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

Hello all, and welcome. My name is [ Fazi ]. I'm from JPMorgan. It's my pleasure to introduce Karsten Voermann, CFO of GoodRx. And I'll hand it over to him to kick us off.

Thank you, Fazi. Very grateful to be here today. And as many of you know, this is GoodRx's first in-person presentation at JPMorgan. We're very excited about that as well, having not been able to participate in person during the COVID period. For that reason, we're going to use this largely as a reintroduction to the company since many folks likely don't know us yet, and many folks certainly haven't seen us here. So again, grateful for the opportunity to participate, Fazi. Before I get into the details of the story though and that reintroduction, wanted to take a moment to let everyone know that we do have a safe harbor provision, and we may make forward-looking statements. You can find our risk factors in our SEC filings, which may affect our future performance. Okay. Now with that out of the way, we can get right into it. GoodRx is a mission-driven organization, and our mission is to help Americans get the health care they need at a price they can afford. This has become more and more of an imperative as time has passed, in particular in the context of current macro factors, which are exactly why we created GoodRx, to help folks in times where they need to save money and they have challenges getting access to health care. In addition, along with being -- in wanting to provide Americans with the health care they need at a price they can afford, we serve a much broader constituency set than just consumers. We serve health care providers and many others in the broader health care ecosystem. I'll get into that in a little bit more detail on the next slides. But first of all, in order to fulfill our mission of providing Americans access to affordable health care, we've done a couple of things. First of all, we're in the process of building the leading digital platform, and there are a few ways that, that manifests itself and then a few precepts that led us to be able to do that. The first thing is that our platforms got unique attributes insofar as we have a unique combination of scale, growth and profitability in this space. Our scale is such that our LTM revenues are about $795 million in revenue with over $220 million in adjusted EBITDA and high cash flow conversion. Secondly, we've built a platform that macro trends help propel forward. Those macro trends drive the need for our solutions and have increased the need for our solutions over time. So things like the increasing copays people face on prescriptions, things like constraints around even getting access to prescriptions through formulary reductions as companies try and manage the cost of health care for their employees, all of those things drive more and more need for GoodRx. In addition, we've had a first mover advantage in this space that's extremely valuable in terms of creating large barriers to entry. And because we work in partnership with all the industry constituencies, pharmacies, pharmacy benefit managers, health care providers, et cetera, we're in a place where this ecosystem model and the first-mover advantage has created incremental success for us. I said I'd talk about the outcomes of building a platform and also the precepts. The precepts or the things that went into the building of the platform, we're #1 in transparency and trust. We've effectively democratized data in the health care, particularly the prescription space, by providing everyday consumers with access to the same information about how to access prescriptions often at lower prices than their corporate entities could get them for them. We've democratized that information to provide that access to information to every consumer in America. Secondly, we've taken an approach that's always consumer first. Either directly by helping consumers or helping health care providers support consumers and help their patients get on medication and have better outcomes. And then thirdly, what we've done is we've ensured that in order to have our platform become a leader in the space, that when we're successful saw all of our constituents or maybe said even better when our constituents are successful, consumers are getting on medication that they might not otherwise been able to access when health care providers are able to get better outcomes for their patients. As those things scale, so do we, and so does our revenue and our profitability. So what does all that mean in terms of the numbers of what GoodRx has produced? First of all, from a scale perspective, we serve about 7 million, a little bit over 7 million people every month through our prescription savings offerings. We have approximately double that many, about 15 million folks who visit our platforms to gather information around how they can get on medications as well. And well, GoodRx has, I think, historically been viewed primarily as a consumer-facing offering. The reality is that we also serve a huge number of health care providers. We have 200 -- 2 million health care providers who have a patient who's used GoodRx. We have about 865,000 health care