Progyny, Inc. (PGNY) Earnings Call Transcript & Summary

Good afternoon, everyone. Thank you so much for joining us for this session at the BofA Securities Virtual Health Care Conference. I'm Michael Cherny. I'm the health care technology and distribution analyst here at BofA. And it's my pleasure to have with us senior management from Progyny. We have Chief Executive Officer David Schlanger; President, CFO, COO, and I'm sure a whole bunch of other unofficial titles, Pete Anevski. We're going to have a little fireside chat, go through some questions. David and Peter are going to take some turns. But I guess I'll just start it off. David, this is the first time you've been at our conference having completed the IPO last year. For those who are new to Progyny, can you give us some details about what Progyny offers on the fertility side that differs from your traditional carrier offerings and some of what makes -- especially the tax dynamics and the payment dynamics so much more beneficial to employers versus what else is in the market?

Sure. And thanks, everybody, for coming. Pete and I are not in the same room, as you can imagine, given all the shelter in place. So we'll try to handle the handoff between the 2 of us seamlessly, but just keep in mind that we're not in the same place, and bear with us. So to your question of what we do differently than the carriers who are our primary competitors, the good news about Progyny, it was created to solve one problem, and that was to provide a better fertility experience for patients, create better outcomes and, therefore, more effectively spend health care dollars for the employers who are funding the benefit. And we're not -- unlike the carriers, we don't have to manage thousands of diseases and health conditions and create efficient ways to do -- and processes to do that. So at Progyny, we really turn the carrier model completely on its head as it relates to fertility. And there's a lot of things we do differently, but I'll try to talk about the kind of the -- them at a pretty high level. So the first is our benefit plan design, which unlike the carrier model, which benefit plan designs are typically force -- focused on limiting utilization of services and, therefore, costs, and that's the only way they can really manage care, our benefit plan design is focused on generating the best outcomes. So it's a comprehensive benefit plan design that puts the comprehensive set of tools in physicians' hands, all related science, and physicians and patients can determine the best course of treatment, get into the most effective treatment first without having to live with a single set of one-size-fits-all protocols or preauthorization rules, et cetera. It's also not denominated in dollars like a traditional fertility carrier benefit is, which isn't really equitable based on if you live in a more expensive part of the country or have a more expensive treatment journey and creates bad incentives for decision-making around trying to save money versus create the best outcomes. Our benefit plan design is really denominated in cycles of care. So a member knows they're never going to run out of care mid-benefit. They're going to get through the end of the treatment, and they can make the decision-making -- their decision-making is solely based on outcomes. Beyond the benefit plan design, we also recognize that infertility is an extraordinarily difficult journey, both emotionally and physically, for patients going through it. And in recognition of that, we provide a really unprecedented level of member support to support, guide and educate members through the whole process. And very unusually for almost all parts of health care, our patient care advocates, or PCAs, who interact with members interact with each member an average of 15 times during the course of treatment. It's both an inbound and outbound model. Our PCAs have an NPS score in the 70s, which is really kind of unheard of for health care. But what it really does is it educates members about the right thing to do, the healthiest way to build their family and gives them the courage to make those decisions so they don't make compromises in care like transferring multiple embryos, foregoing genetic screening in their embryos. So really, really critical to generating great outcomes is patient education and support. And Pete and I know from our history, WebMD, that an educated and supported patient makes better decisions at better outcomes. The next thing is our network is very unusual and that we've really been fortunate that we have a network that includes most of the top fertility specialists in the country. It's an invitation-only network. We have very rigorous inclusion criteria. And we're fortunate that 1/3 of our network only really works with Progyny and doesn't work for all the carriers because of the unique way that we work with them. One of the unique ways that we work with them beyond this great plan design that they love because it lets them be to practice medicine and use best practices beyond the supported patients that they see from Progyny so that patients are inclined to make the right decision. We really support and collaborate with our provider community and actively monitor and help manage what's going on there. So when we sign up a new provider, we'd create expectations about how we want them to practice and care for our patients, but we're collecting from all of our providers in real time detailed treatment and outcomes data so that we know what's going on at the provider offices and that we can intervene when necessary to make sure that, again, our patients are getting the best care, best practices. And in really rare cases where a physician is really doing something that we consider to be bad medicine, we'll exit them from the network. But in most cases, it's a very collaborative experience where we work with the doctors to make them better. The last thing is a, really, reliance on that real-time outcomes and treatment data to guide everything we do beyond just sharing that data with our providers to make them better. It really guides all of our decision-making. And we are a very data-driven organization and the only one in the fertility industry that has access to all of that outcomes of treatment data. The net result of what we do much differently than the providers is that our clinical outcomes far exceeds the national averages, where our live birth rate is 23% higher than national averages. Our multiple birth rate is 80% lower than the national averages. And those clinical outcomes that are far better really create the financial -- the foundation for the financial value proposition that we present to our employer clients. So at a really high level, that's what we do differently. I know you asked about one of the things we do differently is that, again, some of our VC-backed competitors, our benefit is pretax versus posttax. And I'll let Pete explain to you how that works and why that's a unique competitive advantage for us.

