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

No, you did. the guidance?

Yes. I'll -- 2 pieces. So I think the other thing you asked, Mike, was, is this something that we've seen before? And it's true that we'll see pacing changes as we kind of come through in and out of weeks and in and out of different quarters. But those are very, very moderate. This -- again, David used the word abrupt or sudden. This was very different than anything that we had seen before. Of course, absent what ASRM recommended that the clinics not start new treatments last March and April or year ago March and April 2020, when the pandemic was first getting underway, certainly, everything was disrupted in a different way at that point. But no, it's not normal for us to see that kind of a change happen so quickly. And again, with 2.7 million, nearly 2.8 million, members in our base as we get bigger, the ability or the dynamic of so many people changing behavior so quickly tends to point towards an external force and not a general change in attitude, if you will, around pursuing fertility treatment. So that's part of what also drew us into thinking. And again, the observations we had in the weeks subsequent to that, that it was really more of an anomaly and more of a onetime event and likely associated with vacations. And I think the other point -- and David mentioned this around the Delta variant, I think one other additional data point is that in those areas -- and we looked at this, in those areas where the delta variant has been more pronounced in recent weeks versus other areas, there was no real correlation between changes in behavior around the scheduling of new appointments, particularly initial consults, et cetera. So we don't -- it's just another data point. And actually, conversely, in those areas where there was very little or comparatively less influence of the Delta variant, we see comparable reductions in utilization. So again, not much of a correlation at all to point to there. As far as the guidance go, we shared this on our call and then since then. So for Q3, again, David mentioned we were in and around -- at the lowest point earlier in July, about 12% or so less than we would have expected in terms of new pacing of appointments. That had flattened out in middle of July. And over the 1.5 weeks or so leading into our call last week, we saw that improving to the point where we were down only about 10%. So -- and again, that's cumulatively for Q3. So we do see that -- we saw that shrinking as we went on. And of course, over these next few weeks, we'll continue to monitor and see what's happening in the quarter. But the guidance assumes at a midpoint being down about 8% overall. So again, some improvement from what we're seeing here. The low end, though, does assume probably about between 11% and 12%. So that gives you a bit of a benchmark as to what we were seeing, what we're seeing now and then what that low end implies. And then the high end for the quarter assumes more of a continued recovery of utilization so that by the end of the quarter, we're down about 5% or so from what we would have normally expected. And then for the year, that would translate to, at the high end, effectively flat, sort of getting back to where we would have expected; the low end down maybe about 4% or so, with the mid being right in between the 2% and about 2% down.

And just to be 100% clear, Mark, you mentioned it one time, but this is tie to your traditional operating plan? Clearly, it's still incredibly robust growth just versus what you would expect on a normalized level. That down 10% is tied to what the typical trend would be, not actually down 10%?

Yes. So it was down against -- it's versus our expectations that were built over, obviously, the history with all -- with our utilization patterns across over the business.

Perfect. And good to know. I want to dive in a little bit more on what you're seeing in terms of the recent trends on your customer side. There's a lot of metrics that we all try to track in order to make sure we understand the health of the business, health of the market and whether it's the flow of how much revenue you're capturing relative to ART cycle -- the ART cycles you report or whatever it might be, it's a bit of a look on a snapshot basis into your business. As you see the evolution of customers you've grown in terms of total number of customers very well over the last couple of years, are you seeing any difference in usage patterns in terms of how the members of your new customers tend to utilize your service versus how older members do? Is there more egg freezing? Is there more IUI? Is there anything different about the trends in terms of how they've approached the market?

No. I mean, I think one thing you have to remember is that utilization patterns are different across our book of business by each customer. Some customers may have a higher rate of egg freezing, higher or overall utilization, but they tend to be fairly consistent from year-to-year within that customer's book of business. Across our entire book of business, also there is -- it kind of evens out, and there's a fair amount of predictability from year to year. I think the only thing that's different that we see is that, and Mark mentioned it before, for new customers, when they first have the benefit, you see the first half of their first year, there's obviously a lot more initial consults as they're getting up -- as they first are enjoying the benefit intending their treatment patterns as they get into treatment then tend to be pretty normal and look like the rest of the book of business. And then they stay again pretty consistently within any particular customer, pretty consistent year-over-year. And you've seen some consistency across our book of business also. So no, there's not really -- again, there's not really anything new. We do know when we bring on a new customer given kind of the demographics of their membership and the industry they're in, we have a good sense of what their utilization will look like, and we're usually fairly close on that. So -- but again, nothing -- there's no broader macro trends that are driving anything different that we're seeing.

I'd say the only thing maybe to point to is, as we're throughout the selling season and wrapping up and sort of looking year-to-year, the uptake on our pharmacy benefit, which is one of the -- probably the most significant choices that a prospective customer could make, we've continued to see increase in uptake over the last couple of few years on that, where I think we're in the low-70 percentile now overall for our book of business. But the uptake in the last few years has been higher than that, into the low 80s. We're not really talking about what that rate is this year, other than to say that we're pleased with the uptake that we've been seeing to date through the selling season and that there isn't a breakdown in that trend at all.

