GoodRx Holdings, Inc. (GDRX) Earnings Call Transcript & Summary

So I'm Jonathan Yong, the healthcare technology analyst at Credit Suisse. With us today, we have GoodRx. From GoodRx is CFO, Karsten Voermann. I'll flip to him for the most exciting part of any conference, the safe harbor language.

Thank you. Thanks, Jonathan. We have a safe harbor provision, and we'll make forward-looking statements during this presentation. We refer you to our SEC filings for risk factors that could impact our future performance. And with that, back to you, Jonathan.

All right. So you guys recently reported 3Q results, if you want to just provide a quick summary of how the results came in and your perspective of it.

Sure. So we're pleased with our growth in adjusted EBITDA margin for 3Q. We pushed that up to 28% for the quarter, which we're quite pleased with. We're also pleased with the fact that we had $52 million of adjusted EBITDA, and we're also throwing off significant cash flow, differently than many other tech and health care, IT companies, our cash flow from operations for the last couple of quarters, if you just average those 2 has been sort of $40-plus million. So from that perspective, I think we're pretty differentiated. We're also returning to growth. We, earlier in the year, had issues associated with some of the retailers we work with, but now we're growing quite rapidly. We're back in growth rates outside of that retail in our core business, growth rates of 8% year-over-year. With respect to our other business lines, such as, for example, our firm manufacturer solutions business line, we grew that 81% year-over-year through the first 9 months of the year as well. So we're quite pleased that the growth rates are normalizing and the margins are increasing, which is helpful.

Okay. So I guess kind of starting with the prescription transaction revenue side. Sequentially, you're expecting to see a decline in revenue there. There are obviously the grocer headwinds and then some of the consumer engagement efforts. But at the same time, you're also seeing some rebound where the other pharmacies are gaining share.

Correct, yes.

You do one grocer is slowly starting to prove. But again, it doesn't really show that much progress. So can you provide some context to the prescription revenue guidance for 4Q and what's happening there? And how should we think about this as we step into 2023 as well?

Absolutely, yes. So as you articulated, we, earlier in the year, had a grocer that represented a significant amount of the overall volume we drive cease to work with some of the PBMs we work with, which resulted in a headwind in the last quarter of approximately $40 million. And the quarter before that, it was slightly less because the issue only manifested in that quarter. Looking forward, we expect the impacts to continue to be at about those levels. And that is the bigger reason wire growth isn't faster year-over-year. In addition to the grocer issue, we've also elected to change our interactions with consumers, particularly new users to some degree, too, we're focusing very heavily on user engagement. And what user engagement effectively means is that we're asking users to register for GoodRx services. Historically, we've had a completely frictionless funnel where the user could just put their medication price into the GoodRx technologies. They get a great price back, they'd save money and they'd be happy. But we're realizing that our ability to increase user LTV correlates with our ability to interact with them more. And the benefit of that outweighs the incremental friction in the funnel over the longer term. In the short term though, that means that as you create this incremental step where users register, it creates a reality where those users in the funnel will narrow slightly, and therefore the revenue headwind associated with that, we expect to increase from approximately $5 million last quarter to approximately $10 million for the fourth quarter and headwinds. So those are the 2 material impacts to 4Q revenue that are needed to normalize it or think about it conceptually on a year-on-year basis.

Okay. Great. Kind of as we think about the recovery related to the grocer, it will obviously be smaller than what it was previously. But should we think that can cover to 3% to 4% of revenues or volumes in line with that -- in line with their aggregate market share?

Sure. Yes. I think when we look at the grocer in the context of the GoodRx broadly functionality we provide to consumers and our prescription transactions business, consumers gravitate to the offering that has the best price for them in general in a marketplace model like ours where price discovery is a key attribute. So in that context, the reason the grocer was historically over-indexed is that their pricing was substantially lower than where all of the other pharmacies generally are with respect to their PBM relationships. That meant that since they are at the lower price, over time, more and more users gravitated to them. Now that grocers pricing is at or in some cases above the levels that many of the other pharmacies have. So we don't think we will ever be in a position where they're over-indexed in our book of business like they were historically. And we think it's unlikely that they will even index up to the level that they are from a pure market share perspective because their pricing has now become relatively disadvantaged compared to all the other pharmacies that we work with.

Okay. Great. Kind of alongside the grocer, there's obviously grocer consolidation that is currently out there. I guess, is there any consideration here that we should -- that we could possibly see a similar situation in terms of what happened? Or how are you thinking about the dynamics there? And anything for us as investors to consider?

