Today is a big day in drugs. It’s when the US Food and Drug Administration shuts down an emergency measure that allows pharmacies to sell copies of the most widely prescribed weight-loss injection. What happens afterwards is anyone’s guess.
As MainFT reported in April:
Millions of Americans must decide whether to give up on new weight-loss drugs or move to more expensive branded versions, after the US medical regulator in effect called time on the production of cheaper replicas.
While Novo Nordisk and Eli Lilly were unable to keep up with demand for their new blockbusters Wegovy and Zepbound, an unusually large market for “compounded” versions developed after the FDA medical regulator declared official shortages in 2022.
[ . . . ] In the past two years, patients have been able to buy compounded versions of Novo ingredient semaglutide and Lilly’s tirzepatide for as little as $199 a month. The US list price, charged to people without insurance, ranges from $1,000 to $1,300 for the branded drugs. But the FDA has now said the shortages are over.
Compounding in medicine is the age-old practice of altering a drug to match the individual needs of a patient. How the discipline has evolved in the US is, inevitably, by a combination of commercial expediency and regulatory arbitrage.
Two sections of the US Federal Food, Drug, and Cosmetic Act cover human drug compounding: Section 503A allows pharmacies to make compounds in small quantities for patients whose needs are not met by a standard formulation; and Section 503B permits pharmacies to outsource the manufacture of compounds that closely resemble drugs on the US shortage list.
To make a compound under 503A, the pharmacy has to be filling a prescription for a specific individual. Under 503B, a pharmacy or its outsourcer can compound drugs on spec. It’s a Section 503B order covering the bulk manufacture and sale of Nova’s semaglutide that has expired, with the grace period for manufacturers to switch off production due to expire today. A similar grace period controlling Lilly’s tirzepatide ended on April 22.
That’s a challenge for telehealth companies such as Hims & Hers Health, an NYSE-listed online pharmacy with a market cap of nearly $14bn. GLP-1
The US direct-to-consumer healthcare market is very crowded. Established chains like Walgreens and new entrants including Amazon have aimed for the middle ground, while start-ups like Nurx, Ro, Regenics, Keeps and Numan have been carving out niches by focusing on sexual health, hair loss and skincare. Morgan Stanley estimates a total addressable market of at least 100mn patients in the US alone.
Hims started out in 2017 by remotely prescribing treatments for hair loss and erectile dysfunction. By concentrating on problems people might be embarrassed to talk about in a doctor’s office, and that wouldn’t be covered by most insurance plans, Hims was able to recruit cash-paying customers on auto-repeating subscriptions at high mark-ups.
Hims’ move in May 2024 to start selling compounded weight-loss injections, a class of drugs known as GLP-1, really kicked things on.
Whereas Hims’ core customers pay $55 a month on average, it was charging $290 a month for a three-month GLP-1 subscription, or $165 a month if the patient signed up for a year. Weight loss treatments also attracted a different type of customer, which meant new opportunities to cross-sell.
The company’s Super Bowl LIX ad doesn’t go for subtlety:
Hims has 2.4mn subscribers and is growing the count by 30 to 40 per cent each year. The company this month posted a more than doubling of first-quarter revenue, to $586mn, and reported a 73 per cent gross margin.
The stock is a favourite among retail investors and is widely disliked by hedge funds. Nearly 20 per cent of its shares outstanding are on loan, according to S&P Global data. Volatility is, given those two competing camps, as you might expect:
In the background is a lot of litigation.
Actions brought by pharmacy trade groups that seek to block the FDA’s decision to Lily’s tirzepatide and Novo’s semaglutide from its shortage list have failed. The first of these defeats, in March, “has had a chilling effect on the compounding industry, leading to many players (eg, telehealth companies) ceasing operations,” says Morgan Stanley.
Meanwhile, Lilly has begun legal action against pharmacies and telehealth companies for allegedly making false claims about personalisation. Novo says it will step up legal action after today, having said in April it had filed 111 lawsuits across 32 states over what it calls “illegitimate, knockoff” drugs.
Hims shares soared in April after it and two rival telehealth pharmacies agreed non-exclusive deals with Novo to sell branded Wegovy through their platforms. The patient can buy branded Wegovy through NovoCare Pharmacy, Novo’s own direct-to-consumer site, while signing up for a Hims membership plan that offers access to online consultations, meal planners and the like.
It’s in effect a premium-priced off-ramp for patients who want to continue their existing treatment. Branded Wegovy costs at least $599 a month on Hims — a big jump from the old pricing, and a $100 premium to the dose price when buying direct from Novo. New and existing patients who can’t afford the high cost will be offered pills instead.
But Hims also plans to keep selling home-brew GLP-1 by offering doses that are not commercially available. Personalised dosing that reduces side effects will, it believes, allow its sales of compoundeds to pass Section 503A.
