is taking a lot of these conditions, drug to consume, very insane. These are very viable unit economics. So we're going to be able to sell a lot of these, assuming in such a day, a lot, or we've got a pretty good product roadmap within this really good, ideal pharmaceutical drug, let's say, for a lack of a better word, where they're not life-threatening. It's like, you can be a lifetime user of it. And also there's generics of it. And so that actually, and so that kind of leads us into the point. If you look online, the only discourse that you can really see about Hems and Harris, that is pretty nuanced, is about the GLP ones. - That's a new recent, that's a recent thing. I did some reading up on that, but can you talk through that? Because that's obviously maybe adjacent in so far, as it's something that is pretty curable, new, amazing technology that also seems to fall within, like maybe not semi-recurring, but at least non-super life-threatening usage in the most casual cases. So how does that departure from their strategy do you think like, in the Derma mental health and all these other recurring things is they're not insufficient market size, probably not the case, right? Like a lot of dollars to go around there. So what's driving that product expansion, do you think? - So a lot of the, what's driving the product expansion is the fact that GLP ones with Ozembik and Wigovie are currently on an FDA shortage. And so when there's an FDA shortage, the rules are that compounding pharmacies are able to create IP copies of FDA approved drugs that are under IP protection. And so, compounders in generic manufacturers today are able to essentially copy the IP that is patent from Novo Nordisk and a lot of these other companies that are on these types of, or that are on these shortages list. And so Hens and Erie saw an opportunity. They said, we have the distribution. We are going to sell these products while the shortage is available. And what's funny is this is the only thing that's driving any type of discourse online is whether these shortages are going to continue. I think the stock dropped 10%. $500 million in market cap on the news that Novo Nordisk urged the FDA to end the shortage. - And so I was going to ask, it kind of sounds like from them, do they lose the distribution rights if the shortage is no longer around or do they get grandfathered in? - So they don't get grandfathered in. If you, when the shortage is over, the FDA gets 60 days for large compounding manufacturing companies to cease and to cease. - Got it. - And so, GLP1 revenues, and in this case, which should be, you probably have another year worth of revenue opportunity potentially there, will go to zero. However, that also brings up the point is, how much of those revenues contributing to debt, right? Today that's zero dollars. Today, yeah, Hens and Erie's has a weight loss product line, but it is not GLP1's. In any of the trailing results, after November 4th, you will have your first quarter with GLP1 revenue baked into the stock price. Or not baked in, but it's baked into trailing financials. - Interesting. Yeah, exactly. Hens and Erie's doesn't offer, or like today, all of their IP that they have for weight loss for all the products that they offer are from legacy products like Metformin. - And so maybe they make a little bit of cash for a lot of bit of cash off this, I have no idea, but if we're thinking through and putting our Chief Strategy Officer hats on, like really it's a new customer acquisition funnel, right? Like you're bringing them into the platform, there's all these complimentary goods, and that's actually maybe, as I say it, what's driving their overall product strategy. And I don't know, I haven't gone through the investor decks, but I would guess that there's something where, like even if someone is temporarily recurring for one product, then inevitably, if you have a wide enough catalog, you can hook them on another, and that's the error. - Oh yeah, one hundred percent. And if you think about who's gonna be signing on to an app to be doing weight loss drugs that are not covered through insurance, and believe it because supplies available, it's going to be a very healthy consumer. You want that person in your network because they are going to care about what their skin looks like. They are definitely going to be self-conscious about what their hair looks like, and if their dick doesn't work, then they will be definitely self-conscious about that as well. And so yes, if you add your cheat strategy officer hat on, it's a great idea for customer acquisition across cell, and get people also familiar with your platform. So I mean, think about that today. Is people already know how Netflix works today. You don't have to explain to them. The problem is about that is healthcare is very inherently complicated, and just being able to get the consumer awareness that this possibility is even available is huge. And so, yeah, getting people aware, a lot of people are now aware of telehealth today, a lot of people in the United States. And so I think it's a great opportunity, and I also don't think that there's much. They outsourced a lot of them in factoring. So it wasn't like they were putting a lot of capex into it. It was a very asset light product extension. It is probably gonna be one time in nature, and honestly it might be more trouble than it's worth than all honesty. Because the amount of press and ink that's been spilled on this product, potential legal implications, and there's a lot of F, and there's just a lot of scrutiny around it. It's possible it might have been better if they didn't get into it from a focus perspective, but being said they did, it was very capex light. I can see why they did it. And so that's kinda my thought process that I don't really know where it's gonna go with