GoodRx is a completely new acquaintance for me. I have though seen several recommendations from the more reliable investment community, which sparked my interest in this online drug merchant.
The Idea, Product and Potential
In the US there seems to be an issue with accessibility of healthcare at affordable pricing. Many people are uninsured, which means that those that already might be struggling financially, cannot afford proper medication. Furthermore it seems the that even the insured cannot afford, even with a deductible, the medication prescribed. Figures show that 20-30% of all prescriptions are never picked up, and the higher the value the higher the abandonment.
The pricing of medication at pharmacies is the result of a broken and complex system, which includes manufacturers, distributors, PBM's (pharmacy benefit managers) and pharmacies. In short, the system is no longer built to support the consumer with the medication he needs at the cheapest price.
That is exactly where GoodRx comes in. In 2011 Douglas Hirsch and Trevor Bezdek founded GoodRx, as they saw a need in the market to better service the needs of the consumer. The mission statement of GoodRx is "Help Americans get the healthcare they need, at a price they can afford" and provides a clear line of sight on what GoodRx is trying to do.
GoodRx is a platform, that works as a price comparison tool for prescription medicine, hence it makes drug pricing transparent and the GoodRx platform offers discount coupons to consumers, allowing consumers to shop for which pharmacy provides the best combination of price and convenience.
As GoodRx describes: "When a consumer uses a GoodRx code to fill a prescription and saves money compared to the list price at that pharmacy, we receive fees from our partners, primarily PBMs. The fees can be a percentage of the fees that our partners earn or a fixed payment per transaction."
They mention in their investor material that the average discount on the list price is more than 70%, and that they have since 2011 saved Americans for more than USD 25 billion. Furthermore it is mentioned that more than 70.000 pharmacies, being nearly all of the pharmacies in US, accepts GoodRx codes. Looking at the growth of MAU (monthly active users) it is also obvious that the platform is gaining ground. In latest Q4 report the MAU was up to 5.6 million.
Growth of MAU has been slowing a bit during 2020, which must be watched over the coming quarters. I wouldn't be concerned until we see stagnation over several quarters, but as MAU growth is important for the growth story of GoodRx it is worth following. 80% is repeat purchases again signaling broad acceptance of the GoodRx platform. The GoodRx app is one of the most downloaded medical apps between 2017 and 2020.
GoodRx has a very similar business model to highly successful companies in other industries. Companies that are serving as a marketplace, simply connecting supply and demand of services and facilitating transactions between the two. A very powerful business model that can operate very nimbly and has an almost endless potential for operational leverage and optionality as well.
GoodRx is currently trying to diversify their Prescriptions business, which currently accounts for more than 90% of revenue, with subscriptions and manufacturer solutions. They have even initiated a telehealth corridor with HeyDoctor and hopes to capture a portion of the online care market.
One of GoodRx's most important moats is their large userbase, which makes them the more attractive partner to PBM's. It is very important to maintain this advantage, which is why the MAU key figure seems to be one of the most important metrics at this stage.
The US healthcare market is a USD 4 trillion market, and GoodRx estimates their TAM (total addressable market) to be in the range of USD 800 billion, which is an inflated number, but at least gives a huge runway.
Financials
Looking at the balance sheet GoodRx holds USD 969 million in cash, after a successful IPO in 2020. The debt is currently 660, which is high, but not concerning, especially not, when taking into account the yearly positive free cash flow of around USD 40 million for the past three years.
What is really impressive are the margins that GoodRx are operating with, the gross margin at 94,5% is a fantastic sign of the potential operating leverage lying ahead of this company. On top of that the EBIT margin have been consistently in the thirties over the previous three years, except for 2020 where the operating margin was hit by a significant cost from stock compensation given to the management in relation to the IPO.
The only key figure that does not fully follow the wanted trajectory has been the MAU during 2020, which was already mentioned in one of the previous sections.
Management and Culture
Co-founders Doug Hirsch and Trevor Bezdek are still at the helm as Co-Ceo's. Furthermore the third ever employee of GoodRx Andrew Slutsky is still involved in the business as President, Consumer. This type of founder and long term employee involvement is usually one of the core ingredients of a multi bagger.
On the other hand I am not impressed with the share ownership of the founders, as they only own 4.5 million shares each, equal to 1.3% ownership and voting rights each in the company. In total all executive directors and directors as a group owns 4% of the business. Most of the ownership lies with private equity investment firms Silver Lake, Francisco Partners, Spectrum and Idea Men.
Stock
GoodRx IPO'ed at a USD 26 price in September 2020 and is still in early stage development. (opened at USD 46) Therefore there haven't been a lot of movement in the stock yet. (at time of writing USD 39)
Currently the stock trades at a P/S of 27, which seems in investable range for a profitable growth company with such positive margins.
Risks
Generally there are competitors in both market segments; prescription medicine and tele health. It seems that GoodRx is by far the largest player on the prescription medicine platform (SingleCare, RxSaver etc.), while the telehealth opportunity sees much larger players in the space (TelaDoc, Amwell etc.) On top of that the news of Amazon Pharmacy, where discounts with free delivery is offered with Prime, has been a concern, where the impacts will be seen in the coming years. But historically only a small portion (under 5%) of prescriptions have been covered by mail order, and the GoodRx codes can even be used with Amazon Pharmacy.
In relation to the risk of keeping the leadership position, they do mention that they have customer concentration risk, as 48% of revenue in first half of 2020 was covered by the three largest PBM's.
MoGeBat Score: 63
Concluding on the research made GoodRx looks as an interesting opportunity, if they are able to continue the growth of their userbase over the coming years, while keeping the world class margins that they are currently operating with. The MAU will be important to follow, and will be a huge factor in the success of GoodRx. Furthermore it is interesting to see how Amazon Pharmacy will impact the business going forward.
Usually a MoGeBat Score of 63 would be outside the investment range, but the hit from industry disruption risk and a few more points evaluated here and there, would potentially have brought this into investment territory. A watchlist stock for sure.
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