Hi, everybody. I am Elizabeth Anderson. I'm the Healthcare Technology and Distribution analyst here at Evercore. Very pleased to be joined by Karsten Voermann, the CFO of GoodRx, who many of you know. Thanks so much for joining us today, Karsten.
Thanks so much. Really grateful to be here, and great to see some familiar faces in the audience, as well as, like you said, to meet in person for the first time.
I know, crazy, this COVID world.
I'll quickly jump in with a very short Safe Harbor that our team would like us to, to read out.
Yes, please.
We do have a Safe Harbor provision, and we'll report forward-looking statements during this presentation, and we refer you to our SEC filings for risk factors that could impact our future performance. With that out of the way, thrilled to jump right in.
Yeah, absolutely. Well, speaking of things to jump right into, it seems like there's a little bit of news flow this morning, so maybe we'll get, we'll address that first. Obviously, Walgreens came out with their announcement this morning. So just would love to get your thoughts on that announcement. How does that impact your relationship with Walgreens, and sort of how do you think about that announcement in the broader ecosystem of patient affordability?
Sure. I think I'll, I'll take those sort of in reverse order, if that's okay.
Yep. Sounds good. Perfect.
On the broader context of patient affordability, when Walgreens let us know about this, we recognized their intent here, which is to reduce the amount of walkaway prescription fills.
So someone comes to the counter, they don't come using either their insurance benefit, or for that matter, GoodRx. I mean, no GoodRx exists. They're about to walk away. The pharmacist doesn't want to unpack the prescription and restock it. This tool is a mechanism designed to diminish the volume of those kinds of situations.
So from that perspective, that's the intent. From our perspective, we elected to be in the tool because we see it as an opportunity, particularly as we go into next year and start focusing on resetting pricing potentially as well in certain dimensions, to be able to leverage it to our benefit more and more over time. So from that perspective, it's consistent with our view of being in collaboration with, with the company, with Walgreens, on multiple dimensions, whether it's shooting ads in their stores, which we've done historically, sharing our brands in that way, or whether it's doing things like the 200 medication collaboration we did a month or so ago to push prices down.
Okay, perfect. So, yeah, I think the way to think about it is, it's more of a collaborative tool. It doesn't change the relationship you had previously. It's just kind of an additional offering on that space.
It is, and I think we'll see it evolve over time, at least from our side, as we manage and optimize around what the consumer sees in the tool in relation to GoodRx.
Got it. Okay, thank you. That's helpful. So maybe back to sort of the broader business. I mean, you guys have undergone some meaningful changes over the past six to 12 months, including the restructuring of vitaCare, as well as the prioritization of areas like the Integrated Savings Programs and the solutions within Manufacturer Solutions. Can you walk us through the thinking on some of these larger strategic moves and sort of how to think about what to expect over the next 12 months on that front?
Sure. I think the right initial point to make is, I think now that we've been working together with our new CEO, Scott Wagner, for the majority of a year, we're in a place where all of us within GoodRx, from the board to exec team to everyone else in the company, are probably more optimistic than we've been at any time since our IPO several years ago. And the reason for that is that the strategic moves and the unlocks that have been created, we think both creates upside for us and it absolutely, with certainty, reduces downside risk. I'll give some examples.
Yep. Okay.
First of all, we've talked in the past about direct contracting with retailers where historically, we relied almost 100% on PBMs and the aggregation of their discount programs and our price discovery marketplace to drive volume in the PTR business. Now, we've moved to a model where an increasing number of those drug price interactions are directly between us and pharmacies. PBMs will always be important to us, but having that direct linkage does three things that are super critical for us. Number one, it allows us to have a relationship with pharmacies, where we can make sure both we and they are happy with the outcomes that GoodRx is driving, i.e., their margin expectations are met, our volume expectations and acceptance expectations are met, et cetera.
Number two, in some cases, that reality, as we talked about, not in this earnings call, but the prior one, has resulted in us taking, in some cases, margin hits on our part to help theirs, which have been offset by volume gains, so on a dollar margin basis, we're actually better off. And number three, I think the most important part about this is that it means that we'll never have a situation we anticipate, where a large retailer or retailer, period, will take action that is detrimental to GoodRx without at least us knowing and being able to respond to it. As some of you who have been in the paper longer know, we had some issues historically, where Kroger went against PBM discount cards, broadly speaking, and as an aggregator of those, that impacted us.
We believe we've thoroughly defanged that. So that's the direct contracting prong.
Then I think, the next prong we're really excited about is our ISP program.