the JLP ones. I don't see it being like a tailwind. So I don't see it being an extreme tailwind of the future. - Yeah, yeah, no, I appreciate the balance perspective. So then I guess in your mind, you know, Eric always asks, but if you had to make a bull case and bear case, what would the key drivers be behind each? - The key drivers I think is obviously unit economics, the amount of products that you're able to expand into. I think if the bull case for me, in my mind, mind is, Hymns becomes a one-stop shop platform for any non-medical, pharmaceutical drug usage. - Like fundamentally replacing what hospital care spend, ClareCare spend everything more intensive than what CVS can offer. - Well, the thing is about is CVS, and I think Walgreens just put out a announcement and go within last week if they're actually closing 1300 stores. So it's already happening, right? Is that the Hymns' effect? - It's already happening is the thing. Like Nova Nordic already lowered their prices on their JLP ones dramatically as well. They I think they cut the price by them, but nearly 50%. That's just a finger in the year number though. So I don't remember what the exact cut was, but Walgreens is cutting stores, prices are being cut on JLP ones. Competition is already starting to show its effects, but today people aren't putting one and two together that it's like, yeah, it's because capitalism actually occurred and we created a new business model and existed or we applied an existing business model to a broken industry. And so I think the bull cases, the fact that many people are that larger percentages or Hymns and Hymns will be able to distribute and gain market share within pharmaceutical, within the pharmaceutical drug distribution system. So I don't know exactly. I like, if I were to running this business, there's a lot of ways you could go with it. I think there's, you could have a supplement platform where you subscribe for a certain amount of supplements per year distributed to you once a month. You could have a, you have their medical system, which is, which Hymns and Hymns is providing a AI or machine learning basically. They're providing a machine learning platform for diagnosis and I think with their increased numbers of transactions on their simple on their centralized platform and a good data storage, structured data too. I think there's possible that you can have overlays with being able to treat conditions better. I think you have, I think the biggest, let's see. And you also, I think new product lines, I think anything hormone related, Hymns and Hymns can cover. - Yeah, and what, and maybe like, if we're looking into the future, you know, they have a bunch of successful product expansions, they're eating up share from traditional buyers. If I'm trying to kill this deal, I would ask like, hey, but, you know, what if Walgreens comes out, you know, some other incumbent with market power, some buying pressure, again, I don't know, all the nuances of the healthcare web of payments. But someone else, there's probably other people who are well positioned to maybe come out with a competing platform. Like, is there a reason to believe that wood or wouldn't happen? - Yeah, yeah. And so that's a good question. And that's one of the best questions in fact. I think, Hymns and Hymns today, the only part that really worries me about their system where it's like, it's a glaring hole in my mind is their supply chain part of it. I said I was gonna tap into it later. Amazon, could kill Hymns and Hymns maybe. But, I also try to always, I don't, I try to never just look at what potentially could happen, say, because of it. And so what I try to do is I always try to look at the world as it is, it's not as I wish to be fair, there's probably like 30 industries where you could say like, Amazon could kill us, but that being said, given their recent focus, I guess it's a little more relevant for Hymns and Hymns than the random business off the block. But I hear you, what about, are you concerned at all about as we talk about like market size and things like this? But are you concerned at all about just like regulation getting in the way here? Like, obviously they're disrupting the model and not that people are bound to be upset with that. But again, it's like a very heavily regulated market where one institution or agency can suddenly flip the script. Is that a concern anywhere here or is that not really how they operate? - I think after Chevron, I think it's no longer technically concerned. You know about Chevron case, right? - Yeah, yeah, the doctrine overturn of course. - Well, yeah, but it basically said precedent where if you have legal, I'm not saying Hymns and Harris eats a sue the FDA, but you do have the ability for corporations within America though to be able to, within the court system, overrule any federal agency and they're ruling on a particular area if it's not deemed constitutional. - Right, right, and the New Supreme Court ruling. So basically you're saying there's legal pushback power. It's not as big of a concern because maybe even going back to what we were discussing throughout the last 30, 40 minutes, it's just like a lot of their moat is in the way they've set up their business. It's not, you know, whether it's a GLP loophole, one third or another, it's really just they've built a strong platform. - Yeah, and I think the two, or I think that was also just kind of an interesting point that even in worst case, it could be okay. But I think two year point there, I think the regulation focus is largely within the manufacturing area and the HIPAA area. And so between the two of those or kind of the areas that I need to go, or that I need to go further into. HIPAA, obviously, I'm curious what happens with like, Hems and Hers own all of these medical records. Are they able to put