GoodRx(GDRX) a recent IPO

GoodRx Holdings(Ticker: GDRX) is a recent IPO (Sept 23rd, 2020) in the healthcare space that provides an online platform for consumers to get prescription drugs at cheaper prices. 
It appears to have the growth characteristics that fits this board’s interests. I’m benefitting a lot from this forum and am trying to improve my investing acumen 
and hoping at some point I can build enough skills to start giving back here.
If this post doesn’t add value or missing the mark for this board, I apologize in advance.
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Data Sources: 

S1 - [https://investors.goodrx.com/static-files/f5e0051d-9347-4f6c...](https://investors.goodrx.com/static-files/f5e0051d-9347-4f6c-b36c-a99e1dbbfb2b)
Company Website - [https://www.goodrx.com/](https://www.goodrx.com/)
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Problem Statement: 

Rising insurance costs, higher deductibles and drug prices have led to an increase in the percentage of underinsured Americans and also a big reason for non-adherence to 
prescribed medication. About 20-30% of prescriptions are being abandoned at the pharmacy counter because of this lack of affordability. Consumers often don’t have any means
to price compare and Healthcare professionals don’t have necessary resources for conversations with their patients around affordability of their prescribed medication or treatment.
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GoodRx: The Company

GoodRx attempts to solve the above problem by providing an online platform for consumers to easily check prices, compare pricing at different pharmacies in their area. 
They offer free coupons and discount cards on their website which consumers then can take advantage of the discounted pricing with a GoodRx code. 
GoodRx codes are accepted at over 70,000 pharmacies, nearly every pharmacy in the US.

Their pricing platform is built by aggregating over 150 billion prescription pricing data points primarily from 
Pharmacy Benefit Managers (PBMs, key intermediaries that aggregate demand from payers like insurers and negotiate pricing with suppliers like pharmacies and drug manufacturers) 
and from a variety of other healthcare sources including Pharmacies, Mail Order Pharmacies, Drug manufacturers, Medicare.

When a consumer uses a GoodRx code to fill a prescription, GoodRx receives fees from one of their partners, primarily PBMs as compensation for directing the consumer
to that PBM’s pricing and the pharmacy. These fees can be a percentage of fees that their partners earn or a fixed payment per transaction. 
Given the long-term nature of most prescriptions and the nature of their product (pricing discounts during new and refills), 
since 2016 over 80% of their transactions are from repeat activity.  
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Impact of GoodRx on various stakeholders in the Healthcare ecosystem: 

-Consumers -  Improve adherence by improving affordability through all their offerings. 
In 2019 and in 1H 2020, consumers saved more than 70% as compared to the list price, often less than a typical insurance co-pay. 

-PBMs - GoodRx expands market for PBMs by increasing their cash network transaction volumes and by adding new consumers to the overall prescriptions market,
many of whom, both insured and uninsured, would otherwise not fill their prescriptions because of high deductibles or prices.

-Pharmacies - Helps in reducing "walk away" patients and prescriptions abandoned at the counter due to high cost. 
Also helps in increasing overall sales through additional foot traffic

-Healthcare Professionals - By integrated pricing into EHRs, healthcare pros can provide GoodRx discounted prices directly to thier patients. 
They can encourage medication adherence and provide a consumer-friendly service.

-Pharmaceutical Manufacturers - Given the size of GoodRx's consumer base, manufacturers can advertise and enhance consumer awareness of their brand medications on GoodRx’s platform,
increasing the likelihood of a consumer uptake of their prescribed medication. 

-Telehealth Providers - Drives incremental traffic via their Telehealth Marketplace for third party providers.
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Product Offerings:
	
Prescription Offerings: Free to use online coupon codes and discount cards

Subscriptions Offerings: 
GoodRx Gold – Additional savings program and free mail order feature with a monthly fee of $5.99 for individuals and %9.99 families up to five. 

Kroger Rx Savings Club powered by GoodRx – Tailored subscription product to Kroger consumers for an annual fee of $36 for individuals or $72 for families up to six.
They share a portion of their annual fee revenue with Kroger for this program.

Pharmaceutical Manufacturer Solutions Offering-
	Partner program to advertise, integrate affordability programs for branded medications on their platform. Typically charges fixed fees for a specified time period.

