Goodrx Holdings Inc

NASDAQ:GDRX

Earnings Call Transcript 2023-Q2

[Operator]

Good day, and thank you for standing by. Welcome to the GoodRx Second Quarter 2023 Earnings Conference Call and Webcast. [Operator instructions]. Please be advised that today's conference is being recorded.

I would now like to hand the conference over to your speaker today, Whitney Notaro, Vice President of Investor Relations. Please go ahead.

[Whitney Notaro, VP, IR]

Thank you, operator. Good morning, everyone, and welcome to GoodRx's earnings conference call for the second quarter 2023. Joining me today are Scott Wagner, our Interim Chief Executive Officer, and Karsten Voermann, our Chief Financial Officer. Raj Beri, our Chief Operating Officer, will also be joining for the Q&A portion of today’s call.

Before we begin, I'd like to remind everyone that this call will contain forward-looking statements. All statements made on the call that do not relate to matters of historical fact should be considered forward-looking statements, including without limitation, statements regarding management's plans, strategies, goals and objectives, our market opportunity, our anticipated financial performance, the ongoing impact of the former grocer issue on our business, underlying trends in our business, our potential for growth, collaborations and partnerships with third parties, anticipated impacts of the deprioritization of certain solutions under our Pharma Manufacturer Solutions offering, and our cost savings initiatives, our direct contracting approach with retailers, realizability of our deferred tax assets, and the expected impact from the macroeconomic environment on our business. These statements are neither promises nor guarantees, but involve known and unknown risks, uncertainties, and other important factors. These factors may cause our actual results, performance, or achievements to be materially different from any future results, performance, or achievements expressed or implied by the forward-looking statements.

Factors discussed in the Risk Factors section of our Annual Report on Form 10-K for the year ended December 31, 2022, as updated by our quarterly report on Form 10-Q for the quarter ended March 31, 2023, and our other filings with the Securities and Exchange Commission, could cause actual results to differ materially from those indicated by the forward-looking statements made on this call. Any such forward-looking statements represent management's estimates as of the date of this call, and we disclaim any obligation to update these statements, even if subsequent events cause our views to change. In addition, we may also reference non-GAAP metrics, which are reconciled to the nearest GAAP metrics in the company's earnings press release, which can be found on the Overview page of our Investor Relations website at investors.GoodRx.com. I'd also like to remind everyone that a replay of this call will become available there shortly as well.

With that, I'll turn it over to Scott.

[Scott Wagner, Interim CEO]

Thanks, Whitney, and thanks to all of you for joining us today to discuss our second quarter results. As I round out my first 90 days at GoodRx, I can say there's a lot to like here and there's more we can do to further our mission and to build our business. Over the last few months, I've spent time with both key internal and external stakeholders to understand what's working well and where we can improve. I've been meeting with retail pharmacies, PBMs, pharma customers, and insurance payers. I've been digging in with teams across GoodRx to prioritize our biggest opportunities, align our teams against them, and reignite profitable growth. GoodRx has a number of strengths to build from. First, our value proposition of saving people money on prescription medication is powerful. GoodRx’s high consumer and provider net promoter scores, our ability to drive almost $15 billion of consumer savings annually, and the scope of our PBM and retail networks, are all evidence of our valuable role in the healthcare ecosystem. Second, our scale and impact is massive. Over 25 million consumers and over 1.5 million prescribers have a patient who have used GoodRx over the past 12 months. Third, we have the potential to grow in multiple ways, including driving even more meaningful prescription savings, tighter partnerships with retail pharmacies to drive claim acceptance, expanding our integrated savings programs with funded corporate plans, which now include two of the largest PBMs, CVS Caremark, and Express Scripts, and growing our Pharma Manufacturer Solutions business.

We're rebuilding momentum in the business financially and operationally with an eye towards compounding growth in 2024 and beyond. For the remainder of the call, I'd like to reiterate our priorities, update everyone on where we are with each, and call out meaningful takeaways for investors. From a purely financial standpoint, returning the year-over-year growth is our first important milestone. We're conscious of reaching that milestone in the coming quarters, while prioritizing decisions that can lead to compounding growth and profitability in 2024 and beyond. At a broad level, what GoodRx does is drive prescription claims. Operationally, we're focusing our attention on how we're driving more claims in both our prescription marketplace and in our Manufacturer Solutions business. There are also things we're going to change and do less of that we'll discuss. On our last call, I highlighted four areas where I was going to spend my time and GoodRx was going to focus. Our first priority is to ensure GoodRx has the strongest network relationships and retail pharmacy strategy possible. We're having success with our retailer contracting approach, having added another grocer pharmacy in the last quarter, and we plan to continue down this path. We're finding retail pharmacies see incredible value in the GoodRx brand. What retailers want is for GoodRx to help them manage to very distinct pricing margin and growth targets. Now, how we'll do that will differ retailer by retailer in terms of contracting dynamics, but the overall goal is to have healthy, profitable, and growing retail relationships and deliver great value to patients.

We're in the process of working through these contracts retailer by retailer, and plan to continue to do so throughout the second half of the year. We believe that we're creating the foundation for long-term growth for GoodRx that adds value to both retailers and PBM partners alike. As an example, in the second quarter, we entered into a contract with a mid-size grocer where the admin fees have gone down, but as this particular grocer got focused on growth, volumes have gone up significantly. We've now become their leading partner for prescription discounts. That situation is somewhat unique, so overall, we do expect a retail contracting volume versus margin trade-off that may be a bit of a short-term headwind for revenue growth, but we're confident that this is the right approach for the business longer term. We believe that progress here will help us ensure network stability, result in tighter retail relationships with the goal of increasing retailer market share, and enable us to add millions of additional claims to the GoodRx system over time. In addition to partnering with retailers, we're continuing to ensure that we're adding value to our PBMs as well and working with them to drive long-term value for all stakeholders.

