I find value in reviewing SEC filings of competitors and vendors I work with. The process of reviewing the Management Discussion and Analysis and financial results, especially, help me feel more informed about the world around me. So, when GoodRX filed its S-1, I certainly intended to review it.
Well, I didn’t get around to it until yesterday, after being reminded about the $GDRX IPO at a dinner with my friend Rob. The offering priced at $33, above the targeted range of $24-$28. The stock performed incredibly well in its first week as a public firm.
The 204 page filing has a ton of interesting detail. Here is a little background on the firm and some of the most interesting details that jumped out at me.
Background on GoodRx
The founding of GoodRx is described by Doug Hirsch on Page 118:
When I graduated from college a generation ago, my parents offered me a uniquely American piece of advice. Instead of focusing on salary, their top concern was that I find a job with good health insurance. Only with insurance, they explained, could I ensure access to quality, affordable health care. Without insurance, my days would be filled with uncertainty, inadequate care and the potential for financial ruin. So I found a job with insurance. And as I got older and started my own family, I began to appreciate what my parents meant. As long as I was covered, I thought, we could stay healthy without going bankrupt. I wouldn’t be forced to make hard choices — my insurance card would unlock America’s best healthcare at an affordable price. So why was my local pharmacist asking me to pay $450 for a prescription?
This experience led Doug to create GoodRx with co-founder Trevor Bezdek. The firm’s stated mission is, “to help Americans get the healthcare they need at a price they can afford. To achieve this, we are building the leading, consumer-focused digital healthcare platform in the United States.” Most of the business’ revenue is presently sourced from pharmacy solutions, though more recently the firm is building assets and capabilities in telemedicine, both organically, as well as through acquisition (e.g. HeyDoctor.)
Amongst other accomplishments, GoodRx asserts that it has the most downloaded medical application on the market, 4.9MM monthly active consumers, 80%+ repeat activity, 150Bn daily pricing data points, and $20Bn+ of savings created across its four platforms.
GoodRx is very profitable and creates a ton of cash
How does GoodRx make money? You can read more across the filing, particularly pages 87-90, but in summary: GoodRx inserts itself into the health care delivery space as a middle-man, primarily in the purchase of prescription drugs, and charges fees. According to filing, in the quarter ending June 30, 2020, 88.85% of revenue arose from Prescription Transactions Revenue, $109,548, compared with Total Revenue of $123,295 (ref. page 105.)
You can find the Consolidated Statement of Operations on Page 14. I pulled the values and looked at revenue and net income growth, as well as operating margin. I was not entirely surprised by the growth, but I was shocked at the firm’s profitability.
The firm also reports a non-GAAP measure of margin, Adjusted EBITDA, which shows the following results:
I also took a brief look at trends in costs as a percentage of revenue. I am surprised that the cost of revenue is so low, which has some commentary on page 93. I would be interested in reading analysis of the positioning of GoodRx’s telehealth platform given the relatively limited investment into new products. I wonder if this signals more of a “partner/acquire” model rather than “build.”
One final thought: consider that 2019 Gross Merchandise Value (GMV) for pharmaceuticals was USD $2.5Bn (Page 121), while revenue from prescription drug services was USD $365Mm (Page F-12). I would not have guessed prior to reviewing this filing that any third party could draw this level of margin, nearly 15%, from the incumbent players in the health space! The folks at GoodRx have built and executed effectively on a complicated and lucrative business plan…
Some surprises in the GoodRx strategy
The biggest surprise for me in the filing was probably the following on Page 26:
A limited number of PBMs generate a significant percentage of the discounted prices that we present through our platform and, as a result, we generate a significant portion of our revenue from contracts with a limited number of PBMs. We work with more than a dozen PBMs that maintain cash networks and prices, and the number of PBMs we work with has significantly increased over time, limiting the extent to which any one PBM contributes to our overall revenue; however, we may not expand beyond our existing PBM partners and the number of our PBM partners may even decline. Our three largest PBM partners accounted for 61% of our revenue in 2018, 55% of our revenue in 2019 and 48% of our revenue in the first half of 2020. Revenue from each PBM fluctuates from period to period as the discounts and prices available through our platform change, and different PBMs experience increases and decreases in the volume of transactions processed through their respective networks. In 2018, Optum, Navitus and MedImpact each accounted for more than 10% of revenue. In 2019, Navitus and MedImpact each accounted for more than 10% of revenue, and in the first half of 2020, Navitus, MedImpact and Express Scripts each accounted for more than 10% of revenue. The loss of any of these large PBMs may negatively impact the breadth of the pricing that we are able to offer consumers.