Telehealth offerings-
o	HeyDoctor - Fees starting from $20 that provides a convenient way to receive diagnosis and a prescription 
o	Telehealth Marketplace - Earns fees for directing traffic to third party providers on their marketplace
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Management: 
 
It was founded 2011 by Trever Bezdek and Doug Hirsch when Doug realized that the drug prices varied significantly between pharmacies with no easy way for consumers 
to navigate through pricing inefficiencies, with or without insurance. Doug is ex-Yahoo, Facebook while Trever is a software entrepreneur with prior experience
in healthcare startups. They both run the company as co-CEOs since 2015 and each own 1.3% of GDRX stock.

It’s headquartered in Santa Monica, CA and has 338 FT employees as of Q2, 2020.
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Challenges and Risks:
 
•	Three PBMs make up ~ 50% of their revenue, so customer concentration revenue is a risk.
It seems unlikely that they will be able to mitigate this risk as number of PBMs in the industry has been shrinking. 
•	There is a mention of material weakness in their internal controls over financial reporting in their S1. 
Snippet from S1 - “We have identified material weaknesses in our internal control over financial reporting and may identify material weaknesses in the future or otherwise
fail to maintain an effective system of internal controls in the future, as a result of which, we may not be able to accurately report our financial condition 
or results of operations, which may adversely affect investor confidence in us and, as a result, the value of our Class A common stock.” 
•	Pharmacies can price match and takeout GoodRx from the equation. This coupled with a perception or a real problem for GoodRx if its codes aren’t 
providing any discounts then there could be a quick and painful freefall in Monthly Active Consumers(MACs).
•	Switching costs are low but as long as GoodRx maintains better discounts using its scale, it may maintain its lead
•	SingleCare, WellRx, RxSaver all offer similar prescription discount solutions posing significant threat if GoodRx fails to continue 
to execute with users and its healthcare partners.  
•	COVID restrictions around non-essential medical care impacted their Q1, Q2 2020 revenues. Can also see this in their lower MAU numbers.
Prolonged restrictions will have a further impact as consumers to choose mail order delivery to lower risk of infection by going to pharmacies. 
•	Any changes to the regulations or the pricing structure in the industry will have an immediate impact on their revenues
•	They may experience lower margins as HeyDoctor and other non-prescription related offerings continue to grow as a portion of their overall business.
•	Customer acquisition costs may start to increase as they attempt to attract beyond high intent customers
•	IPOed with a P/S of ~ 38 which is on par with best performing subscription cloud stocks without as much recurring revenue potential. 
Perhaps solid growth and profitability track record is being priced in. 
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Some Financials:
 
Topline:
 
Revenue	2016	2017	2018	2019	2020(1H)
     $M	99.3	157.2	249.5	388.2	256.7
   YoY% NA 	58.3%	58.7%	55.5%	48.2%
 

 
Gross Profit	2016	2017	2018	2019	2020(1H)
$M	        1.23	3.07	6.03	14.01	12.8
Margin	        98.7	98%	97.5	96.3	95%

Revenue from prescription transactions fees made up approximately 94% of 2019 revenue and 91% 1H 2020. These high gross margins can be expected to go down 
as they increase revenues from their non-prescription revenues. 
 
*I couldn’t find their break down of financials by Quarter in their S1. 
 
Bottomline:
 
Operating Income	2016	2017	2018	2019	2020(1H)
$M	                18.7	50.3	77.2	139.6	85.6
Margin	                18.8%	31.9	30.9%	35.9%	33.3%
 
Net Income	2016	2017	2018	2019	2020(1H)
$M	        8.9	28.7	43.7	66.04	54.6
Margin	        8.9	18.2	17.5	17	21.2
 
Adj EBITDA	2016	2017	2018	2019	2020(1H)
$M	        30.0	62.9	127.6	159.6	101.1
Margin	        30.2%	40%	51.2%	41.1%	39.4%
 
Adj EBITDA Margin (YoY%)	Q1	Q2	Q3	Q4
2019	                        39.2%	46.4%	42.4%	37%
2020	                        38.8%	40%	 	 
 
Been highly profitable at least since 2016. 
 