providers who've used GoodRx since around last summer. So we're one of the larger aggregators of health care providers in the U.S. through that, and that's helped drive certain aspects of our business, particularly our manufacturer solutions offering that I'll talk about a little bit later, and propel that to high growth. It's also important that we don't only have a lot of users, but they actually like us a lot. So we have an NPS both with consumers and providers of 90. And as a point of reference, if you look at NPS scores for everyone else in the broader health care ecosystem, it's very hard to find people who have NPS scores anywhere close to that. In fact, many of them are in the single digits or low double digits, almost none of them are near 90. And translating this into financials, like I mentioned earlier, scale. So $795 million or so in LTM revenue, over $225 million in adjusted EBITDA, $33 million in cash flow from operations in the last quarter, about $51 million in the quarter before. The reason I raised those things is the revenue-to-EBITDA conversion is quite high, and the EBITDA to cash flow conversion is also quite high. So we think those are all attractive characteristics of the model that I described a little bit earlier. How did this get built? Doug Hirsch and Trevor Bezdek were the founders of the business, the visionaries who created the model we have. But since their creation of the model we have, we've done a lot to reconstitute the management team in order that the management team and, of course, our broader employee base are all very mission-driven, can continue to propel the growth of the business going forward. This year, we added 3 executives. We added Raj Beri as Chief Operating Officer. He came out of Uber where he'd significantly scaled that business. We added Mark Hull, who is previously with Facebook and LinkedIn. Mark's got a laser focus on prioritizing our product investments and ferociously making sure that we're only working on the most important ones that will pay back most quickly. And then finally, we added Vina Leite from The Trade Desk, who previously was CHRO there, to help us lay the HR foundations to continue to scale the business in a very efficient manner going forward. Along with them, of course, we have a much broader employee base who's committed to the GoodRx mission and comes into work every day to drive and propel good outcomes for consumers, again, access to affordable health care for all Americans. One of the reasons we're successful is we picked an excellent area of the health care space to work in out of the gate. And we owe Raj more recently, and initially Doug and Trevor, for the founding vision of the company for that. Health care, of course, overall is a huge market. Different numbers exist. A good one is probably $4 trillion. The prescriptions market within health care is also quite large at $524 billion if you include the scripts that get unfilled due to price. And of course, by helping lower price, we make that part of the market accessible so part of the TAM. We also operate in a pharma manufacturer solutions area. Pharma manufacturer solutions again is the area where pharma manufacturers look to educate and provide access to health care providers and/or consumers as well as adherence solutions to providers and consumers around new and evolving medications. Both of those TAMs together add up to about $550 billion, and we're just a tiny fragment of either one, giving us significant room to grow. Along with the size of the TAM, though, what's also really important about this market is by starting off in prescriptions, we started off in one of the highest utilization or highest frequency of utilization areas of health care. The reason that's so important is when you think about it, folks go to the doctor potentially once a quarter, once a year, not that frequently. People fill a prescription often monthly, sometimes even more frequently. And that frequency of interaction is one of the big reasons we've been able to establish the level of trust we have, both across the health care community, which is one of our biggest source of referrals, and also across the consumer constituencies. The fact that they have frequent interaction and that interaction with GoodRx is great. As consumers, they're saving a lot of money. As health care providers, they're able to get their patients on medication has led to NPS scores that I referenced earlier on. So what are we doing? We've built a significant competitive moat. Again, we talked about some of the first-mover advantage principles. The fact that the business gets better, the more volume we drive -- we are able to drive, et cetera. So right now, we're focusing on 3 key things: number one is increasing the LTV in our prescription transactions offering. That's the folks who use GoodRx to save money on a prescription each month as they resell, sometimes several times a month and they refill. Number two, for those users for whom it's most relevant, so folks on several medications, potentially folks with chronic conditions. Those users are being migrated towards their subscriptions offering where they can save even more, but which is a paid as opposed to