Bloomberg — The emails arrive with a wink-wink appeal to young men’s anxieties over modern lust.
“Don’t leave it hanging …””Put a smile on your face (and your partner’s) …”
Day after day pitches hit the inbox, courtesy of millennial telehealth company Hims & Hers Health Inc.
Only a year ago, the investing public was in thrall as this young business was shepherded to Wall Street. Never mind that it’s never made a profit selling drugs for hair loss and erectile dysfunction. Hims & Hers itself was popping the market equivalent of a 50mg Viagra: To reach the New York Stock Exchange, this little fledgling was merging with a SPAC, one of those blank-check companies that, until recently, were all the rage.
This particular special purpose acquisition company was backed by some of the smart money: Oaktree Capital Management, the $158 billion investment firm run by Wall Street legend Howard Marks. It also had glamour. Alex Rodriguez and Jennifer Lopez, the now defunct superstar couple, were brought in to promote it all.
It was supposed to be all up from there. Hims & Hers would make a fortune selling generic Viagra to men in their 20s and 30s. There was more: generic Prozac; minoxidil, the active ingredient in Rogaine; anxiety-reducing beta blockers; OMG Ring vibrators; Tidal Wave Moisturizer and birth control pills for women. Hims & Hers would remake health and wellness with an app that connects patient-customers to doctors and then delivers everything right to the door.
But the Little Blue SPAC, like so many others, hasn’t gone quite as planned, at least for anyone who bought the story. It’s hard to see many winners, save for a handful of insiders who’ve pulled the strings from the start — and have walked off with millions.
Here are the numbers: Hims & Hers went public at $10, the typical price for SPACs, which are basically shells in search of real businesses. It soon raced to $25. Then, it promptly tanked. Down, down, down it’s gone. In mid December, the price fell all the way to $5.47 — a 78% hit for those who bought at the peak.
What went wrong? The story thus far is a tale for the times, a meme-era fantasy of sex, greed and pharmaceuticals spun through the Wall Street hype machine.
Several rivals cropped up, squeezing money from the game. The direct-to-consumer health services market has seen stiff competition, delaying profitability for many platforms, according to analysts who cover the industry.
Some experts have expressed concern about the viability of Hims & Hers’ strategy for growing internationally and expanding into new markets, such as primary care and mental health.
While Hims & Hers has proven it can deliver in the direct-to-consumer markets for sexual health and hair loss, the company does not have the clinical expertise or technological infrastructure to transform U.S. healthcare at scale, Piper Sandler analyst Sean Wieland told investors in a research note after the company reported third-quarter earnings.
It’s tempting to think that a SPAC’d out ED-pill startup is just some crazy outlier — that Hims & Hers merits no more than a footnote in the wider story of today’s frothy financial markets. But that’s not the case at all. Quite the opposite.
Once a dark Wall Street secret, SPACs emerged during the pandemic like a brood of cicadas. In 2020, 248 of them raised more than $83 billion. So far in 2021, 605 more have raised about $161 billion. All told, that’s far more than in the past 10 years combined.
Here’s the big but: Today, roughly 60% of the SPACs that completed mergers are trading below their $10 initial price, according to data compiled by Bloomberg. Some prominent ones, like betting powerhouse DraftKings Inc., have fulfilled dreams and shot to the moon. Others, like Lordstown Motors Corp., have not only fallen hard but also drawn scrutiny from federal authorities.
“2021 has been like running a steeple chase while somebody throws grenades at you,” says Kristi Marvin, a former investment banker who compiles data on SPACs.
Little wonder, then, that the U.S. Securities and Exchange Commission is looking to tighten up. It’s even asking questions about a SPAC involving former President Donald Trump, one of the many prominent names who’ve tried to capitalize on the craze. SEC Chairman Gary Gensler rang alarm bells again recently. “Currently, I believe the investing public may not be getting like protections between traditional IPOs and SPACs,” he told an industry group on Dec. 9.
Tracing the arc of SPAC-mania — and offering a glimpse at what’s to come — is Hims & Hers. The company ranks among the biggest losers: it’s fared worse than eight out of every 10 businesses that merged with a blank-check firm this year through November, according to data on U.S. SPACs tracked by Bloomberg.
Selling Wellness
Provocative. Authentic. Irreverent. Not words typically associated with healthcare. But they’re ones Andrew Dudum uses to characterize the company he founded in 2016 in his late twenties. He dreamed up Hims (Hers arrived later) while working at Atomic Labs, a San Francisco startup incubator partly funded by Peter Thiel. The basic idea: sell young men wellness the way, say, Nike sells them sneakers.
“How I see Hims & Hers is a vehicle for healthcare innovation,” Dudum said last year during an interview on the Habits and Hustle podcast. “It’s just a brand. Hims & Hers is a brand for health and wellness and underneath that brand can live dozens of different businesses and dozens of different offerings and services that can help people live their best life.”
The youngest millennials were still in diapers when Viagra hit the U.S. in 1998. Back then, Pfizer Inc. enlisted Bob Dole, then 74, to star in an TV commercial about the pill that changed the way people have sex, or at least how they talk about it.
“You know, it’s a little embarrassing to talk about ED,” Dole said in the ad. “But it’s so important to millions of men and their partners.”
While Dudum was working to build new companies at Atomic, the U.S. patent on Viagra was finally about to expire. Enter sildenafil, a generic version.
The play was a no-brainer. One dose of Viagra sells for about $70. Sildenafil instead goes for $4 on the Hims website. The trick would be to expand the market beyond those attractive, older couples exchanging knowing looks in early-aughts TV ads.
