Can you use GoodRx with Amazon?

You can still use GoodRx in the Amazon Pharmacy (which Hirsch confirms), so all of the prescriptions sent to Amazon Pharmacy will still be eligible for GoodRx to earn revenue on.

seekingalpha.com - GoodRx: Amazon Pharmacy Worsens Outlook (NASDAQ:GDRX)

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Introduction

In this article, I will analyze the business model and future prospects of GoodRx (NASDAQ:GDRX). I will share insights from a pharmacist's perspective about how the prescription discount card works and what makes it unique from other players in the field. I hope to create some transparency behind the acceptance of prescription discount cards such as GoodRx at retail pharmacies and at Amazon Pharmacy (AMZN). I will also explain my hesitations about becoming an investor in GoodRx at the current valuation. Rising prescription drug costs have been something that has plagued the wallets of Americans for the past two decades. With the list price of branded drugs rising 159% on average from 2007-2018, it was inevitable that healthcare reform would become one of the most frequently debated topics in Congress and in the media. Many technology companies have come to the fore promising improved efficiency and cost savings. Enter GoodRx, an emerging growth healthcare solutions company that offers a convenient mobile app which enables patients to save money on their prescriptions. The app has become the most downloaded healthcare mobile app ever. Largely due to the fact that it has enabled patients to save $20B on their prescriptions relative to list prices. Prescription discount cards are nothing new to the retail pharmacy industry. What makes GoodRx unique from other discount cards is its ability to furnish a price at any participating pharmacy in a matter of seconds. This allows the patient or provider to compare prices for the same medication between different pharmacies. This also enables the provider to compare the out of pocket cost between medications that are considered interchangeable. For example, a provider looking to initiate a patient on an angiotension II receptor blocker (ARB) such as valsartan may find that sending their patient to a different pharmacy for the alternative losartan may save them as much as $82 every 90 days. In fact, GoodRx claims to put out 150 billion price points daily. This proprietary software is truly unique and creates an interface that's very easy to use.

How GoodRx Makes Money

GoodRx charges the pharmacy a fairly large processor fee for their service (as seen in the image below). I personally have seen fees that eat up 80% of the pharmacy's revenue generated from the transaction. Ultimately, the customer still ends up paying less than they would if they were to pay list price or even if they were to use a competing discount card.

(Courtesy of S-1)

The bulk of the revenues earned come from taking a portion of GMV. The company is looking to expand its revenue streams and has recently acquired HeyDoctor, which is a telehealth service. They have also launched a paid membership program called GoodRx Gold. GoodRx is also working directly with manufacturers of brand name drugs to help drive patients to use their products. They call this GoodRx manufacturer solutions. This is an interesting opportunity for the company which is being viewed as a $30b opportunity. It is uncommon to use a discount card of any kind on a brand name drug because there isn't much variance between GMV and list prices. Normally, manufacturers would negotiate a rebate with the PBM for preferred formulary status, ultimately helping to reduce costs to the payer. A patient with no insurance unfortunately does not see these savings and is forced to pay close to list price. GoodRx is leveraging its massive customer base and directing these patients to select manufacturers for financial assistance. The patient will then find the drug to be more affordable and of course GoodRx will drive high margin revenue in the form of advertising.

Why Would a Retail Pharmacy Ever Accept a Reduced Rate of Reimbursement?

Many readers may have tried to use a GoodRx coupon in the past and found that the pharmacy in question did not accept the card despite the information given on the GoodRx app. The truth is that GoodRx and PBMs have a symbiotic relationship. If GoodRx processes the claim, it means that the claim was not processed through the PBM. This will either save the PBM money directly, or result in the patient being less likely to hit their deductible. As a result of this win-win relationship, GoodRx offers prices on behalf of the PBMs, so technically the pharmacy is obligated to accept the rate unless they offer a better price. The agreement is described below: "As we have agreements with PBMs to market their negotiated rates through our platform, our ability to present discounted prices is dependent upon the arrangements that PBMs have negotiated with pharmacies and upon the resulting availability and allocation of discounts for medications subject to these arrangements." - S1 Page 23

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Unfortunately for GoodRx this symbiotic relationship is not exclusive to them.

The Amazon Pharmacy threat to health insurers, PBMs and even retail pharmacies is overplayed in my opinion. I do think they'll do quite well with tech-savvy customers that have high deductible plans or no insurance. GoodRx investors should be worried about what I just said, considering that the customer base just mentioned is the exact cohort that GoodRx is targeting. The above image should make GoodRx investors even more concerned. Prime RX has partnered with InsideRx to administer its own discount card that is as widely accepted as GoodRx at retail pharmacies. This is of course thanks to the fact that acceptance of a discount card at a retail pharmacy simply requires the pharmacy in question to accept any of the contracts from a PBM that the discount card has partnered with.

Current and Future Financials

It is important to realize that GoodRx is a software company, as revenues grow and customers continue to use GoodRx, the impact of the sales and marketing should rise at a slower rate than revenues. The revenues and cost of the revenues GoodRx generates can be seen below:

(Per the Q3 10-Q)

At least until recently, investors seemed to be investing in equities that could grow revenues at the fastest rate regardless of valuation. This sentiment has seemingly been flipped upside down with the increased concerns about inflation. The rotation into cyclicals has sent GoodRx into a downward spiral (shares have fallen $6 in the time it's taken me to write this article). With that being said, at some point in the near future I do think investors will rotate back into growth equities. I will focus mostly on revenue growth forecasts for that reason. Considering I process prescription claims for a living, I will try to explain the different scenarios playing out.

