If you take a prescription drug in the US, chances are you’ve heard of GoodRx. In fact, a July 2020 survey found that 68% of healthcare providers have recommended GoodRx to their patients. Why? The company estimates it has generated over $20 billion in consumer savings on prescription drugs since September 2011.
The idea for GoodRx came after former Yahoo executive Doug Hirsch was quoted $450 to fill a prescription. After visiting multiple pharmacies he realized the prices were different at each one. In 2011 Hirsch launched GoodRx with cofounders Scott Marlette and Trevor Bezdek with the mission of helping Americans find prescription drugs they could afford.
Fast forward to last week, the company launched a $1.2 billion IPO at a $12.6 billion valuation. More importantly, GoodRx estimates that approximately 18 million consumers could not have afforded to fill their prescriptions without the savings provided by the company.
Problem
The US healthcare system is broken. GoodRx’s S-1 says it best…
To summarize, the American healthcare system is expensive and complicated.
Product Overview
GoodRx found a simple way to solve some of these challenges. The company’s price comparison tool for prescriptions allows consumers to access discount codes for their medication with no strings attached. Consumers save an average of 71% off the list price of their prescriptions. If it sounds simple, that’s because it is. Users are not even required to create an account.
GoodRx also offers a subscription product, GoodRx Gold, where individuals ($5.99) or families ($9.99) pay a monthly fee for access to even greater discounts at select pharmacies.
The company is able to provide this service because it has built a proprietary technology that ingests over 150 billion data points every day, primarily prescription pricing data from PBMs.
In July 2019, GoodRx entered the telehealth market with its acquisition of HeyDoctor. The company has taken a “two-pronged approach” to telehealth by launching the GoodRx Telehealth Marketplace to bring third-party telehealth providers into its ecosystem in addition to its own HeyDoctor offering. GoodRx now offers telehealth visits covering 23 conditions in 50 states. Many of these offerings are at a $20 per visit cash pay rate (i.e. no health insurance required). Company data suggests that 20% of consumers who search for drugs on the GoodRx platform do not have a prescription, indicating a large opportunity to provide those consumers with a convenient diagnosis via telehealth.
Perhaps most importantly, GoodRx is the most downloaded medical app in both the Apple and Google app stores! The app enjoys average ratings from 4.7 to 4.8 out of 5.0 in both stores. The HeyDoctor telehealth app has a 5.0 rating across both app stores.
Business Model
When a consumer uses a GoodRx discount code at the pharmacy, the company earns a transaction fee from its PBM partners. PBMs have contracts with pharmacies where the PBM earns a fee each time a member of its network fills a prescription at that pharmacy. Pharmacies enter into these contracts to provide discounted rates in exchange for access to the PBM’s network of members. GoodRx has essentially negotiated the ability for its users to “piggyback” off of these contracts with multiple PBMs, and in turn the company shares a split of the fees that PBMs earn from pharmacies. Retail pharmacies are the losers in this model given they have fewer customers paying the high out-of-pocket cash rates for drugs.
Market Size & Competition
GoodRx estimates its total addressable market to be $800 billion, with $250 billion of that opportunity in telehealth.
According to the company, there are no competitors of scale in the prescription discounting market. The telehealth market is a different story. Teladoc, Amwell, MDLIVE, and Doctor on Demand are all listed as direct competitors in the S-1. Amwell recently completed its own $742 million IPO, and Teladoc has been in the news after it announced an $18.5 billion merger with chronic-care management company Livongo.
Go-to-Market
As mentioned above, 68% of healthcare providers have recommended GoodRx to their patients, representing a massive trove of word-of-mouth referrals. The company also acquires customers through various paid media channels, including television and paid search. The payback period on consumer acquisition for the core prescription business is under 8 months! To put that number in context, a 19-month payback period for a B2B SaaS company is best-in-class according to our friends at Public Comps. This isn’t an apples-to-apples comparison, but the benchmark helps.
Finally, GoodRx has been growing monthly active consumers at over 50% YoY since 2016, with over 80% of transactions for the prescription offering coming from repeat activity. The drop in Q2 2020 can be attributed to fewer people visiting healthcare providers and pharmacies in-person due to COVID-19.
