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

Great. Good morning, everyone. Welcome to Day 2 of the Morgan Stanley Healthcare Conference. I'm Craig Hettenbach. I cover health care technology and providers from Morgan Stanley. I'm very pleased to have with us GoodRx this morning, CFO, Karsten Voermann; and Chief Accounting Officer, Romin Nabiey. So welcome. I think you have a statement to read before we kick off.

Yes. Thank you, Craig. So grateful to be here. First of all, for a safe harbor statement, I'd like to remind everyone that today's fireside chat will contain forward-looking statements. All statements that made that don't relate to matters of historical fact should be considered forward-looking statements, including statements regarding our plans, strategies, goals and objectives and our market opportunity and anticipated financial performance. The statements are not promises or guarantees but involve known and unknown risks, uncertainties and other important factors, which may cause our actual results to differ materially from those projected in the forward-looking statements. And for additional information concerning factors like that, we refer you to the Risk Factors section of our Form 10-K for the year ended December 31, '23, updated by our Form Qs through June 30, 2024. We may also reference some non-GAAP metrics, which are reconciled to the nearest GAAP metrics in the company's earnings press releases, which you can find on our Investor Relations site. With that out of the way, we can dive right in Craig.

That's okay. I have one on my own. So for Morgan Stanley disclosures, you can see them at the Morgan Stanley website, www.morganstanley.com/researchdisclosures.

So with that out of the way, Karsten, I thought we'd just start with an overview -- a quick overview of GoodRx. And importantly, how the company's strategy has evolved the last couple of years, in particular, under new leadership of Scott Wagner.

Sure. I think talking about how the company -- the founding principles of the company and how it started might be something I turn over to Romin because he's been at the company for the greater part of a decade now, and then it will shift to me for forward-looking strategies.

Sure. I'll take that. Thanks for the question, Craig. So since the founding of GoodRx over a decade ago, we've operated with a mission of helping Americans get the health care they need at a price they can afford. And in doing that, we become the leading prescription marketplace in the United States, trusted by over 25 million consumers and 750,000 health care professionals annually. We provide affordability and access solutions for generic medications as part of our prescription marketplace and similar solutions for branded drugs as part of our manufacturer solutions marketplace. And we've also evolved over the years to offer telehealth visits and a subscription program with even deeper discounts. On the topic of leadership and kind of evolution under Scott, I think with Doug and Trevor, they helped found the company, built the foundation for what we have today. We're incredibly grateful to them for that, and we're also quite pleased that they continue to be involved with the business and help provide strategic insights even today. However, that being said, Scott, since he came in a little over a year ago, Craig, has been instrumental in providing a level of rigor and focus to the business and help us particularly focused in a few key areas. First, strengthening our retail partnerships in the accelerating the uptake of our hybrid contracting strategy, which includes directly contracting with pharmacies and also doing the PBM-centric approach we've done historically or some combination thereof. Second, he's helped hone our growth goals for our core prescription transactions offering, including expanding the benefit of GoodRx to commercial or funded benefits, which in the form of integrated savings, has expanded during that time. And finally, he's helped us scale our pharma manufacturer solutions business by introducing standardized go-to-market programs for that business, that helps kind of build a repeatable, scalable framework we can build upon and provide some compound growth for that business that we're excited about, with a particular focus on access solutions. And finally, kind of wrapped around all of that, he's also help to strengthen the management team over that time and continue to strengthen the management team. So overall, I'd say, he has been well received in terms of him coming to GoodRx, and he's injected a level of excitement and energy that, again, has been well received.

Got it. Thanks for that. And when I think about the importance -- and you touched on just rigor, right? And I think a lot of companies in terms of going from founder-led to a more seasoned management team. Internally, how has the organization responded to this? It's been a year. So just curious how things are going in terms of the response.