Sure. I think there are a few dimensions -- to think through a few dynamics as you put it, to think through. The first is the one I just talked about where most of the pharmacies retailers had pricing that was at a certain level and Kroger, the grocer was at a substantially lower level. That created a different issue for that grocer than any of the other pharmacies we work with. And so far as their agreements with PBMs weren't giving them as much benefit as the other pharmacies relationships with PBMs were. So they were an outlier to begin with as the point here and in a very unique situation. And that's the reason we believe that they were in a position where they had to take a more adversarial role vis-a-vis the PBMs than anyone else does. So the first piece here goes to a unique position that this grocer was in that catalyzed a more adversarial relationship perhaps created the need for it that others don't have. I think the second dimension is that we're moving to a model and have been for a period of time now where we also direct contract as well as work through PBMs with various pharmacies, including the grocery in question. We have a direct contract in place with them, which we're glad to do, and they are great partners for us in that context. We also have direct relationships with a variety of the other top 5 pharmacies out there. And the reason that's so helpful in the context of your question is the direct contracting process allows -- even if a pharmacy is in a situation where there were an altercation with a given PBM or a set of PBMs to be able to make sure our GoodRx users will still have their GoodRx benefit accepted at all the pharmacies through our direct relationship in addition to through the PBM relationships. So we feel like that's been very advantageous to us in connection with the -- in connection with ensuring that a situation like this one will never manifest itself again. I think the other thing we're doing, which ties back to your -- the first question you asked is on the user engagement side, one of the reasons that's so valuable to us is that more engaged users who we know more about and can contact more easily are users that we can help more. So for example, if they see -- if they go to a given pharmacy on a regular basis to fill a script, but we see a price that's much lower to a pharmacy that's next door. We can provide them with that information and give them incremental benefits. The other reason it's so important, though, is in a situation like the one we had with the grocer, we weren't able to reach out and divert many of those users to different retailers or pharmacies because we've created such a frictionless app, meaning a tool where you just put in the drug price, you immediately can save or you go to the doctor's office, the doctor hands you GoodRx's card, you immediately save. Because we didn't request very much information back from users that inhibited our ability to influence their behavior and shift them to a different pharmacy. So we've addressed this growth ratio through, number one, the changing of the price at the grocer. So it's more parallel with other grocers who don't have the need to do what this grocery did given their pricing has historically been better. Number 2, through the direct contracting. And then finally, through the user engagement efforts that give us more information about users, including contact information. Is that helpful?

Yes. No, that's very helpful. Kind of, sticking to the customer engagement efforts that you're talking about, how is the progress going there? And you're collecting extra data. Part of the strategy was also to get a greater share of their drug spend or their wallet. Are you seeing that manifest itself in terms of the early read on your efforts there?

Yes, absolutely. We're -- one of the reasons we're doubling down on it and we're seeing bigger impact on this. And in terms of funnel attenuation, which in the short term means less revenue is because we view this as so long-term valuable. So we've only been doing this for half of the last quarter through now, and we'll continue doing it going forward indefinitely. But what we're already seeing off that is the users for whom we have more information are significantly more engaged and drive significantly more value for us. I think at this stage, given it hasn't been happening that long. We're very pleased with that reality. But at the early incipient stages of an effort like this, we're not yet quantifying it because the quanta associated with the benefit, maybe that we're seeing now, maybe larger than they will be in the long term, either because the first users to engage in this manner, maybe users who have a higher propensity to work with GoodRx. Anyway, for example, or maybe the users who are already likely to be heavier users. So it's all extraordinarily positive, but it's, in some senses, sufficiently positive that we want to look at this over a longer period of time before we put out numbers around the differential value of the users to make sure that we're not looking right now at some unique set that has especially attractive characteristics.

Okay. And in terms of who you're targeting with these customer engagement efforts, my understanding was that was primarily targeted at, as you put, kind of top funnel, so new members. What about the existing numbers? Is there a framework of how we should think about that?