a free offering like our prescription transactions one. And then thirdly, we're focusing very hard on our manufacturer solutions offering which has historically been our highest growth offering. A couple of years ago, it was under $20 million in revenue. This year, the LTM revenue through September 30 was over $70 million. So very high growth offering that leverages the fact that we already have a huge health care provider population who comes to our platform every day, every week, every month and a huge consumer constituency who do the same thing. So we're able to monetize assets that we already have in place. And these offerings are both highly complementary and they're also all aligned with our mission around providing awareness of access and adherence solutions for medications for consumers. So now what we're doing in order to fulfill those 3 pillars is prioritizing more aggressively than ever. The company grew very, very quickly over the years and in growing very, very quickly, we're able to solve a huge number of needs. But at this point, we're also focusing ever more on driving revenue and driving profitability. So growth and profitability on the right side of the slide are our 2 key focuses. To get there, we've added the leadership folks that I spoke about a moment ago, first. Secondly, earlier this year, we undertook a reduction in force as a reflection of the fact that we're prioritizing more heavily and in certain initiatives became less relevant. That was important, both because it was a product of the increased focus and it helped to focus the attention of the company even more since we had limited -- more limited resources to apply to the highest priority initiatives. And then finally, we've taken actions to optimize our portfolio. We've thought very hard about what we're best at and where the most value is to be captured. So for example, for years now, I've had a telehealth offering. We recognize that in connection with that telehealth offering, our strengths are the consumer trust we have, so the NPS of 90 we have with consumers, and the infrastructure we have to connect those consumers to telehealth providers. But actually running the back-end engine and owning the code to do all of those things, perhaps less critical. So our biggest partner, who we actually historically sourced the health care providers through a company called Wheel Health, ended up purchasing a significant part of our code stack so that they could then use that in a variety of other context. So again, optimizing the portfolio, not just to remain asset light going forward, but to lighten the asset load as it were during the year as well. And again, all of these efforts as well as many more are focused on the goal of, number one, reaccelerating our growth rates, which have traditionally and historically been in the 20s and 30s and 40% range, and re-lifting our margins as well, which, again, historically have been higher than they were over the last couple of years, particularly during the COVID era. So with that, let me get into a little more detail on each of our main businesses, prescriptions or prescription transactions revenue line, subscriptions and then finally our manufacturer solutions offering. We talked a little bit about the prescriptions TAM earlier, but to get into a bit more detail on that, that point I just asserted, it was about $524 billion. The makeup of that is 2 components largely. One is the TAM of prescriptions itself that gets sold, which is around $360 billion. But the reality is about 30% of prescriptions don't get filled due to cost. So that 30% of prescriptions that don't get filled due to cost become potential TAM, if you lower the cost as we do. There are a variety of ways, and we'll talk about this more on upcoming slides, we do that. But a way to think about it is that for the average American who has insurance, we beat that -- the cost that they pay associated with their copay by over half, over half the time. So it's a significant amount, given that copays at least 1/4 of the Kaiser Foundation have been increasing year-over-year, near around $20 associated with a single generic script. So again, the point is that we make the TAM bigger through our share existence because we make pharmaceuticals' medications more affordable for Americans. We've also increased the level of discounts we can offer consumers over time as we've scaled because as we've gotten bigger and bigger, we've been able to source through our partner network of PBMs better and better pricing for consumers, which helps to drive even further expansion of the TAM. And we expect that the trends that have existed so far will continue, which only make GoodRx more relevant. We've only seen utilization management techniques increase in frequency of occurrence in a number. Whether those are limitations on fill quantities or otherwise, we've only seen the cost borne by consumers increase, too, which create tailwinds that drive an even bigger differential between a consumer's ability to affordably access medication with GoodRx versus through any other tool. And again, I think a lot of folks sort of perceive GoodRx as largely an opportunity for consumers only as opposed to a consumer