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The Big Business of Expired Pharmaceutical Patents

How Hims went from a $7m funding round to $1.1B valuation in under 2 years

9 Minute Read

In the summer of 2016, Andrew Dudum learned that the patent on one of the most profitable drugs in history was set to expire the following year. At the same time, many states were loosening telemedicine laws, allowing doctors to prescribe pharmaceuticals online.

By the end of 2017, the telehealth sector would account for $21B in revenue. The market is expected to grow to more than $93B by 2026. To Dudum, those changes signaled blockbuster potential.

Dudum — best known for founding Atomic, a startup incubator backed by tech titans Peter Thiel and Marc Andreessen — had his concept ready 14 months later. In November 2017, he launched the direct-to-consumer men’s health business, Hims, to sell prescription erectile dysfunction pharmaceuticals online.

There was every reason to see stars. Viagra did $1.6B global sales in 2016. If Hims could capture just 1% of that business with a cheaper online generic version, he could make $16m a year. He also saw opportunity in the men’s skin care market, which grew 11% in 2017, and the men’s hair-loss market, which did $3.6B in sales in 2016 in the US alone. 

Dudum saw Hims as a “lifestyle brand” that could sell disparate drugs by establishing itself as a go-to source of medical advice for men.

[If you’re interested in the next drugs to come off patent (through 2021), we put together this handy list.]KEY TAKEAWAYS

Patent expirations and loosened telemedicine laws have accelerated the online generic medicine business 

The telehealth market is expected to grow to more than $93B by 2026

Women’s health products are an especially interesting space for innovation

01 How Hims Acquires Customers

After realizing the potential of a generic ED drug and a few other product verticals, Dudum focused on two key ways Hims would go after consumers. 

a) Branding

Erectile dysfunction affects nearly 1 in 4 men under 40, yet there’s still significant stigma around it. With help from Gin Lane, a popular digital ad agency, Hims has helped reduce the stigma around ED by shining a spotlight on its prevalence, even among young men. 

Hims’ aim: to be the brand men turn to when they have an embarrassing medical issue and they’re not sure who to ask for help.  

“The only person men really talk to is like the incognito Google browser at 2 am when we’re scared about something and we look it up,” Dudum told me. “With Hims, we really intentionally communicate this idea of like, statistically we’re all worried about it. We all are suffering from it. It’s actually quite normal.”

To launch the Hims brand, Dudum partnered with Gin Lane in fall 2017. The firm has helped more than a dozen startups get to market.

Gin Lane created an Instagram-friendly brand featuring smiling male models and cheeky images of cactuses and eggplants. 

Gin Lane + Hims branding

b) Medical Education Through Optimized Blog Content 

Hims focuses on answering men’s medical questions online — specifically, capturing Google search traffic with the help of high-ranking organic blog posts.

Behind the numbers: Each month, there are around 70k searches related to the keywords “erectile dysfunction viagra,” for which Hims ranks #1. One Hims blog post titled, “The Average Penis and Erection Size: Real Data” receives over 27k organic hits a month. 

According to Ahrefs data, there are at least 200 articles on the forhims.com domain that rank #1 for different medical keywords. Additionally, there are over 8m searches a month related to various medical keywords for which Hims ranks in the top 100 results, often in the top 10. The below chart illustrates the number of domains that have pointed to Hims’ website since late 2017. These referring domains help increase Hims rankings on Google. 

Hims accumulated more than 80,000 incoming links, or backlinks, in its first month, 40,000 of which came from the website cssdsgn.com, a site that compiles visually appealing web designs. The rest were driven by its initial splash in major tech outlets like Business InsiderTechCrunch, and Fast Company. For reference, Hims’ closest competitor, Ro, has about 9,000 backlinks. (Hims currently has about 75,000.)

Maintaining search traffic after launch is difficult. Hims accumulated nearly 40,000 referring pages in a 5-day period after launch. Then, the company lost all of those pages and had to begin implementing its organic growth strategy.

To lead growth marketing efforts, Dudum hired Chris Hiestand, the former head of integrated marketing at NerdWallet. NerdWallet grew from $0 to more than $100m in revenue by focusing on organic search, and Hiestand has been applying the same principles he used there since he joined Hims in May 2017. 

One of those strategies is to ensure Hims’ paid marketing supports its organic content strategy. Through a combination of sponsored blog posts, sponsored podcasts, and a partnership with an affiliate marketing company, Hims essentially pays for backlinks to increase rankings on its wealth of blog content.