Sure, Craig. I think I'll take that one. I think Scott's been an incredibly welcome addition to the team. And the reason for that is that Scott's focused us on a few key priorities, which is often challenging for founders who see a universe of potential things that we could go to as a company. Under Scott's leadership, the focus has been on number one, strengthening our ecosystem. So in particular, now where many pharmacies in the broader market are struggling and closing stores, strengthening and supporting pharmacies and the ecosystem we operate in broadly is an absolutely key focus. I think second thing that's a key focus is making sure that our product continues to be refined and the kinds of user experiences that we can deliver are better and better. Then we also focus very much on growing and scaling pharma manufacturer solutions, which is the higher growth part of our offering today relative to our prescriptions marketplace that was the foundation for the company. And of course, we're also focused on deepening our relationship with consumers as well, and that's serving us very well now that we've increased our efforts to drive user engagement, registration, et cetera. And wrapping around that, Scott has been great at pulling the team together. So I think it's just been a lot of fun to work together with him over the past now close to 18 months.

Great. Thanks for that. Let's just touch on the growth algorithm of the business as you go forward. You had the Investor Day recently, talked about kind of a 6% to 12% type CAGR. What are some of the key levers that you need to execute on for that?

Sure. I think I'll top on that one as well. So for that growth CAGR, we see the growth opportunities, primarily stemming from 2 broad areas. The first area is in our prescriptions marketplace. The recent offerings that we've created that Romin referred to, which is the combination of the GoodRx offering with funded benefit plans. So that we call that our integrated savings program. The way that works is that someone who's on a funded benefit program, me and my GoodRx funded benefit you and your Morgan Stanley when can automatically benefit from the price that your funded benefit offers for your medications or if GoodRx is lower than GoodRx price. You don't show a different card, you don't have to do anything at the pharmacy other than what you'd normally do, and you automatically get that benefit. We've partnered up with several PBMs to have it incorporated into their pharmacy offering to funded benefit plans, and we're excited about the progress we're making there. Recently, we've also extended that, so it not only covers on formulary medications, so the ones Morgan Stanley would cover for you or GoodRx for me, but also off benefit medications as well or off-formulary medication. So we've expanded the range of medications that we can address there. That's one big growth area. I think the second big growth area I'd point to that you've already seen manifest in nice growth over the years. The business was only $17 million or $18 million in 2020 and now it's pushing $100 million in revenue, is our pharma manufacturer solutions offering. So that offering is also one that scaled quite rapidly, where we partner up with pharma manufacturers to provide awareness, access and adherence solutions for their medications. So those are the bigger growth avenues that we're laser-focused on right now.

Great. And let's touch on profitability. You've had some nice improvement in margins, adjusted EBITDA margins have gone from kind of the mid-20s, you expect 32% this year. What are some of the key things driving that?

Sure. I'll take that one, Craig. The -- so growth in addition to margins, we obviously track quite closely. Last quarter, Q2 '24, our EBITDA margins came in about 32.5%, which are up 400 basis points from a year prior. Most of that has been driven by a couple of things. First is generally driven by top line growth. And second, our vitaCare Manufacturing Solutions restructuring, which has continued to provide savings for the business. Thinking longer term, the core claims business has a high margin and high cash conversion, and that's primarily driven by our mostly fixed cost base. So as we accelerate growth, we anticipate there to be operating leverage that we're going to find that's going to be as that revenue grows, we're going to have a lot of flow-through to adjusted EBITDA and ultimately, cash that we're excited about. I think looking beyond that, on the OpEx side, we're going to continue to find efficiencies in each of our lines of OpEx. And as a percentage of revenue, we anticipate that those should come down as we continue to grow revenue. And beyond that, we'll continue to make smart investments back into the business as well. So hopefully, that's helpful.

That is. And so you're targeting longer term 35% plus. Maybe just touch on key levers and then also you mentioned reinvestment in the business. Is there any areas of the business where you feel is most important that you're investing to drive longer-term growth?

