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

Great. Well, good morning, everyone. My name is Craig Hettenbach. I cover the digital health space at Morgan Stanley. So welcome to the third and final day of our conference here. Very pleased to have with us GoodRx, CFO, Karsten Voermann. So welcome.

Thank you so much for having us, Craig. I'm very grateful for that and to Morgan Stanley as well as to you, and great to see some familiar faces in the audience, too. It's always fun. Thank you.

Great. Well, I've got to read the disclosure here quick. For important disclosures, please see the Morgan Stanley research disclosure website at www.morganstanley.com/researchdisclosures. So...

I think I have one of those, too. Unfortunately, I think from our side, we do have a safe harbor statement. We will be making forward-looking comments during this conversation, and we refer you to our SEC filings for risk factors. So that's my version of the statement.

All right. We both got it done. So Karsten, a lot of interesting developments to get through today. But I really want to start at the top just from a management change. And really in the context of, if I think about a digital health space that many companies have come public the last few years. You've started to see some management changes, right? So founder-led companies like GoodRx, and you recently hired Scott Wagner to come in. And so can you maybe just talk about what Trevor and Doug did to kind of get the business started scale today? And why was now the right time to bring in someone like Scott from an operational perspective?

Sure. Great question, Craig. And I think -- the real focus here for GoodRx going forward is on a few things: number one, making sure our retail network through its consumers, benefit from GoodRx is strong and robust; number two, growing our core prescription transactions business, this is how consumers save on prescription medications through GoodRx broadly; number three, continuing to drive our pharma manufacturer marketing business; and then finally, number four, accelerating the pace of play and putting resources in the right places. And it's on that latter element in particular about someone like Scott Wagner, who previously was CEO of GoDaddy and scaled that business markedly over his tenure as both a CEO and previously as CFO, where someone like that can be so incredibly helpful. So I think as someone on the exec team, we've had the privilege of working with Scott quite a bit. One of the benefits we see is around incredibly focused and fast decision-making that has led to business improvements that are already manifesting including, for example, some of the benefits we've talked about expecting to reap through our exit of some of our lower profitability lines of business like vitaCare, all the way through to accelerating high-growth potential business like our integrated cash savings business, where we have our relationships with ESI, Caremark and for those who saw the press release this morning now MedImpact as well.

Yes, good timing. We can certainly get into the expanded relationships there. From a cultural perspective, is there anything you see kind of changing at GoodRx or are there some influences that Scott has what he's done in the past where he can kind of help come in and...

Yes, sure. I think there are a few dimensions that are important here. One thing that folks have probably noticed is that for a period of time, we've been focused on driving margin. Of course, the biggest single driver of margin and a relatively high fixed cost business is growth. But along with Scott's incremental focus on growing the business, we've also tackled specific areas of the cost structure too. You've seen marketing both as a percent of revenue and in dollar terms drop Y-o-Y quite dramatically. And we've done that in the context where the growth continues to manifest nicely. So sharpening the focus on profitability and focusing hard and doubling down on elements of the business that are growing and have near-term potential to produce great results have been things that Scott has been differentially focused on versus the founders who may have had a longer time horizon and broader aspirations to full sale versus delivering the shareholder value we think is important right now.

Got it. That makes sense. And there's also been a change in Chief Commercial Officer, Chief Revenue Officer. So what are your expectations there in terms of what impact that may have on the business the next [ each ] months?