Our second priority is to hone our short- and medium-term growth plans for the core prescription transactions business and align our teams and resources behind it. In the second quarter, prescription transactions revenue returned the year-over-year growth and total prescriptions volume grew approximately 4% year-over-year, despite ongoing headwinds related to last year's grocer issue. Given the sheer proportion of revenue that was associated with a grocer before the disruption, over 20%, growing the non-grocer volume sufficiently to return to prescriptions transaction revenue growth is an important step for us. Looking ahead, we're going to be ruthlessly focused on driving incremental claims. We're planning to do that by, one, increasing our marketing attention to high value patients and conditions. Two, improving our conversion flows from every source of traffic. Three, adding product capability to improve our customer experience and refills, like our recently announced medicine cabinet feature. And four, expanding our value proposition to payers and insurers.

To the last point on expanding our value proposition to payers and insurers, we made a ton of progress. We have meaningful programs in place with both Express Scripts and CVS Caremark. Express Scripts’ Price Assure powered by GoodRx has been successful today and is already serving millions of lives. This past month, we announced another exciting collaboration with CVS Caremark called Caremark Cost Saver to help lower pharmacy out-of-pocket drug costs for CVS Caremark clients members. This new program will provide CVS Caremark’s eligible members with automatic access to GoodRx’s prescription prices to allow them to pay lower prices when available on generic medications. Members will also benefit from seamless data integration, allowing for both benefit and clinical data improvements. Since it's part of their pharmacy benefit, it's built into the benefit card, with no action required on the consumer's part. We believe these partnerships are a win, win, win for GoodRx, our partners, and for patients. GoodRx becomes more deeply integrated into the healthcare ecosystem and can reach a new segment of the prescription savings TAM. We can help PBMs drive volume and boost visibility into patient behavior, while helping their plan sponsors save money and patients get better pricing on their medication, which can improve both adherence and health outcomes. We expect to start earning revenue from the Caremark Cost Saver program at the start of 2024. ESI considers this year their pilot, and we're looking forward to a broader rollout as we look to move beyond the pilot phase with ESI in 2024.

Our third priority is to scale our Pharma Manufacturer Solutions efforts. As we articulated on the first quarter earnings call, we're focusing on our offerings that have a high ROI for our clients and are distinctive to us. We have brand access programs to allow manufacturers to hit different price points and even drive brand drug pricing below generic pricing to drive meaningful incremental transactions. We can do this for manufacturing partners via outcomes-based programs where we're paid based on performance, and through point-of-sale rebate programs, patient navigator, co-branded content, patient resource centers, and provider newsletters. We're bringing the core value proposition of GoodRx to brand drugs. We allow manufacturers to present their brand at several different touch points, content, provider mode pages, et cetera, all of which are very close and connected to a patient decision on a drug. That's where we add a ton of value. Given the scope of our consumer network, we believe all consumer-oriented brand access and copay programs should really start at GoodRx. As I've spent time with customers and our teams, it's clear that GoodRx is uniquely positioned and capable of creating valuable savings moments, i.e., claims, on both generic and brand drugs. As a company, we're going to spend time where we're distinctive and look to partner or change our approach where we aren't.

An area where we're changing our approach is how we run the higher cost to serve areas of our Pharma Manufacturer Solutions offerings, for example, at VitaCare, the entity we purchased in early 2022. We bought VitaCare to provide access and distribution capabilities for specialty drugs. What I've found is that we can deliver on GoodRx’s core value proposition of creating demand for specialty manufacturers without the inflexible high fixed cost infrastructure that VitaCare currently has. We're going to use our most valuable asset, our brand, to attract HCP prescribing volume and increasingly leveraging third parties for the fulfillment work. Therefore, we're going to deprioritize our VitaCare services to reduce cost. We expect the impacts of these actions will contribute incremental low to mid-single digit millions of dollars to our adjusted EBITDA in the second half of the year, while also reducing second half 2023 revenue by mid-single digit millions of dollars, as we migrate high cost to serve clients off of VitaCare, while simultaneously reducing our cost structure. On a run rate basis, in 2024, we expect to realize at least 150 basis points of incremental margin improvement as a result of this action. We'll be taking a hard look at other higher cost to serve solutions within our Pharma Manufacturer Solutions offering as well, with a focus on growth and profitability and scalability. Historically, some things we were doing in Pharma Manufacturer Solutions were one-off programs. In the second quarter, we've deprioritized these sales efforts and the associated revenue. We're leaning in to our offerings in both access and awareness that we believe will drive faster 2024 growth. These are programs at the intersection of high ROI for our clients and high margin for us, and we're creating standardized go-to-market programs that we expect to scale rapidly. We see Pharma Manufacturer Solutions revenue growing quarter-over-quarter throughout the second half of 2023. We believe our restructuring of this offering and sales focus will help us deliver compounding profitable growth.

Our fourth priority is to align our teams and people against our biggest opportunities. We've recently made two great executive additions to help us execute with quality and with urgency. Dorothy Gemmell, our new Chief Commercial Officer, is working to drive our Manufacturer Solutions efforts. Dorothy is a highly strategic leader, with a fantastic execution sense. Her key areas of focus are scaling our great offerings, increasing the ease of engagement with manufacturers and agencies, and enhancing our reporting and our metrics. Dorothy has a strong track record that includes having built and run WebMD's commercial operation, and she recognizes the strong value prop of our Pharma Manufacturer Solutions offering. As Chief Commercial Officer, she'll also oversee the strategy and operations of GoodRx Health, as well as our HCP offerings. As part of our effort to drive growth in the core prescription business, we also welcomed Andrew Slutsky back as our new Chief Marketing Officer. Andrew is a smart, creative, effective healthcare operator with a great execution sense. Having been one of the first employees at GoodRx, he's a strong believer in our brand and what it stands for. During Andrew's previous tenure, he led GoodRx’s market pacing activities and drove double-digit percentage growth at a fraction of today's spend. As CMO, he's focused on growing our prescription marketplace and sees doctors' offices and retail point-of-sale locations as big areas of opportunity for us, as well as orienting our performance spending towards high value patients and occasions. With our recent leadership changes, continued investments in pharmacy and PBM relationships, and internal alignment on claims growth, we're laying the groundwork for the business we believe GoodRx can be. The initial progress is encouraging, and there's more we can do. We've got great people here with a lot of talent, and I'm excited about the opportunity ahead. I look forward to providing updates to everyone next quarter.