Sure. Happy to take that one. I think, yes, we do continue to see margin expansion from the current levels that we're showcasing in the lower 30% range, 32% plus going forward. I think from our perspective, we feel like the need for the business to retain capital or invest further at this point is pretty darn limited. And the reason I say that is because we've consistently been able to evolve the product, involve the feature and functionality set within the reality of what we're spending today. And of course, as Romin alluded to, those investments tend to be pretty fixed regardless of your scale. So continuing to even invest at current levels, which are quite high, will result in incremental margin as the revenue base growth against that level of consistent investment. So you haven't seen us undertake material M&A for years, plural. We've done some tuck-in acquisitions in the past of some particular technology, sometimes a particular incremental offering, but those have all been pretty small and not very capital intensive.

Got it. You mentioned before just some of the change going on in the pharmacy backdrop. And I do want to touch on pharmacy closures and particularly the Rite Aid situation. You guys had called out a $5 million impact. There was quite an adverse reaction in the stock for just a $5 million impact. And I should also stress EBITDA was still going up and there was still a bigger action. So maybe you can just give context on what's happening at Rite Aid relative to other pharmacy closures, and we'll start there.

Sure. So the Rite Aid situation from our perspective is pretty unique because I think as most folks in the room know, and I'm sure you do. Rite Aid store closures aren't the only store closures going on. Walgreens announced some, CVS has done hundreds of store closures as well. The Rite Aid situation is unique, though. And the reason I say that is because the store closures are concentrated in limited geographies. So where, in most cases, pharmacies might be closing a store that's proximate to another store, as my team who manages the pharmacy relationships as when CVS closes a store, you can generally throw a football and hit another CVS, so the consumers just go to that next CVS, they're that close together, somewhat hyperbolically. I think in the context of Rite Aid though, where there are many stores closing in a particular geography, generally in the upper Midwest, there is no other right in store to immediately go to. And that has implications for us because if there's not another Rite Aid to immediately go to, we need the consumer to do 2 things: first, find another pharmacy, and then second, at that other pharmacy, make sure that they continue to use GoodRx because GoodRx may not be in that new pharmacy system associated with that user's prescriptions. So they may have to show a GoodRx card or at least say to the pharmacist they want to use GoodRx to keep saving money. So there are 2 things the consumer has to do. That creates friction. And any time there's friction, some consumers take longer to do it than others. And that's why we see this -- best way to see this $5 million estimated store closure-related impact because consumers may take time to make that shift.

Got it. And do you feel like it's contained within that $5 million, like as you kind of look out to next year, is there any other variability that you could anticipate?

Yes. I think on that note, the underlying trends in the space continue to be positive, script volume going up. The tailwinds for us associated with prescription pricing, which is increasing cost burden shifting to consumers on the one hand, formulary constraints on the other hand, both of which help our business, we also see those trends continuing as employers continue to try and manage health care costs. So the macro -- the reason I'd point those out as a couple of examples is the macro situation that we operate in as good as it ever was. So we think that consumers will continue to fill those scripts ultimately, continue to use GoodRx, there's just in the interim period at a certain amount of turbulence associated with, say, Rite Aid that's occurring. But we anticipate that, that will be transient users will find their way to stores that remain and we will continue to move forward successfully.

Got it. And there's been enough time now. So thus settled, so to speak, and you've talked to investors. Do you think people are comfortable with this dynamic or anything else they're kind of looking to monitor?

I think you may know that better than I do. It is given the questions investors may place to you. But -- and I turn this over to Romin as well. But I think from our perspective, the pharmacy ecosystem has been or was for a period of time, a big question for investors historically. I think the other open question for investors that Romin talked about in his opening remarks around how the business has evolved is around our approach to contracting with pharmacies and PBMs as well. We've moved to this hybrid model where, while historically, we sourced our low prices almost exclusively from pharmacy benefit managers or PBMs, now we directly work with a large number of retailers as well. In fact, 7 of our top 10 retailers to directly set prices for consumers, helps potentially save consumers even more money, helps pharmacies do better merchandising, get more margin. So in those contexts, that's been helpful to us and the pharmacies, but there was for a while, I'd say, more last year than this year, concerned that maybe the PBMs wouldn't like it or would somehow feel like this was creating friction. I think we've shown since then, though, especially with things like the integrated savings program where PBMs are actually selling GoodRx for us as a channel, and those are big PBMs like ESI, Caremark MedImpact, et cetera, that, that has absolutely not been the case, and the PBMs continue to be excited to work with us.