This is a program, for those who don't know, where instead of acquiring customers as we normally do by engaging in significant marketing efforts, driving usage directly from each individual consumer to the GoodRx platforms, whether that's the app, the website, or cards they pick up in the doctor's office, and then having them use GoodRx, we can effectively leverage huge channel partners like Caremark, ESI, Navitus, MedImpact, et cetera, who basically collect their lives together and leverage GoodRx to provide those lives an automated option to benefit from either the lower of their funded benefit price or the GoodRx price, to the extent that we're better. So that aggregation of demand is attractive to us because we believe, and the data indicates so far, that the cannibalization rates are extraordinarily low. These are new users we wouldn't otherwise have gotten. So excited about that.
I think the final prong that I'd talk about is that we used this year, under Scott's leadership and after hiring Dorothy Gemmell, who used to run WebMD's advertising business, to help us lead our Pharma Manufacturer Solutions business. We're very excited about that, because, number one, we've used this year to cull out offerings that are either harder for us to deliver or less valuable to pharma manufacturers, who have really zoned in on the Venn diagram overlap of Pharma Manufacturer Solutions offerings that are easy for us and scalable to deliver and valuable in terms of ROI to them.
It meant that this year, our revenue growth won't be very big in Pharma Manufacturer Solutions, but it teases up well for next year, both because we're set up well from a scalability perspective, and frankly, it kind of makes this year an easier comp since we didn't grow a lot this year.
So those things all have me excited, and I think, like I said, the whole company is extraordinarily optimistic right now.
Got it. I think you've sort of alluded to some of the top-line impacts going forward of some of those changes. How do we think about the impact from the changes in ISP and in Manufacturer Solutions on the margin side?
Sure. So I'll take those, I'll take those in order.
Okay.
On the ISP side, it depends on how you think about it. But realistically, normally in our business, we'll pay CAC upfront, acquire a user, and then monetize that user over time. Different users have different LTVs, as you'd expect. Some are incredibly valuable, some are less so. You don't necessarily know in advance.
Yep.
With the ISP program and our relationships with the PBMs, the marketing costs that we bear are spread over time on a more per transaction basis.
We actually believe, and based on how we designed the program, we anticipate that from a margin perspective, it'll look really darn similar. 'Cause from a revenue perspective, it's substantially identical.
So the only difference is, instead of paying a bunch of marketing costs upfront before acquiring the user, I'm paying it over time. But if we did our math right, margins should be very similar to today. On the Pharma Manufacturer Solutions side, one of the reasons we culled down the breadth of offerings we had, I mentioned that we want to focus on things that are valuable to pharma manufacturers, and importantly, so the things that are easy for us to deliver. On that latter point, the easy for us to deliver also means not costly for us to deliver.
Historically, we've tried a variety of programs. Some of them have been harder for us and easier for us. The harder ones are now gone.
W hich means that the margin of that offering inherently should increase. We've done a variety of things, including co-branded advertising or co-marketing and other things with drug manufacturers. Some of those went great, some of them not so great. So the ones that haven't been as productive in terms of driving volume into, say, our PTR business, we just cut off.
That drops down to margin effectively. On both fronts, I think we're feeling quite good.
Yep. No, that makes sense. Maybe to just talk about Manufacturer Solutions a little bit more, you mentioned that the 2024 growth is sort of broadly controllable and not necessarily subject to sort of macro fluctuations, given how small the business-
The proportional market they are. Yeah.
Yeah. Yeah, exactly. And then it's sort of that it's all about getting in the right, in front of the right people. How are you ensuring that that's sort of... you're getting the face time with the right folks, and you're sort of getting your foot in the door to sort of accelerate that process?
Sure. So with Dorothy's arrival, who's a real complement to the fellow who used to lead all of our pharma Manufacturer Solutions offering, Aaron Crittenden. Aaron's by history an entrepreneur-
Was a previous company founder and was the perfect person to take this company from zero or in 2020, high double-digit teen millions, like $18-$19 million, to the $100 million-ish we did last year. So great guy to do that, and continues to be amazing at motivating, driving, and also closing sales in the sales process. Dorothy, on the other hand, is someone who's very focused on structure and scalability. So among other things, now we're in a place where we have different levels of sophistication around both sales folks' hiring processes, quantum and type, implementation relative to sales folks' ratios, and most importantly, coverage ratios in pharma.
A lot of our historical deals were deals that resulted from our sales folks who we hired in, whether they came in from competitors, where we picked up lots of them from other names you may know, or otherwise. A lot of those sales folks had deep relationships with a pharma manufacturer. So then our revenues got very big very quickly with that pharma manufacturer.