With that, I'll hand it over to Karsten. Karsten?

[Karsten Voermann, CFO]

Thank you, Scott. I'll first speak to our 2Q 2023 financial results before turning to guidance. In summary, during the second quarter, we exceeded guidance on revenue, adjusted EBITDA, and adjusted EBITDA margin, coming in at $189.7 million, $53.5 million and 28.2%, respectively. Diving deeper, total revenue for the quarter decreased 1% year-over-year to $189.7 million. Prescription transactions revenue growth was up 2% year-over-year to $136.5 million, and up 1% quarter-over-quarter. As Scott mentioned, returning to year-over-year prescriptions transactions revenue growth is an important achievement because at the time the grocer share arose, the grocer made up over 20% of our revenue. We had to fill that gap by growing our prescription transactions offering across all of our other retailers, which we more than accomplished. MACs increased 5% year-over-year to $6.1 million and were flat quarter-over-quarter. The year-over-year increase in prescription transactions revenue is largely driven by the increase in MACs, partially offset by the impact of the grocer issue. Pharma Manufacturer Solutions revenue declined 8% year-over-year in the second quarter to $24.3 million. Our focus is on signing deals with high levels of recurring revenue potential, so we deprioritized one-time deals relative to last year. We're pleased with the trajectory we've achieved and the quality of campaigns we're running. We remain very optimistic about this offering contribution to growth in the long term.

Turning to subscriptions. Subscriptions revenue declined 8% year-over-year to $23.9 million due primarily to a decrease in the number of subscription plans where the majority of the decrease is associated with Kroger Savings Club, and partially offset by the effects of the pricing increase for gold subscribers. We ended the quarter with 969,000 subscription plans, down 14% year-over-year. Gold subscription plans were up versus prior quarter for the first time since we increased pricing last year. Cost of revenue was $16.3 million or 9% of revenue versus $18 million or 9% of revenue in 2Q 2022. The decrease in absolute dollars is related to prior year fulfillment costs for certain solutions provided to customers under our Pharma Manufacturer Solutions offering that were associated with non-recurring deals.

Product development technology expenses were $31.3 million or 16% of revenue, which compared to $35.4 million or 18% of revenue in 2Q 2022. The decrease was primarily driven by a decrease in payroll and related costs due to lower average headcount and higher levels of capitalizable labor. Sales and marketing expenses were $77.4 million or 41% of revenue versus $94.3 million or 49% of revenue in the second quarter of 2Q 2022. The decrease was driven by a decrease in payroll and related costs, primarily due to lower stock-based compensation, as well as lower advertising expenses. As we've discussed, we are proactively managing marketing spend to better align with our strategic goals and future scale, with a focus on finding ways to leverage our brand while getting higher returns in each dollar invested, which led to the year-over-year and quarter-over-quarter decreases in sales and marketing, both as a percent of revenue and in dollar terms. In the second quarter, we continued to invest in POS discounts, and spent a total of $8.2 million, $6.9 million of which is included in sales and marketing, and $1.3 million of which was contra revenue.

General and administrative expenses were $30.2 million or 16% of revenue, versus $34.7 million or 18% of revenue in the second quarter last year. The decrease was primarily driven by a decrease in stock-based compensation expense related to the co-founders awards granted in connection with our IPO.

Net income was $58.8 million compared to a net loss of $1.4 million in the second quarter of 2022. The primary driver of the year-over-year increase was the release of $55.9 million of our valuation allowance on our net deferred tax assets based on our recent trends and expected future tax profitability. As a result, we recorded this discrete tax benefit, which comprises the majority of our net income tax benefit of $46.7 million for the quarter. We anticipate unpredictability in our future tax provision or benefit amounts even after the valuation allowance release due to multiple factors, including the tax effects from our equity awards. This element, among others, is challenging to forecast as it is generally driven by factors outside our control, such as our stock trading price or decisions of individual employees in relation to their equity awards. This is one of the reasons we believe presenting adjusted net income provides a useful perspective for investors.

Adjusted net income was $28.4 million compared to $27.2 million in the second quarter of 2022. Adjusted EBITDA increased 13% year-over-year to $53.5 million, which was ahead of expectations and relatively flat quarter-over-quarter. The primary driver of the increase year-over-year is related to proactively managing our sales and marketing spend. Adjusted EBITDA margin of approximately 28.2% was up 360 basis points year-over-year and down 70 basis points quarter-over-quarter. We generated net cash provided by operating activities of $29.9 million compared to $51.0 million in the prior year period. Our capital allocation priorities are unchanged and will continue to focus on high return investments and maximizing value for shareholders. Our balance sheet remains strong, and we ended the quarter with $762 million in cash and cash equivalents on the balance sheet, and $663.6 million of outstanding debt. Our revolving credit facility had $90.8 million of unused capacity, representing total liquidity of $852.8 million.

Now onto guidance. Our outlook for 3Q revenue is $186 million to $190 million. Turning to Q4 and the remainder of 2023, we are balancing business imperatives for 2024 and beyond with immediate results. As we discussed, we're making trade-offs in how we're running Pharma Manufacturer Solutions, including VitaCare, which we're deprioritizing and expect to result in a roughly mid-single digit million-dollar reduction in second half and particularly fourth quarter revenue. We're also making volume versus margin trade-offs in our direct contracting approach with retailers that may lead to a short-term headwind for prescription transactions revenue growth. As we sit today, we expect our Q4 results to be similar to Q3, perhaps a couple of million dollars higher. We're conscious of delivering year-over-year growth in the second half, which this guide represents. From a margin perspective, during the last couple of quarters, we've delivered adjusted EBITDA margins in the mid to high 20s, and we are confident we'll continue that into the second half.