What followed was a heady blitz of marketing. Suddenly, a cartoon Snoop Dogg was exhaling a cloud of smoke on YouTube, amid a psychedelic swirl of eggplants, assuring young men that “ED Can Be Optional.” Billboards of firm, phallic succulents lined subway stations in New York and the men’s rooms at Oracle Park in San Francisco. Forget prescription bottles — Hims would mail guys sildenafil in a sleek little packet that they could stick in their wallet next to a condom.
Oaktree was sold on the idea and quickly selling it to others. Hims & Hers was “modernizing the delivery and accessibility of healthcare and wellness solutions,” Patrick McCaney, who runs Oaktree’s SPAC business, said in a press release announcing the deal.
“We think this is just the beginning,” McCaney said.
Pandemic Boom
The timing seemed exquisite. The pandemic was opening new doors for telemedicine. Everyone was buying stuff online. Sales of ED drugs, antidepressants, hair-loss treatments and anti-anxiety meds were soaring — great news for Hims & Hers.
On top of all that, there was the new math of SPACs. In 2018, pre-Covid, Wired reported a new round of funding had valued Hims at $200 million. About two years later, it hit the Big Board at a valuation of $1.6 billion — an increase of 700%.
The company had backing from venture capitalists known to fund some of the hottest tech startups. Redpoint Ventures, a veteran Silicon Valley VC, Maverick Capital and Thrive Capital, run by Josh Kushner, were all early investors.
Flush from its listing, Hims & Hers poured money into marketing and an aggressive expansion. It opened its own pharmacy, started a mental health service and acquired a tele-dermatology business, Apostrophe.
As part of the SPAC deal, A-Rod and JLo, early investors and “brand ambassadors,” got warrants giving them the right to buy Hims & Hers stock. They stood to make millions.
Dudum should do okay for himself too. He was paid a salary of more than $500,000 in 2020. He owns about 10% of the company and the majority of the voting rights. That arrangement means Hims & Hers is exempt from certain Big Board corporate-governance requirements, such as the company having a compensation committee that is made up entirely of independent directors.
By the middle of this year, the retail trading frenzy that had propped up so many meme-stocks as well as SPAC shares had begun to fade. Competition has been heating up in the healthcare space: Another tele-med startup, Roman, is growing in the business of ED, premature ejaculation, hair loss and more, while Amazon is pushing into the online pharmacy space.
Most of the analysts covering Hims & Hers have lowered their price targets on the stock. Wieland, of Piper Sandler, had a target of $20 in February; it’s now at $12.
Even with the stock price hovering near record lows, Dudum has no regrets. He said in an email that the valuation was fair and Hims & Hers is in great shape. “The fundamentals of our business are just as strong — if not stronger — today than they were 12 months ago,” he said. “That’s why I personally made a big investment to purchase new shares this week.” He purchased $500,000 in Hims & Hers stock on Dec. 13, according to a regulatory filing.
By the end of the third quarter, at least some of the smart money had bailed. Hedge funds including Steve Cohen’s Point72 Asset Management and Maverick Capital were out. Deutsche Bank, which advised Oaktree on the transaction, sold its remaining Hims & Hers stock.
Oaktree, as the SPAC’s so-called sponsor, will likely benefit regardless. The investors who bring the SPAC public typically get shares for free, or close to it. Even with a large drop in price, the firm should be able to walk away with plenty of money.
Oaktree declined to comment.
Glowing Reviews
Where Hims & Hers goes from here is anyone’s guess. It has turned to even more ambassadors such as Miley Cyrus and Rob “Gronk” Gronkowski, the Tampa Bay Buccaneers tight end in the NFL. Short term, the challenges to the company’s stock price are daunting.
Never mind. Hims & Hers says as many as two out of five men under 40 can sometimes have trouble getting erections. Urologists tend to agree. If young men are willing to buy, Hims & Hers has a lot to sell.
Reviews posted on the Hims & Hers website are predictably enthusiastic.
“Pure rocket fuel... for men!” says James.
“Having more sex than I can remember. Amazing,” says McKay.
Shareholders, of course, have less to cheer about. But SPAC fans say there’s no reason to worry — that the hits will outnumber the misses. And yet an estimated 505 SPACs are out there right now still prowling for businesses to buy, according to data compiled by Bloomberg. Typically, SPACs have 24 months to make an acquisition or they have to liquidate and give investors their money back. In the coming rush, some bad deals are bound to get done.
“I don’t see how 500-plus SPACs are able to get deals done in the next year or two,” says Jeremy Swan, a lawyer with CohnReznick who specializes in mergers and acquisitions. “People are trying to look at what they can do to stand out.”
Of course, a lot will also depend on all those investors who’ve piled into meme stocks, cryptocurrencies and SPACs during the great pandemic market rally. Earlier this year, Cassius Cuvee, a hip-hop artist and champagne enthusiast from Oakland, California, was so smitten by SPACs that he wrote “SPAC Dream.” When the market started to cool a few months later, he followed it up with a song titled “SPACs Just Chillin.” Part of the lyrics:
SPACS are at NAV again
Does it look like I’m panicking?
Some guys froze
And shook up like a mannequin
But me? I ain’t abandon ‘em
I been had a plan for them...
I texted Cuvee in December about what he’s thinking now. Yes, he told me, he still owns a few SPACs, including a big winner, electric carmaker Lucid. But he’s mostly moved on to his next big thing. He couldn’t talk for long — he was wrapped up in Miami, attending an Algorand conference on blockchain and cryptocurrencies. He has another music video coming out, this one about nonfungible tokens, or NFTs, those blockchain-based collectibles that have upended the art and crypto worlds.
“I can see the future!” he texted.
