Morgan Stanley: Hims (HIMS.US) has a target price of $40 with 18% downside potential, GLP-1 lawsuit tug-of-war becoming the biggest variable.

Morgan Stanley maintains a "hold" rating on Hims & Hers Health Inc (HIMS.US) with a target price of $40, representing a downside potential of about 18% from the current stock price. The bank believes that although Hims has growth potential in personalized medicine and telemedicine, recent events such as the termination of collaboration with Novo Nordisk A/S Sponsored ADR Class B (NVO.US) and the legal lawsuit initiated by Eli Lilly (LLY.US) against compounders have cast a shadow on the company's future prospects, and investors should be highly cautious. Morgan Stanley notes that Hims currently has a market value of approximately $9.892 billion, with a 52-week stock price range of $13.48 to $72.98. According to the bank's forecasts, Hims' earnings per share (EPS) for the fiscal years 2024 to 2027 are projected to be $0.54, $0.79, $1.15, and $1.50, with corresponding price-to-earnings (P/E) ratios of 45.2 times, 59.8 times, 41.3 times, and 31.7 times. Despite revenue growth, the company's profitability may still face pressure in the short term. The sudden termination of collaboration between Novo Nordisk A/S Sponsored ADR Class B and Hims has raised concerns in the market about the company's business model and compliance risks. Morgan Stanley interviewed two legal experts to assess the potential impact of Eli Lilly's lawsuit against compounders on Hims. Both experts believe that the court is likely to not dismiss Lilly's lawsuit, and the case may take 2 to 3 years to reach a preliminary judgment. The experts unanimously agree that the original intention of 503A compounders was to provide personalized treatment options for patients who cannot use FDA-approved drugs, especially during drug shortages. However, one expert takes a more conservative stance, suggesting that clients should stop large-scale compounding after the end of the GLP-1 drug shortage, while the other expert believes that the 503A provision allows for customized compounding for different patient groups, despite limited legal precedent. Regarding the outlook of the lawsuit, professionals believe that the court may allow the case to proceed, even if Lilly's current claims have flaws that may need to be revised and refiled. The experts point out that Lilly's claim in the lawsuit filed in Florida about compounders damaging its brand image may have the strongest chance of success. Furthermore, the experts mention that the FDA updated its list of restricted compounds on June 26, with GLP-1 drugs not being included, which could serve as strong evidence for compounders to refute Lilly's "misconduct" allegations. Morgan Stanley emphasizes that Eli Lilly and Novo Nordisk A/S Sponsored ADR Class B have not yet filed patent infringement lawsuits against compounders, but experts generally believe that patent infringement lawsuits could still happen in the future. As patent infringement falls under strict liability, compounders may find it difficult to prove that their use of semaglutide or tirzepatide does not constitute infringement. If found guilty, compounders may face punitive damages of up to three times the compensation. In terms of valuation, Morgan Stanley's target price for Hims is based on a 3x EV/Sales ratio based on 2026 revenue expectations, as well as a 0.08x EV/Sales growth rate. The bank believes that this valuation represents a certain discount compared to other digital health and direct-to-consumer (DTC) medical companies, reflecting the current uncertainties and risks faced by the company. Morgan Stanley highlights that the main upside risks for Hims in the future include: unexpected user growth, successful expansion into high-potential markets such as weight loss and hormone replacement therapy (HRT), and profit margin improvement from platform scale effects. The downside risks include continued issues with GLP-1 drug shortages, competition eroding market share, and regulatory policy changes impacting manufacturing and telemedicine operations. Overall, Morgan Stanley believes that Hims still has long-term value in the digital healthcare sector, but the company faces high legal risks and business uncertainties in the short term, and investors should exercise caution.