Motley Fool Money - A New Name in Weight-Loss Drugs

Episode Date: May 20, 2024

Novo Nordisk and Eli Lilly have soared on GLP-1 weight-loss drugs – now Hims & Hers is trying to get in on the action with a more available and affordable option. (00:21) Asit Sharma and Dylan Lewis discuss: - Hims & Hers getting into the business of GLP-1 weight loss injections and what the compound market means for Novo Nordisk and Eli Lilly. - A sneaky company that’s another winner in the weight-loss market. - Wix’s successful pivot to a free-cash-flow orientation, and how the AI wave is pushing the company forward. (14:52) Gym stocks haven’t worked out for most investors, Ricky Mulvey caught up with Motley Fool analyst Sanmeet Deo to find out why he has cooled on one fast-growing gym franchisor and a space in fitness that is investable. Companies discussed: HIMS, NVO, MCK, LLY, Wix Host: Dylan Lewis Guests: Asit Sharma, Ricky Mulvey, Mary Long Producer: Ricky Mulvey Engineers: Dan Boyd Learn more about your ad choices. Visit megaphone.fm/adchoices

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There's a new name in the first. the hottest part of the weight loss market. Motleyful money starts now. I'm Dylan Lewis, and I'm joined over the airwaves by Motley Fool analyst Asset Sharma. Asset, thanks for joining me. Dylan, happy to be here. We've got two stocks up big today, and we are digging into why the first one up, Osset, online pharmacy and healthcare company, Hems and Hers, up over 30% as we record today's show on news that they are expanding beyond some of the more conventional health and wellness products, sexual health, hair loss treatments. and are going to be offering compounded GLP1 weight loss injections.

This seems to be them following a playbook that they have established for other markets with what might be one of the hottest medical treatments in the industry right now. Dylan Hems and Hers offers personalized subscription care that can often be in the form of telehealth. So you sit with a doctor, and then you get a prescription for medications. They work with affiliated pharmacies and now have their own pharmacy manufacturing facilities. So they're adding on GLP1 drugs to something that is already in play if you are a subscriber to Hymns and Hurs. They have a comprehensive weight loss program, which seeks to treat weight loss in a holistic

way. It almost sounds like Weight Watchers. If you followed the convolutions that Weight Watchers has had over the years, sometimes it's focused on exercise, sometimes it's focused on the diet, what you're eating, sometimes it's focused on medication. They sort of combine all of this. So they've got a group that is bringing them in something like $100 million in revenue a year just on weight loss.

Today, we find out they're adding GLP1 injections. That price point, the subscription is going to be as low as $199 a month. So the stock is up 30 percent. Investors see the potential of this, and investors have been trained to pay attention to GLP1, this phrase in particular, as it applies to the health. healthcare industry. Yeah, and if you don't know GLP1, and you haven't added that to your vocabulary yet, you might be more familiar with Wagovi or OZempic or Mungaro.

There have been a lot of brand name drugs that have made a huge splash in this space, notably from Novo Nordisk and Eli Lilly. What they'll be offering here with Hems and Hers, Osset, is a compound, which is very similar to those brand-name drugs, and something that it seems, Hems and hers is kind of uniquely able to offer. Yeah, that's true, Dylan. So the FDA has allowed certain companies to provide essentially a generic or compounded, built-in-house version of these drugs just because the demand is so high and there's still

several medicines under approval. So using this, Hems and Hers has teamed up with a generic wholesaler. They don't mention who, but it's important to know that through their own pharmacies and their affiliated pharmacies, they can basically. make this in-house. So they're sort of licensing the recipe for these drugs, and that is a cost savings for them. They're not selling a branded product. And as has been the case, if you examine their business model for several years, they try to show subscribers that they're lowering costs over time. This is a great way just out of the gate to show that they can offer something

that's really in demand for what you were pointing out to me before we went on air is like a fraction of the price of a subscription, if you get one of these branded medicines like Wagovi? Yeah, I think the monthly treatment costs are over $1,000 for most of the name brand products. We've seen that the beginning price, you mentioned, $199 a month. We'll see what that looks like in terms of a number of treatments, if it's truly comparable. But the playbook for Hems and Hers has been take something that is incredibly popular, like Viagra, and then make it cheaper and more accessible to the mass market. They've been able to do that through telehealth.