Yes. So our fertility benefit is a fully carved-out benefit from the current medical benefit that's helped insured employers who are clients of ours use. And so although it's a fully carved-out benefit, it's really important to understand that for a visit purposes the benefit is part of the medical benefit, unlike dental or vision that's separate. So as a result, all of the plan design elements that relate to member copays, coinsurance, deductibles, et cetera, have to be coordinated with the -- with our clients' medical carrier so that it could be included as part of the medical benefit and, therefore, take advantage of the pretax nature of your medical benefit. And so we have 3 different integration solutions that really address the needs of every carrier sort of in the country where we're integrated with more than 2 dozen carriers, including all the major national carriers that you would know. And it makes our benefit a pretax benefit as opposed to some of the VC-backed companies that David mentioned that are posttax reimbursement benefit. So by definition, because they're not integrated with their carriers and they don't coordinate member out-of-pocket, coinsurance, deductibles, et cetera, those -- employees of those companies that are using a posttax reimbursement are taxed for the portion of benefit they use for fertility on a reimbursement basis. And fertility, if you don't know, is a pretty expensive treatment protocol. So on average, the medical treatment and the drugs are something in the $25,000 range. And so to get a tax bill for that portion of your medical benefit is certainly a disadvantage relative to employees of those companies that are utilizing a posttax reimbursement solution.

And...

Perfect. And very helpful -- sorry. Go ahead, David.

The one thing I would add, Mike, is that those integration solutions that Pete talked about that we have with the carriers are not easy to get. The carriers don't really have an incentive to do it. And they took a long time and they took some cajoling from some very influential customers, but we view those integration solutions as a real competitive advantage vis-à-vis some of the fertility-focused new entrants in the marketplace.

Understood and a definitely very helpful overview of what differentiates Progyny.

I want to tie back to the recent performance. Clearly, you're executing, started the year on strong footing with new client wins. I think the business got a little whipsawed with regards to the closure of a lot of fertility specialists. Can you give a little sense about recent trends, some of the highlights you had on your call earlier this week and how you think about the rebound of volumes for your fertility base for your members over the course of the year?

Sure. Pete, do you want to talk about some of the data we've been seeing and what caused us to have some optimism about the V-shaped recovery in the fertility space?