health care provider entity. But they also often view GoodRx as an entity that serves the uninsured market, which is fundamentally untrue. And that's why I brought up that proportion of time that we're able to beat the copay. The reality is that almost 3/4, about 74% of GoodRx users have some form of insurance, but it just doesn't work very well. Before I get into that, though, let me talk a little bit about why all the different constituents work with GoodRx. Of course, on the consumer side, they save money. The cumulative quantum on that's about $45 billion-plus now. On the part of health care providers, they get better outcomes for their patients, which is one of the reasons that we have 88% awareness with health care providers and about 80% of them refer patients to GoodRx. Payers are happy because to the extent consumers are using GoodRx, they're getting on medication and they're not suffering from higher cost health conditions that would subsequently occur if they weren't on their appropriate medications. Pharmacies benefit from increased volume of prescriptions that they'd otherwise get. Again, we increase the TAM and lower the cost. And they incrementally benefit because as those new scripts come through, the foot traffic associated with consumers who fill a basket on average is more than $40 worth of other items according to our research. PBMs benefit because we give them more volume. By acting as a marketplace that lowers price, these fixed cost providers see more volume, and therefore, ultimately more profitability flow through. And manufacturers are able to help more consumers get on medication and benefit from the findings, the innovations, and ultimately, the medications manufactured. So on all dimensions, GoodRx is created in an ecosystem that is largely symbiotic. This is not easy to do, though, and I think one of the things that's remarkable about GoodRx and credit to Doug Hirsch, who is more on the product side during our founding is that GoodRx takes something that's incredibly complicated and makes it dead-bang easy. So some of you may have used our app or a website or you can even go there right now, and you'll see a search box in the middle of it that's blank, and you can stick in any drug name. You can even misspell it because our algorithm is usually pretty good at correcting it, and you will get a bunch of prices for that medication in this geography, but almost certainly per the statistics I just put out beat your copay. But that's not easy to do because each medication in each pharmacy chain store, not across the whole chain, in each store across all the different geographies has a different price and it has a different price associated with how it's sourced. So each of our PBMs who we work with, and we work with well over a 1.5 dozen, has negotiated different pricing with manufacturers and pharmacies for each medication across all of these different dimensions. So we ingest about 230 billion price points a day and other data points a day, and that's what drives the engine that looks so easy. So when you just stick the drug name in, you find you can fill atorvastatin in San Francisco for sub-$10 for a 30-day fill. And you can test this, too. You can type it in literally right now. So because this has been so fruitful in terms of driving value for consumers, we're able to drive prices to a relatively large discount, 80% versus other cash pay prices on top of the copay dimensions that I mentioned before. Health care providers also argue that we create more adherent patients who have better outcomes. And the pharmaceutical manufacturers appreciate again what we do because it makes their medications more relevant. So with respect to providers, I'm going to spend a little time on this because, again, I think there's a perception that we're highly consumer oriented, which we are, but providers use GoodRx to a huge extent as well. We've done a number of things to partner up with providers better over time, too, providing digital tools so they can text or e-mail a GoodRx discount to a given patient without having to disclose what their own phone number is or what their own e-mail addresses are. That's been very valuable to them and help drive our business as well. In fact, so many health care providers use GoodRx that currently around 25% of website visitors are actually health care providers. And that's a huge statistic, incredibly valuable to us, and they're coming to us because they're trying to help their patients. As I said earlier, over 2 million providers have a patient that's used GoodRx, and providers actually source from GoodRx collateral material. This was a pull thing that happened many years ago when providers started asking for GoodRx materials to keep in their offices to hand to patients. We've now done that primarily or shifted to a model. We're driving this more and more to an electronic medium. But nonetheless, we already have 400,000-or-so HCPs who have offices that distribute our materials. That's an amazing free sales force to have on our behalf. We've also integrated into EHRs or EHMs, health record/health management systems, just to make GoodRx really, really easy for providers to use. So what's all this