And I think it's been really great for a lot of people who have health conditions and know the drugs that they need to be taking and are ready for those cheaper ones. What has always concerned me a little bit, Asset, with this business, is they are both the prescribing doctor interface and the provider of that medication. I've always worried a little bit about that. Has that been something that you've caught as a risk as well? Yeah, I think so. I haven't followed Hems and Hers as carefully as some other companies that are on my watch.

list, but one of our Motley Fool analysts, who listeners will have heard before, San Mateo, did a great presentation last week to the investing team and sort of pointed out the potential opportunities with this company's in the downside. If you are that sort of therapeutic caregiver via telehealth, but you're also the prescribing doctor, and you're also the entity that's on the hook to make a profit or loss at the end of the day. Now, okay, cynics out there shopping me already. Well, isn't that the healthcare model in the U.S.? Yes, sort of. But still, is there a way that that model can be taken to an extreme? And we worry, we is in, I think, just as a society, that healthcare sometimes can be a bit mercenary at its worse. And so you can

see how this could be an investment risk for those who are considering an investment in Hems and HERS. Could this mean that you are really buying into a company that has to prescribe to keep growing. Now, that's not the only way they can keep growing. One of the things I like about hymns and hers is that they really are trying to get more personalized medicine to their subscribers. And also, there's some benefit to this model. You mentioned, like, the popular drugs and therapies out there that have to do with weight loss. You mentioned Viagra. They focus on things that are hard to talk about. They're advertising is all over the place. Okay, we've all seen it, right? But dermatology, sexual health, weight loss, if you think

about the areas that they're reaching out to, those are ones that are really hard to talk to other folks about. And men in particular don't get up out of the chair and go see a doctor to discuss these problems. So reaching out to, and even maybe a generation now that's less inclined to talk in person and more inclined to use an app or get through to someone. via an app, I think is something good. It can help people who might not otherwise get treatment for these. But, man, over time, we'll just have to watch, like, if this company does become too dependent on prescriptions. That's not something that most of us would want to be invested in long term. I'm not saying that that is their model, but the potential is there. And

I'm glad you brought that up. Awesome. Before we head to the next story, I do want to take a step back on the overall weight loss market here. I think it's no surprise that we saw the market. reaction to this news because the opportunity with GLP-1s and smagletides is so big. You look at Novo Nordisk, one of the leading companies here, up 275% since early 2021, when these drugs really started to come into the consciousness. Eli Lilly, also there with Munjaro, up 350% since early 2021. How are you making sense of this market and the investable opportunities here?

because we're seeing the conventional pharma approach. We're seeing the follow-on brandless approach. Is there anything that's more or less interesting to you from an investing standpoint? Well, I'll tell you something that's neither of those, Dylan. Let me explain. I mean, I think there's a little bit of GLP1 fatigue. I think investors are waking up to the fact that the big pharmaceutical companies have benefited a lot, those who have got their medicines out.

But now you get to different use cases, so you still have to get the, those drugs past the FDA, so have to have them commercialized. So some of those big, quick opportunities seem to be less resilient now. And so when there's a concentrated play like this, that's why investors wake up and the stock is up 30%. But I sort of like the wholesaler aspect to this. And there's a company called Erickson, some free IP here, just recommended in Stock Advisor, our flagship newsletter, re-recommended. And we discussed the fact that a company like that, which is maybe a little bit lower growth, huge sales volume, low profit margin, but turns out a lot of absolute dollars in profit, they benefit from this whole wave,

regardless who gets the approval. Someone's going to get approval for the next wave of drugs. They're the largest distributor in the US, so they're going to benefit. They'll get a slice of that. I'm looking for opportunities like that where you don't quite have to place the bets, because we're getting to where that easier money has been made, and it's going to be harder to identify what really would propel it, a JLP1-type investment. I'm happy that you ordered off menu for what it's worth there, Asset. I love it. Also, Up Big Today, website Builder Wix. Shears up 25% after earnings Monday. And, Asa, this is one of those companies that kind of went through the COVID growth ringer.