Yes, we're wrapping them in as well. So it's -- we're now in this quarter, moving to a point where we're able to wrap in everybody who interacts with us through our digital technologies. That's the goal. We will continue, though, to also offer services via health care providers in their offices. That's our biggest single source of referrals and to GoodRx. Health care providers request from us collateral materials. They've sitting over 400,000 health care provider offices in the U.S. health care providers, again, have a 90 NPS with respect to us, so they like us a lot, and they refer us a lot of patients. Historically, that's happened through things like the collateral we put in their offices. Now we're shifting that because in part of this engagement effort to electronic media. So we built, for example, a provider mode version of our GoodRx app that allows them to seamlessly share GoodRx savings, coupons either via e-mail or via text with their patients. And then those patients then come into our flow and our folks that we can use our engagement efforts to capture information from -- that said, I guess at the very beginning of this comment, we still have collaterals in these physicians' offices because there will always be some set of patients who maybe doesn't have a smartphone, belongs to a demographic that's less likely to be adept at using an app, et cetera. So there will be some subset of users for them it's challenging to get engagement data, but they're still valuable to us, and we still want them.

Yes. On that provider mode, I mean, it sounds pretty useful if a provider can push GoodRx right to the patient. I mean have you seen much volume being derived from provider mode yet or how do you think about that?

Yes. So, we launched it fairly recently and the incipient results are extraordinarily attractive to us, both in terms of provider opt-in, where about 90% of the providers we expose it to opt-in, again, that correlates to the high NPS we have and their desire as well to find a more efficient way of getting patients on medication and the physical collateral. The other thing we're seeing, associated with the provider mode, is that we learn more about the providers through it, too. We always had a strong sense of what their specialties were, for example, because we see the prescribing information through their NPIs, their prescriber numbers. But when they enter into a provider, well, they also self-identify incrementally. And the reason that's valuable isn't so much for the prescription transactions business that we've been talking about so far for most of our conversation. It's very valuable to our manufacturer solutions business too because pharma manufacturers seek to target often by specialty and having that information both on what's prescribed and the self-identification helps materially -- the other reason that's important is it gives us incremental data on provider usage of GoodRx. So for example, GoodRx is used primarily by providers during prescribing hours. There are some other tools out there that docs use and providers generally use that don't match that reality in the pharma marketing space. And so that makes GoodRx relatively more attractive to a pharma manufacturer than something that the doc may only be using early in the morning or late at night, outside prescribing hours. So we're able to guarantee that kind of information, which is helpful, too. So again, it helps in our core prescriptions business because they're routing coupons to patients in a way that's way more effective for them and the patient, but it's also very valuable to our broader pharm manufacturer solutions offering.

Okay. That's good to hear. So during the quarter, you announced a deal with the Express Scripts, can you describe how this works and when this should go into effect?

Sure. So I think I'll describe how it works for the patient or the life to start with, then we can work back from there on how the sales cycle looks and when we expect to see impact, if that sounds good. So the way the benefit works for the consumer patient is that they walk into a pharmacy. And if the GoodRx price on a given medication is lower than what their co-pay would be, the transaction automatically routes to go GoodRx. They get the benefit of the low GoodRx price, which beats the co-pay on average here in the U.S. by over 50% over half the time. So a significant amount of proportion of the time GoodRx will be the lowest price. So the patient walks in, automatically routes gets the GoodRx lower price than their co-pay gets the prescription filled and the patient's data flows back to ESI and through ESI to the plan and everyone else who may ultimately need it. So from that perspective, a patient gets a huge advantage in savings. From our perspective, we have a unique and very large distribution channel. I think last I read, ESI has somewhere around 60 million lives that they serve. So it's a very, very large-scale player. And many of those folks, the majority of them likely don't even realize prescription prices vary across pharmacies, let alone that you can save money with GoodRx. Our stats indicate about 70% of Americans have no idea that you can save on prescriptions or that prices vary. So having this ability to serve patients who don't even know that -- that there is an opportunity to save like this expands our ability to serve more and more people very, very nicely for us. So the way to think about it for us is primarily a distribution arrangement. Now from the Express Scripts' side and from the side of the plan sponsors, the reason this even came to fruition is because plan sponsors, employers are hearing from their employees, "Hey, my co-pay is x, I can get this more cheaply on GoodRx, what's going on? This plan isn't great." So from a plan sponsor perspective, this becomes an incremental benefit they can offer to their employees that cost them literally nothing, which is what people are looking for today because we're just going through our open enrollment period now. And as CFO, I have been following the cost of the -- of the health plans we have in place, and they're increasing double digits again this year. So a free benefit that you can offer your employees is very prized right now. And from ESI's perspective, if the prescription routes through the cash pay modality, of course, ESI bears no cost associated with that medication. So from their perspective, it's also attractive insofar as they can win more business from plan sponsors and they're not bearing the cost of the medication at all since it's we're adding through a cash pay modality. Does that make sense?

Yes. So I guess it should go into effect for '23 ideally, I know that. There's only time issue...