B ut maybe they didn't with another top ten pharma manufacturer, where the pre-existing relationships didn't exist. So now we're taking a much more programmatic approach of looking at amount of spend to coverage, as an example of one of many dimensions. So from that, from that perspective, that's one of the things we think it's one of the reasons why we think it's more in our control than it's ever been in the past. We're also just hiring more sales folks 'cause they pay for themselves pretty darn fast, which is also a nice thing.
Yeah. Yeah, nice. I like that. So is the right way then to think about the growth on that, if you sort of think about the guidance of, I guess, $27 million-$30 million in the fourth quarter, is that kind of like the right, like, run rate going into 2024? Or just anything else just to consider with vitaCare or anything else?
So, yeah, we're pleased with VitaCare, on a side note, because that restructuring is going faster than we anticipated, so there'll be no VitaCare drag on EBITDA in 2024.
There will, of course, also be the headwind of the vitaCare revenue not coming in, too. But, pleased with how that's going. I think more broadly, as we think about Pharma Man Sol, we're trying to be very careful on the earnings call, given where the company stock was trading and things that we'd heard from investors, to be able to set a reality in place that we believe that the company is gonna be a grower into 2024.
That you saw us grow PTR into 2Q. You saw us grow the overall revenue line to 3Q year-on-year, and we felt like investors still weren't feeling the confidence of knowing that there's gonna be growth. So Scott was very intentional around making sure that we said: "Hey, you're gonna see the 4Q numbers imply year-over-year growth. You're gonna see that, and going into next year, we anticipate similar growth rates." And I think the reason for setting that expectation in the way he did is, while we normally guide on the 4Q earnings call, we felt like it was important to showcase some of the optimism we have, even if it's at a baseline level and even if some unknowns and upsides may remain at this point.
So from that perspective, narrowing down to your ManSol question, I think the way, the way Scott and I discussed it on the earnings call, just to keep completely consistent with that, is we expect that folks from a modeling perspective will extrapolate Q4 to full year.
That said, in ManSol itself, there can be some seasonality.
Sure.
Q4 can be a little heavier, Q1 can be a little lighter, but the extrapolation is absolutely a sound exercise, which both he and I encouraged on the call.
Yep. Okay, that makes sense. Maybe switching over to ISP. I mean, you mentioned you're taking a little bit more of a prudent approach to expectations at this time. How do you think about the metrics you're monitoring and sort of the signposts that investors can look at to gauge the traction of ISP?
Sure.
Sure. That's a great question. So again, I'll take those in order, the signposts first, because I think those are the, at this point, the more critical elements to talk about to help people at least understand how we're thinking about it and modeling. So on our side, there are a couple critical variables. The first critical variable is how many lives ultimately are available to us.
And that's a function of both the number of PBMs we've partnered with, the four that we've talked about in the past, Caremark, ESI, MedImpact, and Navitus, and then the number of sponsors or employers that opt into or don't opt out, respectively, depending on which PBM and which context, these programs, to assess how many, ultimately, lives we get. That's prong one. Then prong two is the number of times our price ends up being lower than the price that the funded benefit offers. That's how we think about it. That said, it's difficult now, prior to the start of the year, to be able to quantify that in a way that is gonna be super useful for folks, for two reasons.
Number one is, we're still in the selling season, and this is, for us, a new thing in so far as it's a channel model where we don't directly see the results of, say, our own ad spend a day after we make the ad spend, depending on whether it's online or not.
Because it's a channel model, we get information about how well it's progressing on a delay. This is in terms of number of lives. On the conversion rate, we likely won't be able to have great precision on that until into the first quarter.
The reason I say that is because the composition of the plans makes a really big difference here. Like, I was talking to an investor, an investor this morning here at the conference. Thanks again for inviting us.
Yes, absolutely.
Talking to an investor this morning, and that investor has $0 copay on generics, like none at all. No matter what, I'm not gonna be able to beat $0. So if plans look a lot like his plan, then the conversion rate will be lower. If plans look more like super large employer plans, where the employee cost burden is higher, then our GoodRx's win rate against the funded benefit will also be better. Right now, the average copay in the States is about, call it, roughly $20. I think I saw on the most recent Kaiser Family Foundation report, if these plans mirror that $20, that would be great.
But if they mirror the plan that the investor I spoke to this morning had, where there's a $0 generic copay, then the conversion rates will be extraordinarily low. In either case, it's still great, though. One is obviously better than the other but in either case, it's still great, though, because the one thing we haven't seen is any significant amount of cannibalization, meaning that the same user comes in directly, and now all of a sudden, we're seeing their claims come through one of these programs.