Yes. I'll start out with what we were seeing prior to, really, state by state and then overall stay-at-home orders around the country and then ASRM guidance that really impacted significantly a pause in treatment. So before that, we were seeing overall utilization in the early weeks of the quarter up through when we reported year-end earnings and issued our initial guidance for Q1 and the year of comparable to better than last year for the same quarter utilization across the business. So it was very favorable. And historically, for us, early utilization is a really good indication of expectations for the upcoming quarters and full year in terms of behavior client by client, in terms of what percent of members are utilizing the benefit. So things were very favorable for us up until the point when, as I said before, the -- most states basically had stay-at-home orders in place, and most -- and those orders included guidelines that paused any treatments in fertility. And so we've seen -- we saw a precipitous drop in our treatment volumes in the back half of March so much so that they dropped to roughly 15% of what we were seeing, if you calculate it on a weekly basis, what we were seeing in the weeks prior to those stay-at-home orders and the ASRM guidelines that were published, I think, on the 17th of March. Since then, we've been seeing -- we sort of see -- saw those -- that trough or low levels for about 3 weeks. And we've been seeing in the last 2 or 3 weeks an increase off of now those -- that trough, the low level of 15%. Week after week for 3 weeks in a row now, we've been seeing a return to normalcy. And we've been seeing that both in scheduled appointments but also in actual prescribing and dispensing around our Rx benefits. And so that gave us comfort combined with all of our conversations and surveys that we've been doing across our network with our clinics to put out for -- in terms of Q2 expectations relative to utilization and how that would translate to revenue.

And so along those lines, can you give a sense on how your providers expect to ramp over the course of the year and then what type of capacity constraints or capacity availability they have to be able to make up for the catch-up of any of the fertility treatments that had been postponed?

Yes. So there's a couple of things going on, and all the providers are at different phases of what I'm about to talk about. So as you might imagine, in contemplation of patients returning back to treatment and patient volumes going up, they've all put in place or are in the middle of putting in place protocols, safety protocols, in order to mitigate the risk around COVID-19. They're all at different phases of doing that, and they're doing that in a very thoughtful way so that they can operationalize at scale things like extended hours, A, B teams and all the other protocols that they have relative to minimizing the potential risk of the disease -- of the virus, whether it's for patients coming in and/or also for their staff. They are all expected to be open and do all of their treatments around the middle of May, so around now. But that volume that they're able to handle in terms of capacity is the ramp-up that they all expect to occur through the end of the quarter, and that's based on when they all put in place their protocols and when they roll their -- as they're rolling out and operationalizing and making sure that they are very thoughtful and careful, they're increasing the scale of what they could do. Now in terms of capacity, prior to this, there's sort of, what I call, 3 patient audiences, if you will, that impact capacity going forward. One is clinics are still materially cash pay. And so cash-paying members or -- and they vary by clinic in terms of percentages, but about 50%, 60% of clinic volumes nationally are class pay -- cash pay and not covered. So that's one audience. Second audience is the covered audience, which we fall into that category. And the third audience is patients that come -- and this is primarily large East Coast and West Coast clinics, patients that come from overseas, whether they're coming from Asia or whether they're coming from Europe for treatment, so there's best medical tourism. So as we talk to the clinics and their expectations around capacity, they expect -- obviously, with travel restrictions that are going on, the medical tourism part of this, they expect to come back to last. And I don't know that anybody has good visibility as to when that would occur in any real scale. The cash pay patient, they expect to come back later than the covered patients. So to the extent that any of these protocols and safety protocols that they're putting in place impact their ability to do any overall volume of patients in terms of treatments versus what they used to be able to do, it should be offset or more than offset by their expectations around both the impact of medical tourism patients as well as the impact of cash pay patients returning later than covered basis.

Perfect and appreciative. I want to dive a bit into the selling season. Right now, your team is in the heart of the RFP process, the discussions. I believe you said that a lot of the students are maybe kind of late summer. Clearly, there's a lot of HR reps that are -- perhaps sort through where their employee base is going to be working, what their employee base will look like. Can you give a sense on some of the discussions you're having with prospects, in particular, about what's the most appealing components in this uncertain environment with the recession going on that makes Progyny such an intriguing potential benefit to pursue?