Yes. I think we're mostly through the sales cycle for '23 plans. So because ESI is selling those 2 plans who then opt into it. I think we're not anticipating a material amount of revenue associated with this for '23. But I think we'll get a bunch of very nice proof points that will allow us to propel this very aggressively in collaboration with ESI for '24 and beyond.

Okay. I'm just curious, on the selling cycle, I mean, why would a company not want to pick this up, given its effectively a free benefit design?

Yes. We think there will likely be a significant amount of uptake because of that. I think because we're not in next year yet, knowing specifically what the uptake will be and knowing then how many consumers and the benefiting from the modalities in the future, but our expectation is similar to yours. It's one of the reasons we're so excited about this deal.

Okay. And then you talked about the marketing benefits associated with this. What's kind of the fee structure for -- in terms of marketing? And how does it work? Do you pay a fee to Express Scripts for this? Or what are the dynamics there?

Sure. I can't get too deep into specifics of the deal given the confidentiality. But I think this is, for us, analogous to what we call an affiliate relationship. Like in the past, we've had relationships with entities ranging from USA to others where they offer GoodRx to the affiliates membership. This is sort of similar to that. And in the same way as other affiliate deals, we traditionally compensate our affiliate partners by providing them with value and return for them, sending script volume to us. In all of these cases, it's generally been highly variable. So what's nice about it for us is instead of spending money -- spending a bunch of money on CAC for a new user directly and then reaping the benefits over time as the user fills more and more scripts with GoodRx. In a model like this, you're not spending a significant amount of CAC upfront, and you're getting that volume coming in as time passes and as the users are automatically routed to GoodRx, if it's cheaper for the study of generic medications that this program is focused on relative to the traditional ESI benefit.

Okay. Let's turn to the pharma manufacturer solutions. So obviously, in the quarter, it did come below the anticipated guidance. The outlook looks like revenue will be down 15% or so year-on-year in the quarter. Can you talk about what happened in the quarter and kind of what's embedded in that outlook?

Yes. I'll talk about the quarter, in particular, the fourth quarter, that's evolving. And I think we may also refer back to last fourth quarter, too because I think we view them as fairly distinct from each other on a few characteristics. For example, last year in the fourth quarter, we saw pharm manufacturers seeking to and other entities who leverage our pharm manufacturing services, seeking to spend up and to use a budget before the end of last year. I think the dynamics of COVID perhaps or the shift to digital perhaps and the reduction in use of non-digital media and detailers had left more resources available at year-end than perhaps they're expecting. And we benefited from that significantly last year. We had a couple of deals in the mid-single-digit million-dollar range that were signed late in the year and delivered late in the year because of that. That makes -- the reason I bring that up and refer back to last year is it makes that quarter of last year a bit of a tougher comp because if you look at last year's revenue growth, there's a fairly big spike in the fourth quarter. This fourth quarter looks very different to us. What we see is that pharm manufacturers are delaying the decision-making associated with new deals in particular. So what we see is where someone might call and want to launch a program, and we would have traditionally launched that program in 2 or 3 weeks after going to the entire contracting process. Now our counterparties are going through more internal hurdles to get the deals approved, which delays the timing of deals. So certain deals will fall out at the end of the quarter, almost inevitably because of that. The other thing we're seeing is that where deal size may be the same, the period of time over which the deal takes place, maybe longer, which impacts revenue recognition too. So instead of a given pharm manufacturer looking to spend $500,000 of resource in a quarter, they may be spreading that same $500,000 over multiple quarters or over a few more months than they were historically. I think this ties largely to the macro environment. It doesn't appear to be unique to us. I listen in on the earnings calls of a number of other entities that operate in the space similar to us, and it feels like it's an experience that we're all having right now. I think the counterpoint though, is that it also appears to be very transitory in so far as recent surveys of pharma manufacturers, including when just published, I think it was earlier this week, maybe at the very end of last week, suggested 2 things that we view as highly positive. The first is spend is expected again to increase on marketing by pharm manufacturers next year versus this year in the mid- to high single-digit range. And 2, the shift to digital expected to continue or accelerate. So this isn't a business where you're tearing share away from someone else. This is a business where the shift to digital and the increase in spend period are expanding the amount that's accessible to companies like us and others in our space in a fairly dramatic way, which is one of the reasons we believe that over a longer period of time, the growth rates that we've shown historically continue to be possible. Like when you look at the first 9 months of this year against the first 9 months of last year, it was roughly 80%, 81% growth this year over last year. Fourth quarter is going to be an anomaly on that. Perhaps first quarter will also be suppressed by what pharm manufacturers are doing now. But again, given what they're saying about growth in spend period and continued shift to digital that does look transitory to us.