Given the consolidation in the PBM space, while it is unsurprising to see ESI and Optum as a source of 10%+ revenue, the inclusion of Navitus and MedImpact, coupled with the omission of CVS and Prime, all struck me as somewhat surprising.
I was also surprised by breakdown of insured status of GoodRx customers. I found this disclosure on Page 124.
We believe that the prices available through our platform are highly competitive, for both insured and uninsured consumers, and our platform enables consumers to save on prescription medications regardless of whether the consumer is insured or not. The majority of our consumers are insured and, based on a survey that we conducted in July 2020, approximately 36%, 34%, 26% and 4% of our consumers had commercial insurance, Medicare, no insurance and Medicaid, respectively. The results of this July 2020 survey are consistent with our historical surveys. We believe we can drive significant growth in our prescription opportunity through our ability to continue to provide attractive prescription pricing to consumers.
Healthcare markets | There are some interesting notes throughout the S-1
One of my favorite aspects of this filing is the analysis of market structure of specific areas in health market. Here is a short list of references I found interesting:
- The basis for estimate of Total Addressable Market (TAM) include CMS data for prescription benefits, JAMA for pharmaceutical manufacturer solutions, and McKinsey for telehealth. Page 29
- The total market opportunity defined in the S-1 is USD $800Bn. Page 121
- USD $524Bn is associated with prescriptions, including $164Bn of unfilled scripts
- USD $34Bn is associated with pharmaceutical manufacturer solutions
- USD $250Bn is associated with telehealth services
- Risks described by GoodRx include market power of pharmacies and PBM. Page 26
- Pharmacies named include CVS, WalMart, Walgreens, and Kroger.
- PBMs named include ESI, Optum, Navitus, and MedImpact.
- GoodRx cites competitors in telehealth. Page 27
- Teledoc, AmWell, MDLIVE, Doctors on Demand
Other areas in the S-1 I would like to read more about
I always learn something when going down these types of rabbit holes on weekends. I was initially a bit confused when looking at the income statement on Page 14 and noticed the disconnect between “Net Income” and the subsequent “Net Income Attributable to Common Shareholders.” I read the balance of the S-1 looking for a minority interest explanation (and wondered if the VIE disclosure would provide the explanation); Well, the answer was revealed on the near-final page of the appendix, F-47. (The delta is attributable to the Preferreds.)
I am interested in reading a thorough valuation of GoodRx, including a narrative on the impact of the SBC, dual-class structure, and corporate governance details, such as the status as a “controlled company.” I hope someone notices such a piece and forwards it to me! *hint-hint!*
I am also interested in hearing opinions of marketing professionals around the description of marketing mix and priorities on pages 135-138. It is interesting to me that S&M as a percentage of revenue is declining while revenue and CFO both continue to grow. What more could be done?
Finally, I wonder how continued expansion into the telehealth market will a) create synergy with the other platforms, and b) create economic impact, given the market structure and, seemingly inevitable, lower relative operating margins.
I spent a few hours reading through this S-1 yesterday, September 27, and found it informative and interesting. If you read my blogpost and have reactions, please let me know. I am interested in seeing where this firm goes and where there is competitive response.