Yes. I think there are a couple of changes that are important to note and probably important for you and the investor community as well. I think the first is that on our pharma manufacturer solutions offering, which is one of our fastest-growing offerings focused on access and awareness solutions for pharma where we expose their -- the access solutions as well as the medications themselves to health care providers and also health care provider patients is that we've grown that business grassroots for years now. Tried different things, figured out what worked and got into the point where we really wanted to drive volume on that business. And we recently hired Dorothy Gammell, who's now as Chief Commercial Officer of that business, driving growth there. For folks who don't know her, she did the same thing at WebMD grew their business from its nascency to the very large scale that it ultimately -- that ultimately reached, she had also done work at Havas and media agencies. So we're grateful to her for joining GoodRx in that dimension. One of the other important changes is that Scott pulled back our original Chief Marketing Officer, Andrew Slutsky back in. And this is congruent with the comments I was making around cost structure as well. One of the reasons for that is that Andrew was very effective at growing GoodRx at a rapid rate. Up through 2020, our growth rates were sort of in the 40%, 50% range off our core prescription transactions business and the growth was very efficient from a marketing perspective. We intend to return back to a profile that is more similar to that and hope to do so in the coming quarters and years. And it's in connection with that, that you're already seeing some of the manifestations, including the proportional cost structure going to marketing as a percent of revenue. And like I said, in absolute dollar terms decreasing as Andrew Slutsky continues to apply the techniques that he did during our high-growth, high-margin years previously.

Got it. I want to shift just to the macro. And when I think about just utilization, we've seen utilization improved this year. What type of impact is that having on your business? And what's your visibility into that?

Yes. We've historically, outside of the year in which we had the growth ratio associated with Kroger, no longer accepting PBM cash paid discounts, our growth has always been markedly faster than market. And the reason I bring that up is that the growth in utilization is helpful, absolutely, but it doesn't serve as the key determinant of our -- or has never historically served as the key determinant of our own growth rate. The key determinant of our own growth rate has been our actions to propel the various offerings that we have forward. So it's a great tailwind. But we anticipate, again, returning to growth rates that are substantially higher than market growth.

Got it. And how about on the pharma manufacturer solutions, like you said, it's one of your fastest growing business. That whole ecosystem has seen some slowdown in terms of pharma ad spending. And so what are you seeing in that marketplace today?

Sure. I think that's accurate. And we talked about that starting, I think, in the fall of last year/last spring of this year that for manufacturers were extending deal periods, in particular, in their high level of scrutiny. I think there's a variety of speculation as to what the causes might be, whether it's preserving marketing dollars to put behind GLP-1 where historically, the supply hasn't necessitated -- the supply constraint hasn't necessitated marketing. So that dry powder is potentially being kept. I think it may also just be macro environment to some degree, too. However, all that said, I think for us, the biggest single factor this year has been associated with how we're thinking about the business because that business too, historically has grown substantially faster than market. We did like $19 million in revenue in 2020. And last year, we did about $99 million. So much faster than market growth. I think the big change this year is that we narrowed the aperture of what we're selling because we had the few previous years to look back on and look at what worked for us in terms of our ability to deliver efficiently and make our margin. What works for pharma manufacturers in terms of them being able to drive high ROI and where the growth in the market was likely to be. And under Scott's leadership, we narrowed the set of offerings that we sell to those that intersect high-value for pharma manufacturers and high margin to us, which means that we forewent, that's a word, a little bit of revenue to be able to set a foundation for revenue that will stack up and be recurring year-over-year. So from our perspective, that's probably a bigger single element and how we think about that part of our business than market or pharma manufacturer decision-making slowdown.

Got it. I want to touch on the topic of technology and AI. And we've had a number of companies through the conference talk about some of the things they're doing from a go-to-market or internal productivity. For GoodRx, can you just touch on the investments you're making? And how tangible could it be to your business?

Sure. So I think when you look at GoodRx, the analytic portion of GoodRx is very tied to the aggregation of a significant number of data points in the billions daily that touch on everything from each type of medication that you can fill through GoodRx, which is effectively almost everything in the generic space, each pharmacy, each geography because pharma price varies for medications across geographies, each fill count, et cetera. So there's a huge number of data points that we aggregate and then optimize the pricing around for consumers. So the consumer savings rate can continue to go up. It was around 59% at the time of our IPO that we talked about. It's grown since then by about 20 points versus what a consumer would pay in the UNC context. So rapidly increasing savings rates. Right now, those processes that we need to ensure the savings rates increase, we can offer these great prices that consumers can benefit from are largely handled by teams of folks with pricing expertise, PBM relationships, et cetera. There are opportunities there to be able to automate significant amounts of this in an AI context. So that's one big area. I think the second big area is that we also have a fairly significant content business as well. And while I think we take a cautious approach to AI, given that the very elements of our business tied to health care, and you don't necessarily want to delegate that to machines, there's potential opportunity on that dimension as well.