That would be worrisome to us if it had been the case, because we would have had to pay CAC to get them for ourselves, and then having all this volume shift would make it more challenging to defray that CAC that we had spent. So we looked at the pilot we ran with ESI this year very, very carefully to evaluate that before signing up new PBMs and diving deeper into this pool.
Got it. No, that, that makes sense. And it sounds like even, but given that $20 average cost, that's still an okay place for you guys to be, but it's just a makeshift, right?
Yeah, I think the tricky part is that, again, if PBMs are offering this to marquee big clients like, that look more like Wall Street or consulting firms or, or firms that tend to offer incredibly rich benefits, then that would be more of a headwind for the program than not.
Got it. Okay.
So I think we'll know a lot more as we get into first quarter and see actual usage dynamics, how many pings there are against the program, relative to how many times we win and close the transaction.
Okay, that makes sense. So as you guys shift towards more towards a hybrid model, how should we expect the PTRs and MAC or revenues per customer to trend over the coming quarters? And when should we expect that to sort of normalize?
Sure. So we talked about this a little bit in the context of both direct contracting, and to a lesser extent, the fact that we offer consumers, particularly on first fill, discounts on medication that we fund to get them into the boat on their first fill, on their first medication. The reason those two things matter, taking those in reverse order, is that those point-of-sale discounts end up being, in many cases, as we go forward into 2024, into even more cases, given how we're using them, those tend to be contra revenues.
So that creates a drag. So when you think of 2023 revenue, included a bunch of vitaCare revenue, including a little bit of contra revenue, but not as much as next year will, for example, and it also included more, Kroger Savings Club prescription revenue that's ramping down by middle of next year. So when we provide our guide, that was all in our '23 guide, all of those amounts will be subtracted out of the baseline that we will grow from into next year. And the reason that's important is because that essentially means the growth rates you'd calculate for 2024 relative to 2023, even if you extrapolate off 4Q, are actually slightly higher because you're working off a lower base to start, right?
'Cause you're losing those chunks. To hit your point on PTR per MAC, specifically, the two that are salient for that of the three are point-of-sale discounts-
for that first fill, number one, and the direct contracting relationships, where in some cases, like we talked about on the prior earnings call, and I mentioned, we will reduce our revenue on a per script basis and work with the pharmacy to inflect up volumes. Those two things together, because both of those point-of-sale discounts and direct contracting has existed for much of this year, are in the rates right now. So you've seen the rates Q-over-Q on PTR per MAC drift down by 1% or so quarter-over-quarter, one to two-ish, like, low single-digit percent is probably a more general way to phrase it.
'Cause I can't remember the quarter before offhand. But the point is, those, that slow degradation trajectory is one that we expect and included in the guide for next year, too, since we expect to see a few more quarters of that as the proportion of the PTR transactions, the scripts filled continues to skew, or shift a little bit more towards the direct contracting side. Definitely don't see that becoming a majority anytime, but I think we will see that increase over time as our relationships with pharmacies get stronger and stronger.
Okay, that makes sense. So just to make sure, so the Q over Q step down, the PTR per MAC, that we saw on 3Q, that should be pretty representative of the step down we should see over the next couple of quarters?
I don't think we expect nonlinearity.
Yeah.
I think it'll hover within those low single-digit percentage. At this point, we're not expecting any nonlinearities associated with that, where we would see a more rapid degradation or a stop to the degradation, given our strategy of incremental direct contracting. And, as I'd mentioned earlier, the POS discounts to get that first fill have been working super well, so we don't want to stop doing that either.
Got it. Okay. Last time we spoke, you mentioned that you would like to keep some room when providing margin targets in case the firm wants to do some opportunistic marketing activities. What would sort of trigger those opportunities, or if you have a sense of what they are? Is this a function of ad pricing trends, new spaces, or something else?
Sure. It's actually... That's more speculative in a sense than or makes it sound more speculative than it really is.
Okay.
I think what we're doing is a lot less speculative. I think going back years, when you and I first met in the context of GoodRx, we had come off a period where we had relied very heavily on healthcare providers as evangelists, driving volume to GoodRx. When GoodRx was tiny, they were the first adopters, the early adopters, where that recommended GoodRx to their patients. I think we strayed away from that a little bit, both by our choice, in the sort of 2019 era, when we started to shift more towards top-of-funnel, like, advertising on mass media kind of stuff, and then through COVID as well, when folks weren't actually seeing healthcare providers in a traditional way.
