GoodRx qualified as a unicorn prior to its IPO, but its story and ambition is rare enough that it may warrant a new mythological creature dedication. Founded in 2011, the nine year-old digital health company went public last September with $388 million in 2019 revenue and, more surprisingly, $139 million in operating profit.
GoodRx is best known for making prescription drug pricing transparent and offering discount coupons to consumers, allowing consumers to shop for which pharmacy provides the best combination of price and convenience. The company earns revenue only only when it saves people money. Thus far, the company estimates it has helped Americans realize $20 billion in savings.
Doing good is going well for GoodRx and its investors, as suggested by the company’s $18 billion market capitalization (as of the publish date).
While GoodRx’s growth has been impressive, it also begs questions:
- How does GoodRx save people money?
- Where do pharmacies fit in, and why do they work with GoodRx?
- Why does a 9 year old company with $388 million in revenue have a market cap of $18 billion, when Fortune 8 McKesson has $230 billion in revenue and a market cap of only $27 billion?
- What is GoodRx’s real business and who does GoodRx really compete with?
Perhaps most interestingly, is GoodRx’s position sustainable?
How Does GoodRx Save People Money?
This is a big question, because in a well-functioning healthcare system that helps people find and access high quality, low cost services, there would be no need for GoodRx. That’s according to one of GoodRx’s co-CEOs, who has said, “A company like ours should not have to exist: People should be able to get the health care that they need, without having to do research and jump through hoops and get approvals.”
Picking up a prescription from the pharmacy seems like it should be a straightforward process from a consumer perspective: the doctor writes the prescription, the pharmacy fills it, and when it’s ready to be picked up, the consumer shows up.
In the background, however, the process is anything but straightforward. And virtually none of the decisions that have an economic impact on the consumer are made by any of the stakeholders involved in the prescription- fulfillment process: few doctors will know the out-of-pocket costs the consumer will face, the pharmacy doesn’t set the price, and consumers often face sticker shock when they arrive, unaware that the same prescription may be available at a lower cost at another pharmacy down the street.
Behind the curtain are actors and forces that in general seek to reduce healthcare costs at a system level but, as each has its own set of incentives, whose efforts frequently conspire to put consumers at a disadvantage.
Most Americans, especially those between the ages of 21 and 65, get their health insurance through their employers. It’s an odd situation stemming from an executive order by Franklin Delano Roosevelt during World War II to stabilize wage rates during labor shortages, and subsequently enshrined in tax policy and code, which allowed employers to recognize spend on health insurance as tax deductible (thereby reducing their taxable income).
The problem? Most employers are in the business of running their business, not in understanding the intricacies of healthcare, the needs of each employee or how to best manage benefits across populations. As a result, they rely on benefits consultants to help them structure the healthcare benefits they offer to their employees. Increasingly, their focus is on reducing an expense line that is rising faster than their top line. They have been doing this in a number of ways, including shifting the cost burden to employees through high deductible health plans HDHPs) and requiring higher copays; the theory is that such efforts reduce overall premiums.
With HDHPs come the consequences of patients being increasingly responsible for high out-of-pocket costs, including delaying or neglecting seeking care and medication non-adherence. As detailed in a 2020 report from CoverMyMeds (CMM), prescription abandonment tends to increase as out-of-pocket costs grow, especially during the deductible period when patients are responsible for the entirety of their healthcare costs.
As cited in the CMM report, for prescriptions under $50, abandonment can range from eight percent to 21%, but when costs are above $250, prescription abandonment can reach as high as 69%. Moreover, one of four prescriptions are abandoned by patients during the deductible period of a plan versus only one in 10 prescriptions when there is no deductible.
While employers are frequently the party ultimately funding healthcare coverage and services, it is pharmacy benefit managers (PBMs) who design and administer plans to manage outpatient prescription drug spend. To do so, PBMs develop a formulary of covered drugs, which include brand drugs (whereby they negotiate to receive rebates with pharma manufacturers based on the volume of prescriptions they process claims for) and generic drugs. PBMs also develop a network of contracted pharmacies, whom they negotiate with on drug prices.
Perhaps in an effort to keep overall costs (and premiums) down, PBMs and employers have increasingly negotiated drug prices that are lower than what the consumer’s copay actually is. That is, the PBMs require (contractually, it should be noted) the pharmacies to collect more from the consumer than the PBM will actually pay the pharmacy.
To be clear: consumers pay the pharmacy for the prescription, and the pharmacy subsequently pays the PBM a portion of what it collected from the consumer. Research suggests that this “overpayment” occurs for almost a quarter of all prescriptions. Pharmacists call such arrangements “clawbacks”.
As a middleman, PBMs’ ability to create value is all about volume: the more claims it processes, the more negotiating power it has with both manufacturers and pharmacies. Perhaps for this reason, many PBMs have started to offer drug discount cards to the public, intended to reach uninsured and underinsured populations.
Where does GoodRx fit in? Simply put, PBMs run complex healthcare B2B operations and are not recognized for their customer service or consumer savviness. Express Scripts, one of the largest PBMs, reportedly had a negative Net Promoter Score prior to its acquisition by Cigna.