result in? We talked about sort of aggregate economics. On a unit economics basis, it's equally attractive. So -- but 80%-plus of our transactions are recurring, meaning they're with consumers who've done a transaction with GoodRx before. We've built the largest network of PBMs in the discount space, in the cash pay discount space that exists, and our PBMs like us too. We've never had a PBM who's terminated on GoodRx. In fact, we keep on adding more. And every time we add more PBMs, we're able to drive pricing for consumers down even lower. So that has the benefit of them expanding the TAM and the amount of consumers we can serve at any given time. The other nice thing is that for those who may be less familiar with PBM contracts is PBM contracts generally incorporate the concept of more discounts, the more volume we drive. And of course, as GoodRx has continued to grow, that's automatically help provide our consumers with more value. And again, I'll hit this slide only very briefly, but this is specifically to address the reality that the majority of GoodRx users actually have insurance. So we're certainly not limited in any way to a TAM made up of uninsured folks. And most importantly, I think what's critical is to recognize that as GoodRx has continued to grow, what we've built continues to strengthen. So as more consumers come on board and affect more transactions, that creates more value for the pharmacy benefit managers from whom we source all of our discounts. As that happens, we're able to achieve even bigger savings for the consumers. That means that according to our research, about 87% of the time on the top 40 drugs in the U.S., GoodRx has the lowest pricing. And because GoodRx reliably has the lowest pricing versus other alternatives, that also means that health care providers are more likely to pick GoodRx is the one entity they refer. That drives even more transactions and continues to expand the unit economics going forward. So that reality is that as we, as I said at the very beginning, continue to have more impact for consumers, we continue to create a model that gets ever stronger and that we're able to monetize more on behalf of ourselves and on behalf of our shareholder constituencies as well. Okay. Moving on to subscriptions. This will be much more brief. Our subscriptions business is made up of 2 components. Our own GoodRx Gold product, which is the majority of subscriptions and the massive majority of revenue. And we also are the back end for Kroger's Kroger Savings Club as well. As I said earlier, subscriptions are oriented to those folks who may have chronic conditions or otherwise have multiple prescriptions to fill. They can save even more money in our subscriptions offering than they do in our core prescriptions transactions offering. So our subscriptions offering has been very successful with 63% revenue growth Y-o-Y, about 1.5 million members represented by the 1.1 million subscriptions since some of the family plans have more than 1 member. And then there's our Pharma Manufacturer Solutions business. Our Pharma Manufacturer Solutions business is one of the most exciting we have. And this, again, is the business in which we help pharma manufacturers who are looking to reach consumers and health care providers, respectively, with information, meaning awareness solutions with the solutions oriented towards the ability to get patients on medication or access solutions, and then finally, with adherence solutions. This business has grown 81% Y-o-Y in the first 9 months of this year versus the first 9 months of last year. The business works with 19 of the top 20 farm manufacturers in the U.S. And the reason it works so well is because many of our users search for brand drugs in GoodRx. But for expensive brand drugs, even though we take the price of prescriptions down by 80%, folks can't afford to pay on a $2,000 per month medication, they can't necessarily afford to pay $400. So rather than go through the prescription discount space, we're able to route them and orient them towards manufacture, access, solutions, whether it's copays or deductible assistance solutions or otherwise, and manufacturers leverage us to do that because our drug pages for a given manufacturer's medication often get way more hits than drugname.com. I don't want to mention any particular medications or manufacturers, but you can imagine almost any single one, and you'll find that the consumers that come to GoodRx and hit that page are more than the manufacturer's own web page for that medication. And that makes it very attractive to partner with GoodRx to reach consumers. The reality though is that we help consumers and we also help health care providers too, because one of the big challenges manufacturers have, particularly in a world of step therapy, pre-authorizations, et cetera, as they rely on either a consumer who doesn't necessarily have the competencies to navigate that maze of complexity or health care providers who don't necessarily have the time to navigate that much complexity. So in that context, we bought an entity earlier this year, I guess, now said better early last year called vitaCare that basically offloads that work of both the