Competitive dynamics matter, and often sooner than investors might expect. Eli Lilly's (NYSE: LLY) chief executive officer recently disclosed that the big pharma is positioned to cut off a potential driver of revenue growth for Hims & Hers Health(NYSE: HIMS), and that it will chalk up some growth itself along the way.
Here's what's happening, and how it affects the case for an investment in each company.
This blocker to revenue growth is receding fast
Weight loss drugs are wildly popular these days. Eli Lilly's anti-obesity drug Zepbound brought in more than $1.2 billion in sales during the second quarter alone, and it hasn't even been on the market for a whole year yet. There's also ongoing research and development (R&D) work, and a handful of clinical trials attempting to increase the set of conditions that Zepbound is approved to treat.
As you may have guessed, Lilly needed to make a huge number of doses of the medicine to bring in that much revenue. In fact, from the drug's launch up until roughly now, the company couldn't manufacture enough to keep up with demand. Per the Food and Drug Administration (FDA), Zepbound is in a state of shortage, requiring a halt of new patient onboarding in the name of providing enough medication for existing patients.
Since billions of dollars of capital expenditures are underway for manufacturing facilities across the globe, that shortage was always going to be temporary, even in the face of serious and accelerating demand. Surprisingly, Eli Lilly's supply capacity is, according to CEO David Ricks, on the cusp of being sufficient for the drug to be removed from the FDA's formal shortage list. That's good news for Lilly's shareholders, because it implies that the therapy's revenue growth will no longer be constrained by an inability to serve up enough doses to meet demand.
For Hims & Hers, however, that's bad news.
As part of its wellness-focused direct-to-consumer business model, Hims & Hers sells both brand-name and compounded formulations of popular weight loss therapies, like Novo Nordisk's (NYSE: NVO) Wegovy.
Compounded drugs are prepared by compounding pharmacies, which prepare different formulations of medicines for patients who can't take an FDA-approved drug in its original form, due to either allergies to specific ingredients or other issues. In cases of a shortage of an FDA-approved formulation, compounding pharmacies can also step in and manufacture copies, so long as they abide by federal rules. Importantly, compounded formulations are not themselves considered to be FDA-approved, nor does the FDA have the oversight to guarantee quality and safety standards.
Hims & Hers doesn't actually sell a compounded version of Zepbound. But given such a large market for weight loss therapies, and the existence of a shortage, it's clear that doing so would have been a major boon to its revenue. That possibility may soon be cut off.
If the company decides to try to move forward with compounding Zepbound anyway, it may encounter another headwind. As they're weakly regulated, compounding pharmacies and compounded drugs have a less-than-sterling reputation among the public. Once consumers can access brand-name Zepbound, which is essentially backed by a regulatory guarantee of quality and safety, their incentive to buy from Hims & Hers will be reduced.
Another competitor could soon pile on
As you probably noticed, Eli Lilly's ramp-up of Zepbound manufacturing doesn't actually harm Hims & Hers's top line today, only one of the latter company's avenues for future growth. The case with Novo Nordisk is different.
At the moment, Novo Nordisk's weight loss drug Wegovy is still in an official state of shortage. Much like Eli Lilly, it's throwing down billions of dollars and working overtime to fix that. Sooner or later it will produce enough to match demand, and at that point its revenue will grow even more than it already has. And that could spell the end of Hims & Hers's ability to profitably sell a compounded version of Wegovy.
Once Novo Nordisk's newest manufacturing investments come to fruition, the impact on Hims & Hers sales will likely be fairly quick and also quite sharp. While it's true that patients may have a harder time getting a prescription for Wegovy, the prospect of having better insurance coverage for the costs of treatment, as well as a guarantee of a high-quality product, will probably draw them to the FDA-approved option and away from the compounded option.
In a nutshell, Eli Lilly and Novo Nordisk are worth buying because their rising levels of output will drive shareholder value. Hims & Hers isn't necessarily a bad investment, but -- at least in the weight loss market -- it looks to be a player on the downswing.
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Alex Carchidi has no position in any of the stocks mentioned. The Motley Fool recommends Novo Nordisk. The Motley Fool has a disclosure policy.