Podcast partnerships are key to Hims’ high organic rankings. The top referring domain is radiopublic.com, a podcasting platform that hosts 690 backlinks to the forhims.com domain. 

Backlinks are critical, but continuously cranking out high-quality content is even more important. Dudum hired a team of more than 10 writers to produce hundreds of SEO-driven articles, ranging from “The Best Candles for your Bachelor Pad” to “Erectile Dysfunction and Diabetes: What’s The Link?” 

Collectively, these articles receive millions of page views a month, he says. All medical content is vetted by Hims’s medical advisory board, which is comprised of licensed physicians. “So, real heads of urology and real heads of dermatology across the country are actually publishing these articles” Dudum says. 

How important is top-ranking content to the company? Dudum claims half of all people who end up buying something originate from a blog post. Hims’ website receives over 460k organic hits a month, and more than 2m monthly hits total. That means blog traffic is more likely to convert than paid traffic. What’s more, Hims is acquiring twice as many customers per month as its competitors, Ro and Keeps.

02 A $1B Valuation

After more than a year of planning and testing in Atomic’s headquarters, Hims launched in November 2017 with $7m in funding. Its first week, the company did $1m in sales, its smallest week to date. By June 2018, Hims had raised another $90m at a $500m valuation and had done tens of millions in sales.

Six months later, the company raised a $100m series C for a total of $200m funding at a $1.1B valuation. A Hims representative says the company has shipped over 1m orders to date. Even by Silicon Valley standards, that kind of growth makes Hims a standout.

The strong content strategy helps acquire customers, but the product experience keeps them. Hims products are more convenient and less expensive to buy than going to the doctor and pharmacy to get Viagra and hair-loss pharmaceuticals.

03 Hims’ Unique Business Model

Hims is rare among direct-to-consumer healthcare businesses in how it structures the checkout and medical consultation experience. Some products on the site are over-the-counter, meaning they don’t require a prescription. If you purchase an over-the-counter medication from Hims, you’ll receive a confirmation email after checkout and the product arrives a few days later. 

However, if you purchase an FDA-approved pharmaceutical like the ED medication, Sildenafil, the process continues. Only after payment do you begin the approval process for the prescription-only meds. It starts with a detailed medical quiz. After completing the multi-page quiz and divulging sensitive medical information, you must meet with a real doctor via secure video conferencing or messaging uplink.

If the doctor signs off, you’ll receive the meds a few days later in the mail (if not, you receive a refund minus the $5 consultation fee). The first month costs $5, but after that it’s $30 per month for 10 20mg pills, plus a $10 monthly subscription fee to have access to a doctor via the secure portal.

Viagra costs about $425 for 5 50mg pills, about 4x more expensive than Hims’ generic Sildenafil. Considering the time spent avoiding the doctor’s office, the $15-$45 co-pay to see your doctor, and the visit to the pharmacy, Hims’ model represents a radical shift in how men buy prescription pharmaceuticals.

The success of generic Sildenafil has led Hims to expand to other generic meds. This year, Hims launched generic Cialis, generic Zoloft, and generic Propranolol (a repurposed high-blood pressure med the company is marketing as an anxiety cure). 

These new medicines signal a clear strategy moving forward: capitalize on patent expirations of profitable drugs and continue expanding into new health verticals. In the past two months, Hims branched out even further, adding “wellbeing” and “mouth” categories to its website.

The doctors prescribing these pharmaceuticals aren’t Hims employees; they’re employed by Bailey Health, an independent health services provider. According to Hims, doctors from Bailey are compensated on an hourly basis for time spent consulting with Hims’ patients.

There have been unconfirmed allegations of Hims pressuring doctors to write more prescriptions. Hims’ head of product calls that claim “patently false.” Regardless of their validity, the claims provide a window into the conflicts of interest that arise when a health-services provider also sells medicine to its patients.

04 The Big Business of Patent Expirations

Sales of Viagra declined 73% in 2018, from $789m to $217m. Hims and close competitor Ro haven’t captured the full $550m difference, but that’s the market opportunity Hims is targeting with Sildenafil.  

Hims isn’t alone in the DTC pharmaceuticals space. A number of online pharmaceutical companies launched in the past 4 years, and many have been driven by the same two factors Dudum was when he first saw the possibilities; patent expirations and loosened telemedicine laws. 

Several of those companies have also enjoyed early success. Women’s birth control startups Nurx and The Pill Club launched within one month of each other in late 2014 after Bayer Pharmaceuticals’ patent on Yaz expired. 