Got it. Maybe we can -- on the macro backdrop, as you mentioned, on the one hand, you have strong utilization, pricing, those are tailwinds. On the other side, you have seen some retailers talk about pressure on their own profitability. So where does GoodRx come into play there, and really want to focus on the value proposition of the business and where you can help retailers.

Yes. No, great question, Craig. I think as far as the value prop goes, the GoodRx value prop has only increased in the midst of kind of this pharmacy landscape that we're seeing now. The pharmacies obviously want to attract and retain customers, especially now, and GoodRx help them do just that. We send them new traffic in terms of customers looking for savings. We help reduce friction at the counter. We also helped reduce the number of walkaways of which there are 900 million scripts that go and fill each year. And pharmacies need that and they want that. So I think the value prop has only increased. And as far as the macro goes, I think we're well situated to weather kind of the choppy landscape as it is now, whether it's through the form of our flexible contracting strategy that Karsten talked about, where we're able to direct contract and help work with pharmacies on margin or volume or a combination thereof or also our ability to directly contact consumers, which we've built up over the past couple of years to have contact information, the ability to push messaging to them and divert them, whether it's a script to a different pharmacy to transfer it, to alert them to new pricing or so on and so forth. So I think we've kind of built up a set of tactics and strategies that help us kind of weather the storm to come if there may be one, and are well situated.

Got it. Thanks for that. Another dynamic that comes up is just CVS CostVantage and maybe so middle of last year where that really got a lot of investor attention, but just how are you thinking about that and just the interplay in terms of what they're doing there versus GoodRx?

Sure. I think CostVantage has created a great deal of confusion. And we also got questions about it primarily last year, maybe a year plus ago, as I'm sure you did, Craig. And I think from the CVS perspective, given the backdrop that we've been talking about now in relation to the last few minutes of this dialogue where pharmacies are struggling to get more margin, the CVS backdrop is important to understand, which is they, too, ultimately have to capture more margin per script. So one of the concerns I think investors had was that somehow this would push down consumer prices to a degree where maybe consumers would be less incented to use GoodRx. But we don't really see that as likely, and the reason we don't is because that implies that the pharmacies are actually giving up margin and lowering price versus capturing it for their own benefit. And from that perspective, I think some of the common CVS has made as well indicate that they're not in a place where they are seeking to lower consumer prices either. So from that perspective, we feel pretty comfortable. I think the other thing that's important to note is when CVS first announced CostVantage, and this is going back at least a year at this point, they said they're going to work with discount card providers like GoodRx on CostVantage first and then go out to the broader funded benefit side. And we've been working with pharmacies, including with CVS in a cost informed way for years now. So from that perspective, a, it was nothing new for us; and b, it's consistent with the way we have been operating. And as you can see from our results, our revenue per MAC and our relevant metrics, even though I've been working this way for a long time, have been pretty darn stable for the last several quarters.

Got it. That's important context. I want to dig in a little bit more to the ISP program, and you've shared some thoughts there in terms of the contribution to the business. But just -- how is it going relative to your initial expectations? What are some things investors should be watching for the momentum in ISP?

Yes, I'll take that, Craig. ISP has been, at least from the perspective of our PBM partners, the plans and employees, a great success. So far, we've heard really positive feedback. And we think that's part of the reason why we become a leader in the commercial market for integrated benefits is because the value prop is just quite resounding. And so far, we believe in terms of integrated savings, the value prop is quite positive here. And again, we've heard great things from our consumers. The uptake has been significant. We've seen a few levers that we're pulling on, whether it's through increasing the win rates, whether it's through selling through to more plans or selling into more PBMs themselves or increasing pharmacy acceptance. And so we're executing against those levers and working hard to continue kind of growing this business. But so far, really positive feedback and have seen quite an uptake.