GoodRx is a consumer friendly, technology savvy platform trusted by consumers to bring transparency to a complicated process and provide affordable options for them. Essentially, GoodRx is just one more distribution channel for the PBMs to increase their prescription volume.
In summary, GoodRx can help different groups of consumers save money:
- For uninsured or underinsured consumers, GoodRx allows consumers to tap into and leverage PBMs’ scale and purchasing power to negotiate drug prices down from pharmacies’ ‘usual and customary’ prices
- For commercially insured consumers, GoodRx allows consumers to access PBMs’ discount programs to identify when discount card options are lower cost than the consumers’ own insurance copay is for a given drug
In fact, while logic would suggest that the majority of GoodRx users are in the first group, GoodRx reports that almost 75% of its users are insured.
Where Do Pharmacies Fit In, And Why Do They Accept GoodRx?
What is the role of pharmacists and pharmacies in all of this? And why do they agree to arrangements in which they charge their patients more than the cost of the drug? Why don’t they simply come up with their own discount programs that saves their patients money and keeps more of the profit for themselves?
It used to work this way, after all; pharmacists would fill prescriptions and establish prices based on their cost of inventory and the value of the clinical service they provided. Patients largely paid for their prescriptions in cash.
Beginning in the 1990s, however, PBMs started to emerge as employers and health plans sought to mitigate rising prescription drug costs. As the size and scale of PBMs increased, so too did their influence over pharmacies: iIn order to keep long time customers, pharmacies needed to start accepting their insurance.
The presence of PBMs also introduced what turned out to be a perverse dysfunctional wrinkle in pharmacies’ economic relationships with their patients. PBM contracts generally stipulate they will pay the lowest possible price in all cases, creating a situation in which pharmacies inflate their ‘usual and customary’ prices (including on generic drugs) in order to not shoot themselves in the foot from a negotiating standpoint. This creates the opening for GoodRx.
It helps to understand a pharmacy’s cost structure. Pharmacies average 21% gross margin on prescriptions they dispense. With fairly high operating costs in the form of rent and utilities, significant inventory carrying costs, and relatively high labor costs, estimates are that pharmacies operate with slim 2% to 4% operating margins.
While there are promising new technologies and models of care to pay pharmacists for delivering care, in the meantime, business survival is all about the volume of prescriptions dispensed. So while pharmacists are an underutilized clinical resource who should be doing more as part of a care team, most pharmacies today accept GoodRx coupons because they want to help their patients save money, and they want to stay in business. If they don’t accept the coupons, surely their competitor down the street will.
Why Do Investors Value GoodRx At Close To The Same Level As McKesson?
GoodRx had 2019 revenue of $388 million, a growth of 55.6% over the previous year. McKesson had 2019 revenue of $214 billion (a modest 550X GoodRx’s revenue), reflecting year over year growth of 2.8%. If topline growth continued for both companies at their current rates, GoodRx would overtake McKesson somewhere near 2035. This seems improbable for a number of reasons, including that (a) GoodRx’s growth rate is likely to naturally decline as its revenue base grows, and more importantly (b) the market opportunity for prescriptions is far too small: there were 5.8 billion prescriptions filled in the US in 2018, far fewer than an estimated $110 billion that GoodRx would need to match McKesson’s revenue.
What explains investors’ optimism about GoodRx relative to McKesson? A few things.
The first is per unit economics. While McKesson distributed $168 billion in prescription drug supplies, its gross margins on this business are paltry. A study out of USC suggests that for every $100 of prescriptions a wholesaler distributes, it has direct costs of $96.30, so it only keeps $3.70 in gross margin; after overhead, the wholesaler might make $0.50.
On the $20 a consumer might spend on a prescription using a GoodRx coupon, McKesson’s revenue might be $12, but its gross margin would only be $0.74.
In that same circumstance, GoodRx has a “take rate” of 15% on the consumer’s $20 purchase price, meaning it realizes $3 of revenue. More impressive, GoodRx’s direct costs for the transaction are only ~$0.12, so it realizes $2.88 in gross margin.
Said another way, GoodRx keeps ~4X the amount ($2.88 vs $0.74 in this example) that McKesson does on every prescription dispensed.
The second reason is immediate growth opportunities. McKesson operates in a mature and highly- competitive industry; every client won is done at another’s expense, and McKesson must likewise spend resources to protect its own client roster from competitors. GoodRx, on the other hand, has a relatively “blue ocean” market opportunity in front of it: while there are some smaller competitors, for the most part the biggest questions GoodRx face are how quickly it can increase consumer awareness of opportunities to save on their prescriptions and reach them with this information at the right time. A big open question for GoodRx is the total potential number of consumers who might benefit from prescription discounts, but with increasing prevalence of high deductible high plans (HDHPs) and the level of uninsured increasing, GoodRx seems to have a lot of runway for growth in its core business.