Yes. Well, I think we're lucky in Progyny in that the things that made Progyny attractive pre-COVID are still at work and, I think, even more important as we look beyond the COVID epidemic and what's going to happen afterwards. So all the things that are important, the superior member experience, the better clinical outcomes, the fact that it's an equitable benefit and makes a really strong cultural statement about your company about what you stand for and what's important, those things are all really important. Even more so, the fact that we can save an employer 25% to 30% versus their carrier benefit, even more compelling in an uncertain economic climate. So all those things are still really important. And as we're at this point in the selling season, the good news is that despite the fact that HR managers are working from home and somewhat distracted and trying to deal with this remote workforce and what it might mean afterwards. And I think most employers are realizing, at least for the foreseeable future, it's going to mean more remote workers than they may have ever anticipated. But nevertheless, for those companies that are well positioned vis-à-vis this economic disruption, and there are many of them, and we're seeing it with our tech -- within the tech industry, software, pharmaceuticals, financial services and consumer packaged goods. Their -- the HR people that are home -- working for home are doing what they always do, which is considering changes to their benefits package to make them most attractive to employees because they're still -- they still want to attract and retain top employees but also most cost effective. So we're having those types of discussions. So from that perspective, the nature of the discussions hasn't changed that much. We're certainly, as I mentioned before, trying to focus on companies that are better positioned for the economic disruption we're all seeing. And that's been productive in that the overall level of activity that the sales team is getting, as I mentioned on our earnings call a couple of days ago, is encouraging and positive comparable to last year. And that extends all the way through things like the amount of RFPs we're seeing, how prospects are moving to the pipeline and even all the way down to the number of early-season sales decisions we've already gotten. So again, pretty positive. Message is the same but, I think, even more important in this point in time. I mean, honestly, as I look at kind of a post-COVID world, I think the reality is kinds of national crisis make you rethink what's important to you and what you value most. Many of us in those times start looking at our family even in a more kind of important way in kind of the scheme of things in our lives. So -- and employers tend to kind of follow those kind of changes in social attitudes. So the reality is family building, in our view, will be even more important post COVID.

And thinking about that, can you also give us a little sense on your current customer base? You -- a lot of the organizations that started with Progyny early tend to fall into the tech-heavy side. So you've really been able to broaden out your customer base to a wide swath of various different industries. And how has that helped you, especially in this turbulent time from an employment perspective relative to what your customers are currently seeing in terms of their employment roles?

Well, the good news is, and I'd like to say it's completely by design, certainly, diversifying across industries is by design. We believe that our benefit brings enormous value to any employer regardless of industry. And over the past 4 selling seasons, we've gone from being very heavily tech and software-focused client base to now our clients represent over 20 industries in both old and new economy. The good news for us, though, and again, I'd love to tell you this was by design, is that relative to some of the industries that were -- have been very directly impacted by COVID and have had very drastic impacts to their business, so things like clothing retailers and restaurant companies and travel and hospitality companies, our clients have -- for the most part, have avoided the worst of those impacts. So as I said on the call the other day, the vast majority of our -- both our revenues and membership comes from employers that are not directly in those industries and that have either announced nothing as it relates to staff reductions or have actually affirmatively said they're not going to reduce staff or they're still hiring. So the good news is that, again, the majority of our customer base is well positioned. And for the small number of customers that are in industries more directly impacted, based on the amount of furloughs that they've announced and their impact on our revenues and membership, it's really de minimis. And in many cases, they've even announced they're going to provide extended health benefits. So it's even less than that. So despite what we all watch on television and see this kind of really very shocking almost unemployment numbers, our -- again, our companies have largely avoided it. And the 2.1 million member number that we came in to the year with is still a good number and still accurately reflects the size of our membership.

And I want to dive back into the business a bit. You've mentioned earlier the focus of the PCAs. Can you give a little sense, given how high touch the model is, how their job has morphed and the other pieces that you've had enabled the PCAs with -- to put in place to ensure maximum best-in-class support for anyone that has an ongoing treatment, ongoing pregnancy during this time when their fertility specialists are closed down?

Sure. Pete, do you want to talk about PCAs?

