Learning Resources

Investor Does Fundamental Analysis on GoodRx (GDRX) - Stock Analysis For Beginners

24 Sep 2021

Transcript

00:00 About GoodRx

When it comes to the top industries to invest in for long-term growth potential, it always falls back to these few sectors. Healthcare, tech, renewable energy, cybersecurity, just to name a few.

And this company that we’re going to analyse today is a combination of two of those important sectors. Healthcare and tech!

Hey guys, I’m Alex. Welcome to Behind The Stock where I dissect company information and annual report to discover and identify investment opportunities for you. We upload new episodes every Friday! Make sure to subscribe and turn on the notification bell!

Today, let’s talk about GoodRx, an American healthcare tech company. Their IPO was only a year ago in September 2020.

They are known for their free website and mobile app that tracks prescription drug prices in the United States. They provide coupons for discounts on medications. Besides that, they also operate a telemedicine platform. This virtual healthcare service was formed after the acquisition of "HeyDoctor" in late 2019. Renamed to GoodRx Care, patients can get affordable online visits with board-certified doctors, nurses, and medical professionals.

GoodRx was started to solve one of the biggest healthcare issues in the US – which is the long history of insane prices of prescription drugs. This is because drug companies in the US set their own prices and it’s increasingly more expensive each year. And it will only continue to get more expensive due to the complexity of the US healthcare system.

It's a common experience for millions of Americans. They go to the doctor, get a prescription, take it to the pharmacy, and get hit with a massive bill. They still sometimes have to pay hundreds of dollars even if insurance covers a part of the cost.

Americans spend around USD 1,200 a year on average for prescription drugs, which is more than any other country.

According to GoodRx co-founder, Doug Hirsch, the challenge with health care in the US is that it’s so complicated and so confusing that a lot of people just don't know what to do. For example, when a patient gets a prescription from the doctor, they take it to the pharmacy to get the prescription filled. Pharmacy A could charge $500, but then Pharmacy B charges $250 instead for the same prescription. Different pharmacies would charge different prices.

That was a personal experience for Doug Hirsch which made him think – there should be a better way. If he can compare prices for travel and for electronics, why not compare prices for health care? And so that was how and why GoodRx was created.

02:54 GoodRx Business Overview

Since the creation of GoodRx about a decade ago, the business has expanded and evolved. Currently, the company now offers prescriptions, subscriptions, pharmaceutical manufacturing solutions, telehealth, and marketplace. 

GoodRx is the number one most downloaded medical app in the last three years. They have helped consumers save about 30 billion dollars in medication. Between the website and apps, GoodRx generates about 20 million monthly visitors.

GoodRx entered the market as a price comparison tool for prescriptions. Over the years, they developed a proprietary technology, which as of 2020 aggregates over 150 billion prescription data points from many sources. This data gets curated and presented back to consumers via their free mobile app and website.

By 2017, GoodRx launched their first subscription service, called Gold, and by 2018, they also launched Kroger Savings. GoodRx Gold charges a monthly fee to give subscribers access to discounts on over-the-counter drugs each month. Kroger Rx Savings Club, on the other hand, is a partnership between GoodRx and Kroger. For an annual fee, subscribers can access lower prescription prices at Kroger pharmacies.

Next, in terms telemedicine, the service they provide include online consultation with doctors at discounted rates. There is also online medical resource and a telephone consultation service.

As for Pharmaceutical Manufacturer Solutions, it includes Co-pay cards, Patient assistance programs and other savings options. GoodRx partners up with pharmaceutical manufacturers to advertise their solutions on the platform, while offering discounts to eligible consumers.

All these allow GoodRx to provide value to multiple parties.

They can especially empower consumers with a single access point, greater transparency, cost savings and convenience.

GoodRx makes money through coupon redemption fees, monthly subscription fees, online healthcare services, and advertising on the platform.

In terms of revenue breakdown, GoodRx mostly generated from prescription transaction fees, which is when pharmacies fill prescriptions for consumers.

Based on their annual report, over 80% of their 2020 revenue are derived from prescription transaction fees. And those revenue are primarily generated from PBMs. So how it works is GoodRx partners with these PBMs, which is short for pharmacy benefit managers. PBMs are the most common source of pricing information. They are like the middlemen between insurance companies, pharmacies, and manufacturers. They negotiate directly with drug manufacturers or wholesalers to secure lower drug costs for insurers and insurance companies.

When a consumer fills a prescription using a GoodRx code, the PBM receives a portion of the price that the consumer paid. GoodRx then receives a cut from there.

As for the other revenue, they’re from subscription, pharmaceutical manufacturer solutions and telehealth services.

05:44 GoodRx Growth Potential

In terms of growth, from their recent earnings report, they have been showing strong consumer growth and strong revenue growth with high profitability.