Moving on to the third quarter guidance by offering, we expect prescriptions transactions revenue of approximately $133 million to $134 million. We expect subscription revenue of approximately $23 million in the third quarter. And while our gold subscription plans increased quarter-over-quarter in the second quarter and may increase again, we expect our total subscription plans to fall due to declines in subscription plans for the Kroger Savings Club program we operate. We expect Pharma Manufacturer Solutions revenue of approximately $25 million to $28 million. This guidance range reflects our planned rationalization of this offering, including, for example, deprioritizing VitaCare Services, which is anticipated to decrease revenue from that offering. We expect other revenue to be approximately $5 million in the third quarter.

Finally, in connection with the changes we're making within our Pharma Manufacturer Solutions offering, for example at VitaCare, we currently expect to incur approximately $55 million to $75 million in total pre-tax restructuring charges, consisting of future cash expenditures of first, approximately $5 million to $10 million relating to various headcount reduction in personnel initiatives, and second, up to approximately $5 million relating to contract termination or restructuring costs associated with rolling off certain high cost to serve clients, as well as non-cash expenditures of approximately $50 million to $60 million, principally related to accelerated amortization of certain intangible assets acquired in connection with VitaCare and other software abandonment charges. We expect substantially all of these amounts to be incurred during the third and fourth quarter of 2023. These restructuring activities are expected to result in approximately $18 million to $22 million of annualized run rate cash savings.

With that, I'll now turn it over to the operator for Q&A.

[Operator]

[Operator Instructions] Our first question comes from the line of Charles Rhyee from TD Cowen.

[Charles Rhyee, TD Cowen]

Yes, thanks for taking the questions. Scott, would love to dive deeper into the CVS Cost Saver program, and obviously the Express one as well. Just trying to figure out first a little bit, sort of the experience that you're seeing with Express Scripts in this pilot so far. How often are you seeing the GoodRx price being accessed as the member goes in with a prescription? And just trying to think about how that might translate to Caremark next year. And then as we think about those plans for next year, how is the Cost Saver program being offered within Caremark's Pharmacy benefit four 2024? Is it included in the default plan design, or is it an opt-in, opt-out benefit? Just trying to figure out a little bit here what might be the incremental cost to this plan sponsor or how it's being sold in the market currently. Thanks.

[Scott Wagner, Interim CEO]

Yep. Hey, Charles. Thanks for the question. Appreciate it. So, on the specifics of the ESI plan program, we're not going to share the detail of exactly how and where the benefit is showing up. However, I can say that it’s been a pilot for ESI right now, and I think the pilot from our perspective, and hope to say for theirs, it's going well. And I think from our perspective, we’re getting really nice incrementality. So, the patient and consumer event that we're addressing is unique. Obviously, we're pleased with it, and I think it's great for ESI also because they're looking for additional benefit into the corporate-funded plan, and for patients, that's an add-on to what they had. And I think it's safe to say, if it's incremental activity for us, then it's hitting their marks as well. And so, again, we're looking forward to hopefully rolling that out and into 2024. Raj Beri, our COO, is here with us, and in terms of the Caremark program and some of the things you asked, I'm going to hand it off to Raj to give you a little color. Raj?

[Raj Beri, COO]

Thanks, Scott. Thanks for the question as well. And so, at a high level, what we're looking to do with both the ESI and the Caremark programs is to expand our prescription savings beyond cash pay into the insured and the insurance market. And so, we're really excited about this Caremark program. In terms of how this program will specifically work, and then I'll get to the specific question you had on the ESI kind of beat of the average copay, et cetera. How this program will work is that eligible members will have automatic access to GoodRx’s prescription pricing, so when available on generic prices. And so, they'll get that seamless consumer experience, similar to ESI. But what we're also going to see here is that this will drive a lot more improved savings and service for insured customers. In terms of the plan designs, they're broadly similar in terms of ESI and Caremark. They have some of the same principles, but there'll be some differences overall. What we're really excited about though is it really unlocks a new serviceable addressable market for us. I think the second part of the question was on eligible members, is it an opt-in design overall? So, I think in terms of Caremark, how we're looking at it is that members whose plan sponsors have enrolled in Caremark Cost Saver, will be part of this program automatically. And we're working on the specifics of plan design. And the third, or the last part of the question you asked was around how the ESI program is performing in terms of, how often does it win? So, on average, it beats average copay 50% of the time by around 50% plus. And I don't know if anyone else, Karsten, anything to add to that.

[Karsten Voermann, CFO]

Yes, I can jump in on that one too, Raj. Yes, I think, Charles, the most relevant metric is probably that by analysis, like Raj quoted a second ago, by analyses we see us beating the average US copay with GoodRx prices by over 50% of the time. We put that stat out about a year ago. We can't get specific about ESI or about Caremark, certainly not Caremark at this point, given it’s at the inceptional stage. But that's one of the reasons that we see these programs as valuable, and that's one of the reasons that the PBMs, and more importantly, the plan sponsors, see them as valuable. So, that's indicative, obviously not ESI-specific, but it gives you a sense for why folks are working with us on these kinds of programs generally.

[Charles Rhyee, TD Cowen]

If I could just follow up real quick, ESIs there a timeline for when they will decide to go from a pilot to a full engagement? Is that a - is there a trigger point for that and - or is it already built into the contract, that pilot will automatically go into full production?

[Raj Beri, COO]

Yes, so this is Raj here. So, and we're really happy with the progress from ESI and obviously now getting into the Caremark partnership. Right now, we're really just focused on making both of these work and moving from pilot to broader rollout, as you mentioned. And so, we're excited in 2024 to kind of continue to work and ramp this program up. As we've mentioned previously, the revenue contribution hasn't been material in 2023, but if you look at both ESI and Caremark, there's a potential for both of them to contribute materially to revenue beyond 2024.

[Charles Rhyee, TD Cowen]

Great. Thank you.

[Operator]

Thank you. One moment for our next question. Our next question comes on the line of Jonathan Yong from Credit Suisse.

[Jonathan Yong, Credit Suisse]

Hey, thanks for taking the question. I want to understand the comments you're making about the retail pharmacies and the trade-off in volume and revenue and margin. It sounds somewhat similar to what the Kroger situation was, where there was a little bit too much volume and perhaps not as much benefit being derived for the pharmacy. So, one, is that correct? And two, it sounds like you need to allow for higher prices going to consumers to reduce the volumes a bit. So, how meaningful is this type of situation becoming? And separately, what does this mean for the GoodRx brand if consumers kind of see that price point moving up relative to what they had previously and what that means for the competitive landscape? Thanks.