Prospective patients on the Hims website now take a multiple-choice questionnaire that begins with an explainer of why custom doses might be good for them:
Then they’re asked in general terms about possible side effects:
And are offered a diagnosis before they’ve even given an email address:
A patient who qualifies for a custom dose can be offered compounded GLP-1 at estimated gross margin of around 80 per cent. Patients who’ll be fine with the standard dose will be directed towards the branded drugs, at a gross margin to Hims of approximately 15 per cent.
Between them, Novo and Lily have signed up most of the big US telehealth companies as direct-to-consumer sales partners over the past few months. What that shouldn’t suggest is an end of hostilities over customised compounds.
David Moore, Novo’s executive vice-president or US Operations, said on a May 7 conference call that its collaborations with telehealth providers were to protect patients:
The reason for this is increasingly, people living with obesity are seeking health care through telehealth companies, that we need to be where patients are and to have an offering for the real Wegovy. These collaborations allow a link to NovoCare Pharmacy, where the real Wegovy can be available through these telehealth companies.
As we’ve mentioned, on May 22, we fully expect the FDA to enforce the law. And at that time, we will continue to fight against unlawful compounding, for example, mass personalization.
Ten days later, the Novo board told CEO Lars Fruergaard Jørgensen to step down.
The ousting doesn’t appear to have altered Novo’s strategy. Goldman Sachs, after meeting with Novo Foundation CEO Mads Krogsgaard Thomsen and its head of investor relations, Jacob Martin Wiborg Rode, wrote in a note published yesterday:
Personalisation accounts for just under half of the current compounded market. With the passing of the FDA shortage list deadline, Novo believes the risk/ reward has changed for compounding pharmacies that engage in mass or bulk personalisation, as now Novo can litigate with a view to recovering lost profits. In terms of the compounding impact [ . . . ] there are around 1m patients on compounded product (c.1/3 of the market), while compounding impacts c.5% of the diabetes care market (larger volume market, so still a meaningful number). The challenge for Novo is conversion of patients from compounded product to branded product, which could take some time, which includes reinstating [direct-to-consumer] campaigns highlighting that branded product is the only safe product and also by broadening out the cash channel through NovoCare and through additional partnerships.
Legal action on top of falling GLP-1 sales could serve a double-whammy for Telemedicine companies, but estimating Hims’ direct exposure is not easy. The company doesn’t break down the sales mix it projects to reach a 2025 target of $725mn from weight-loss treatments, and has declined to say how many of its GLP-1 patients are moving to custom doses.
To be legal under Section 503A, personalised drug compounding must be patient-specific based on their prescription. Andrew Dudum, Hims’ founding chair and CEO, said on a conference call this month that he’s confident of meeting the requirement:
We aim in all of our adventures to be extremely blue chip and play by the rules. And with regard to compounding and the personalization exemption, the rules are extremely straightforward and clear. So we continue to expect the personalized semaglutide to exist on the platform. That’s something we’ve shared as of last fall and something we shared early with Novo. But we also believe that the necessity of that should be limited to when providers feel it is clinically needed. And so the ability to do hyper personalization for side effects mitigation, whether it’s agnogia, vomiting, muscle loss, et cetera, is something that we continue to allow on the platform to continue to give providers that flexibility and the tools to make that type of personalization.
But generally we think of it as relatively additive to the ecosystem because for the most part, these are patients that frankly just cannot use commercial doses or a lot of them have actually tried the commercial dose and then have turned off due to the high side effect rate. And so we think it’s really additive as part of the mix.
But relations with Novo seem to still need some work. Any agreement cap sales of personalised doses sold would be “something we’re definitely not comfortable with”, Dudum added:
We believe that personalized semaglutide is both clinically necessary for some patients because of the side effects that are very widespread and well known. [ . . . ]
I think there’s an alignment that both the regulation allows for it and we believe there’s a need, whether or not there’s total agreement with regard to how much of that should be available to what types of consumers. Will our organizations ever align on that perfectly? Probably not.
One irony is that, at least until cheaper GLP-1 generics arrive over the next few years, Novo and Lily may not stand to benefit much from shutting down telehealth companies they say are exploiting the custom-drug loophole. Morgan Stanley says:
[B]ased on our conversations with physicians, we believe that the majority of patients on compounded GLP-1’s have either no insurance coverage or high co-pays (>$300/month). Therefore, we believe that only a portion of patients losing access to compounded GLP-1’s may switch to branded GLP-1’s.
…which puts all the short-term focus on Hims, with its fervent retail boosters and its crowd of short sellers who are praying for any setback in the courts or with its partner relationships. One cease-and-desist order might be all it’d take for things to get very heavy, very quickly.
Further reading:
— US patients lose access to cheaper weight-loss drugs as market for replicas winds down (FT)
— Is there an obesity drugs bubble? (FT)