Okay. Kind of on that macro back up as we -- as you kind of talk to the manufacturers, where is their head out? Because obviously, we're early in the cycle, and we're not exactly sure where things will -- what trajectory things will go right now. So are they considering elongating that process of actually putting things into contract? How are they thinking about that? And how is the pipeline?

Sure. So we see them -- we see exactly what you're describing, which is an elongation of the contracting process taking more time to go from the request from a manufacturer to do business and drive a program to when that program can actually be implemented. So the internal approvals and the routing within the pharm manufacturers appears to be getting more scrutiny than it did in the past. So that elongation is one of the reasons we see revenue impact at the beginning of when an elongation like process like that begins. That said, the manufacturers, like we talked about a moment ago, continue to be focused on spending up. So from that perspective, we see this as something that's taking place this quarter, maybe next quarter, but not on certainly a permanent basis in any way whatsoever. And we, I think, anticipate that the manufacturer solutions offering will continue to be our high-growth offering for many years to come, given the dynamics of the market, in particular, things like the provider mode we talked about earlier, which gives manufacturers new ways to interact with providers using GoodRx than they have in the past had, and frankly, the ability of manufacturers to leverage the very, very high targetability we have, not just on the provider side, but on the consumer side, too.

Yes. Okay. As we think about EBITDA margins for the company, you had a really strong quarter on EBITDA. Marketing spend was reoriented a bit, next quarter has taken step down as marketing reaccelerates. So as we think about the company's pathway back to 30% margins, is this the achievable level? And what do we need to see from the prescription transaction side or the other segments to really hit that 30% margin?

Sure. Yes. Thanks for the question. I think a couple of points to make. The first is that for marketing, generally, if you look at our historical financials, you'll see that marketing increase in dollar terms and as a percent of revenue, quite significantly during the COVID period, One of the big reasons for that is because during the COVID period, the interaction that folks were having with health care providers was severely attenuated in 2 ways. One was the sheer number of interactions and the other is the type of interaction. Health care providers are limiting the number of folks in waiting rooms, sometimes on doing virtual care, et cetera, and that inhibited their ability to drive their patients towards GoodRx. Like we talked about a little bit earlier in the context of physical collateral and GoodRx cards and so on. If the patients aren't going to the office, they're not as easily exposed to that. One of the reasons why we built the provider mode to electronically share the same kinds of information. But the point in relation to marketing is that you're now seeing as providers are once again being able to -- the utilization rates are increasing and being able to see more patients in a more traditional context, we're actually able to take marketing back down again. So the arc is shifting back down. And we're still able to generate the same user benefits that we have historically been able to generate as well. Like you've seen that our MAC count, even in light of the grocer issue we talked about at the beginning, our MAC count is not attenuating because there are enough new users coming in to mitigate the significant impact that the grocers you had on us. And that's an indication, I think, of the strong brand we've created with providers and consumers that gives us value now, so we can pull back on marketing without suffering impacts associated with that, that impact the top line of the business. So we anticipate that we'll continue to be able to be very efficient with marketing going forward. The fourth quarter is an interesting one, though, because in the fourth quarter, people also make a lot of decisions in anticipation of the new plan year coming and a new deductible period and so on coming as well. So in the fourth quarter, we anticipate we may ramp up marketing just a little bit more to take advantage of that. Given that this is, kind of, a new era where through COVID, we see cold and flu coming back, the relevance of positioning GoodRx in front of more consumers this fourth quarter relative to previous ones looks higher for us, and we're preserving the ability to do that in the low to mid-20s margin guide we provided. But again, we see ourselves growing up from that again through next year as well. We view it as a fourth quarter thing.

Okay. Got it. And so I guess in the last 30 seconds here, as we think of other areas of investment that are important for the company, what are you looking at in terms of investments and what types of products are key kind of on a go-forward basis for the company?

Sure. Yes, I'll try and keep it quick since we only have 14 seconds or so. The engagement we talked about, very key in the consumer side and our health care provider mode absolutely critical to driving our manufacturer solutions business and having our providers be able to push consumers towards our prescription transactions and subscriptions offerings.

And with that, we're out of time. I'd like to thank Karsten for participating and GoodRx the company for being here. Thank you.

So grateful for the invitation. Thanks so much.