consumer, patient constituency and the health care provider constituency, and manufacturers pay us for that because they get better outcomes because vitaCare focuses exactly on that. It's not a side job for the health care provider, and it's not something the consumer has to navigate on their own. So we're excited about that business. And we believe it's going to be driving significant incremental medication access and adherence opportunities for manufacturers, and of course, for patients. So that's why it's so important that we expand the 50 million prescriptions that are -- 50% of prescriptions that are filled on the brand side to a much larger number because it means better health outcomes for Americans. We're only at the early stages of penetrating the manufacturer solutions opportunity, too. We work with 19 of the top 20 manufacturers, but they're about 550 in the U.S. So a lot of room there to grow. We also have room to grow within the brands at the manufacturers by having manufacturers buy more of our solutions, which they have been. The solution set that they're buying has doubled over the last year or so. And we're also increasing the size of the solution set each year too, which continues to create opportunities for more revenue generation. So in summary, starting from the beginning of the presentation to here, 3 main offerings around prescription transactions, subscriptions and across manufacturer solutions, but those exist within a spectrum of services that range from prevention and research through our content offerings for GoodRx Health and HealthiNation, which offer video and non-video content, respectively. We offer diagnosis and care services through GoodRx's telehealth offerings. And then, of course, we have treatment and adherence offerings, which is where the heart of our revenue is generated across our prescriptions, subscriptions and our manufacturer solutions offerings, respectively. And with that, I think we'll move on to any questions that folks might have. And thanks again for hosting us, Fazi, as well.

Thanks so much, Karsten. We received a few questions. So I guess we can start with one. With the shift of focus to EBITDA and cash flow, can you talk to us about how you're thinking about the long-term strategy of your company and how you might balance that with growth investments going forward?

Sure. Yes. We don't view the 2 as contradictory to one another. We've historically -- if you look back to the pre-COVID period, we've always been simultaneously high growth and high profitability. And what we saw during the COVID period was a bit of an arc where as health care utilization decreased, as health care providers were more limited in their ability to provide referrals to GoodRX, both due to the lower utilization period, and then secondly, due to the fact that the nature of the interaction changed where waiting rooms had capacity limitations or visits went virtual, in those contexts, they were less able to drive referral volume to GoodRx. And so we spent up, for example, on marketing and that context on our own. So that narrowed our margins. But now we're coming out of that and we've actually seen our marketing drop as a percentage of revenue. It's our biggest area of expense at over 40%. But from 2Q to 3Q, it dropped as a percentage of revenue. And as a matter of fact, from 2Q to 3Q, our advertising spend also dropped in absolute dollar terms despite the fact that we're seeing growth in elements of our business that we're most focused on. So I think from that perspective, the 2 are not contradictory. The other area in which they're not contradictory is in the context of the efficiency we're driving in the organization and are much more aggressive focus on the priorities and investments that will pay off quickly, provide the most return to the company and the most benefit to consumers. That incremental focus doesn't come at the cost of growth, certainly relative to where we were before. So we're very excited to sort of balance those 2 realities and aspire to return to growth rates and margin levels of the pre-COVID era and anticipate that we'll execute against those objectives over the coming years.

Great. Do you see your capital allocation priority shifting going forward?

I think we do. In terms of capital allocation over the last few years, we have made material investments in M&A. We bought a number of smaller entities over the last while. VitaCare is one I talked about in today's presentation. We bought an entity called Scriptcycle and an entity called RxSaver as well since mid-2020 around the time of our IPO. I think at this point, though, we feel like we have the assets we need to be able to continue to drive growth in our space. So we're busy digesting the acquisitions that we already have. And -- but for that, the acquisitions are the only things that really separate our cash flow from operations and our free cash flow. So -- but having a less acquisitive strategy going forward, we'll have even better cash flow conversion than we have historically. So from a capital allocation priority, I think the intention is to take what's always been an asset-light business, and if anything, make it even more asset light going forward.