OVERVIEW
In our ongoing effort to gain a better understanding of the drug coupon space and GoodRx’s ($GDRX) model, we continue to speak with industry contacts about the inner workings of the overly complicated drug chain puzzle. On September 30, we spoke to a pharmacy industry veteran with over 15 years’ experience in market strategy, planning and M&A roles at one of the largest public retail pharmacy chains in the U.S. We think we finally have our arms around 1) the GDRX story and value proposition, as well as 2) how to look at the TAM. Our contact echoed the sentiment of the two previous executives we spoke with (a hospital pharmacy exec and an owner/operator of a smaller, independent chain). Based on our collective experience with these types of “checks,” when experts in different parts of the supply chain/ecosystem line up on topics such as the investment in/focus on pharmacies’ in-house coupon programs and the overarching Amazon threat, it’s worth paying attention. We think GDRX's model, which has been very profitable to date, looks fragile.
Takeaways: 1) Every pharmacy group in the country is looking at how to leverage in-house coupon programs better, 2) Amazon has all the pieces it needs to be disruptive – it’s just a matter of when and if GoodRx is a target (vs. competitor), 3) Rx coupons are likely to grow at a HSD% - 10% per year over the next couple of years, and GDRX could maintain 50-60% share, 4) reimbursement pressure is not expected to abate in ‘21, and 5) divvyDOSE could pay dividends for UNH on the back-end in the form of higher reimbursement for better adherence.
FIELD NOTES
Can you walk us through the transaction here? What happens at the counter when a consumer pays with GoodRx?
- The patient pays the price based on the contracted rate with the PBM associated with the scanned code. This all happens “behind the scenes” whether it’s GDRX or a pharmacy’s own discount card. The confusion surrounds the gap between the consumer handing over $10 and the medication costing $60. With a coupon, the discount takes the place of a health plan (the transaction is not applied to a deductible), and the pharmacy receive the money from the PBM…it’s complicated, but the pharmacy can easily end up upside down on generics once the dispensing fee and transaction fee are paid to GDRX.
What % of the time is a patient/customer using a coupon/coupon app? What’s your opinion of how Rx coupon usage will change? Is it up/down YoY vs. ’19, and what do you think about ’21?
- It’s probably about 8-10% of the time. That’s a combination of coupon and discount cards like GDRX. Across the industry, usage has been increasing (up ~20-25% YoY in ’20). There was a pause for the worst of the pandemic, and adherence nationally was down, but it’s slowly coming back (the industry is not at expectations YoY for Sept, but it’s getting closer).
- GDRX has been gaining share and customers are savvier at the pharmacy (seeing an increase in both GDRX coupons and manufacturers’ coupons, plus willingness to join pharmacies’ programs for discounted generics).
- Using round numbers, I think we’ll see ~10% growth to 11% (of total customers) using coupons next year. Also, ~99% of that activity is generics.
If you had to guess, what % of that is GoodRx? And, who else do you see (next two or three behind them, if they are the leader)?
- GDRX is probably ~5% of that 8-10%. It’s amazing b/c most Rx savings programs have been around for 7-8 years but none of them are great, and nobody has done a good job of “selling” them. Now, everyone is revamping them. One issue is that many of the are membership-based, which is a barrier to entry despite savings on hundreds of drugs vs. U&C (usual and customary).
- One of the reasons for GDRX’s success is their marketing. It’s a catch 22 for the pharmacy, because it’s hard to catch the patient before intent to purchase, etc., especially when GDRX is on their phone and they see a better price for the script. If they don’t price match, they lose the customer and script – if they do, they make less per script.
- Blink is the only other one worth mentioning.
What’s the incentive for the PBM?
- The PBMs get to reach patients that don’t have insurance. It’s a lower gross profit, but it’s all incremental (some of the transaction is better than none).
- It’s just my opinion, but everyone has been in a battle with PBMs since Obamacare started, and maybe even before that. They are unnecessary middlemen. Why can’t employers negotiate? Laziness is a part of it – companies don’t want to do the work. So, PBMs exist and are deemed necessary.
- PBMs complicated the reimbursement schedule to the point where they’ve become “very necessary” to employers w/ regard to negotiating rates, tiers, and with suppliers. Plus, the rebate schemes and DIR fees haven’t gone away.
