When GoodRx (GDRX 6.31%) founder Doug Hirsch realized that Americans lacked a one-stop destination for prescription discounts and prices, he decided to build the leading, consumer-focused digital healthcare platform in the U.S today. With its unique customer-centric business, GoodRx holds a key competitive advantage in the industry, and its growing popularity could enable the company to become a product that every American uses.
The industry’s inefficiencies
One problem in the U.S. is that prescription drug prices are not regulated as it is in other countries. This lack of regulation allows pharmacies to set their own price for drugs, resulting in different prices for the same drug across various pharmacies.
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There are also tons of middlemen between the drug manufacturers and the consumer who are trying to make money. Manufacturers sell to distributors who sell to pharmacies, and pharmacy benefit managers (PBMs) fight for prices for insurance companies. In exchange, PBMs get a slice of every transaction. Five separate hands in the pot result in the variable, opaque prices for prescriptions.
GoodRx’s prescription
GoodRx partners with PBMs to display the price that pharmacies buy the drugs at, and allows GoodRx to offer prescriptions at that price to the consumers. PBMs love it because it is easy work and it still gets a slice of transactions, and pharmacies need to accept GoodRx, or else it could lose business to competing pharmacies who do accept GoodRx. The biggest winner in this entire transaction are consumers -- who can easily find the cheapest prescriptions.
GoodRx takes a small cut of the transaction, which begs the question: Isn’t it just another middleman in this complex process? Yes, but GoodRx is the only customer-focused middleman, resulting in overall cheaper prices.
GoodRx’s platform is great in theory, and it has the financials to back it up. In the recent quarter, revenue grew 43% to $176 million and reached 6 million monthly active customers -- which grew 36%. GoodRx’s main platform is free, but it also offers a Gold version -- which offers even cheaper prescription prices for a monthly subscription -- that over 1 million additional customers use. The company’s subscription members increased 86% year over year, resulting in 125% revenue growth to $14.3 million. These businesses are very high margins, reaching a quarterly gross margin of 95% and an adjusted EBITDA margin of 31%.
GoodRx has other forms of revenue, including telehealth and manufacturer solutions -- which is advertising revenue from drug manufacturers. These revenue streams grew 136%, passing $17 million last quarter. The company’s various forms of high-margin revenue result in profitability. Due to large stock-based compensation (SBC) grants related to last year’s IPO, net income has been very lumpy, but GoodRx could be continuously profitable as those grants fade away. Even after $41 million in SBC, the company had $30 million in net income in the recent quarter. Investors should, however, expect this figure to remain lumpy and volatile in the short term.
GoodRx’s services are loved by customers: GoodRx has a net promoter score (NPS) of 90 among customers in 2020. GoodRx has saved an estimated $30 billion dollars for consumers since 2011, so this satisfaction should be no surprise. Even the best businesses in the world like Netflix (NFLX -4.26%) only have NPS scores around 55-58.
The side effects of owning an industry disruptor
One of the downsides of disrupting an industry is that it typically attracts competition. Recently, Amazon (AMZN -1.44%) made an attempt to enter the prescription industry by launching Prime Rx. Prime Rx focuses mostly on mail-order prescriptions rather than retail prescriptions, which only make up 5% of the total prescription fill count. For this reason, GoodRx does not view Amazon as much of a threat today. While nobody should underestimate Amazon, it hasn’t been able to take any market share away from GoodRx so far.
Another concern is the high SBC that GoodRx gives to its co-CEOs. After its IPO, GoodRx planned to give over $530 million in SBC to its co-CEOs -- $470 million of which has already been paid out. The company will still be dishing out roughly $60 million over the coming quarters, damaging profitability.
GoodRx has been able to push back competition, making way for its dominant position. Its strong growth in subscription users could result in even larger revenue growth in the future. Looking forward, investors should watch for user growth -- specifically subscription user growth -- and keep an eye on SBC. If it can grow its customer base and keep costs low, GoodRx could help even more Americans find the cheapest prescriptions for many years to come.
