Is Hims & Hers Stock in Trouble?

Hims & Hers Health (NYSE: HIMS) is a telehealth company that offers personalized solutions for its customers. And demand has been robust, with subscriptions for its products rising significantly in recent years.

While telehealth has for the most part not been a hot place to invest in, Hims & Hers Health has been the exception to that. Last year, its share price jumped by 172%. And this year, shares have already more than doubled in value (returns as of June 27).

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Recently, however, its share price took a hit amid some troubling news involving Novo Nordisk (NYSE: NVO), the healthcare company behind popular diabetes and weight loss drugs Ozempic and Wegovy. And it raised questions about Hims & Hers' business practices.

Here's what you need to know about these recent developments and whether you should be thinking twice about buying Hims & Hers stock.

Image source: Getty Images.

A partnership that didn't last all that long

In April, the two companies announced they would collaborate to make it easier for Americans to gain access to effective obesity treatments. Through the Hims & Hers platform, people would be able to obtain Wegovy for $599 per month.

And it seemed as if it would be the start of a promising long-term partnership. Hims & Hers CEO Andrew Dudum said, "We share a vision of what consumer-centered healthcare looks like, and this is just the first step toward delivering that future."

It sounded like a great way for Hims & Hers Health to bring popular drugs onto its platform. And for Novo Nordisk, it would be an opportune way to reach more customers.

Less than two months later, the partnership is over. Novo Nordisk expressed concerns over Hims & Hers marketing practices, which it referred to as "deceptive" and that it "failed to adhere to the law which prohibits mass sales of compounded drugs."

The controversy over compounding

Hims & Hers specializes in selling compounded drugs, which are copies of FDA-approved drugs using adjusted (and unapproved) formulas. They are often made by foreign suppliers and occasionally contain active ingredients that may not be safe. Compounding is used for various appropriate reasons (like certain patients needing a modified version to account for a specific issue) as well as when a drug is in short supply. Among drugmakers, it is considered a controversial practice. Both Wegovy and Ozempic were OK'd for compounding for a time to deal with supply shortages, but that is no longer an issue.

Hims & Hers is justifying the continued use of compounded drugs because it says it offers personalized compounded versions that it says are medically necessary. Novo Nordisk doesn't agree with this practice. Novo Nordisk may have expected that with the partnership, Hims & Hers wouldn't offer compounded versions of its drugs anymore and would instead simply offer the real drugs.

Should Hims & Hers investors be worried?

Hims & Hers has been a growth beast over the years. It went from just $272 million in revenue in 2021 to $1.8 billion in sales over the trailing 12 months. It has also gone from being in the red financially to now generating significant profits; earnings over the past four quarters have totaled $164 million -- more than 9% of its top line.

The business has evolved by offering a wider range of products to its customers, including obesity treatments. But in doing so, it has been pushing the envelope with compounded drugs, and the danger is that patients could experience side effects and consequences that may otherwise not happen with FDA-approved drugs.

My concern is that the business could open itself up to potential legal issues down the road. It is winning over customers by offering low-cost, personalized solutions, but the way it's going about that could lead to significant risk in the future. Plus, if the company ends up having to stop selling compounded drugs, that could thwart its growth prospects.

Hims & Hers has done incredibly well in recent years. But with question marks about its future growth, the potential legal risk ahead, and a high valuation (it trades at more than 70 times its trailing earnings), this isn't a stock I would rush to buy right now.

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David Jagielski has positions in Novo Nordisk. The Motley Fool has positions in and recommends Hims & Hers Health. The Motley Fool recommends Novo Nordisk. The Motley Fool has a disclosure policy.