[Scott Wagner, Interim CEO]

Yes, this is Scott. I think this is a matter - this is us just being proactive about working with retailers and going to each of our retail partners and looking at certainly us, but it's really the whole category and being able to say, how do you want to show up from a price point and margin perspective? And we're helping them get to that point. So, I would actually say it's different than the situation that we were describing before, and this is us about being proactive about our relationship with retail.

[Jonathan Yong, Credit Suisse]

Okay, thanks. I'll keep it at one.

[Operator]

Thank you. One moment for our next question. Our next question goes through the line of Jailendra Singh from Truist Securities.

[Jailendra Singh, Truist Securities]

Thank you, and good morning, everyone. I want to focus on your plans to deprioritize certain solutions under Pharma Manufacturer Solutions, including VitaCare. This business was - when you acquired, was like less than 1% of your overall revenue and very low EBITDA, like low single-digit million. Did that business significantly underperform since the acquisition? And also broadly, can you comment on what you're seeing from a spending environment from your pharma clients? Has that changed in any ways what you communicated on the last earnings call?

[Scott Wagner, Interim CEO]

Thanks, Jailendra.

[Karsten Voermann, CFO]

Oh, go ahead. Sorry.

[Scott Wagner, Interim CEO]

No, sorry, this is Scott. I think on the former as you asked about VitaCare, I think, yes, I'll let Karsten talk about some of the specific numbers around it. But I think the big point is we thought we were getting this patient access capability, and over the last year we've learned that there's just different ways to service our customers who are trying to assign brand transactions to GoodRx. And the reality is, there's just a more effective and efficient way for us to do this period point stop. So, Karsten, if you want to add on any more about VitaCare, and then I can come back and talk about Pharma Man Sol in general.

[Karsten Voermann, CFO]

That sounds perfect. Jailendra, great to speak with you again. So, yes, when we bought Vita, just to recap, it sounds like you've got it nailed, but in case others don't, we talked about it contributing somewhere around a bit less than 1% to revenue, which back at that time would've been high single-digit millions of dollars, and costing us a couple percent of margin, which implies something more like high teens or $20 million. So, as of the time we bought it, of course we indicated that the business was not profitable. I think since then, we've been able to add to revenue. So, that part of the business has increased in size. On the flip side, though, the cost structure aspects of it, we're not evolving in a direction that led us to be able to meet our commitment to all of our investors and internally to push the business towards breakeven without cost structure work as well. So, given that we've made the commitment to get this to breakeven by the end of this year, 2023, we focus now on top of revenue side efforts taking cost side actions as well in the interest of increasing the probability and making sure that happened. And I think, Scott, you’re going to jump in on Man Sol?

[Scott Wagner, Interim CEO]

Yes. Particularly relative to VitaCare, this is just - we have a value proposition for brand manufacturers that's really strong, and it's about demand generation and being able to put them really close to the point of transaction in unique ways, and we're focused on that. And the VitaCare action is merely a way to service customers and clients that are working across our properties in a much more, frankly, efficient way for them. And it has to - it happens to be really good business and margin-enhancing for us.

[Operator]

Thank you. One moment for our next question. Our next question comes from the line of George Hill from Deutsche Bank.

[George Hill, Deutsche Bank]

Yes. good morning, guys. Thanks for taking the question. I guess, Scott, my kind of a big picture question is that you guys are now both going to market trying to serve the PBMs as well as tighten retail pharmacy relationships. I guess I thought about this before, but can you talk about like, how exclusive are the retail pharmacy relationships, or are there other vendors trying to compete in that space as well? And kind of like how do you get the retailers comfortable that you guys are so closely aligned with the PBMs, especially the two largest that they feel comfortable tightening their relationship with GoodRx?

[Scott Wagner, Interim CEO]

So, I think the really important point to make off your question is we don't think, and we don't find that that's an either or relationship that you have to say you're wearing a PBM hat or you're wearing a retail hat. And again, I’m still approaching, I think my hundredth day here, but this is a network and a system, and truly we think there's a role in the ecosystem where we can partner with both. Now, when we look at our relationship, particularly with retail, the dynamics of how we're specifically contracting them may be different retailer by retail, whether it's a grocer, whether it's a traditional drugstore chain, et cetera. But the objectives that we're trying to solve for are the same, which is, number one, have a very tight relationship around how they're realizing relative price points, consumer savings and margin targets. And given our demand generation, we're in some ways like the big footprint in the category, and this is about taking our customer base, our user base, and being a really good partner at retail. None of these actions mean that the PBMs, it's a one for one relationship, and we continue to be able to work with multiple PBMs and believe that can be so in the future.

[George Hill, Deutsche Bank]

Thank you.

[Operator]

Thank you. One moment for our next question. Our next question comes on the line of Stan Berenshteyn from Wells Fargo Securities, LLC.

[Stan Berenshteyn, Wells Fargo Securities, LLC]

Hi, thanks for taking my questions. Just back on the Caremark deal, thinking about the mechanics here. So, in a situation that could potentially result in lower out-of-pocket costs to fill a script through GoodRx PBM network partner, rather than through Caremark, is there anything that prevents Caremark from price matching or price beating and effectively keeping the prescription filled within its PBM rather than outsourcing the fill through a GoodRx PBM network partner? Thanks.

[Karsten Voermann, CFO]

Hey, Stan, this is Karsten talking here. Thanks for the question. So, I think your question ultimately goes to whether PBMs have an incentive to fill through when they enter into programs like ESI’s Price Assure, Cost Saver at Caremark, where they have an incentive to fill through their own PBM on the back end. And without getting into the specifics of the agreements, we aren't seeing a material proportion of claims in the program that's live today routing back to a specific PBM. That would be a significant anomaly from the pattern we've seen today.

[Operator]

Thank you. One moment for our next question. Our next question comes on the line of Sandy Draper from Guggenheim.

