GoodRx: What The Dr. Ordered?

Summary

• GoodRx Q4 earnings and FY2021 forecast continued to validate the strong core of the company and foreshadowed the future revenue drivers.
• The primary prescription business is a steady and growing cash cow that provides a strong valuation floor.
• I believe the risk/reward scenario is very favorable but some questions remain.
• The threat of Amazon to the business is vastly overstated at this juncture.

I don't normally invest in individual stocks nor write on SeekingAlpha, but I wanted to better express my rationale for being long GoodRx, and hope that the community can challenge any unreasonable assertions. I find that there is a fair amount to add to SA post Q4 earnings, and want to add context on some other misinformation I've seen on the web. Disclaimer: While I have a finance degree, my experience is more so from 10+ years as an operator within ad-tech. This is not financial advice. 

One thing that I find odd about the analyst coverage for the company is that it seems to be made up of mostly internet analysts. That isn't obviously the right experience for analyzing these companies... it is really a healthcare analyst that can properly can size up the various risks, market valuation, and potential market size here. Not that the internet perspective isn't valuable as well, but I feel we are missing diversity in proper healthcare specific questions and analysis on the Q&A.

Q4 Review

GoodRx's core business is in the drug couponing model that enables them to provide lower drug prices for both insured and uninsured consumers while earning a fee from multiple Pharmacy Benefit Managers in exchange for bringing them incremental drug transaction scale. Other authors and fintwit have already expanded upon the business models so I won't go into detail.

The stock has been under pressure since Q4 release, however, there isn't anything they said that should have changed a shareholders perspective as overall it was another strong quarter and strong forecast. Highlights for this earnings release include:

- Core prescriptions biz up 26% YoY

- Other revenue up 122% to $22 million

- Forecast of 20% growth Q1 and 35% on the year to $735 - $755 million

- Gross margins at 94% 

- Growth of 5.6 million monthly active customers in Q4, up from 4.9 million the month prior

As some general commentary based on the conference call and release:

*The upcoming Q1 is a tough y/y comparison for GDRX as COVID impacted prescription volume. The economy normalization will serve as a 2H tailwind as the economy re-opens and physician visits normalize. A good potential leading indicator for when/if physician visits normalize will be to watch the earnings of the Labs companies like Lab Corp. They break out the base lab tests affected by COVID and have similarly predicted the rebound. They tend to report earlier than GDRX. Still Q4 was also a tough comparison quarter and the company still grew at 36% and is still forecasting another 20% on the most challenging comp.

*The business continues to be highly stable and with subscription growth doubling to 800K users in Q4, we are getting further insight into the highly recurring nature of the business

*Other revenue (GoodRx gold, advertising solutions, mail-order, GoodRx care) was incredibly strong and there appears to be a lot of potential in each as future drivers

*Two points of personal concern was the growth in monthly MAU's. On the call it was mentioned that their acquisition of ScriptCycle added 'mid hundreds of thousands of MAUs' to the count this quarter. Given that we went from 4.9 to 5.6, it seems their may have been very little if any organic growth in MAUs in the core business. 

Valuation

With 95% gross margins, 37% adjusted EBITDA, and 35% rev growth, it is easy to see why P/E firms loved anchoring capital into the business. GoodRx will likely do ~$250 million in adjusted EBITDA in FY21 leaving a fwd Enterprise Value/EBITDA of about 14bil/250mil = 56x and P/S of ~20x. For comparison sake, the S&P 500 EV/EBITDA ranges between 18-25 on ~10% growth forward rev growth at best. 

While the stock may not be an 'absolute' bargain, relative to the market and tech it feels comparably cheap given the unique blend of profit and growth. 

I've seen a lot of comparison to other digital health tech companies, but I personally think comparing against other PBMs would be a useful take. My view is that GoodRx is effectively a meta-PBM for both insured and uninsured consumers. Unfortunately the PBMs with the largest market share have all been acquired and/or are part of a broader company so it is hard to pull a true comp. Express Scripts acquisition by CVS would be the cleanest to run a true comp. 

I took the 2017 numbers of Express Scripts, one of big three PBMs, prior to the CVS acquisition. 

PBM	Members	Revenue	EBITDA	Acquisition Price	Prior 12 mos EBITDA growth rate	EBITDA Acquisition Multiple
Express Scripts	83 million	100 billion	~5.4 billion	67 billion	8%	~12x	*2017 numbers
GoodRx	5.5 million	735 million	320 million		42%		*2021 numbers

By this valuation, if we ignore growth, CVS would pay 4 billion for GDRX or roughly $12/share. The growth rates of course are not close to equal though so a strategic buyer would have to pay the right premium for that. While PBM top-line revenue numbers are dramatically inflated because it includes cost of drugs and it would be interesting if we could compare GDRX on an apples to apple metric. One thing that does stand out to me is just how much more profit GDRX appears to generate per user compared to say Express. 