Sure. So one important component that's always been a part of what the PCAs do is they help members in what -- in fertility, which is a difficult treatment protocol and complicated, get through it and do -- stress manage it, if you will, with the members in relation to what they're going through just naturally. As you might imagine, if you're trying to have a baby and you can't do it naturally, there's a level of stress that, that causes for couples. And then beyond that, navigating a complicated journey makes it even more difficult. In a world of COVID, that gets exacerbated. It gets exacerbated to the extent that you're anxious and want to go on to your family building journey but can't do so because of the current environment and stay-put orders that are around the country. And so part of what they -- we're doing is helping members during that process, a combination of letting the members know what clinics in their area may or may not be doing, coordinating with them, pointing to information that's out there, sending it to them based on specific clinics. But also, we did a number of webinars for members, both again around stress management in this COVID environment and also educating members on tools that the clinics created relative to telemedicine and utilizing telemedicine during this period to do consults to continue as much as you can on your journey while the physical part of those consults and the diagnostics are -- were being paused. And so just coordinating and making members -- keeping members informed, and the details of which, again, clinic by clinic around the country were different, was a pretty important component of what they've been doing.

And to jump into another question, one of the things, I think, really shown through not only in the quarter but also in the outlook you provided for the second quarter as well is the financial strength of the organization. It's rare for a company at this level of ultra growth at the time that you became public and since then to also be EBITDA positive. You had really nice cash flow in the quarter. Can you give a little sense on what makes the cost base so stable, the employee base so nimble and how that's helping you manage through what is a clear unexpected macro pressure?

Go ahead, Pete.

Sure. Yes. Yes. As you mentioned, we had a good quarter from a cash flow perspective. We generated over $1 million in cash. We're now $91 million as of the end of March with no debt and over $100 million of net working capital. And the reason for that is the majority of our expenses in our P&L are directly variable relative to treatment volumes. And so to the extent that there's a pause, our fixed cost infrastructure isn't that major. And so we're able to keep the workforce intact but not take a major hit to the bottom line. And just to give you some idea of sort of what breakeven looks like, if you will, we -- as you mentioned before, we put out a floor for Q2 for a top line of $45 million and with that for EBITDA of a loss of a little over $1 million, which is really a good indication of what breakeven is for us. And that'll give you some good idea as to how small relative to the variable expense the fixed expenses are within the P&L.

Perfect. And I guess in thinking about some of the other pieces of your organization and also on a go-forward basis, you've talked about the ability to potentially internalize incremental services, look at what you have from an outsource perspective that could be brought on an in-source basis, especially as you take a fresh look at your organization having moved so much, obviously, to telework, what does that do to identify the potential for additional service expansions as you think about the further build-out of your organization beyond the initial heavy fertility focus?

Yes. I mean we're always thinking about what else we can do to make our offering more robust from 2 perspectives. How can we better serve our -- both our clients and their employees and members based on kind of our expertise and what we put together. So -- and certainly, the initial focus of those service extensions will be in women's reproductive health since we have such a strong footprint there and understand that kind of unique patient journey. But that unique patient journey is far broader than just fertility services, so -- and it could encompass lots of things. The mental health aspects of women's reproductive health alone are a gigantic area and one we're very carefully exploring. And we'd probably do something via telemedicine to do that, but that's a big market in and of itself. There are other adjacencies from a care perspective, and providing kind of care management service is similar to what we do in fertility, whether it's managing high-risk pregnancies or managing NICU babies, we're kind of at the beginning stages of analyzing some of these. I think the reality is that we had a bit of a pause in considering some of these strategic alternatives given that we were trying to make sure we were managing effectively during our core business offering during this kind of COVID pandemic. But now as we -- as things seem to be normalizing and getting -- and kind of getting back to business a little bit, we've certainly -- we just recently put a renewed emphasis on that. So it could be some of those kind of horizontal areas. But also, we're still very much intrigued by the opportunity to bring in-house some of the services that are core we do now but that we outsource. So whether that could be certain types of lab testing, pharmacy dispensing, those are other things we're looking carefully at. And some of that work is going to ramp up over the next short-term period of time.

Appreciate that color, David. And with that, I think we are -- actually just run out of time. So I'm going to wrap it there. David, Pete, thank you so much for joining us and educating us a bit on the Progyny story.

Thanks, Mike. Appreciate it.

Thank you very much as well.

Great. Everyone, have great day. Thanks.

Thanks, everybody.