While there are also other factors at play, perhaps the biggest remaining reason for investor enthusiasm for GoodRx is the fundamental business it is in. Looking at McKesson, the company has invested many billions of dollars in distribution assets and capabilities; clearly, its core competence is pharmaceutical and medical distribution and building relationships with manufacturers and clients.
GoodRx’s core business may not actually be the prescription discount business at all.
GoodRx’s Vision, And Who It Really Is Competing With
GoodRx’s vision is to “Build the leading digital platform for consumer healthcare”. What does it mean to build a digital platform for consumer healthcare?
One can look at who GoodRx compares themselves to for an idea of what their vision really entails. Zillow, Uber, Booking.com, and OpenTable are among the comps they offer.
What stands out about each of these companies? Several things: first, obviously, they are all relatively young technology companies; second, they all have strong consumer brands; and most importantly, their primary business function is to create a marketplace to match supply and demand in certain categories. Uber matches riders with drivers, OpenTable matches diners with restaurants, Booking.com matches travelers with airline and lodging needs, and Zillow matches homebuyers and renters with sellers and myriad other services.
In short, each of GoodRx’s self-selected comparable companies is a platform that serves as a marketplace, connecting demand and supply of services. Each one creates value not by developing and selling products or services, but by (i) bringing together users of different types to match supply and demand and (ii) facilitating transactions between the two —just like GoodRx.
What else stands out? Each has dramatically upended (one might say disrupted) a staid, inefficient industry and created enormous value by increasing transparency and dramatically reducing search and transaction costs for consumers —in other words, by organizing previously complex and opaque industries into marketplaces that favor consumers. Uber has empowered consumers with the confidence of knowing they can get from point A to B safely and reliably, without a car or a trusted friend in the area. Booking.com gives consumers the confidence to search for convenient and low cost travel options, putting individual consumers on par with access to information that airlines and travel agencies used to leverage for their own benefit.
Healthcare represents the most opaque, complex sector that Americans have to deal with. At close to 20% of GDP, it’s also the largest, with powerful vested groups, each of which claim to want to protect patients but who also want to protect their slice of ever-increasing healthcare expenditures.
GoodRx appears to trying to become the most powerful patient advocate in America: it operates at national scale, aggregating the purchasing power of millions of individuals to help them find convenient and low cost options for healthcare needs. The company may have started off by focusing on prescription drug costs, but it has since expanded into telehealth. While GoodRx offers telehealth visits with its own providers, the company seems to be more interested in establishing the platform as a marketplace to connect consumers with any provider, with co-CEO Trevor Bezek noting in its recent earnings call “… this marketplace gives the GoodRx consumers much broader provider choice and physicians and covered by HeyDoctor, and it addresses areas not addressed by HeyDoctor.”
In service of its vision, GoodRx seems to be trying to organize our massive and fragmented healthcare delivery system into a marketplace of goods and services that work for the individual, in a way that puts the individual on equal footing with healthcare organizations.
If this is right, GoodRx’s core business is not the drug discount business, nor does not seem to have much interest in competing with other drug discount card companies. Accordingly, its real competition seems to be the types of companies that are also trying to organize healthcare at scale to work more efficiently, albeit with different models:
- UnitedHealth Group is one of the largest medical payers, but has been working to gradually incorporate delivery services and other benefits management into its portfolio; it’s also simultaneously been investing in digital health at a rapid clip
- CVS Health started as a chain of retail pharmacies, acquired Caremark to offer integrated pharmacy benefits management, and now with Aetna is a full service payer it has both the administrative and delivery functions across ambulatory and long term care
- Mayo Clinic is one of the nation’s preeminent academic medical center that also operates hospitals and clinics; it has now brought on Dr. John Halamka to develop the Mayo Clinic Platform, which seeks to “expand beyond our walls, multiply what we can do on our own, and innovate in new ways”
- Amazon’s employer collaborative (Haven) with JP Morgan and Berkshire Hathaway recently was shuttered, but the company’s announcement of Amazon Pharmacy (rebranding PillPack) and a discount card offering suggests the company continues to believe there is opportunity to disrupt the staid healthcare system.
Notably, GoodRx shares are down since the Amazon news. And with only 4.9 million monthly users of its service, GoodRx lags not only Amazon’s Prime membership numbers (126 million members in the US) but lacks the breadth of relationships and market position of a CVS Health, United HealthGroup or Mayo Clinic.
GoodRx claims that its network strengthens with every transaction, and that it experiences virtuous feedback loops: the more customers use it, the more GoodRx learns about consumer preferences and the more data it gathers, leading to a better product for customers. Now that GoodRx has proven out the consumer-first model, however, it is sure to be replicated by others, Amazon included. Whether GoodRx can maintain its position and healthy margins as competitors mimicking its marketplace model remains to be seen.
Regardless, for a company with GoodRx’s vision and uncanny ability to exploit systemic loopholes in favor of consumers in a way that generates profitable growth at scale, perhaps a unicorn is too modest a mythological creature. It was a Pegasus that helped a Greek hero defeat the awful Chimera, a monster composed of different animals that terrorized citizens. If the complexity of healthcare is intimidating to Americans, perhaps GoodRx (and others like it) is our Pegasus?