[Sandy Draper, Guggenheim Securities, LLC]

Thanks very much. Just want to circle back to the manufacturing solutions business and sort of come back to one of the questions that was asked. One of your competitors last night commented they thought the market growth had slowed by as much as half versus what they originally expected this year. Would love to get any thoughts on that, but also the idea that pharma customers are looking for more technology-enabled buying opportunities as opposed to salespeople coming and sitting in the office going over a program, hey, I just want to go to a dashboard and click four things and launch my program. Where are you guys in terms of technology? Is that - maybe I'm just thinking about VitaCare. It’s a little bit different. That's a very service-oriented solution. And just trying to think, do you also see customers pushing more for technology-enabled solutions and the ability to buy these technology as opposed to having to do hour long face-to-face meetings with sales reps? Thanks.

[Scott Wagner, Interim CEO]

Yes. Thanks for the question. So, first, relative to other people in the world, we're not going to comment or have a perspective on others. I'd say from our position, we're just at this point where our value proposition is unique and a little different than all these traditional healthcare media companies. And for us, this is about just leaning into what makes us unique and different. So, remember, GoodRx, what makes us, I think, kind of unique and powerful for these manufacturers are, we’re at this point between the consumer patient and the doctor that's pretty unique, and it's around the transaction. And so, our assets, whether they're awareness like a patient navigator, and yes, some of our health content are usually deeper in the funnel than most of these other companies. And then the second is our ability to put programs around the transaction, whether it's cashback or copay or some performance things that we're starting to build up. And honestly, we're just leaning into that. And so, if you think about what that means, the market obviously impacts us, like it impacts other people, but really we're just focused on us and still introducing these solutions to customers. And so, we're just in some ways, earlier in our evolution and life stage, which means our ability to build up the business and the market really has more to do with us than it does to do with market dynamics. So, I think what I'd want to leave everybody with is, hey, we honestly should be able to continue to build up this business from our standpoint, pretty healthily because this is still about introducing us and these solutions to the market.

[Sandy Draper, Guggenheim Securities, LLC]

Great. Thanks.

[Operator]

Thank you. One moment for our next question. Our next question goes on the line of Daniel Grosslight from Citi.

[Daniel Grosslight, Citigroup]

Hi. Thanks for taking the question. I'd like to go back to the Caremark deal and also ESI, and really focus on how these deals may change your business as it rolls out more generally in 2024, because to us, and I'm sure to others out there, it seems like a no-brainer for sponsors to opt into these programs. So, if you have a vast majority of commercial members with access to these plans, you're beating copays 50% of the time, you're going to attract just a whole bolus of new members to the platform as this rolls out, with importantly no incremental marketing spend because it's all done kind of in the background. So, as you think about 2024 and marketing spend, and I suppose this also relates to hiring of Andrew Slutsky as well, how should we think about your go-to market approach in terms of marketing? You're still spending around 40% of revenue on marketing. Is that going to drop dramatically if we see the uptake of these programs? And then I guess in conjunction with that, are there going to be some negative knock-on effects to the pharma mantle because you're attracting less eyeballs to the GoodRx platform because you simply don't need to do it if you're doing everything on the backend.

[Scott Wagner, Interim CEO]

Awesome. Scott, you're covering a lot of ground there, but let me - so first on marketing and relative to CVS Caremark, and ESI, et cetera, these actually aren't trade-offs. They're ands. So, first big point is these are not an or and a trade-off, but an and. On our marketing - from our marketing standpoint, this is a - we're a good analytically-based measurement business around our ROAs. And a lot of the focus, again, in my first 100 days has been what and where are we able to access good 12 month-plus ROAs points of savings, whether they result in a new customer or it's reactivating our base. A point from our marketing spend is that we measure it. It's effective, and our ability to both bring in new patients from our marketing relationships is valuable. It's important. It's really good. We're going to continue to do it. With Andrew coming back, what's great is I believe and we believe that there's ways that we can lean into higher value patients and occasions, perhaps more than we've even been doing. So, taking a step back, if you told me for an individual what their condition, what their drug mix and what their insurance profile is, we can absolutely map the quantum of savings. And as a direct marketer, that's like total goal. And so, if you think about our marketing strategy, it's really honing our performance spend deeper into that funnel, which again is just good tactics around building the business. So, point is, marketing's important. We're going to continue to market and do so in a highly sophisticated way. And then back to the payer programs, it's just incremental. And you did point out the nice thing for us is that there isn't a CAC. It's a new audience. It’s something that's adding value, and honestly, we think both of these two things can coexist.

[Daniel Grosslight, Citigroup]

Got it. Thank you.

[Karsten Voermann, CFO]

Hey, Daniel, you had a couple of other things in there, so I'm going to jump in real quick here. I think the first one was, the first other thing was tied to the uptake rates. And again, I want to caution here a little bit that while we beat the copays on average for Americans as a whole quite successfully as I referenced in the stat a little earlier, that's not specific to the ESI or the Caremark programs we've been talking about, because again, we can't talk about those very specifically. Second point is, with respect to your concept around Pharma Man Sol and folks coming to the platform or not, I think that that's something I really want to make clear is not a fear that we have today at all. We've looked at the overlaps between users and medications more importantly, and the medication overlap is incredibly low. The profiles of cash pay medication purchases relative to funded are pretty darn different, and that's what's really driving the lack of overlap. I think the only way I can really describe it is as de minimis at the drug level. As we look at the top 10 drugs in our cash pay and the proportion that they make up of today ESI program, and one would anticipate in future Caremark's program, it's almost nothing. Hopefully, that's helpful, and hopefully that gives you the confidence that we're not particularly worried about fewer users hitting our platforms or the non-ESI and Caremark user counts, frankly, being impacted by this very much at all.

[Daniel Grosslight, Citigroup]

Yes, very interesting stats. Thanks for the color.

[Operator]

Thank you. One moment for our next question. Our next question comes on the line of Mark Mahaney from Evercore ISI.

