Thread by @investing_city

Following up on how GoodRx fits into this ecosystem...

continued [THREAD] ⬇️

https://twitter.com/investing_city/status/1349548469044670465

1/ If you haven't already read through the prescription drug value chain, I'll give a super brief breakdown.

Distribution: Manufacturers -> Wholesalers -> Pharmacies

Payment: Employer -> Health insurance companies -> PBMs -> Distribution points

2/ GoodRx sits in an interesting spot, benefitting from the opaque industry and the PBMs specifically.

To be clear, GoodRx doesn't work with insurance.

It works if you're paying out-of-pocket.

3/ The product works like magic. Open the app and all of a sudden you can get up to 90% off on prescriptions!

How is this possible?

It comes back to PBMs. They have contracts allowing the pharmacies to access their clients' (health insurance co's) patients.

4/ But remember, GoodRx doesn't work with insurance!

So what gives?

The answer is that GoodRx enables the PBMs to monetize out-of-network patients. GoodRx essentially acts as a lead gen for PBMs in cash-paying consumers.

5/ Nearly all of GoodRx's revenue comes from PBMs.

Because pharmacies are forced to list very high drug prices (because of the PBM reimbursement incentive misalignment), GoodRx has room to lower the cost.

So why would the pharmacies allow GoodRx to cut into their margin?

6/ Well, they have no choice. The PBM forces the pharmacy to comply in order to stay "in-network" & have access to their swath of health insurance patients.

GoodRx justifies this by saying that more foot traffic in the pharmacy means higher order values and non-drug purchases.

7/ But wait, so the pharmacy has to comply with GoodRx just because the PBM said so? I thought PBMs were trying to lower the cost for insurance companies?

Yes and yes.

It seems like GoodRx is benefitting from this messed up system.

8/ From the PBM's point of view, GoodRx is great. It's a DTC channel that enables them to share incremental profits on volume they wouldn't have had.

From the manufacturer's POV, they are actually partnering in more and more cases to advertise on GoodRx, driving more volume.

9/ What's more is that only ~5% of prescriptions are paid out-of-pocket, so it's not a huge deal for the manufacturer.

I guess the same can be said for pharmacies. Maybe they are cash-flow negative when customers use a GoodRx coupon, but maybe more foot traffic offsets this?

10/ To recap, here is a visual of the value chain with GoodRx included.

It works with PBMs to monetize cash-paying consumers. Notice that there isn't a line connecting Cigna and GoodRx though.

11/ I honestly don't know if GoodRx is an amazing company or perpetuating a messed up system.

Hey, it's great that cash-paying customers can get discounts but that means the PBMs stay fairly entrenched.

At this point, the big PBMs are all owned by insurance companies anyway!

12/ We know drug prices are increasing and because of that, insurance companies are leaving particular drugs off their formulary lists.

GoodRx can help consumers find these drugs at a lower cost too!

13/ But it seems like GoodRx is taking away more pharmacy margin and capturing that for itself and PBMs.

But the reason the pharmacy list prices are high in the first place is because of insurance/PBMs!

14/ It seems like pharmacies and insurance companies will continue to consolidate, cutting out this excess.

For instance, CVS bought Aetna for nearly $70 billion. With a streamlined effort, is there a true place for GoodRx?

15/ Maybe GoodRx is already entrenched enough and their DTC presence will allow it to capture value from manufacturers and other pieces of the value chain.

I think the future of GoodRx likely won't look like it's past of benefitting from the weird PBM incentive problem.

End/ GoodRx clearly has a smart management team if they can navigate all of this and have a 90 NPS score and a growing manufacturer advertising business and telehealth offering.

I'm less bullish about the alignment of the model with pharmacies.