Based on Q2 numbers, GoodRx has a user base of more than 7.5 million that includes both monthly active users and subscribers. Having active users is key because when it comes to medication, it’s a repeat purchase. So, customers will form a long-term relationship and reliance on GoodRx.

Subscribers for GoodRx Gold has also doubled year on year. As the user base grows and when users spend more using GoodRx services, the higher the revenue and profitability.

Another growth potential to point out is the sizable addressable market. GoodRx operates in a market with a combined total of over 800 billion dollar out of the 4 trillion-dollar healthcare market.

According to their IPO prospectus, the prescription market in the U.S alone is estimated at more than 500 billion of annual spending. The telehealth opportunity is estimated at $250 billion, and the manufacturer solutions offering has a potential annual market value of over $30 billion.

In terms of Alex Meter, I rate GoodRx's growth as good

06:51 GoodRx Moat

Moving on to the competitive advantage of GoodRx, one of it is the recurring revenue model.

GoodRx generates the bulk of their revenue by taking a cut when consumers use GoodRx to purchase their prescription drugs. The typical process is, a consumer shows their GoodRx discount at the pharmacy for their prescription. GoodRx is then saved to their profile at the pharmacy and it applies for future refills and new prescriptions for their next visits.

They become repeat customers because most of these prescriptions are repeat purchases since they’re for chronic medication. The consumer continues to save and GoodRx continues to earn fees. The company estimates that 80% of their prescription drug revenues are recurring, giving GoodRx a steady recurring revenue stream.

Another competitive advantage of GoodRx is their network effect. GoodRx has a defensible platform strategy. There have a strong cross-side network effect between consumers, pharmacies and PBMs on the platform.

First is the consumer – pharmacy relationship. Pharmacies seek to increase customer volume, and customers are looking to price shop across more pharmacies. Therefore, increase in the numbers on one side translates to higher value for the other.

Next is the relationship between consumers and pharmacy benefit managers, PBMs for short. More PBMs means more pricing data for the consumers, which attracts a bigger user base, and in turm higher margins for the PBMs.

There is also the relationship between PBMs and pharmacies. As the number of pharmacies on the platform increases, PBMs can cut costs for the insurers further. And as for pharmacies, they’re cautious about honoring agreements with PBMs. An increase in number of PBMs on the platform strengthens the legitimacy GoodRx’s business model, and allows pharmacies to consolidate their partnership with GoodRx.

In terms of Alex Meter, I rate GoodRx's competitive advantage as good

08:38 GoodRx Risks

Now let’s look at the risks of GoodRx.

One of it is the decreasing margins.

In 2019, GoodRx acquired HeyDoctor. The service is popular, but is not very profitable on its own. Now known as GoodRx Care, they provide telehealth medical services at affordable prices. Majority of these visits end with prescriptions likely to be filled with an attached GoodRx coupon. Right now, the telehealth service is squeezing profit margins. GoodRx hasn't broken out separate results for GoodRx Care, and it could squeeze margins further if the GoodRx coupons stop performing.

Next is the regulatory risk.

US has had a long battle with high drug prices for decades. While the government and lawmakers have worked to address this issue, it has been a slow process with limited success. However, if a national healthcare reform takes place, this could impact drug prices and the overall healthcare industry. This could be an issue for GoodRx.

However, if reforms don't change the healthcare system, the future looks bright for GoodRx.

In terms of Alex Meter, I rate GoodRx risks as mid to high risk.

09:44 GoodRx Financial

Next, let's look into the financial. In terms of revenue, they are growing. However, do note that they are currently still making losses. In terms of debt, their debt to equity is at 0.85x. It is relatively high considering they just raised 1 billion US dollar from IPO funding. However, they're able to generate strong operating and free cash flow.

In terms of Alex Meter, I rate their financial as good

10:07 Likes & Dislikes About GoodRx

Here’s what I like about GoodRx.
I like that the management team is shifting its business model from transaction-based model to recurring subscription model where it provides more value-added services. This will lock in customers as they would want discounted prescriptions with even higher savings. The GoodRx Care Telehealth services also improves consumers’ convenience and increase leads of prescription services. This will increase customer lifetime value.

Another thing I like about GoodRx is that they have over 7 million customers using either their free service or subscription service, which is growing fast. What is most interesting about these results is that subscription users topped 1 million, growing 96% year-over-year. Meanwhile free Monthly Active Customers jumped over 35% year-over-year. This shows that GoodRx is able to convert their free users over to subscription users at a very fast pace.

The third thing I like is that while many tech businesses are running at a cash burn model, GoodRx is able to generate strong free cashflow, and achieving a 15% to 20% Free cash flow margin.

So, after watching my analysis, would you add GoodRx into your watchlist?

Make sure you stay tuned for next week’s video. It’s going to be a special episode where I’ll be reviewing the BEST and WORST performing stocks that I previously covered in Behind The Stock

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Till then, I’m Alex and goodbye!