They emerged on the other side of that, a much more disciplined, much more free cash flow-oriented business. And it seems like that's what the market is responding to in these earnings results. Totally, Dylan. You know, this company was back in the heyday of websites, an extremely successful, fast-growing SaaS-type business. And then, you know, that all tapered off. As you point out, the pandemic had something to do with that. But just the idea of building websites, that's been their model, both for individuals out there who get premium subscriptions and then agencies, advertisers, who are their business clients. They call them partners. That model was slowing down some. And management had a come to earnings moment. And they came to the market and said, look, it really explicitly said this. We're going to be judged on our cash flow going forward. Our growth is slowing, but we're going to pay attention to our business. We are going to be a very positive cash flow generator.

And they've largely executed on that in the two to three odd years since management first brought this up. But something else happened, which is very interesting too. We had this whole wave of generative AI, and we've seen different companies come to terms with what AI can do for their business or disrupt it. And I really liked the way that Wix just jumped headlong, but in a thoughtful way. So both jumped into AI, jumped into the innovation, dialed up the hype factor, but brought the bona fides, brought the real credentials. And what I'm getting to here is that they have a very interesting website builder, which is

basically a conversational AI builder. You start chatting with the bot. It develops a website instantly and says, how do you like this? What do you want to change? That's a very powerful tool. But what management has been pointing out, which is, I think, really taken very nicely by its business partners who really provide the bread and butter of this business model, this isn't just like a cool website design. It's a fully functional site. It's got tested security. The The SEO is top-notch. The page design is really flexible. The APIs can be tweaked on a moment's notice.

Typically, you could do that if you're using a more advanced version called Studio, maybe conversing with the bot. It's got all the underpinnings of their business, all the processes that they developed, all the techniques they've honed. I don't want to call it magical because it's Monday. Be short on the hyperbole. We'll save that for later in the week. But it's pretty nifty.

So they delivered on that, and customers love it. They've started to grow a little bit faster with those partner clients because of this. And they raised their outlook for next year. So two stories that have sort of come together. Yeah, I think if you haven't checked out their website building demos with AI, I would highly recommend it. I think it's one of the cooler and more immediately communicates the power of technology-type executions that we've seen from a business.

And customers have gotten on board. Management said, hundreds of thousands of sites already built using the tool over just a few months. So the product is clearly resonating. So with the performance we're seeing, with the tailwinds of AI, where do you put Wix as an investment opportunity? Is it something that's interesting to you? Is it something that's kind of on the watch list?

How are you categorizing it right now? Yeah, I'm kicking myself, Dylan, because there's a service that I work on where we named it, like two years ago, as a watch list company and didn't buy it. Sometimes the hardest thing to do is to listen to a season management team when they're doing an about face. If they've executed in the past and they tell you, look, we're going to change our business, sometimes it's good to say, you know, I'll take a little bet on you because everything you've said in the past, you've sort of executed on.

And I didn't listen hard enough to management when they did that. And of course, now, Mia Kulpa, of course, they didn't foresee what generative AI could do to a business like this. The stock has very aggressively climbed off lows that it hit in 2022, and it may be approaching sort of like a fair value for now, but it's still, if you're an investor who likes to crunch cash flow numbers, looks like a business that could have some value. You buy in today, you're patient with it. Those cash flows are going to increase, and they've added on the element of now using some of that excess cash flow to buy back shares. So I think it could still be interesting for those who want to follow an AI-facing company that also is now profitable,

has those cash bona fides, maybe not from here, another two and a half times like they've done in the past 18 months, but certainly one that could beat many other companies in the market over the next five years. Asa Sharma, appreciate you helping me check off the boxes on all of the 2024 bingo card topics with today's show. Weight loss drugs and AI. Thanks for waiting through it with me. Yeah, this is great. Thanks so much, Dylan. Coming up, we're sticking with the wellness theme. Jim stocks haven't worked out for most investors. Ricky Moldy caught up with Motleyfool analyst Sandmeet Deo to find out why he's cooled on one fast-growing