Hair-loss startup Keeps followed on the tail of Finasteride’s expiration (the active ingredient in Propecia). And ED startups Hims and Ro launched within months of each other in late 2017 as Pfizer’s patent on Viagra expired.

05 The Bigger Picture for Hims

Once Hims wins a customer, it has the potential to keep him for a “very, very long time,” Dudum says. In a 2007 study commissioned by Pfizer, 979 men were given Viagra as needed over a four-year period. While the total number of doses ranged from 1–1,469, the average was 420. While it’s true these patients were receiving Viagra for free, one can assume they were using it on an as-needed basis. Had they been paying for the Hims generic, each participant would have been worth an average $1,260 over the four-year period.

In addition to the value generated from pharmaceutical sales, Dudum believes Hims could one day become the destination for men to connect with doctors. And he makes a compelling argument. About 90% of Hims customers don’t have a physician they feel comfortable calling, he says. Hims has built tools to allow them to communicate and connect with doctors quickly.

Currently, patients who use Hims can connect with doctors via photos, a phone call, and text messaging through the company’s secure medical portal. Dudum says the tools are designed to maximize efficient doctor-patient communications for mobile-first consumers.

Critics of Hims’ approach argue that nothing replaces in-person doctor visits. They say its tools may actually discourage men from seeking proper treatment from a doctor, opting instead for a quick 5-minute consultation and a few pills.

The cheeky branding doesn’t help. The FDA has strict regulations about advertising specific medicines, which explains why drug commercials sound like laundry lists of death and destruction.

However, the rules around advertising a brand that sells drugs are virtually non-existent, which is why you’ll see ads for Hims on every corner of the web and throughout the NYC subway system. A Hims representative says that, at any given time, the company leverages over 24 marketing channels. The goal: to “feel like we’re everywhere at once.”

Hims ads in NYC

When asked about Hims’ use of cheeky branding to normalize the idea of medication as a solution, Dudum responded, “What we’ve seen is that people are really capable of self-selecting the degree of seriousness that they feel their issue is.”

In other words, he believes that given the right tools and digital access to a doctor, consumers are able to determine how serious their problem is and choose the solution they think is right for them.

But in some cases, it can be difficult for a doctor to accurately determine how serious a problem is without full access to medical history and an established relationship with their patient. Striking the right balance between doctor-patient relationships and medical sales will be key to Hims’ reputation as a service that takes care of its patients.

06 The Booming Women’s Market

If you want to create a direct-to-consumer healthcare company, start by thinking about widespread problems or social pressures that affect different demographics of consumers.

Solving problems for traditionally underserved communities is a good place to start. A host of DTC companies have surfaced recently servicing the black skin and hair-care market, various elderly needs, and specific women’s health products.  

Women’s health products are an especially interesting space for innovation.

Urinary tract infections (UTIs) and yeast infections are 2 common problems most women will have to contend with at some point. About 50-60% of adult women have had at least one UTI and 75% have had at least one yeast infection. 40-45% will have multiple yeast infections. 

Monthly search volumes for keywords related to UTI and yeast infection treatments are between 2 and 20 million. The average cost per click for top-of-page search ads is between $0.53 and $3.01. Competition is low so a paid search strategy would be successful considering the $16-$35 value of one purchase. But an organic content strategy is even cheaper and potentially more successful. 

The leading solution for both problems is Monistat vaginal treatments, made by Prestige Brands. They own about 45% of the total vaginal treatments market and net $339m on a little over $1B annual revenue.   

The solutions they provide are over the counter, which means far less red tape for FDA approval than Hims had to go through for its prescription drugs. 

The play: Create a content site that educates women by relating to them, emphasizing that this is a problem most women will face. In other words, apply the Hims formula for success. Then branch out into other women’s health solutions.

The startup Lola is focusing on feminine care products and is starting to branch into sexual wellness products. Lola provides subscription tampons and has raised $35m since 2015 to go after the $6B+ tampon market.

CB Insights provides examples of many other companies shaking up the DTC women’s healthcare market.

Once you know the DTC formula, it’s actually not hard to find a ton of niches that haven’t received the DTC pretty-branding treatment and are ripe for disruption. 

Here are a few more ideas:

  • A new parent’s guide to natural medicines for babies and toddlers
  • All things stomach-related (become an authority on different types of gastrointestinal issues from indigestion to constipation and provide DTC solutions)
  • CBD capsules for the 50+ pain-relief market

If you can combine education about the problem with an optimized solution and an amazing consumer experience, you just won a customer.

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