[Jian Li, Evercore ISI]

Thanks for taking a question. This is Jian for Mark Mahaney. I want to kind of go back to clarify that comment on the volume versus margin trade-off. So, is the idea that kind of the near-term revenue impact really just kind of the time that it takes for the volume to ramp up? And also maybe like kind of medium to longer-term, how does the structure, like, because with volume versus margin trade-off, it kind of implies that there's a margin impact. Is that kind of the right assumption? What's kind of the longer-term margin impact? Thanks a ton.

[Scott Wagner, Interim CEO]

Thanks. I think you're getting the right general sense, but if it were at any specific retailer, if admin fee is changing a little bit, that effectively is revenue for us. And our unit economics, again, may have some impact on our relative share of those unit economics that's day one and immediate. And then you're right, as we then work with that retailer around different areas of growth, both market share, showing up at the retail point-of-sale, the volume stacks and builds over time. And I think that's the right concept and I'm not sure I'd call it volume versus margin as much as having tight relationship with retail, with the goal of long-term platform stability so that we can continue to stack volume in multiple ways, whether it's partnership at retail and share gain in the category, then layering on additional volume through corporate payer programs, two and then three, layering on brand drug programs on top. So, really the strategy around this is about continued stability and partnership at retail. And then frankly taking the scope and distinctiveness of our network and stacking different ways that we can add more patients and serve more savings events, which for the investors in the world, that shows up as volume.

[Karsten Voermann, CFO]

I think I may jump into this one too real quick, Jian. I think as we talked about in the prepared remarks, we don't see this happen, certainly in all our direct contracting. Like we talked about, significant volume gains at the mid-size retailer we recently contracted with out of the gate. And the thing that folks need to remember is there are multiple variables here. One's the admin fee we take, obviously, which forms part of our revenue, but the other is consumer price elasticity generally. And as retailers look to balance consumer pricing, the admin fees that we take, et cetera, the opportunities that we really have here are by partnering with the retailers to optimize that much more carefully when it's just us - versus when it's just us setting admin fee independently or the retailers setting consumer price independently. The interplay of all this working together and our immense amounts of data around elasticity curves specific to an individual consumer or to an individual medication, allows us to add a material amount of value in terms of them getting more margin without hurting us. Hopefully, that's useful.

[Jian Li, Evercore ISI]

Thanks a ton for the color.

[Operator]

Thank you. One moment for your next question. Our next question comes on the line of Craig Hettenbach for Morgan Stanley.

[McCoy Madson, Morgan Stanley]

Yes, hi, this is McCoy on for Craig. Thanks for taking the question. Just want to dig a little bit deeper into marketing spend. Karsten, it seems like kind of some of the discretionary marketing spend that you thought you might spend at the beginning of the year, isn't going to flow through this year. I just kind want to know what's going right with marketing spend. I know you guys have a number of initiatives to kind of prioritize where you're spending, but just want to hear what you guys have seen work this year and it’s kind of not having that kind of come in this year. Thanks.

[Karsten Voermann, CFO]

Thanks so much, McCoy, and I appreciate the question. I think, first of all, I think the overarching message is that we are watching cost structure, inclusive of marketing, certainly more carefully than we have in the past. And you've seen that manifest in a variety of ways. You've seen it manifest in marketing spend drop as a percentage of revenue. You've seen it manifest in absolute Q-over-Q drops in spend too, as you look back over the last few quarters. And you've seen it in the form of other parts of our business become more efficient as well, so that you see adjusted EBITDA generally going up over, again, the last few quarters that we've been operating in. I think with respect to marketing specifically, we have been able to drive efficiencies there as well. And while those efficiencies have manifested and we didn't spend up as we preserve capacity to do in our guides over the last couple of quarters, I think now that our marketing leadership has evolved, and now that we're in a position where we feel like we can leverage incremental experience, we very well may do that in the second half of the year, particularly as we ramp up into new plan years for consumers, which is generally great sort of selling season for us. So, from that perspective, I think we are preserving the capacity to do it, even though we didn't necessarily spend up as much as we might have anticipated earlier in the year.

[Scott Wagner, Interim CEO]

I'd love to add just a higher-level point on marketing, which is, our brand and our approach to marketing is an asset. Again, being still new and spending time with awareness from a patient and doctor perspective, not just a GoodRx, but the category in general, there's still a ton of greenfield broadly about people's awareness that there's ways to save money on prescriptions. And one of the biggest assets of GoodRx is the fact that we actually have a brand and a network of people who refer other people to us. But the awareness of the category of the savings event in general is still out there. And so, our marketing is designed, number one, and will be going forward, in unique ways around content and savings events that I believe and we believe will not at the upper funnel, require a lot of money but is unique to content, is unique to savings and to particularly doctors that I think is going to be a way to get awareness. And then lower funnel performance activity and spend that we're going to have is really driving hard towards higher value patients than occasions. So, probably a whole bunch of detail there, but the broad point being marketing and our brand is an asset. We're going to continue to work on effectiveness, number one, and I think as you well point out that if we're efficient with it, fantastic. Great.

[Operator]

Thank you. One moment for our next question. Our next question comes from the line of Andrew Warren from D.A. Davidson & Co.

[Robert Simmons, D.A. Davidson & Co.]

Hey, sorry I think we have misregistered. This is Robert Simmons. Thanks for taking the question. So, there's kind of two buzzy topics that pop up a lot recently in the last few months in tech and healthcare, which you guys are both, AI and weight loss drugs. Can you talk about what you're doing in AI and also what the impact of those drugs are having on your business, if any?

[Scott Wagner, Interim CEO]

Sorry, it's Scott. Could you give me - could you repeat the question? That was a little muffled, not to make you repeat the whole thing, but I didn't quite catch it. I heard AI once.

[Robert Simmons, D.A. Davidson & Co.]

Yes, exactly. Like, what you're doing in AI, and then also what impact you're seeing from the weight loss drugs.