Note there are many limits to the comparison above and it is for illustrative purposes only. While I think of GoodRx as a meta-PBM, is not a PBM (and finding a way to potentially not be dependent on PBMs long term may be key to GDRX survival), many others may disagree this is a reasonable comp.

Amazon has jumped in but brought none of their nets

The hallmark of poor investing decisions often begins with "I sold because X FANG stock just announced they were entering the space". I'm far too lazy to demonstrate the many examples that exist where market reaction has been dramatically incorrect and overstated the ability of a FANG to cross-sell new initiatives into existing subscriber base.

In November, Amazon has launched Amazon Pharmacy and PrimeRx discount card. Even more recently, it has been announced Amazon will roll out a telehealth offering to employees and other employers. I believe the market fears are, again, vastly overstated. As a Prime user, without specifically typing in a search for 'primerx' on the site, I'm not even sure how I would navigate nor discover the discount card benefits. I imagine this was just an easy offering for Amazon to add and see how many fish swim passively swim into net. Furthermore, it is odd to me that Amazon made the offering exclusive to Prime members when discount cards are open and free to all already. 

The Amazon fear-mongers also ignore the likely user path to discount drug price discovery... google search. Just about any search path related to cheap drug prices for X will send a user to GoodRx's site as SEO result #1.

It is just very difficult for me to imagine the Amazon offering getting any real marketing dollars or homepage real estate from Amazon. They would have to spend a lot of internal resources to effectively cross-sell and there are likely higher ROI places internally. If Amazon is a threat, there is certainly no sign of it yet. A quick search on Twitter or Google Trends both suggest that these offerings might as well have not been launched yet.

Lastly, the fact that Amazon, a business where it is hard to find revenue products that move the needle, the fact they are even interested only validates the GoodRx model. 

Entry strategy

As of writing, the stock is hovering around $37 and has been extremely beaten down over the last month as it was gunning for $60 a short time ago. 

Will lockup expiration on March 22 impact the stock negatively? It seems to have been a hangover as of late, and I'll personally be watching to see if the exec teams chooses to pull out cash. Research shows that so as long as the exec team isn't selling then insider selling isn't nec. indicative of future poor returns, as employee and large share holders generally just need to diversify holdings. 

I believe there should be strong support at the IPO price of $33. The largest share holder at 1/3 of the float is the PE shop Silver Lake. Given they recently chose to increase their holdings by $100 million and the shares are only marginally up from $33, it seems unlikely they would have any incentive to bail here. 

A high lingering short float could also quickly become a catalyst for a bounce

All in, I think that there is relatively strong downside protection from these price points, say 10-15%, and given how the overall market is valued today, it is not unreasonable for the stock to climb to $60-80 a share over the year to comp out well. 

Open Questions

There is still a lot I want to dive deeper on about this company and the sustainability of the model and its growth. Here are some questions I'm thinking about or want to dive deeper on. 

- What is the risk of legislation or regulatory change that squeezes the entire middlemen / PBM / discount card dynamics and ultimately hurts GDRX? There appears to be some pressure here that comes and goes but hard to suss out how likely anything is to happen. A Trump executive order pressuring PBMs was just delayed by a DC judge for further review.

- Will the telehealth acquisition prove to be meaningfully beneficial? This is a very different business form the core business, and while a hot market, it is extremely competitive and I worry about the distraction in focus and whether they will be able to effectively cross-sell to users. I think I'd have preferred to see them focus more on building out the telehealth marketplace and earn referrals fees vs. managing telehealth service directly. They acquired pre-pandemic so comparatively got a good deal on the acquisition, but the fact they don't break out the growth numbers here makes me at least somewhat skeptical about this business line. I'd love to be wrong here. 

- Should GDRX be spending more aggressively to acquire users and race ahead? While perhaps damaging to near-term margins, their market power exponentially grows as the user base grows and gives them higher leverage. The co might be underestimating the LTV and strategic value of each sticky user. 

- How far can they press the manufacturing solutions business? As the team is partly formerly facebook, they are familiar with building vauable ad products on top of user data. Advertising for pharma manufacturers is particularly restrictive and it often difficult for pharma to either use data to target or reach a user at POS. I expect very strong growth here and it is another reason I'm pro spending more on CAC. I think this business is the true second horse of GDRX for now.

- What future products can they potentially build to help US consumers continue to find the best deals on healthcare? With hospitals now required to post prices as of Jan 1, there seems to be a lot a company like GDRX can do with this data and earn potential earn advertising fees

- How can they drive value for independent pharmacies? Will pharmacies eventually rebel against GoodRx? Contracts make this difficult but pharmacists are justifiably upset as they can at times take a cash loss accepting a GDRX coupon when dispensing medication. More of a problem for independents whose broader survival is already under attack.

Thank you to the FinTwit community and especially RichardChu97 https://richardchu97.substack.com/p/goodrx-the-frontdoor-to-healthcare who has done a great takedown on the stock and addresses much of the business model, upside, and risks that I left out or never would have thought of!