Hims & Hers Health Is Looking to Cash In on This Novo Nordisk Blunder

Key Points

• Hims & Hers Health is entering the Canadian market.

• The company will offer a generic version of semaglutide in the country after Novo Nordisk let its patent expire there.

• 10 stocks we like better than Hims & Hers Health ›

Hims & Hers Health (NYSE: HIMS) is a top telehealth stock that has been growing its business rapidly in recent years. And one of the ways it has done that is by expanding into new markets and reaching a broader range of customers.

Recently, it's looking to take advantage of an opportunity that has opened up as a result of a costly mistake that drugmaker Novo Nordisk (NYSE: NVO) has made. After failing to pay a maintenance fee, the patent on semaglutide will run out in Canada as early as next year. And Hims & Hers is looking to capitalize on that.

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Hims & Hers to sell generic version of semaglutide in Canada

Hims & Hers Health partnered with Novo Nordisk earlier this year, only for that to unravel shortly afterward due to controversial practices around the sale of compounded drugs. These drugs are knockoff versions of FDA-approved drugs that can be sold when there is a shortage.

But Hims & Hers won't have to rely on compounded drugs in one market: Canada. That's because Novo Nordisk is losing patent protection there after the healthcare company failed to pay a maintenance fee that would have allowed the patent on semaglutide (the active ingredient in the weight-loss drugs Wegovy and Ozempic) to remain in effect.

This will open up the market to generic drugs, which are true copies of the original, without the need for compounded versions. Hims & Hers plans to expand into Canada next year, which is when the patent will expire on semaglutide, and it will sell a generic version of the treatment.

In the U.S., Novo has patent protection on semaglutide until 2032.

It's a good opportunity for Hims & Hers, but not a massive one

Selling generic drugs is a more sustainable strategy for Hims & Hers than relying on compounded drugs, but it's also not a highly lucrative one. There will be plenty of competition, which is why drugmakers normally go to great lengths to protect their patents to ensure they don't lose market share and can keep their prices high.

Last year, the semaglutide market in Canada was worth around $1 billion. Not paying a maintenance fee of a few hundred dollars could prove to be a costly mistake for Novo Nordisk. Even if it's not a huge market for the company, it effectively opens up the door to much more competition and will result in lower sales.

The question is how much of a catalyst this may prove to be for Hims & Hers, whose sales last year totaled a little less than $1.5 billion. It will get a slice of the semaglutide market, but how much that will add to its top line will come down to how many Canadian customers it can win over.

Should you invest in Hims & Hers Health stock today?

Hims & Hers stock has doubled in value this year, and that has pushed its valuation up to around $11 billion. While it has done well, it's now trading at a fairly high forward price-to-earnings multiple of 79 (based on analyst estimates), which is extremely high when you consider the S&P 500 average is only 24.

Despite its impressive growth in recent years, Hims & Hers Health isn't a stock that I would rush out to buy right now. At such a high valuation, a lot of future growth is already priced in, expectations are high, and that leaves no margin of safety should the business underperform in the future. This is a stock that's safer to put on a watch list than in your portfolio.

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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.