gym franchisor and a space and fitness that is invested in. San Mate, I know you've followed the health and fitness space for a long time. You followed a lot of these gym stocks. And when you look at the chart on pretty much any extended timeline, it doesn't look good for the shareholders. I feel like, are we in a case of maybe a good product, but a bad stock for a lot of these gym stocks? Yeah, I think so. This is one of those things we talk about a lot. You know, you can have a good business, but a bad stock and vice versa. A lot of these gyms have some great boutique classes. You have your Pilates, yoga, boxing, lifetime, has. some great, it's a great facilities with all kinds of classes. I go there myself, actually.

They're intriguing. They're new. They're innovative. They're different ways of working out. So they're good products. People love them. They go. They connect with other people, the instructors. And so people enjoy the classes. They enjoy the environments. They've hit on something with those products. But the stocks have just not been very good. They've all, over the past three years, when I'm talking about Lifetime, Planet Fitness, Exponential, and Peloton, all have. have gotten crushed, specifically Peloton and exponential. Peloton down over 95% over the past three years, exponential over 31%. So they've been hit hard. And even Lifetime. Lifetime is supposed to be that luxury top dog in this category, and you would expect it to do a little bit better

if you just walk in and see what's going on there. So what's going on with these stocks after the pandemic. I think in general, the fitness business is just a very difficult business. I mean, I can say that from firsthand experience. I owned a boutique fitness franchise. We operated it. And while you can get a influx of members and excitement and the business starts off strong, sustainability of the business is very hard. I mean, people are fickle when it comes to fitness. They want to try different things. They start, they stop. They're, they're. They're kind of all over the place with their fitness, and it's a difficult business to keep these customers locked in and captured. The churn is extremely high, especially these boutique fitness brands.

And even the churn on like a lifetime, you know, it's an expensive membership. So when times get tough, where are they going to cut? They're going to cut, you know, lifetime. Planet Fitness has been okay. Their membership has been about $10 a month. Now they've raised it to $15 a month. Generally, I think people tend to keep it because it's like a call option on fitness, right? They think, all right, you know, I'll go at some point.

I don't need to cancel. So the businesses are just generally very tough customer turn, keeping people motivated and coming in and cancellations and all those things. Well, there seems to be an economic issue where your most engaged customers, you actually, you may lose money on if they come to the gym every day or five, six times. a week. And the people they're making money on are those who sign up for the membership, but then aren't coming to the gym. And one would think that those are the, not even one would think, I think those would be the ones who are the most incentivized to cancel and then churn out of their membership. So for any of these, do you think there's an opportunity to buy low,

or are these all down for good reasons in your view at this point? I think most of them are down for good reasons. Planet Fitness is one. I continue to monitor, because the churn issue is less of a factor. I think because of the low membership price. And, you know, the business model itself is a little bit stronger than some of the others. But all these others, I would not fish in that part. And now let's get to the rant you were stoking me with on Slack last week, where it's about leadership as well, which seems to be a problem at a lot of these gyms.

The warmups for this are stretching motions will be, for Planet Fitness and Peloton, where Planet Fitness CEO, Chris Rondow was ousted by his board last year. Barry McCarthy, after about two years at Peloton, is out after just two years. What do you think is going on? Why are all of these CEOs seemingly in the hot seat with the exception of Lifetime Fitness? Yeah, you know, I think it's an interesting breed of executives that we get at the fitness companies. You know, Planet Fitness CEO was literally surprised ousted on his, on his marriage. He was surprised for, you know, and there's reports that employees allege that there was a toxic high school environment, and it was just not a good place to work. He said, I have a quote here says it was portrayed as a fitness

employees gone wild. So the environment that he created was not great. The Peloton CEO, you know, he came in to turn around the business, started off, laying off a whole bunch of people, rebranded, focused on the app, did a bunch of things to work to turn around the business. But ultimately, you know, he also left on his own accord. He resigned, or at least we think so. And I think it's because now he claims it's in growth mode now and all the layoffs are done and everything. But it's just too hard to turn around. And so I think that's why he left.

