GoodRx’s 75% Profit Growth Augers Well For Its IPO
On August 28 the drug discount coupon provider GoodRx — which has been profitable since 2016 — published its IPO prospectus.
Its IPO, paired with Snowflake’s, will help answer the eternal question: Do investors care more about revenue or profit growth?
In contrast with money-losing cloud data analysis software provider Snowflake — about which I wrote August 27 — GoodRx’s profits are expanding much faster than its top line.
Assuming its goes public on a day when market conditions are good, I think its IPO will be successful. After all, its very skilled management team is targeting a huge market with a compelling value proposition and a scalable business model.
Due to its much faster revenue growth, I am guessing that Snowflake’s IPO will generate more of a first-day pop than GoodRx’s.
I will revisit this guess after their IPOs.
(I have no financial interest in the securities mentioned.)
What is GoodRx And How Does Its Growth Compare to Snowflake’s?
Santa Monica, California-based GoodRx owns and operates a prescription drug price comparison platform that uses pricing data from pharmacy benefit managers (PBMs) to compare prices at local and mail-order pharmacies. GoodRx collects fees from PBMs when consumers — 17 million per month, according to CNBC — present their GoodRx coupon at the pharmacy.
GoodRx is providing investors with some of the most compelling financial statements I have seen in an IPO candidate. The company — which has reported profits since 2016 — has grown net income faster than revenues. In the first half of 2020, GoodRx revenues grew 48% to $257 million while net income increased 75% to $55 million — yielding a solid 19% net profit margin.
Snowflake is growing much faster than GoodRx. Snowflake’s revenue jumped 133% to $242 million in the first half of 2020 while its net loss declined slightly to $171.3 million, according to CNBC, marking a whopping negative net profit margin of 70%.
Due to its faster growth, I am guessing investors to reward Snowflake with a bigger first day pop than they will GoodRx shareholders.
Nevertheless, I see three reasons that GoodRx has a bright future.
Excellent Management Team
Founded in 2011, GoodRx’s cofounders include Facebook veteran Doug Hirsch and serial software entrepreneur Trevor Bezdek. The cofounders aspired to make it easier for consumers to get the best prices on prescription drugs. Their solution was to offer discount cards and coupons that consumers could take to the pharmacy to pay lower prices.
Hirsch and Bezdek are co-CEOs — a role they have been co-playing since January 2015. Prior to GoodRx, Hirsch, a Tufts graduate, was CEO of a healthcare-focused social network, DailyStrength, after serving in senior roles at Facebook and Yahoo!.
Bezdek — who holds a B.S. in Biology from Stanford — was Managing Partner at Tryarc, an information technology consulting firm from 2001 to 2007, and co-founded Bioware, a community for biologists and scientists.
Hirsch says this unusual co-CEO arrangement works because they are tackling a complex problem with complementary skills. “Trevor and I have tackled the two-sided problem [of joining exceptional consumer-facing technology with an expert understanding of healthcare’s byzantine economics, regulations and incentives] together — as friends, colleagues and co-CEOs who still share an office — for over a decade.”
Hirsch is good at consumer-friendly product design and Bezdek brings insight into healthcare’s complexities. “Fortunately, we have complementary skills; Trevor’s deep understanding of the complex web of healthcare is unparalleled, while I have created category-defining, easy-to-use products that have helped and delighted consumers for decades,” Hirsch wrote in the company’s prospectus.
In June 2020, GoodRx deepened its executive bench by hiring a new “CFO, Karsten Voermann, from wealth management firm Mercer Advisors [who is no doubt working on a raft of accounting problems described in GoodRx’s prospectus], and a new president of health care, Bansi Nagji, who previously was the chief strategy officer at McKesson MCK ,” according to CNBC.
Huge Target Markets
GoodRx estimates that its addressable market totals $800 billion. This includes $524 billion worth of prescriptions — including the 20% to 30% of prescriptions that are written but not filled because consumers can’t afford to buy them. GoodRx also targets “the $30 billion pharmaceutical manufacturer solutions opportunity.”
Moreover, with its acquisition of HeyDoctor — which enables consumers to refill medications and receive advice about their prescriptions — GoodRx is targeting the “$250 billion telehealth opportunity,” according to its prospectus.
Compelling Customer Value Proposition And Business Model
While the health care industry is highly complex, GoodRx’s business model hinges on creating value in ways that matter to patients and physicians.
GoodRx’s value to consumers is simple to describe. It has saved them $20 billion on prescriptions and medical services by enabling its 18 million consumers a month to reduce the price they pay for generic and branded prescriptions by over 70% at 70,000 U.S. pharmacies.
Consumers like this service. Its February 2020 net promoter score (NPS) survey — a measure of consumers’ willingness to recommend the service to others — found that GoodRx’s NPS is a very high 90.
GoodRx enables physicians — who are judged by patient outcomes — to encourage medication adherence and provide a consumer-friendly service. When GoodRx started its service, physicians contacted the company complaining about how frustrated they were that they could not tell patients how much prescriptions would cost, according to CNBC.
Since GoodRx codes prices directly into Electronic Health Record systems, healthcare professionals can provide discounted drug prices to their patients at the point of prescribing, noted its prospectus.
Not surprisingly, the huge market opportunity has attracted rivals — including Singlecare and RxSaver. GoodRx targets 28 million Americans who are uninsured and those with high deductible insurance who could saved money through GoodRx’s website and mobile app, according to CNBC.
Here’s how GoodRx makes money from PBMs. For a $20 prescription, the PBM takes $6 — some of which goes to GoodRx — leaving $14 for the pharmacy. In addition, GoodRx sells ads on its website and charges consumers $5.99 a month for GoodRx Gold that saves money for consumers with many prescriptions, explained CNBC.
GoodRx generates high profits — a 19% net profit margin — due to its low cost of goods sold and well-controlled other fixed costs. Its biggest expense is sales and marketing which grows at roughly the same rate as its sales.
More specifically, GoodRx enjoyed a whopping 95% gross margin and its R&D and G&A costs were at a low 8.7% and 4.7% of revenue, respectively, in the first half of 2020.
GoodRx’s biggest expense was sales and marketing which accounted for 45% of revenue in the first half of 2020. Compared to the same period in 2019, sales and marketing expense grew 47% as revenue increased 49%.
What Could Sully GoodRx’s Picture?
One real risk I see for GoodRx is its 2019 launch of HeyDoctor. That’s because telehealth is intensely competitive with “significant price competition” contributing to “lower margins than [the company’s] other offerings,” according to the prospectus. Should HeyDoctor grow to become a significant part of its total revenues, GoodRx’s net margin will surely drop.
Nevertheless, the biggest risk to GoodRx investors is highly unlikely to occur — an America in which all citizens have affordable, transparent, comprehensive health insurance.
As long as millions of consumers are not covered by insurance and drug prices remain opaque and unaffordable, demand for GoodRx should remain strong. As Hirsch told CNBC, “If America as a country decided to keep all Americans healthy and things were upfront and transparent, there would be no need for GoodRx. I don’t suspect that’ll happen, but if it did, I’d happily hang up my hat and move on to another problem.”
With 12 million people having lost their employee-sponsored health insurance since the pandemic began, the pain that creates demand for GoodRx is likely to keep getting worse. That should be good news for investors in its stock.