Balance Sheet and Cash Flow:
 
Cash	2016	2017	2018	2019	1H 2020
$K	23.6	17.7	34.6	26	126.6
 
Total Debt	2016	2017	2018	2019	1H 2020
$K	        46	136	722	670.9	696.9
 
They have been maintaining some debt in excess of their cash on the balance sheet even at such high profitability levels. May be their first earnings report 
will show if they used IPO proceedings to pay off their debt

Other Metrics:
		
Monthly Active Consumers (MAC)
 
MAC(K)	Q1	Q2	Q3	Q4
2018	2,020	2,170	2,413	2,750
2019	3,188	3,513	3,787	4,272
2020	4,875	4,418	 	 
 
		
MAC(YoY%)	Q1	Q2	Q3	Q4
2018	        58%	66%	66%	61%
2019	        58%	62%	57%	55%
2020	        53%	26%	 	 
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My stance: 

 A business model based on pricing arbitrage makes me uncomfortable but I understand the value GoodRx brings to the table in the increasingly expensive healthcare
and price sensitive consumer world. They went public with a marketcap of ~19B and it is hard for me to imagine them growing 10x from here unless they keep innovating 
and delivering with other offerings with increasing ARPUs. I took a tiny starter position (0.25%) at ~52 as I build my knowledge around it.
Their website looks very easy to use but I myself have never tried it before. 
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Additional reading:
 
[https://twitter.com/richard_chu97/status/1309195034114351106...](https://twitter.com/richard_chu97/status/1309195034114351106)
[https://www.drugchannels.net/2020/08/how-goodrx-profits-from...](https://www.drugchannels.net/2020/08/how-goodrx-profits-from-our-broken.html)
[https://digital.hbs.edu/platform-digit/submission/goodrx-or-...](https://digital.hbs.edu/platform-digit/submission/goodrx-or-greatrx/)
28 Likes

Thanks for the writeup, Upsidedown.

As a family doctor, I have been recommending GoodRx to patients who can’t afford their medications for quite some time now. Which is pretty much all of my Medicare-aged patients with diabetes and many, many underinsured and uninsured folks. We are sent a steady supply of cards by the company and have them in the waiting room. Patients report up to 75% savings on some prescriptions compared to cash pay and even some very substantial savings compared to the insurance copayments for meds for those with insurance.
I had no idea how they made money, actually, so this was educational. Thank you!

I wonder how the company would do if there is actually some progress on medication costs / insurance reform if we as a country ever really get serious about equity re: healthcare. I doubt GoodRx has much of a market in countries that have some form of universal healthcare, which is pretty much everywhere else.

BC

18 Likes

Recent INdustry Focus podcast on GDRX - https://www.fool.com/podcasts/industry-focus/2020-09-23-wild…

1 Like

They are expanding into telehealth

1 Like

To add to the great introduction above, I wanted to share my write-up on GoodRx. With 38% revenue growth last quarter, it might not compare to a CrowdStrike or Zoom but I believe they can continue to see strong growth for years to come with durable competitive advantages and a huge TAM. They are also quite profitable with 95% gross margins and 38% adj EBITDA margins.

At 25.5x next year’s gross profit estimates, it’s also relatively quite reasonably valued with room for multiple expansion. Although it’s not SaaS, its prescription offering is highly predictable with 80% of transactions coming from repeat activity. It is the clear leader in its core prescription business with a massive TAM and has significant optionality as other revenues should increasingly drive top-line growth.

I believe that Amazon’s entry has created a compelling entry point as user growth begins to normalize post-reopening.

Link: https://richardchu97.substack.com/p/goodrx-the-frontdoor-to-…

3 Likes

I advise caution to invest in GoodRx.I didn’t look deeply into GoodRx business model. But I googled and found this:
“GoodRx takes huge fees from pharmacies in order to capture the uninsured market AND encourages patients not to use their own insurance so they don’t have to pay the pharmacies. Typically, the pharmacies lose money on these transactions.”

GoodRx reminds me of Groupon. I think ALL coupons businesses are doomed to fail. Groupon boomed initially but revenue has been declining in the past several years. Small businesses hate Groupon. The stock price never went back to IPO price. It reversed split and stock is currently trading at 10% of IPO price.

The reason is simple: coupon eats into business profit margin. It lowers price across the board for no good reason. It creates super cheap consumers who will buy only with discounted price. It’s bad for businesses. I understand some people are living in poverty and need help. The solution is government subsidy, charity not coupon issued by a business.

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Anecdotally, I have used GDRX even though I am insured. My wife needed a medication, which the insurance would pay only for the generic. For some reason she did better with the branded variety. Our out of pocket was very high, but with GDRX, the cash price was almost reasonable. This is a product that even the insured can use.

Gordon

5 Likes

I am aware that many pharmacies don’t like GoodRx but I believe the situation is quite different from any typical coupon provider. The reason being that the cash pay prices that pharmacies set are guided by PBMs so, in order to protect their reimbursement rates and thus the majority of their revenues, the pharmacies have artificially set prices much higher than they should be. This screws over cash pay patients, which are also usually the most price-sensitive.