But during the period before we pivoted away from it, healthcare providers were incredibly valuable, and we've been continuing to look at this with more and more aggressiveness recently now that Andrew Slutsky, who led our go-to-market strategy pre-COVID, is back in the CMO. And one of the biggest pivots and opportunities is to leverage HCPs like we used to. The value creation or the amount of revenue attributable to a single prescriber can be in the four-digit range.
As prescribers move up from one decile to the next of prescription referral volume for us or move down respectively, can make a big difference. I think our focus on top of funnel was useful to get the brand out, but it's not as effective in terms of driving dollars, we believe, on a forward-looking basis, directly into revenue and into the bottom line. That's part of the reason you've also seen us reduce marketing as a percentage of revenue to date, is because we're finding some of the things that we used to do still work great and work better than some of the more recent past activity. So we expect that to continue. Now, that sounds somewhat contradictory to you, then why the heck are you preserving some room if your percent of revenue is going down?
The reason is because we've been running tests of some of these strategies we've used in the past to see how they work before pushing a bunch of cash into them.
That's the reason for preserving room in the OpEx stack for that.
Got it. Okay, that makes sense. And maybe sort of turning to the 2024 guidance, you talked about the mid-single-digit growth. I think that's like $14 million-$40 million of incremental revenue. Can you help us break into where the pieces of that are coming from?
Sure. I think we have to be careful about this, and I alluded to this a little earlier, because I think your calc is predicated on where you think this year will land-
Yes
... 2023 will land.
That's fair. That's a fair comment.
I think there are low- to mid-double-digit millions of revenue in 2023 that will not exist in 2024.
Okay.
Those three components, again, are, number one, associated with vitaCare.
Yep.
That's gone.
Number two, the shift of marketing dollars from S&M, in the form of OpEx into contra-revenue-
Yep
'Cause we're giving, we're basically giving our coupon users an additional coupon to save more money on our dime which is paying your customer in contra-rev.
Yeah. Yeah.
And then the third thing is that, again, between July of this year and July of next year, on the subscription side, the portion of subs that are associated with Kroger Savings Club, again, small minority of revenue, but non-zero, also goes away. That's why I point to this being, like a decent double-digit million-dollar number.
Okay.
So I think with that in mind, the sort of implied growth rate ends up being a little higher than the nominal growth rate.
Yep.
Of that implied growth rate, I think we anticipate, per our conversation earlier on Pharma Manufacturer Solutions, we'd be disappointed if that didn't contribute a good-sized chunk, especially given we made 2022, or excuse me, 2023, kind of an easy comp year by narrowing the offering.
I think on the base business, we see that growing nicely as well, our prescription transactions business. I think the big wild card for us, where we have been very modest in our expectations, is around the ISP business we talked about. The reason for it is the exact issue that I and the FP&A team broadly at GoodRx are struggling with, which is not knowing the details of which plans are more and less likely to be, A, offered by the PBMs to join into the ISP program, and then which ones will ultimately adopt, because that conversion rate is just such an important factor in assessing it.
So for now, we've been extraordinarily modest in our expectations because Scott, our CEO, has a very firm belief, which he articulates often, including on pretty much every earnings call he's been on, that you only guide what you know, and you don't guide what you speculate on or hope for.
Yep.
So-
It seems like a wise strategy.
It's a philosophy.
Make that-
A shift for us in some ways.
Yeah.
No, it makes sense. So we are unfortunately out of time, but on one last view, what would you say is the most misunderstood part of GoodRx by investors right now?
I think the growth abilities of GoodRx, the view of those and the confidence in those is different between the investor community, at least judging by the multiple, and our own view internally to GoodRx.
We feel like we've shored up the PBM retail reality in a manner that makes us highly confident that there will be no degrowth associated with that in fact, the opposite. And I think the reinstallation of Andrew Slutsky as CMO and what that's allowed us to do in terms of leveraging marketing in ways that have historically been much stronger for us than the last couple, three years, is also something we're extraordinarily excited about.
So I think those are key causes of optimism, and I think that manifesting more quarters of growth will hopefully allow investors to feel the same confidence that we feel. And the reason this is so important, and then I'll shut up, the reason this is so important is because, given the flow-through dynamics of our PTR and Manufacturer Solutions businesses, growth inherently causes margin to happen at an accelerating rate.
That's a good place to stop, I think. I love you. Thank you so much, Karsten.
Thanks so much for having me.
Yes.
I'm so grateful. Yeah.