Got it. And when you think about the umbrella of just spending, is this incremental in terms of maybe some investments you're going to make? And how you think about what you have to do from a technology perspective going forward?

I think we see it as -- if we were to move forward, we see it as cost saving, not cost generating, again, because of the fact that a lot of this work, particularly on the pricing side and the content side are done by very smart humans with algorithms that they apply versus an automated fashion. Very smart also for kids not obvious usually equals very expensive for those humans as well. So...

I understood. Well, maybe we can segue into the PBM partnerships. And there's been a lot of buzz. Hoping just to kind of level set in terms of just how do we think about the latest CBS you mentioned in the announcement this morning in terms of what does it do for GoodRx for kind of a SAM perspective?

Yes. No. We're excited about these relationships, primarily for one really big reason. And the really big reason is that even today, despite all the money we spend on marketing, even today, there are a huge number of consumers and patients who don't realize: number one, the drug price is very materially between pharmacies; and number two, that you can save a lot of money on them. So that portion of the market who just aren't aware is very expensive to capture and may ultimately not be wholly capturable at all. The benefit of the integrated savings programs, whether it's Evernorth or Caremark or now MedImpact, is that consumer behavior at the pharmacy doesn't change from what they've always done, absent GoodRx, but now we still generate revenue is probably the best way of putting it. So when historically, a consumer wants to use GoodRx, they either have to go to our app or use a GoodRx card that they got from their health care provider. It's usually the biggest source of users for us referrals like that on the organic side and on paid side and then go into a pharmacy and present it. So that inherently represents a change in user behavior that requires awareness, a health care provider recommending the use GoodRx to fill a script in my example. And then it requires them to actually take action on it. The beauty of the programs with Evernorth, Caremark and now MedImpact is that consumers just using their existing benefit cards, so no incremental GoodRx card, code, coupon or anything else, benefit from GoodRx pricing, which saves them money. The benefit to us is that transactions were route to us automatically too, where the GoodRx cash-free price is lower than the price associated with their funded benefit because of their co-pay or deductibles or other factors. So from our perspective, that makes it materially to use year-term SAM expanding because you're addressing folks who you wouldn't have otherwise gotten. I think the other point I'd make on this is we've now been in pilot with Evernorth for this entire year to date. Obviously, you can imagine from the fact that we're signing up more PBMs and more PBMs are signing up with us. It's working great for us, and presumably you can imagine it worked well for them, too, given more of them are doing it. And I think what's important, though, to understand too, is that the nature of the users and the medications that we've seen through the program that we've worked on with Evernorth are very different than our traditional base of cash pay users. So from medication overlap, perspective and from a sheer consumer overlap perspective, we have seen almost none. And by almost none, I mean like single digits, which makes this highly noncannibalistic on our existing business, which is exactly what we hoped for when we entered into these relationships. And that's the reason that SAM expanding because you're not shifting users from one category into another, you're actually getting new different users than you would have who are buying different medications that follow more of a funded plan medication utilization construct than the cash pay plan.

Got it. So you mentioned it could be a material SAM expansion. How do you contextualize just from a growth perspective? I know it's early days, but if you thought about just percentage points to growth or things like that in terms of what it could do to the business?

Yes. I think it's, from our perspective, very exciting first of all because of exactly those dimensions that it adds an incremental opportunity for growth on top of the avenues that we've historically had. I think it's a little tricky to be able to be -- to speculate on today is the degree of growth contribution in future periods. And the reason I say that is, while we've been in pilot with ESI for the entirety of this year to date, it is, by its very nature, a pilot that's characterized both by them and by us. So it's unclear what the incremental growth rates would look like or could look like if this gets rolled out to more and more plan sponsors and health plans by the 3 PBMs that we've announced so far. So I think Caremark and their announcements have talked about the fact that they intend to roll this out much more broadly than Evernorth did straight out of the gate in 2024. So I think as they roll it out more broadly, that will give us the data to see what uptake by plan sponsors looks like in a more empirical manner and will give us more data on utilization by patient consumers within those plans as well. I think it's a little premature to speculate right now.