Got it. And I think the expectations are for around $35 million this year. How do you think about it perhaps on a multiyear basis? Like how should this business trend?

Yes. So far, it's exceeding expectations and in line with what we've put out there. We -- as far as it goes this year, or have yet to kind of complete the year, so we're not going to talk yet about what we pinpoint next year's growth to be at. But we've talked about during our Investor Day, approximately 60%, 90% CAGRs through 2026, being our expectation. So that should give a bound of expectations of what we believe the business can do. And obviously, we're optimistic for it. We're working hard to execute against those targets. And the business has a lot of upside, including what Karsten talked about earlier with potential for RAP programs, which are basically are noncovered or off-formulary medications. So as we sell programs like that, like we did, like we announced in Q2 with net impact, there is incremental upside as well. So yes, it's going pretty good so far.

Great. And then on direct contracting, I think that's roughly 20% or so of client volume today. It was only about 5% at the beginning of last year, right? So there's a big move in terms of magnitude there. Similar thing, how should that trend over time and -- from a growth driver perspective?

Yes. I think direct contracting is going to continue to grow as a percentage of our claims. By and large, though, I think we're going to follow the lead of pharmacies on that. So that's -- as we continue to contract with different pharmacies and work with them on their books, really, we're going to see where they want to go with this, but we have the flexibility of our hybrid model to always defer to, if necessary, we can do the PBM marketplace or continue with the direct contracting, just depends on what pharmacies want.

Got it. And then switching gears to Pharma Manufacturing Solutions. You've mentioned that was -- when we think about Scott and focus, I think that's important to note in terms of the strategy. This is a market where there's still headwinds out there from a budget perspective, right? Growth has slowed, but yet your growth is pretty robust. So can you just talk about what's resonating well with you in this business?

Sure. So on the Pharma Manufacturer Solutions side, the market growth, especially on the digital side, continues to be decently robust depending on what data you're looking at, it's high single-digit, low double-digit teens growth. So reasonably robust. But given our share of the market is still quite small, we see it more up to us in our execution than anything else to continue to drive the growth rates we talked about on our Investor Day. So growth rates around or in excess of, say, 20% Y-o-Y. And one of the key focus areas for us in that space is, in particular, some of the offerings that we can uniquely provide, like, for example, our point-of-sale discount solutions for pharma manufacturers and device manufacturers like Dexcom too. In that context, we can offer an ability for a manufacturer to set a price and have that price be applicable at pretty much all the pharmacies through which consumers will like our products. A great example of that is Sanofi with their Lantus diabetes product, where Sanofi wanted that to be a $35 price point or $34.99 price point, pretty much nationwide. Of course, pharmacies set price in various different ways. So they could leverage the relations we have with pharmacies on one side, health care providers and consumers to drive demand on the other side, to allow us and to enable a price point that is consistent by allowing the consumer to use a coupon that would always take the price down to that $34.99. And the way we do that is that we collect cash from Sanofi in that case, and we make the pharmacy hole on the back end for whatever the delta is between what the consumer would otherwise pay and the Sanofi target price is. So the pharmacy, we're charging $38 then and the consumer paying the $35, then Sanofi will fund that delta through less of the $3. Consumers win through lower prescription prices, Sanofi wins because they're increasing the volumes that they sell. And then finally, we're able to win as well because we enable the transaction and generate revenue from it.

Got it. At the Investor Day, you talked about also there could be a couple of potential upside drivers to longer-term growth. I wanted to really zero in on GLP-1s, right? And kind of what's the play there for GoodRx?

