Americans spend about $1,200 per person per year on prescription drugs -- more than anywhere else in the world. Unlike other countries, the U.S. doesn't directly regulate medicine prices. As with many areas of the healthcare system, saving money in the $359 billion prescription drug market can be a tall order.
GoodRx (NASDAQ:GDRX) was founded to address this high-cost problem and "help Americans get the healthcare they need at a price they can afford." Does its potential to disrupt make it a good fit for your portfolio?
The complicated world of prescription drugs
The prescription drug buying process seems deceptively straightforward: Go to the doctor, get a prescription, pick it up at your local pharmacy. But under the surface, the market is quite complex and filled with middlemen all trying to make a profit -- which often comes at the expense of the consumers they purport to serve.
Drug companies sell to wholesalers, who then sell to pharmacies. Pharmacy benefit managers (PBMs) negotiate prices for health insurance companies. Health insurance companies then develop formularies, which are essentially price lists for their members, to encourage the use of certain drugs (e.g., generics) or delivery methods (e.g., 90-day supply via mail order).
Drug pricing gets increasingly complex as each of these players negotiates prices, fees, discounts, rebates, and incentives. Industry studies have criticized PBM contracts for their "complexity and opaqueness with multiple, hard to track, sources of revenue." The effect on consumer pricing is made even more complex by the level of government involvement in Medicare and Medicaid markets.
The high cost of complexity comes out of your pocket
Unlike almost anything else you would buy in your local grocery store, drug pricing can vary widely. For example, Crestor from AstraZeneca (NASDAQ:AZN) is one of the most commonly prescribed medications for high cholesterol. It's now available in generic form as rosuvastatin. If you visited the pharmacies in your local area to fill a 30-day supply of the generic version, you might find prices ranging from $10 to $80.
For many consumers, it's probably hard to believe there could be an 8x price difference for the same drug from nearby pharmacies. It may be even harder to believe someone could "walk in off the street" and pay less than the rate negotiated by their expensive health insurance company and its PBM partners. That's where GoodRx comes in.
How do we fix this mess?
Instead of trying to address the problem through legislation or negotiation, GoodRx created a third-party marketplace where pricing is transparent and everyone competes to provide the best deal to consumers.
When you open the GoodRx app and type in a drug name, you immediately see all the pricing from local pharmacies. These pharmacies are incentivized to reduce prices to capture customers and generate store traffic. The wholesalers and PBMs are incentivized to reduce their prices to help win the business. The big winners are the consumers, who have choice, transparency, and the best available drug price. For its troubles, GoodRx takes a cut (yes another middleman, but at least one with a consumer-centric focus).
Unlike many young tech companies, GoodRx is profitable with high gross margins in the mid-90s and operating margins in the mid-30s. In the first quarter, monthly active consumers were up 17% and prescription transaction revenue increased by 9% year over year. In a good sign of things to come, GoodRx saw revenue from other sources, including telehealth and drug manufacturer programs, increase by 154% to $26.4 million. These new programs will be critical to increasing consumer stickiness and creating value beyond low prices.
What can go wrong?
Since its Q1 earnings call, GoodRx has declined more than 40% from its 52-week high. Unlike some other companies, it's not because GoodRx was a COVID stock falling in a reopening stock rotation. Two things seem to be weighing on the minds of investors.
First, Amazon (NASDAQ:AMZN) announced the first enterprise client for its new Amazon Care services. Amazon is moving into healthcare, and prescription drugs are a particular area of focus. You can't easily discount potential competition from Amazon since price transparency between competing merchants is one of the core functions of the Amazon Marketplace.
Second, as part of its recent IPO, GoodRx issued a "Founders Award" of $533 million in equity to its co-CEOs. Although this type of stock compensation is fairly typical, the awards weren't mentioned in the initial IPO prospectus and the amount is considered higher than normal. Management has positioned the award as a one-time event, but if overly generous stock awards are repeated it would be detrimental to other shareholders and bears watching.
If you're like the half of all Americans who will need to fill your prescription this month, then by all means check out GoodRx. Your pocketbook will likely be the beneficiary of newly found market competition. If you're an investor, keep an eye on GoodRx to see how the potential competition and compensation issues play out for this industry disruptor.