How men’s health start-ups are turning erectile dysfunction and hair loss treatment into a booming business – CNBC


A marketing campaign from Hims

A screenshot from Hims’ website

To try and take the stigma out of erectile dysfunction, men’s health start-up Hims turned to rapper Snoop Dogg to deliver the message that, “sexual performance issues are more common than you think.”

The animated video is just one of the many commercials Hims runs across TV, radio and the web, promoting its home-delivery treatments for ED and hair loss, two subjects that men typically prefer to avoid talking about publicly. The company also showcases subway ads, with images of an erect cactus and some with the tagline, “thanks to science, ED can be optional.”

Hims is one of the biggest players in a new trend coming out of Silicon Valley, blending traditional e-commerce, subscription services and health care so customers can get the products they need while avoiding undesirable trips to see a doctor.

Along with Roman, Curology, Pill Club and others, Hims is fueling the kind of growth that’s unfamiliar to investors in the medical field, who are accustomed to dealing with regulatory hurdles and burdensome insurance issues. For example, One Medical, the tech-friendly primary care chain that opened in 2007, just recently hired banks for a potential IPO, and digital health company Livongo went public this year, around a decade after it was founded.

Hims is on a much different trajectory, at least for now. Just two years after launching, Hims has reached $100 million in annual subscription revenue and is growing so fast that it expects to reach $250 million in recurring revenue by the end of 2019, according to a recent sales pitch to investors that was viewed by CNBC. The average monthly order size is $45 and, at a time when investors are hyper-focused on profitability, Hims says in the presentation that it has a 60% gross margin, or the percentage of revenue left after subtracting the cost of goods sold.

To date, consumers have shown they will pay out of pocket, meaning Hims doesn’t have to deal with insurers, who may or may not be willing to foot the bill.

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Hims, which more recently jumped into women’s health with the Hers brand, is using its growth figures to try and raise a fresh $200 million in cash, according to the presentation, after reeling in $100 million earlier this year at a valuation of $1 billion.

There’s nothing new about buying health products online, but investors have been leery when it comes to this particular corner of the market because of the potential liability of serving consumers directly. Hims drew criticism earlier this year for pitching off-label, or unintended, uses of medications that could be dangerous. Birth control company Nurx was investigated by the New York Times for cutting corners in its quest for growth.

“There are a lot of questions that still need to be answered,” said Greg Yap, a health-care focused investor at Menlo Ventures who has looked at the space but hasn’t made any bets. “Time will tell whether companies can branch out beyond their initial product to build a broader relationship with that customer.”

This emerging class of start-ups is trying to avoid pitfalls of the past while taking advantage of the regulatory progress. Hims and Roman request that consumers fill out a survey about their health, which their doctors review, before they prescribe a drug like Sildenafil for ED. Patients can ask any followup questions to a physician by text message, an approach that’s popular with younger consumers and is increasingly gaining approval from regulators on a state-by-state basis.

Nathaniel Lacktman, an attorney at Foley & Lardner who works with virtual medicine companies, says that in addition to a friendlier regulatory environment, companies are getting smarter about making sure that remote treatment is appropriate for the specific conditions they’re targeting, so they’re not perceived as a “pill mill.”

Curology, which specializes in treating teens with acne, offers a three-month intensive training to doctors and nurses, so they can prescribe skincare medications and provide advice on everything from birth control to diet. Nurx and Pill Club, another birth control company, offer access to doctors and nurses, who perform an online medical examination before prescribing treatments, and to pharmacists, who are available to answer questions about the medication.

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Curology charges $20 a month for its suite of services, which includes one-on-one messaging with a provider and a bottle of cleanser. Hims subscriptions start at about $20 a month, although prices vary. For example, a hair-loss kit with pills, shampoo, topical treatment and vitamins costs $44, while for erectile dysfunction, a monthly supply of Sildenafil, the active ingredient in Viagra, costs $30 a month. That’s more expensive than if users were to buy at many drug stores through online discount programs, but consumers have proven willing to pay for brand association and convenience.

Making the financials work

Hims customers can cancel anytime, a persistent risk with subscription products. According to the investor presentation, Hims has a retention rate of 50% over 18 months, which industry experts say is high for these types of treatments. The company also says its customer acquisition costs have stabilized over time, referring to the expenses behind all of those billboards, online ads and commercials, including retaining Snoop Dogg.

A Hims spokesperson declined to comment for this story.

Curology CEO David Lortscher, who’s also a dermatologist, said the business model is working.

“A lot of health-care folks thought this would never be a financially healthy business,” said Lortscher, whose company is treating patients in 35 states. “But we did the back-of-the-envelope math and saw an opportunity for consumers to access custom skincare at an affordable price point.”

The pressure for financial viability has become all the more intense of late given the near-collapse of WeWork and the challenges that cash-burning companies Uber and Lyft have had on the public markets since debuting earlier this year. Tech investors are still thirsty for growth, but not at the expense of healthy margins.

Adam Neumann, co-founder and chief executive officer of WeWork, in April 2018.

Jackal Pan | Visual China Group | Getty Images

Hims left some important details out of the presentation that was viewed by CNBC. For example, it didn’t break down the metrics for each of its products or include the length of the critical payback period, which is the amount of time it takes for a user to become profitable after factoring in the costs to turn that person into a paying customer.

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Still, medical professionals say that Hims and others in the space have turned a corner by proving that they can establish relationships with doctors and make sure that patients are getting sound advice and appropriate treatment.

Matthew Wetschler, a physician who is starting a direct-to-consumer health business, said the key is delivering a product that consumers will use for extended periods of time while also ensuring that the doctors who work with virtual businesses have enough autonomy to choose not to prescribe a drug, or to spend more time with a patient when needed.

“These companies figured out early on that when you find a problem that requires a pill for months, there’s a lifetime value in each new customer and it changes the economics of the business,” said Wetschler, who has worked with telemedicine companies like HeyDoctor.

Roxana Daneshjou, a dermatologist in Silicon Valley, said the emerging players in her space are going after a real need because patients can wait months for a traditional appointment.

“There are lots of things that can be done and don’t require an in-person visit,” said Daneshjou, a resident at Stanford Medicine. Virtual businesses can work “as long as the patient is able to contact someone if there is an issue, and the physicians doing the consulting have the appropriate specialty for what is being done,” she said

Daneshjou said that many of her fellow physicians are moving in the direction of direct-to-consumer health.

“Medicine is a bit of a conservative field and we have to make sure it’s not a wild, wild west,” she said. “The opportunity exists for a hybrid model where there are certain things that can be assessed virtually right from the beginning.”

WATCH: Start-up delivers Viagra to your door



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