Current Revenue Forecast

2019A 2020P 2021P 2022P 2023P 2024P $388,244.0 $545,094.6 $737,294.9 $1,015,992.4 $1,397,497.6 $1,826,249.8 Growth 40.4% 35.3% 37.8% 37.6% 30.7% Click to enlarge

Revenue Forecast Assuming 700bps Negative impact from Amazon Pharmacy (Below)

2019A 2020P 2021P 2022P 2023P 2024P $388,244.0 $517,917.5 $664,281.0 $868,215.2 $1,133,455.0 $1,401,857.1 Growth 33.4% 28.3% 30.7% 30.6% 23.7% Click to enlarge I personally think the above model is extremely conservative but fair considering the current status of Amazon Pharmacy and the Prime RX savings card. I'm largely in agreement with J.P. Morgan analyst Doug Anmuth on the impact to future revenues. Anmuth downgraded his share price target to 29$ once the Amazon news broke. This price target implies a Price/'24sales of 8.7, which is closely in line with the current price to consensus '24 revenues. You'll notice I kept the revenue impact at a constant 7% (on an absolute basis) rather than gradually increase the impact like Anmuth did in his projection. The reason for this is the current PrimeRX discount card does not show real-time pricing and requires a membership to obtain. If Amazon were to commit the necessary resources into developing this program for use at retail pharmacies and offer something with similar convenience to GoodRx, then I think Anmuth's 2024 revenue projections of $1.31b may actually be overly optimistic. Despite the tremendous 2020 revenue growth and recent share price decline, the company still trades at a P/S multiple around 30. I personally think this is a steep price to pay for a company that just had Amazon sit down at its table.

Risks

At first glance, the Q3 operating loss is extremely concerning. Once we look deeper into the 10-Q, we will find that the extraordinary increase in G&A is primarily due to a $98.1m stock-based compensation plan awarded to co-chief executive officers after the IPO. While this isn't a recurring charge, it seems excessive based on the company's current income levels. Regardless, if we add back the $98.1m in compensation mentioned above to Q3 operating income we get $36.415m. Compensation and dilution will be something to keep a close eye on in the future. Competitors other than Amazon loom. Scriptcycle was a growing RX discount card that GoodRx acquired in August of 2020 for $58.3m of which $24.9m was considered goodwill. Scriptcycle had $4.8m in assets sans liabilities (10-Q Page11). While this isn't something to be overly concerned about, the company does have a net debt of $688m and total liabilities of $790m. It must be noted that GoodRx does have almost $1.1b in cash thanks to their IPO. Current discount card usage data could be inflated due to Covid-19 and patients losing employer sponsored health benefits. According to the Economic Policy Institute (EPI), as of August 2020 an estimated 6.2m people had lost health insurance through their employer. Medicaid programs were able to pick up ~85% of these individuals. This data does not truly represent the churn in employment we have seen throughout the past year.

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Normally, health benefits are not available immediately upon new employment and GoodRx would have provided patients with an option to help receive affordable generic medications during that break in coverage. From a forward-looking perspective, someone who is employed is much less likely to go uninsured vs. someone who is unemployed (11.6% vs. 29.8% respectively). As we continue to move towards full employment, the pool of individuals that look to use GoodRx may shrink. Obviously, investors need to be cognizant of the risk of major healthcare reform. I don't see major reform happening in the next four years, but an expansion of the ACA and increased insurance accessibility is possible. Based on the data just provided, this may also reduce the pool of individuals that look to use GoodRx.

Digesting Doug Hirsch's Comments on Amazon Pharmacy

As you would expect, after the news broke that Amazon was entering the prescription business, CEO Doug Hirsch went on CNBC in an attempt to calm investors. Below I will try to digest a few of the claims made in the interview. "There’s actually not a lot of news there. Amazon has had an online pharmacy since they acquired PillPack in 2018. And they’ve been trying many things to build PillPack because as you know Amazon is really great at shipping things and warehouses and stuff like that." This is true, Amazon has been moving slowly in their mail-order Pharmacy buildout. I think the announcement that Amazon made shows that they intend to accelerate that market share capture in the future. I do think they'll find the mail-order business difficult, but they certainly have the resources to succeed. The threat of Pill-Pack/Amazon has been on the minds of health care investors for almost three years. This announcement was expected. “I think they’re trying to do what they do best, which is mail order,” Hirsch said. “I don’t see it as competitive, I see it as complementary.” I see this as the current situation, but I wouldn't call it complementary. More so, Amazon isn't coming directly at GoodRx yet. You can still use GoodRx in the Amazon Pharmacy (which Hirsch confirms), so all of the prescriptions sent to Amazon Pharmacy will still be eligible for GoodRx to earn revenue on. If Amazon builds their discount card platform so that their prices are lower than GoodRx's, we would see this turn into a very unhealthy relationship for GoodRx. I think this is a most certain eventuality, as Amazon Pharmacy won't like paying the GoodRx transaction fee for very long.

Conclusion

Despite how bearish my comments and tone may have sounded, I'm actually very impressed with the business itself. The current valuation implies an extended period of tremendous revenue growth. Something that I suspect will never materialize as anticipated. For that reason, it is probably best to wait for a better entry point if you feel you need to be in this space. The threat of Amazon is massive, and will likely result in reduced revenue growth and reduced EBITDA margins in the future. With that being said, I don't see GoodRx going out of business because of this. EBITDA margins are strong, and I expect marketing increases to decelerate from the 50% increase as seen through the first 9 months of 2020. The app provides intangible value to the company thanks to its ease of use and millions of downloads. I will revisit GoodRx in a few months' time if I feel it has become overly discarded by investors.

seekingalpha.com - GoodRx: Amazon Pharmacy Worsens Outlook (NASDAQ:GDRX)

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