Monthly Active Consumers (in millions) and Year over Year Growth (%)
Business Performance & Financials
When it comes to performance, the first thing to note about GoodRx is its astonishing level of growth. The chart of cumulative consumer savings, a key performance metric for the company, shows a true hockey stick pattern since inception.
Cumulative Consumer Savings (in billions)
For the year ending December 31, 2019 GoodRx pulled in $388 million in revenue, which the company has managed to grow at a 57% CAGR since 2016.
Revenue (in millions)
In 2019, GoodRx generated 94% of its revenue from prescription transaction fees, with the remaining 6% “other revenue” including its telehealth business. It’s interesting to note that both categories have grown in absolute terms, but the mix has shifted. Other revenue grew from 3% in 2018 to 6% of total revenue in 2019, likely indicating the telehealth business is starting to gain traction.
Another beautiful aspect of this business is its profitability. It’s rare for a technology company to generate this level of earnings and growth simultaneously. GoodRx is breaking that mold by delivering ~40% EBITDA margins at over 50% top line growth. The company is profitable on a net income basis and generates positive free cash flow.
Adjusted EBITDA (in millions) and Adjusted EBITDA Margin (%)
One particular line item to watch as the telehealth business grows is cost of revenue (CoR below). In the first half of 2020 cost of revenue is just 5% of total revenues, up from 3% in the same period last year. However, building a telehealth business with employed healthcare providers is a fundamentally different and much less profitable business than GoodRx runs today. For benchmarks, look at Awell (~60% CoR/total revenue) or Teladoc (~36% CoR/total revenue). Investors should be aware that building out the telehealth business may eat into profits and cash flow.
Cost of Revenue (in thousands)
Valuation
GoodRx went public last week at a price of $33 per share, equating to a $12.7 billion enterprise value. After trading up over 50% in its first day the stock has hovered around $55 per share more recently. This equates to an enterprise value of ~49x trailing revenues and ~128x trailing EBITDA. Taking a rough cut run-rate revenue of ~$513 million implies an EV to revenue multiple of ~45x. Acknowledging there is not a pure play competitor out there today one way to put this in perspective is to comparing it with the Payments peer group from Public Comps.
EV/2020 Revenue
I’m not in the business of putting out price targets for publicly traded companies, but I think it’s important to understand valuation relative to competitors. Pure play telehealth businesses like Amwell and Teladoc are trading between to 18–28x 2020 revenues. Clearly, it’s much better to be in the payments business.
The Bottom Line
GoodRx has built an extremely attractive business. In fact, some might wonder why the company would want to venture into telehealth at all. The margins of telehealth competitors like Amwell (~40% gross margin) and Teladoc (~64% gross margin) are much lower than the 95% gross margins of GoodRx. However, these telehealth competitors have essentially become tech-enabled healthcare providers. That is, they employ or contract with physicians who provide care and submit insurance claims.
GoodRx’s telehealth marketplace strategy could be a game-changer by breaking free of the provider mold and becoming a true marketplace for third-party healthcare providers. Marketplace businesses have proven to be some of the most valuable of all time, and GoodRx might be the best positioned player to build a marketplace for telehealth services given the company’s ubiquity with US consumers. Marketplaces are inherently challenged with the “chicken or egg” problem of deciding whether to build the supply or demand side of the market first. GoodRx’s acquisition of HeyDoctor could be viewed as a way to prop up the supply side of the marketplace rather than a long-term foray into providing virtual care.
Simply put, GoodRx is an important step in the evolution of consumer-driven healthcare. There are detractors who argue the company simply found a loophole to profit off an already broken system. I agree. That a business this large can be built as a workaround to the traditional pharmaceutical value chain is indicative of a seriously broken system. However, the consumer demand for price transparency, radical ease of use, and digital-first solutions should be key takeaways to anyone operating or building healthcare businesses today. GoodRx makes life better for anyone taking a prescription drug in the US.
Disclosure: I am not a financial advisor, and this post is not meant to be investment advice. I am not an investor in GoodRx.
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