[disclaimer: Although 10Ks and S1s are snapshots of the company in question, We are interested in the nature of the business and economics of the industry / sector. These articles will not go into financial analysis of companies but highlight interesting business models, macro and microeconomic insights of the industry and companies, interesting accounting issues, risks and any interesting tidbits we can discern. These are not recommendations to buy or sell any securities of the company in question.]
In two of the last four articles we focused on “health care concierges” (Evolent Inc. & Accolade Inc.). The term alone is sufficient to tell you how convoluted and complex the US medical industry is. Today we look at GoodRx Holdings that has built a $300M+ annual revenue business, arbitraging the complex pricing dynamics of prescription drugs in the US. It recently went public. Here are some insights from their S-1.
Learnings about the Industry / Sector
- To understand GoodRx, it is essential for us to first understand the basics of the Pharmacy Benefit Manager business (henceforth called PBM). PBM is a quintessential “middle man” business, probably unique to the US.
- PBMs are companies that deliver prescription benefits. PBMs are hired by corporate employers, health plans, labor unions, and other organizations to interface with drug manufacturers and process prescription-related claims. In short, PBMs are the connectors between employers, members, drug wholesalers, pharmacies, and drug companies working to facilitate the best possible health outcomes at the best possible costs.
- PBMs have two main objectives: to reduce pharmacy drug spend within prescription benefits plans and to help patients achieve better health outcomes through greater access to appropriate medications. To do this, PBMs work with drug manufacturers, wholesalers, pharmacies, and plan sponsors.
- Companies like GoodRx and SingleCare are exploiting the arbitrage between PBMs and their partner pharmacies to deliver dollar savings to people.
- Lack of affordability in healthcare is a contributing reason why 20% to 30% of prescriptions are left at the pharmacy counter. (page 111)
- Every year, approximately 140 million Americans fill nearly 5.8 billion 30-day equivalent prescriptions, according to the Centers for Disease Control and Prevention. However, finding affordable prices for prescriptions is complicated by a lack of price transparency, a confusing reimbursement and insurance landscape and a fragmented marketplace in which the list prices for the same medication can vary more than 100 times across pharmacies. (page 112)
Learnings about the Company
- Revenue is primarily generated from PBMs when a prescription is filled with a GoodRx code provided through their mobile app. For example, when a consumer uses a GoodRx code to fill a prescription and saves money compared to the list price at that pharmacy, they receive fees from their partner PBM.
- A small amount of revenue comes from subscription offerings including Gold and Kroger Savings, revenue generated from pharmaceutical manufacturers for advertising and integrating onto the platform.
- Long term there is risk in the business model due to the significant concentration in the U.S. healthcare industry, and in particular there are a limited number of PBMs, including pharmacies’ in-house PBMs, and a limited number of national pharmacy chains. Industry mergers like Aetna + CVS are pushing to remove the “middle men” from this business. It is possible that longer term platforms like GoodRx may not be able to retain favorable contractual arrangements with PBMs. [This maybe why the company has made new forays into areas like telemedicine and tele-health]
- Clearly the company has exploited a huge inefficiency and has achieved a valuable product market fit. The company had 4.4 million Monthly Active Consumers during the second quarter of 2020 and has generated approximately $20 billion of cumulative consumer savings to date.
- Achieved 55% annual revenue growth from $250M in 2018 to $388M in 2019.
- Sales & Marketing constitute a huge expense about 40–45% of Revenues in 2018 and 2019 respectively. This is problematic especially if we look at upcoming competition from clones like SingleCare (you may recall the Martin Sheen ads). There is no stickiness between GoodRx and SingleCare since customers can switch apps and pick the cheaper option at the flick of their fingers.
Conclusion
GoodRx has exploited an inefficiency in the complex US healthcare / pharmacy ecosystem and achieved phenomenal success ($300M+ Annual Revenues). However long term there are clouds on the horizon
- An increasing consolidation between pharmacies, PBMs and insurers will perhaps remove a lot of inefficiencies
- PBMs may adopt a direct to consumer approach
- Drug pricing will come under increased political pressure
The company seems to have a great founder/s led management team that sees these challenges and is rapidly building adjacent businesses like a nascent tele-health division and working directly with pharmaceutical companies to enable them to reach consumers. This will be a rapidly evolving space and company.