What changes have you seen with CVS as a vertically integrated player (with Aetna and Caremark)?
- I give them credit for committing to the vertical integration path. It’s been working well for them. It looks like they are winning business in the open season, and while they legally must separate the businesses, everyone knows it’s all blended together (e.g., Aetna members will get a card in the mail from CVS and think they must go there – so, they reimburse themselves from Caremark and Aetna more than other pharmacies). Plus, the rebates help suppress Medicare Advantage and commercial premiums to a degree. Overall, the business strategy is smart.
- HealthHUBs aren’t unique – there are similar setups and variations of the model everywhere. They do a good job w/ marketing it, and the strategy is on track with how retail Rx outlets are changing. People are buying less front-end goods because of online, so pharmacies need multi-channel approaches, to personalize services, offer vaccines, vision, dental, etc. services., and provide telemedicine in rural areas.
- Our contact agreed with sector head Tom Tobin’s view that Amazon+PillPack, Walmart+Oak Street, Walgreens+VillageMD, etc. are all converging on the same spot: the relationship with the patient. Everyone in the industry can be a fast follower when they see something working that can be copied.
- Pharmacies have tried most of these business line extensions with little success; however, this time might be different because of COVID.
We’re still trying to figure out who GDRX gets a cut from – or how they get a cut. Can you walk us through the flow of money here?
- There are a variety of flow charts out there – at the core of this transaction, the patient pays a copay to the pharmacy, the pharmacy pays the negotiated rate (AWP/WAC-based), the wholesaler buys it at whatever the price is from the manufacturer. A lot has to happen on the coverage side for a patient to get medication too (from the patient/employer paying an annual premium to Aetna for drug coverage, the payor granting drug coverage and paying the PBM, which gives the health play a share of rebates from the manufacturer, etc.). The PBM to pharmacy piece involves a negotiated discount on AWP on inventory… AWP -70% (hypothetical) plus $2 or $3 to fill. When GoodRx is involved, it gets a piece of that $2-3.
Who is the average GDRX customer?
- I think it’s a barbell with Millennials higher than gap between ~35 and 64, with a greater % of people 55-64 years old using drug coupons (especially if they take generics or have poor insurance coverage or high out-of-pockets). GDRX has a good brand, and coupons can be helpful for 65+ too, especially when in the donut hole.
- In general, I think ~25% of people have heard of GDRX, and like I said earlier, ~5% of people filling prescriptions have tried it.
What could GoodRx do to drive more people to its app?
- First, they should continue to spend on advertising. The second part is harder: GoodRx must work with chains and to a lesser extent the independents. They must get chains to want to accept or promote the product because the industry continues to consolidate. In five years, there will be even less differentiation among pharmacies than there is today. If GDRX cannot get along with the owners of the businesses where the coupons are used, they risk going away.
Do you have a feeling or opinion about Amazon launching a drug discount card?
- Amazon is scary. The whole industry thinks it’s a matter of when, not if. And Amazon has options. I think they wanted PillPack to see how it could be integrated into the supply chain. They can’t mail across state lines, but once they hit a comfortable point of dispensing, we could see them start partnering w/ discount cards or having one of their own. They could buy one – it’s easier to buy vs. get one up and running. So, Amazon could either destroy or buy GoodRx.
- Amazon already has what has been difficult for others to develop – a succinct national supply chain to deliver products smoothly w/ quick turns, the ability to deliver [drugs] by tomorrow at a low cost, the potential to use drones, etc. Retail could be in trouble.
How about UNH acquiring divvyDOSE – would that make sense?
- Conceptually, divvyDOSE could help with adherence, which helps with Star ratings and leads to higher reimbursement. At the same time, I don’t see a way to make money on the divvyDOSE model. UNH would be investing in improving adherence b/c that should lead to better outcomes. The special packaging isn’t unique (remember, Walmart bought CareZone), and I think it increases the cost-to-fill by a couple of bucks. That said, the “help” on the back end could be worth the investment.
What are your thoughts on investing in medication risk management software like what Tabula Rasa offers?
- It’s absolutely important software; however, there are a couple of problems: first the cost (its expensive and reimbursement remains under pressure), and second, there are a lot of options and there probably ought to be one universally adopted option (there could be consolidation in this space).
All data available upon request. Please reach out to with any inquiries.
Thomas Tobin
Managing Director
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