Understood. I want to talk about just kind of long-term growth. And if I characterize this year as one of stabilization after the growth issue last year. And certainly, this PBM contracts and partnerships could be a swing factor. What are the swing factors do you see in the business going into next year and beyond on the prescription transaction size as well as pharma manufacturing?

Sure. Yes. I think you definitely highlighted the right ones with the integrated cash savings programs with the PBMs. I think the other areas that are important to us are direct contracting initiatives with retailers as well. Again, stabilization of our retail network post that grocer Kroger issue, is very important. For context for those who may not know the history, GoodRx is a price discovery and savings marketplace effectively in our prescription transactions revenue line. And in that context, we aggregate all the savings programs of all the different PBMs well over a dozen that we work with. One retailer, Kroger elected not to accept PBM cash pay discounts around the middle of last year, which attenuated our ability to distribute GoodRx or have consumers benefit from it. And it was pretty material. It was about 24% of our prescription transactions revenue line, call it, roughly 20% of overall revenue at the time. So a big amount. That's where -- a high-margin business. So we continue to be profitable, like 24%, 25% EBITDA margins, high cash flow from operations in that quarter, but it did impact us. So one of the things we did now is instead of solely relying on the PBM agreements with retailers and relying on them to enforce the obligations of retailers to accept there and therefore GoodRx's discounts, we directly contract with retailers. And we talked a little bit about this in our last earnings call, when you directly contract with retailers, not only do you have assurance that you don't have another situation like the Kroger one where there's nonacceptance, but you also have the ability to work directly with retailers in order to optimize elasticity in pricing. So on the last earnings call, we talked about a midsized retailer that we direct contracted with. And by adjusting pricing, for the consumer and by adjusting the amount that we make per prescription in this case, downwards, we saw volume increases that not only mitigated, but actually increased total revenue relative to where it was before because of the shape of the elasticity curve, meaning price down, revenue down to us on a per prescription basis, but prescriptions up so materially that more than made up for that. So along with the integrated cash savings side, I think the direct contracting part of our business is one that continues to be a very important dimension for us going forward. And then the business and offering we talked about a little earlier, the manufacturer solutions line is the other one that's, I think, integral to our view of forward-looking growth. We talked about Dorothy coming on board to support that business and leverage her experience at WebMD. And her purpose is not outward facing so much as it is business infrastructure building. So moving the business from sort of a nascent adolescent stage to one that is more matured. And that includes things like creating a more robust sales ops function, so you can make sure you optimize revenue from each agreement, working carefully to ensure that the sales force and the ratios applied to different clients are appropriate, both geographically and biopharma specialty, et cetera. So again, we narrowed the aperture of what we're selling this year to recurring revenue-centric pieces of business in the manufacturer solutions offering, and we built the infrastructure so that we feel like we can scale up more rapidly going forward.

Got it. And just going back to direct contracting for a second. I do see the Walgreens announcement earlier this week. Is that one of proof points? Should we expect other type of arrangements as we go forward?

Yes. They -- we're -- not all of them are announced publicly for a variety of reasons. But we do continue to aggressively push on that. I think with respect to Walgreens, in particular, it's interesting because each retailer has different aspirations for what they want to get out of their relationship with GoodRx. Clearly, we have a huge number of users. We have mid-teens millions of visitors to our platforms every month. We have millions of monthly active consumers who actually transact and fill scripts, some of them more than one. So you can hypothesize that script counts on a per month basis are -- and -- are very high indeed, millions and millions of them. So different pharmacies, though, look through different lenses with respect to those scripts. Some pharmacies focus more on margin, some focus more on volume and monetizing the folks who come in looking to fill a script through the pharma store. So as a direct contracting approach lets us adjust GoodRx's relationship with the pharmacy to the pharmacy's goals in a way that we couldn't when we're solely leveraging the PBMs for access to the pharmacy networks. So that's what you see manifested in Walgreens as well. And in connection with that, you see better pricing for consumers on a set of medications than we had previously been able to showcase at that particular retailer. Benefits consumers, we anticipate will benefit volumes for Walgreens and for us as well.