these in an anonymous business intelligence tool that any doctor can utilize without violating HIPAA standards? I obviously, Hems and Hers has people on their payroll that can be able to answer these questions pretty effortlessly, I imagine. But with their MedMatch solution, I am not sure it seems evidence indicates that they're going to be able to build medical record. And like, they're going to be able to build products on top of the data set that they have without violating HIPAA, or I'll stick probably would have been asked to take it down already. It's been an effect for a few quarters now. And then yeah, the manufacturing, the manufacturing regulations about what IP you're able to utilize what IP is generic, got to give them point. I think a lot of this was de-risked in my mind once Hems and Hers brought on the executive. That was an executive at Nova and Ordisq for a number of years. His name, Sholtz, was the individual's name. And he also is the CEO of a generic pharmaceutical drug company, manufacturing. Interesting. Interesting. Yeah, yeah. Yeah, I mean, the operation of pharmaceuticals, I believe. And so Sholtz has the expertise, the contacts, to be able to know what drugs are able to be manufactured. They already have the specialty or the specialty, the expertise on hand though, to be able to deal with that issue. I'm not saying it's a non-issue. It's just saying, I think that Hems and Hers has the people on hand to be able to handle it. And I think that's also, if you were to flip that on its head, the difficulty of managing within regulations is also an advantage for an incumbent that already is meeting the regulations. Think about starting to your point. If you had a billion dollars, do you know regulations to be able to go after on the day-to-day basis? Are you able to get the people on hand that do? I'm like, I mean, and then also create a good user experience after that. And so it's just a lot of the pieces of the puzzle took a long time for it to come together. And not saying that regulation isn't a worry, but it's I think Hems and Hers at least brought on the people that I feel comfortable can handle it. You'd underwrite it. Yeah, no, totally, totally. And I guess then, I said we'd come back to it at the end just briefly. But let's talk margins. I know there's been some evolution here, at least since you've been tracking it. But maybe we can attach some numbers to it and just like where do you see that going over the next few years as the business continues growing and expanding? So this is the crazy point that I'm a numbers person. This is where I geek out. Everything up to this point qualitative, but I'm a quant person. Hems and Hers today is operating with the last 12 months operating margin about 1.5%. 1.5 on gross prop. And I guess if we go for their full-- if we give their full margin profile, Hems and Hers is operating today with an 80% gross profit margin, which is software-like in nature. That also shows how broken and dislocated this industry is overall like that. Hems and Hers is able to undersell the total cost by 80% and still operate with 80% gross profit margins. This is why people are then getting upset about the healthcare industry for a long time. But then from there, Hems and Hers largest expense item is marketing today. Hems and Hers operates at about a little bit under 50% of their revenue today goes to market. So you think about where are they marketing and benches in the subway in New York, but also on Instagram, Facebook, Snapchat. I've seen them on a lot of. I've heard them on radio. It seems like-- I mean, and this was my observation about six months ago to nine months ago that I was sitting there realizing the density of these Hems and Hers ads. And I realized I'm like, they're probably going to get to a point where they can barely even operate with a denser ad. And so then from there, what happened is in the next quarter, I saw 400 basis points of leverage on their marketing expense. So that leads to the question of where do we think margins are going to go over long term? I would expect marketing to drop as a percentage of revenue from the high 40% range today. It's a probably-- I mean, this is just angry in the air. But I mean, I think it's going to be 30% of revenues for a long time. And what's driving that motion is a kind of-- like you've gotten to the bulk of the customer base and now it's just an upsell motion or whether it's, you call it upsell or cross sell into other products, but is that what the background is or, yeah. - It seemed initially that like there you are seeing ads right now for Henson Hurres that previously were not shown. Today, but the original ads that came out were all condition focused, let's say. So you don't want any of women to see your, and ED was the wedge, that was the wedge. You don't want any women to see this, basically, 'cause then that's a waste of marketing spend. And so sure enough, you want this to be targeted. And so then from there, I think that their marketing spend is targeted on conditions based on demographic. And so that's where I see it going in the future is the fact that the marketing spend is gonna be allocated based on basically the likelihood, the probability that your overlapping condition is being could be met by their products. And so they're probably not gonna be, they're not gonna be marketing menopause to someone that has a 20 to 30 year old age for within the female area. So the, and so that's where I see it going in the future is like a lot of it is going to be product focused upon the demographic that could be utilizing it. And so then from there, you're able to layer on additional products that could be relevant. I think you're gonna also see a very large leverage on just hands and hers, just as a platform ad. I think you'll start to see those a lot more