4 Reasons to Avoid the GoodRx IPO

Initial public offerings from consumer-focused digital healthcare platforms have been terrific sources of gains for investors in 2020, and there's another big one on the way. Shares of GoodRx (NASDAQ:GDRX) are expected to begin trading soon, and plenty of everyday investors find the company's prospectus compelling.

Digital coupons that route sales of prescription drugs through a pharmacy benefit manager (PBM) are increasingly popular. GoodRx -- a price comparison app that offers such coupons -- stands to benefit from that rise. Before you dive in, though, there are a few things you should know.

A person sitting at a table in front of a laptop and a mug.

Image source: Getty Images.

1. It's a complicated business

Investors do best when they avoid businesses they don't understand. Most don't realize the bizarre pricing structures that pervade America's uniquely fractured market for prescription drugs are more complicated than the science that produced those drugs. 

When a consumer uses a GoodRx code to fill a prescription, GoodRx receives a portion of the fee the pharmacy must pay the PBM that facilitates the sale. Anyone who doesn't already understand how the PBM industry makes GoodRx's business model possible probably shouldn't hold it in their portfolio.

2. House Resolution 3

Drugs cost more in the U.S. than they do almost anywhere else largely because the nation's largest end payers, Medicare and Medicaid, aren't allowed to use their enormous leverage to negotiate. Sensible healthcare reform might seem impossible at the moment, but that could change quickly.

In December 2019, the House of Representatives voted 230-192 to send H.R. 3 to the Senate. This bill would allow the Department of Health and Human Services (HHS) to directly negotiate the prices it will pay for hundreds of different drugs. The resolution never got a vote in the Senate, but the matter could come up again in the future.

3. Safe-harbor rollback

Healthcare plan sponsors and insurers that haven't already acquired PBM businesses of their own hire a PBM to negotiate drug prices on their behalf. Pharmaceutical companies must offer PBMs rebates to secure access to the patients they represent. If those rebates sound like payments for an illegal kickback scheme to you, you're not alone.

Discounts PBM wrestle from pharmaceutical companies are protected from Anti-Kickback Statute enforcement by a safe harbor regulation that exists for this sole purpose. Last February, HHS proposed a rule that would unwind that protection. That means the government could torpedo the PBM industry GoodRx relies on for around 90% of total revenue without enacting any new legislation.

4. Contracting margins ahead

In 2019, GoodRx acquired a company that offers online applications for consultation with physicians called HeyDoctor. The service is popular, but not very profitable on its own.

Instead of a digital coupon that simply directs prescription drug sales through a partnered PBM, HeyDoctor provides telehealth medical services at knockdown prices. The vast majority of HeyDoctor visits end with prescriptions likely to be filled with an attached GoodRx coupon.

Person looking at a prescription pill bottle on a shelf.

Image source: Getty Images.

People like paying just $20 to get a prescription for an Epi-Pen refill, but right now the service is squeezing profit margins. GoodRx hasn't broken out separate results for HeyDoctor, but it looks like the low-cost service provider could become an albatross around the company's neck if GoodRx's coupons stop performing.

In the first half of 2020, total revenue grew by an impressive 48% year over year to $256.7 million. Unfortunately, costs associated with producing that revenue more than doubled over the same period to $12.8 million. As a percent of total revenue, income from operations fell to 33% from 38% in the previous year period.

It could work

It probably isn't a good idea to invest in a company that relies so heavily on cash flows that could quickly evaporate. That said, betting against a sharp rise in GoodRx's stock price isn't a good idea either. 

A continuation of the status quo could lead to steadily growing profits, even if margins get a little thinner. In the medium term, a repeal of the Affordable Care Act could send a lot more customers into the arms GoodRx.

10 stocks we like better than Walmart
When investing geniuses David and Tom Gardner have an investing tip, it can pay to listen. After all, the newsletter they have run for over a decade, Motley Fool Stock Advisor, has tripled the market.*

David and Tom just revealed what they believe are the ten best stocks for investors to buy right now… and Walmart wasn't one of them! That's right -- they think these 10 stocks are even better buys.

See the 10 stocks

Stock Advisor returns as of 2/1/20

Cory Renauer has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

Latest Markets Videos

The Motley Fool

Founded in 1993 in Alexandria, VA., by brothers David and Tom Gardner, The Motley Fool is a multimedia financial-services company dedicated to building the world's greatest investment community. Reaching millions of people each month through its website, books, newspaper column, radio show, television appearances, and subscription newsletter services, The Motley Fool champions shareholder values and advocates tirelessly for the individual investor. The company's name was taken from Shakespeare, whose wise fools both instructed and amused, and could speak the truth to the king -- without getting their heads lopped off.

Learn More