Got it. I want to talk about kind of margins as we go forward and for investors after we get through margins. If you do have a question, you can raise your hand, and we'll bring a mic around. On the margin front, you raised your guidance this year from the mid-20s to mid- to high 20s EBITDA. And that was even with revenue coming down a bit and some of that around the choices around manufacturing solutions. So can you just talk about the emphasis on margin expansion here and some of the key levers that you see to drive expansion?

Sure. Yes. I think as we look at the business, and this is also, I think, true equally, if not more so, for Scott Wagner, our new CEO, as it is for me. As we look at the business over an arc from before our IPO in 2020 until now, before IPO, we saw growth rates that were in the 40%, 50% range, we saw margins that were consistently in the high 30s or higher. And that was a function of a couple of things. There was a function on the one hand of high health care provider referral rates pre-COVID that then decreased during COVID as utilization decreased and necessitated the spending of more of our own dollars on marketing, which has since gone away. So that's a contributor to what we talked about a little earlier, namely marketing spend, both in absolute dollar terms as well as a percent of revenue reducing significantly on a Y-o-Y basis. And therefore, contributing to margin to bring it back to your margin point, without attenuating our ability to bring on users. So I think we're pleased with Andrew Slutsky rejoining as CMO and the results that are manifesting from that, from a CAC perspective and from a payback and marketing spend perspective. So again, marketing big source of revenue generation. I think the perhaps more important one, though, is that I talked a little bit earlier about as you did too, about the gross ratio in Kroger, where we saw 24% of prescription transactions revenue go away, so about 20% of overall revenue. In a fixed cost structure business that's inherently margin attenuating. So our adjusted EBITDA margin drop down to around 25% during that period, which was in the year at the lowest point that we've seen. The growth itself, again, this fixed cost construct, the growth itself also helps drive margin materially. So on top of doing specific things around marketing, around employment levels and labor costs, et cetera, and the cost structure, the push to return to accelerated growth rates inherently cascades through to the bottom line.

Helpful.

So I made sure I wasn't confusing.

That works. Okay. If there aren't any questions here, I'll segue over just to capital allocation. And historically, you've done some tuck-in acquisitions, some buyback. How are you thinking about that? And again, does anything change under Scott in terms of best uses of capital going forward?

Yes. I think it under Scott, there are some different views. I think our founder CEOs had extraordinarily broad aspirations around the span of impact across all of health care that GoodRx could potentially have. And in connection with that, M&A was a lever that was considered more than, I think, Scott and the rest of the team are considering it today. So while there had historically been some tuck-in acquisitions, I think our view now is to stay super focused on stabilization of our core prescription transactions business, including through the direct contracts we talked about, returning that business to growth. You saw it grow Q-o-Q into 2Q -- or excuse me, Y-o-Y into 2Q for the first time in a while since that Kroger grocer incident. That focus is really important, and the [indiscernible] growth focus is really important, too. So I think those dominate over any sort of M&A aspirations period. On the buyback side, we've continued to leverage the authorization we have from the Board. You see that reflected in our 2Q filings as well. And as you can imagine, given the multiples as well as the absolute market cap that we have, we consistently evaluate opportunities to be able to get a nice ROI on our own stock as well.

Got it. Well as we wrap here in the last minute, what are some things, if we look out 12 months, that you want to make sure you check the box from an execution perspective and deliver for shareholders?

Sure. I think the manifestations of the direct contracting and the integrated cash savings work we're doing will be attractive to investors, again, as revenue growth drives margin. And I think the other critical prong will be continuing to evolve and mature our pharma manufacturer solutions offering so it can reach its full potential. Again, that offering was doing like $19 million in 2020 and about $100 million last year. So it's grown quite rapidly. And I think that maturation process, the infrastructure are putting in now will allow it to reach the next phase of growth rates in our anticipation over the years to come.

Great. Well look forward to monitoring that. So Karsten, thanks so much for your time today. Appreciate that.

Appreciate you hosting us. It's always great to see you, Craig. Thank you so much.