[Scott Wagner, Interim CEO]

Oh, thank you. Sorry. okay. AI, so we have a team, like everybody, you’re not - if you're not leaning into this in any form of consumer tech, you're probably not doing your job. So, we do have a team, not only of data scientists, but AI, that are focused on particularly what we call pricing, but it’s really the value equation and ways, again, as Karsten was talking about relative price point. There's again, a lot of sophistication that we can bring to bear around just that savings event, number one. The second is we think about content. We've got all this unique data that's a real asset that not only in the pricing models, but in the outside world, we're starting to experiment with, which as a marketer, is kind of exciting. So, and then on just on GLP-1, one broad point, it's an opportunity. We're working with several of the manufacturers today, which is great. And we think that category has a ton of promise as we think about our network being able to provide savings events that can go directly from a brand manufacturer to consumers, particularly on drugs that may or may not be covered in corporate plans or in government funded plans. And so, that value proposition is square to the heart of GoodRx. We're working with several of the top GLP-1 brands. It's obviously a fast-growing category and we're looking forward to growing our programs with them because again, I think we're unique in our ability to actually put a price point in front of consumers that makes this particularly valuable.

[Operator]

Thank you. One moment for our next question. Our next question comes from the line of Sean Dodge from RBC Capital Markets.

[Thomas Kelliher, RBC Capital Markets]

Hey, good morning, this is Thomas Kelliher on for Sean. Thanks for taking the question. I wanted to go back to manufacturing solutions. And you talked about focusing on recurring revenue rather than one-time deals. Are you all getting longer multi-year contracts? And I guess maybe, what kind of visibility do you expect to have on Man Sol revenue when you start the year, for example, versus maybe what you've had in the past? Thanks.

[Scott Wagner, Interim CEO]

Yes, thanks. My broad comment for Man Sol is that we're still - this is almost a business unit that it's in its preteen phase, which is ton of potential. We're learning and figuring out our sweet spots where we're uniquely different, and then it's building the organizational muscle to scale. And what that means on multi-year contracts is - we generally don't have multi-year contracts. It's just not how any of the media programs work, but again, because we're close to the transaction and to the event, it if we're working, we renew. And so, I think when we speak about one-time versus not, what we're doing is creating specific programs, a half dozen programs that we can go to both agencies and manufacturers, rinse, lather, repeat, and they'll work. And then if things work, they turn into renewals and they build over time. And so, that's really what we're focused on doing. When we go into the year, like any ad business, there's probably visibility in the two thirds. You would hope now what we're booking and working on for 2024 is that you're going to go into the year with approximately two thirds of your business that's renewals that stack, plus bookings that happen now as media planning goes into the year, and then you're filling in the remainder of the third.

[Thomas Kelliher, RBC Capital Markets]

That's helpful. Thanks again.

[Operator]

Thank you. One moment for our next question. Our next question comes from the line of Eric Sheridan from Goldman Sachs.

[Eric Sheridan, Goldman Sachs]

Thanks so much. Maybe I'll ask two bigger picture questions if that's okay. First, when you think about implementing this strategy and the mix of businesses you're now trying to sort of align for the platform going forward, what would you see as sort of the key investments or critical developments that are necessary to executing on that strategy looking out over the next six to 12 months, to put a final point on some of the commentary from earlier in the call? And then second, when you think about where you're trying to go from a mix shift standpoint, any updated views on longer-term margin structure and how we should be thinking about some of the headwinds and tailwinds to margin looking out over the next couple of years? Thanks so much. Take care.

[Scott Wagner, Interim CEO]

Thanks. In terms of investments, I would call it supporting capability that reflects what we're trying to do. And so, I call it a couple of things. One is this dynamic of retail partnerships and actually making the retail point-of-sale clean. There's both product and engineering work on our part to make a coupon and a savings event really clean at the point-of-sale with a seamless customer experience. And so, there's product and engineering work that is not only on the GoodRx side, but what we can do on behalf of retail partners that we're leaning into. And so, that's big point number one. Point number two, from an investment standpoint, I would say is mobile and data, that the real - one of the big assets of this company is data, again, in a super secure protected way, but is the data around a transaction event that can, again, being secure in exactly the right way, but then can have real insight around it. And so, we're leaning into both of those areas, data, one, and mobile, two, because inherently this is a mobile experience. And while we have a super capable mobile team, it's something that we really want to lean into. I'd say those are really the big areas of call out. And naturally, in things like Manufacturer Solutions, we will add people, go-to-market capability, but it’s aligned to revenue growth. And so, really the big areas of investment are around the retail point-of-sale and how we think about data and mobile from an experience standpoint. I'm going to hand it off to Karsten to talk about the margin structure.

[Karsten Voermann, CFO]

Yes, Eric, thanks for the question, and great to talk to you again. From a margin perspective, I think the overarching concept that is important for folks to understand is that our gross margins are extraordinarily high and our variable costs on any aspect of our business other than VitaCare, and VitaCare we already talked about, taking care of that, the variable cost is very, very low. So, when you look at our margins, going back to before the grocer incident, our adjusted EBITDA margins were pretty deep into the 30s. and then the grocer incident happened. That was over 20% of PTR revenue. So, a significant amount of revenue that dropped out, and that flows through, again, given the gross margin profile, almost entirely. What you're seeing us do now is return to growth in the prescription transactions business. You saw that in this last quarter. And the implication of the guide we put out is that we'll likely see growth overall in the third and fourth quarters relative to last year. The nice thing about that growth, especially when combined with, number one, a relatively more fixed cost structure, and number two, addressing and taking out the cost associated with the variable VitaCare area, means that we see margin continuing to accrete up in years to come, and we see that happening potentially at an accelerating rate. And with that, I'll turn over to Scott in case he has a few thoughts on this too.

[Scott Wagner, Interim CEO]

Oh, Karsten was hitting the point, and I'd like to just come in strong, there's a lot of incremental flow-through as we grow. So, as you see the business return to growth, we absolutely see the possibility for high incremental flow through that growth down to margin and the decision on how much to either reinvest and go-to-market or not will be a good one, but the potential for incremental flow-through is really high.

I think that's the last question. Thank you, everybody, for the questions, for being with us. We look forward to next quarter and giving everybody an update on where we are. Thanks so much.

[Operator]

This concludes today’s conference call. Thank you for participating. You may now disconnect.