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Prediction: Up 74% so far this year, this skinny stock is about to crater

A small telemedicine company has just entered the weight loss race.

Weight loss drugs like Ozempic, Wegovy, Mounjaro and Zepbound are taking over the pharmaceutical industry. while Eli Lilly and Novo Nordisk are the big players in diabetes and obesity care thanks to their glucagon-like peptide-1 (GLP-1) agonists, there are a number of companies looking to dethrone industry stalwarts.

For the most part, competitors invest significant amounts in research and development to bring their own GLP-1 drugs to market.

A company that recently entered the weight loss space without a new proprietary drug is a telemedicine company His and her health (HE 1.81%). Instead of producing an alternative to existing treatments, Hims & Hers entered the weight loss race through the back door, offering patients combination versions of Ozempic and its sibling treatments.

I see this strategy as not only controversial, but one that could very well be a huge disadvantage for the company.

What are combination medications for weight loss?

Have you ever been in a big city where sidewalk vendors are selling fake designer bags and clothing that look identical to those sold in a store?

The difference between these lower-cost alternatives and what’s sold at a brand-name store is that these reproductions are likely made with lower-quality materials and may not last as long as the real thing. There is no big company backing the products with its deep pockets and shiny brand name.

The concept of combination drugs is similar.

The main compound in Ozempic and Wegovy is called semaglutide. Novo Nordisk owns a lot of intellectual property (IP) around the specific chemical component of semaglutide. This makes the drug almost impossible to copy at the molecular level.

In the case of weight loss drugs, combination semaglutide may contain ingredients that are tested in research but never make it to the final FDA-approved version of a drug — possibly for safety reasons.

The FDA notes: “Compound drugs are not FDA approved. This means that the FDA does not check the safety, effectiveness, or quality of combination drugs before they are marketed.”

Pharmaceutical drugs spread over hundred dollar bills.

Image source: Getty Images.

Why does he and she do this?

Ozempic, Mounjaro and their sibling treatments are expensive – there’s no doubt about that. Basic GLP-1 agonists can cost nearly $1,000 per month out of pocket if your health insurance provider won’t cover the cost.

According to the Hims & Hers website, the company’s rationale behind offering GLP-1 combination injections is to allow customers to have access to “medications with the same active ingredient as Ozempic® and Wegovy® without navigating the shortages and costs that currently limits access to branded medicines”.

It’s no secret that people will do extraordinary things to lose weight. But that said, I think Him & Hers is looking to bolster their business by capitalizing on a theme known as “body politics” rather than providing top notch healthcare.

Saying that their compound semaglutide contains the same active ingredient as Ozempic and Wegovy is like wearing two different shoes, but saying they are the same because they both have laces. Taking a combination semaglutide is far from the equivalent of Ozempic or Wegovy and is very much an unregulated product.

And the shortage leads people to combined GLP-1 agonists may not last forever. Earlier this year, Novo spent $16.5 billion to acquire more manufacturing facilities from Catalent. The entire reasoning behind the deal was to augment its existing production capabilities and increase production for Ozempic and Wegovy.

Lilly followed this template with an acquisition of its own. In April, Lilly acquired an injectable drug unit from Nexus Pharmaceuticals to increase its supply of Mounjaro and Zepbound.

I caution investors not to buy into the idea that Hims & Hers is here to save the day because Eli Lilly and Novo Nordisk are failing to meet supply and demand dynamics.

Why do I see the downside ahead

Year to date in 2024, Hims & Hers shares are up 74%, easily outpacing S&P 500 and Nasdaq Composite. I believe these gains can largely be attributed to the impressive growth of the company’s subscription business.

Hims & Hers Health subscriber and revenue growth trends

Image source: Hims & Hers.

While the trends in the charts above indicate that Hims & Hers has been successful in acquiring and retaining subscribers, I believe the company’s move to compound semaglutide will backfire.

The FDA warns that a major risk around compound GLP-1 is dosing errors “from patients measuring and self-administering incorrect doses of the drug and healthcare providers miscalculating drug doses.”

If patients taking Hims & Hers’ combination semaglutide experience significant health problems, the company could find itself at the center of a public relations nightmare and could very well face lawsuits or even fines administered by the Department of Justice (DOJ).

On the other hand, while shares of both Lilly and Novo have rallied considerably over the past year, each company appears to have a robust long-term roadmap ahead — suggesting there could be further gains for patient investors.

More daring investors might want to check out a number of alternatives to Lilly and Novo that actually devote a lot of time and capital to drug development. But for now, I see too much risk with Hims & Hers and think the company is simply biting off more than it can chew at the expense of potential near-term growth.

Investors seeking exposure to the weight loss space are best to consider positions in larger players with established footprints and avoid speculative opportunities such as Hims & Hers.

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