Well, that's actually -- it's a good segue from the last question, I'd say, Craig, that we were talking about around point-of-sale discounts, because I think the areas where point-of-sale discounts are most effective are, for medications, number one, that consumers are familiar with; number two, they're sometimes not covered by their employer's plan or formulary; and three, pharma manufacturers want to put them in consumers' hands. And because they're not necessarily covered by the formulary, the traditional models to do that through PBMs with discounting and rebating may not work super well. So it's interesting because GLP-1s, certainly as they applied in the weight loss context as opposed to diabetes context, are often not covered by employer plans. So check that box. Number two, consumers want them, sort of like Dexcom devices versus finger sticks, so checks that box. And finally, because the traditional PBM distribution model isn't working as well for pharma on the weight loss side as on the diabetes side, alternative tools to put them in consumers' hands are also an attractive option for them. So it checks that box. So this is an area where we think our POS discount model could be very useful to pharma manufacturers.

Got it. And anything to watch for, be it on the branded side versus compounding in terms of how the market evolves?

That's -- I think that's an interesting question. I think the compounding has catalyzed a greater interest in manufacturers to consumerize the market more quickly than they might otherwise, meaning that the compounding does 2 things. It first erodes a portion of the market for the big GLP-1 manufacturers. And number two, I think it creates confusion on the part of consumers that manufacturers also don't like. So the consumerization of the market, we see as a potential accelerant for things like we just talked about, the ability maybe for us to help manufacturers, given we are a large consumer base or a large health care provider base and our ability to enable discounting as they consumerize the market more.

Got it. And then I think another area of potential upside as you reengage with Kroger. Can you talk about that in terms of how that reengagement is going? And then longer term, what could potentially drive upside there?

Sure. Maybe I'll jump on that one too real quick. So with respect to Kroger, Kroger used to be a big part, actually disproportionately big part of GoodRx's set of offerings. And then shrank down to be sort of under-indexed for a period of time, where their market share in the market broadly exceeded the proportion of transactions that they make up within our transaction universe. We recently signed, around the time of our Investor Day, an incremental agreement with them to ensure consumer pricing and our relationship with them could be improved. And so we're expecting through that over time that the proportion of transactions Kroger makes up within GoodRx's ecosystem become more similar to their market share overall. So grows for their proportion or share within GoodRx grows, in other words. We think that's going to take a little bit of time because, number one, consumers shifted away from Kroger for a period of time or GoodRx users. Number two, the pharmacy was generally having limited support for the PBM discounts we aggregate for a period of time. And so the pharmacists too were no longer accustomed to accepting those and processing though. So I think on both dimensions, there is a ramp period as consumers realize that Kroger is a viable option again for prescription savings on the one hand; and two, those pharmacists become more educated and revert back to their prior practice of accepting the discounts that we're aggregating on behalf of the consumers.

Got it. So as we wrap up here, I do want to touch briefly on just capital allocation. You mentioned before, you've kind of cooled on M&A. You've been focused on the core prescription business and manufacturing solutions. How does the management team and Board approach capital allocation? What's the bar for M&A? How are you looking at buybacks?

Sure. I'll take that, Craig. I think our capital allocation approach has remained unchanged. That is, we're going to continue being capital efficient. We're going to continue reinvesting in the business in smart ways, and we're going to continue maximizing shareholder value. I think on the topic of buybacks, we've done plenty of those in the past, and we've done them when we've seen our stock trade at values that we believe are below intrinsic value or true value of the business. And so we have about $295 million left on our off, so plenty of space to continue executing on that strategy. And when -- if and when it becomes an opportunistic play for us. So we'll continue doing that. I think on the M&A front, we've pulled back that, as you've stated, I think a lot of our focus has been honing in on the strategies and focus areas that Scott and the team have kind of laid out here today. And that's really been our focus. But when it comes to M&A, the bar has effectively been raised for us. We want to make sure that anything that comes our way is really in line with our long-term strategy and is a compelling opportunity or as a unique advantage. So we're not totally turned away from it. But if the right opportunity comes along, we certainly will take a look. But again, that bar is quite high now.

Got it. I think we're right on time here. So Karsten, Romin, thank you so much for your time this morning.

I appreciate you hosting us. It's been a pleasure to be here and a pleasure to see some familiar faces in the audience, too. So thanks, everyone, for joining us.

Thanks so much for the time.