Something about the executives in those fitness industries. Maybe it's just they're working out too much and they're all pumped up. Who knows? And what's happening there? Let's talk about a franchisor. You follow pretty closely. We've talked about it a few times on the show. I used to own the stock.

It's exponential fitness, which owns Club Pilates Cycle Bar Yoga 6. Here was the pitch, is that you got a fast-growing fitness chain that's buying up brands, aggressively expanding into retail centers where there's a lot of space for something like this to go to where people are hungry for communities, so they're going to want to go to these Club Pilates classes. It's going into L.A. fitness locations. even cruise lines they're signing deals with.

And then something changed, Sandmeet. What happened? Well, you know, they had a lot of interesting brands. It's almost like it was a business of a portfolio of fitness brands, and that was kind of their thing. What happened is the short report came out, kind of exposing the CEO for some past suspicious activity, stock boiler room activity that he was involved in,

also creating a toxic environment within the company. And also, something that happens a lot in fitness franchises is franchisees complaining that they misrepresented the amount of one investment to open up these gyms and also the profitability of those gems. And so a huge amount of franchisees, especially their smaller brands, weren't making money. And they also, the short report also claimed that some of the gym, the company was claiming that they hadn't closed any gyms. The short report claimed that, yeah, they had a lot of closed gyms. They were just buying them up onto their own balance sheet, and so it looked like they weren't closing gyms. So it was exposed. So I want to be clear that former CEO Anthony Geisler denies this.

However, this was reported in the New York Post and also in a Bloomberg Businessweek story, which is that in a mediation session with a franchisee, Geisler allegedly threatened to decapitate. the franchisee over a disagreement, essentially saying that he would put their head on a spike. Send me, you wouldn't call that like a best practice, would you? Oh, no. You don't want to disenfranchise the franchisee because those are the people that are paying the royalties, opening up your businesses, and keeping your business going. You want to have a good relationship with those franchisees. And when a CEO is deemed to be a bully

to the franchisees. The franchisees are not going to take well to that. So, this has been a company you followed closely. You were excited about, then definitely cooled off on what was your sort of breakup point with exponential? When were you ready to hand in your subscription on that one? So in one of our services where we had recommended it, the team and I talked after the short report. We spent some time digesting it, and we just felt that the risk-reward on the company was not. The dark clouds over the CEO, and it's hard to trust. Ultimately, when we invest in stocks, we are almost giving our money to these executives to manage via their business. And we didn't trust that he was the right person to do that.

While the business model as a franchisor with royalties, high margin recurring royalties was nice, there was just too many dark clouds hanging over the company potential investigations, franchisees disenfranchised with possibly more lawsuits, and now it's under investigation. Too much hair on the stock to say, let's stick in and see how this plays out. While the gyms have not worked out, it's very difficult to invest in them. Is there anything fitness, health adjacent that you think is investable and attractive to stock investors? Fitness industry is a huge industry, and it impacts a lot of other businesses as well. And when you think of, when I think of investing, too, picks and shovels companies are always very attractive to play a trend or an industry.

And picks and shovels of the fitness industry is what we wear, shoes, apparel, what we wear to the gym, what we use, equipment to the gym. So, you know, Lou Lemon is one that I still like a lot. It's a very healthy business that's generating tons of cash. They actually, too, forayed into the connected fitness and digital fitness realm. And now they're out of that and they're focused on what makes their business strong. And, you know, they're delving into some shoes. So that's a great business. Nike is another one that's just tried and true.

They've had some recent struggles. but, you know, that's a, that's a classic brand that will be around for a very, very long time. They'll go through their ups and downs, but that's, you know, that's another one that's pretty solid. Both of which, on a little bit of a down swing, makes them more appealing to someone like me. Send me, Deo. Appreciate your time and your insight. Thanks for, thanks for checking out the gyms with me. Thanks, Ricky. As always, people on the program may own stocks mentioned, and The Motley Fool may have formal recommendations for or against, so don't buy or sell anything based solely on what you hear.

I'm Dylan Lewis. Thanks for listening. We'll be back tomorrow.