often. - Yeah, just overall operating leverage from the platform totally, totally. - Yeah, yeah. And so I think as I think as the conditions increases and it becomes harder to market to an individual condition, I think that you'll see ads for hands and hers as a platform more often. And I think across all of this, I think you're also gonna see a lot of operating leverage due to these scaled marketing campaigns. Because these aren't one-off shoots, these are very like, these are nationally distributed advertising campaigns. I think you are gonna see leverage on top of it. I don't think that you're gonna, and I think a lot of its dollar clicks based. And so I think you're gonna see leverage into a good range. And as hands and hers is able to grow their subscriber base, they're able to invest more in marketing. And so we've seen that as if you look in there, if you look at the marketing budget on each quarter, it's a stair step in line with revenues because they're trying to just continue to build that brand awareness. And that's why they have 54% of new telehealth users. Like that advantage doesn't just come from nowhere. It's the fact that they're the one spending the most to gain that consumer awareness in the direct to consumer channel. And so if you were to have a competitor wanting to compete with hands and hers, they would likely need to get aggressive and try to market equally to hands and hers for a lack of a better word. And without the scale, I think you're gonna be throwing a lot of billions of dollars, you're gonna be throwing, think billions of dollars away essentially. Totally, yeah, that makes a lot of sense. And I guess like then down arrow here, obviously there's reasons for bullishness and bearishness alike, but your assessment is that there's enough juice in the tank. And you know, at least with their product road map with the overall platform benefits, which are gonna grow and then maybe as we've outlined a really compelling and competitive position within the market. - Yeah. And what's interesting about this is with that 1.5% operating margin, hands in her and let's compare that to one of the numbers that I just know, flop my head, Johnson and Johnson, for instance, now which is another pharmaceutical drug main factor. This company operates at the 20% operating margin, which that plus, and is their return on equity with an operating margin that is eight times higher is only 50% higher than hands in her. - Wow. - There you go. - So, ends in her reducing return on equity of about 15% with a 1.5% operating margin. Johnson and Johnson is providing a 20% return on equity for a 20% operating margin. So, that when we talk about efficiency at the beginning of this, that we talked about at the beginning of this podcast, bringing back, that's how much more efficient this business model is. It's about six to seven times more efficient with the current products that we have. So, where does that lead in the future from margin perspective? I think as hands in her has all of the system built out and their return on capital can be met with smaller conditions that are a little bit more specialized, a little bit more one off, maybe things that don't need to be advertised directly to consumer, I think it's possible that their gross profit margin gets reduced, especially as they keep investing in supply chain and in factoring items, I think they're going to be, you're gonna have a system where I think they're gonna give a lot of the value back to the consumer, which we haven't actually seen in the healthcare market ever. - Interesting. - Yeah, a lot of, a lot of novel disruption to come. This is one of the first deflationary forces, like this is what Amazon did for CPG goods and distributing TV scripts. I mean, it's like, I think this is one of the biggest, it's a massive deflationary force. And I think a lot of this economics is probably gonna be given back to the consumer by word of guess. I think you're gonna see operating margins. I think the long-term guidance that the company has given us was about 25% free cash flow margins. - That's generative, for sure. - They're pretty high today. The company in centers is very free cash flow margins, say. - That's definitely what the public market's like to see. Well, thank you well for the really comprehensive overview. I think this was as, as I said, as comprehensive of an overview as probably I could get from a single call. So thank you so much for taking the time. Maybe do you want to quickly shout out your socials and where people can, I know you do a lot of other excellent research on equally exciting companies. So, so where can people find that if they're interested? - Of course, my name's always fun to see investor. Spelled F-U-N-D-A-S-Y, and then investor, no stasis. You can find me on Twitter and Sub-Stack. I do long form write-ups and the majority of my research is all free for consumer or for anybody to read. I think I put my IRR expectations behind a paywall because the way I see it is, you gotta pay for analyst work if you want. If you want that type of service. - That's right, word is free, Excel, you gotta pay for. - Exactly. - But I provide all my research for free as the, as the ad for my work if you want. - No, and it's really top notch, really clear writing, which I've appreciated reading and obviously a big reason why you're here today. Well, thank you again for taking the time. I hope to have you back soon, but thanks again. - Of course, Lorenzo, thanks for having me. - Thanks for listening to Company Breakdowns. Make sure you're subscribed on Spotify, Apple, or YouTube. Let us know in the comments or reviews what companies you want us to deep dive on next. Company Breakdowns is a show from Turpentine, the network behind Moment of Zen, Turpentine VC, Turpentine Finance, and Request for Startups. (upbeat music)