PBMs partner with GoodRx for incremental margin and allow GoodRx to access the lower rates that they have negotiated, competing against other PBMs on GoodRx’s platform. Since pharmacies are obligated to fulfill their PBM contracts, they are not able to do anything unless they breach their contracts and offer to match GoodRx prices under the table. Thus, GoodRx is at the top of the value chain, followed by the PBMs, followed by the pharmacies. Since it is beneficial to the PBMs to access GoodRx’s 4.9M MAUs, they will force the pharmacies to follow along.

So GoodRx is not lowering the price for no good reason, but rather restoring free-market economics to the industry.

13 Likes

I have been to two pharmacies in the part couple of months. Both had GoodRX cards in a display on their counters.

1 Like

I’ve been using GoodRx for a few years and found their prices to be half to a quarter of what the health insurance company would charge for the medication. (Since I’m healthy and have a $5,000 deductible health plan, I’m paying everything out-of-pocket anyway.) Of course, if you use GoodRx, your drug purchases don’t count towards your annual deductible and maximum annual out-of-pocket cost. If you have significant health expenses and will breach your deductible, it’s likely better to just pay the inflated insurance company cost.

I start Medicare on Feb 1st and tried out the Medicare Part D Drug plan selection app. The app determined the best plan was a $29.50/month premium with a $727/yr all-in cost. A detailed investigation starting with the lowest cost Part D plan available in my zip code revealed that the Part D plan with the $6.30/month premium yielded an all in cost of half that (i.e., $355/yr) if I bought the most expensive drug on my list with the GoodRx coupon. Here’s the details of my analysis.

Navigating the Medicare Part D Drug Plan cesspool
https://www.retireearlyhomepage.com/medicare_partD_2021.html…

I question the investment opportunity here with Amazon getting into the prescription drug market. But GoodRx as a service gets “two thumbs up” from me.

intercst

10 Likes

CloudL posts,

I advise caution to invest in GoodRx.I didn’t look deeply into GoodRx business model. But I googled and found this:
“GoodRx takes huge fees from pharmacies in order to capture the uninsured market AND encourages patients not to use their own insurance so they don’t have to pay the pharmacies. Typically, the pharmacies lose money on these transactions.”

GoodRx reminds me of Groupon. I think ALL coupons businesses are doomed to fail. Groupon boomed initially but revenue has been declining in the past several years. Small businesses hate Groupon. The stock price never went back to IPO price. It reversed split and stock is currently trading at 10% of IPO price.

The reason is simple: coupon eats into business profit margin. It lowers price across the board for no good reason. It creates super cheap consumers who will buy only with discounted price. It’s bad for businesses. I understand some people are living in poverty and need help. The solution is government subsidy, charity not coupon issued by a business.

Here’s the link to the article with CloudL’s quoted passage in bold above.

How GoodRx Profits from Our Broken Pharmacy Pricing System
https://www.drugchannels.net/2020/08/how-goodrx-profits-from…

As the author points out, the real problem in the pharmacy business (from the perspective of the consumer) is the wildly inflated “Usual & Customary” prices for common generic drugs that should be as cheap as aspirin. Not the fact the GoodRx is offering folks a coupon.

The U&C cash price for prescriptions varies greatly among pharmacies, especially for generic drugs:

One study of two generic antibiotics found that cash prices varied from $4 to $229 for one product and from $2 to $134 for a second product. (source: The Price May Not Be Right: The Value of Comparison Shopping for Prescription Drugs https://www.ajmc.com/view/the-price-may-not-be-right-the-val… )

Prescription list prices are generally far above a pharmacy’s actual net acquisition cost. That’s because a pharmacy benefit manager (PBM) will not reimburse a pharmacy above the pharmacy’s U&C list price. Consequently, pharmacies typically establish U&C prices that exceed the maximum expected reimbursement from any payer. The pharmacy eliminates the risk that it could be reimbursed an amount less than what a third-party payer would have been willing to pay.

GoodRx may be taking a “huge fee” from the pharmacy, but it’s still a lot less than what a PBM with greater market power is taking from them – and most of the PBMs are now owned by health insurers.

Mergers between health insurers and pharmacy benefit managers could be bad for your health
https://www.statnews.com/2018/06/01/mergers-health-insurers-…

intercst

7 Likes