And that brings a great follow-up question, Mark, tied also to the upsell potential. And clearly, the conversion that you've had on the pharmacy benefit, both when you introduced it went back to existing customers as well as selling as an attachment now has been quite high. At this point and given the ability, you have to create a full circle of solutions essentially, why is the customer not selecting a pharmacy benefit as an add-on to the overall offering when they do -- when they choose not to?

Yes. I don't think the reasons have really changed, Mike. I know we've talked about them in the past. The -- for most customers, a large, self-insured employer, particularly the larger ones, the decision to carve out the medical benefit is often a separate decision than to carve out the pharmacy benefit because someone -- there's a different stakeholder that manages their PBM relationship. So oftentimes, it's just they can't get both done in a single year so that they just choose to bring medical benefit on, and then we go try to upsell them in subsequent years and have pretty good success. And it's not much more complicated than that in most cases. So one of the nice things is we have this new CVS relationships. So certainly, with respect to prospective accounts that are CVS PBM customers, that issue has become much simpler to deal with. Because our relationship with CVS actually helps facilitate some of that upsell activity, both from ease of contracting, no underwriting adjustments from -- or threatened underwriting adjustments from CVS, they've really made it quite easy. So we're happy with the rate of uptake on the pharmacy benefit. As Mark said, it continues to be strong. And the good news is, as you can tell from the upsells, -- the comments we made about upsells, even those accounts that want to get the benefit of didn't take the pharmacy benefit initially. We have good success in going back and eventually getting them to take it. So we're still shooting for that point where 100% of our customers have the integrated pharmacy program and believe that we can get there someday.

And expanding on that CVS relationship, I think a lot of the investment community doesn't realize that you do have the CVS relationship. I know I've had numerous conversations where there's been an element of surprise that, wait a minute. They work with CVS? How does that work? Can you just remind us a little bit about how that came together, especially since you could argue at times, that was your pharmacy benefit you're encroaching a bit on their turf, not to mention the futility benefit. How you work symbiotically, though, to have a successful partnership?

Well, CVS as a PBM -- obviously, one of the strategies of the PBMs is to go to their customers and try to provide value-added services beyond just what has largely become a commodity, which is dispensing medication, sending it up by mail and managing the formulary. So one of the things that CVS has done is they put together a platform of point solutions that they can take to their PBM customers that they have vetted both from a quality perspective, from a security perspective. They've created a simplified contracting process for. And we've had on and off discussions with CVS since we've been in business. And they're well aware of us, and we're well aware of them. And they approached us interested in having Progyny become one -- the fertility solution as part of their point solutions management platform. We went -- we ran with the discussions and were able to craft a relationship where it was mutually beneficial, where CVS as something really positive they can take to their PBM customers. And they can take the integrated program with the pharmacy benefit. We have found a way to work with them on the pharmacy side, which they're happy with and we are happy with. We are still managing the pharmacy benefits and able to offer the integrated program that CVS plays a role in that. And again, we've created a situation where, at least for the CVS PBM customers, there's no aberration around bringing on a pharmacy benefit. And again, even just from selling the medical benefit, they are being very helpful in introducing us to their PBM customers and introducing us with have fully vetted benefit that's easy to contract for. So we're very pleased with the momentum in the relationship. CVS is taking it very seriously, as are we, dedicating the appropriate resources to make sure that it works. And so far, so good.

Got it. I want to circle back to some big-picture questions in terms of some of the differentiating factors. You walked through a lot of components at the beginning, but one thing I don't think you spent a lot of time on, David, is the role of your own staff. It's a very lean organization in general, but you have a lot of clinical staff that does a lot of the support work, that helps support that high NPS growth Progyny is being able to generate. Do you give a little sense of the base of that patient care advocates and some of the most important roles they play in supporting the family journey throughout the fertility plan?

Well, I mean, you're right. We provide a level of patient support that is really kind of unprecedented in the industry. Every patient gets assigned a designated coach, if you will, we call them patient care advocates, that they speak to and to communicate with frequently during the course of their journey through fertility treatment. I think the average is like 15 times over the course of a couple of months treatment, which if you know anything about kind of the traditional kind of managed care case management approach, where you get a call from a generalist nurse and they ask if you're okay. And if you say yes, they're kind of done with you. This is really your resource for everything you need, beginning with understanding your benefit and what this may cost you, understanding all your various clinical options, helping you find the right doctor, helping you understand all the clinical ups and downs and outcomes and things you're going to have -- decisions you're going to have to make along the way and providing emotional support for what is very much an emotional rollercoaster. It is a very unique program. We hire very experienced people from within the industry. They're often fertility nurses or doulas or midwives or patient support people at fertility clinics. We put them through a very rigorous training program. It's about 3 months before they can actually even speak to a member. Sometimes they don't make it through the training, and they never get to speak to a member. And again, very unique program, and it's really the driver behind that NPS score because those people are the frontline people interacting with our members. They're the frontline people interacting with the folks that are providing those scores then in our physicians. And we carefully monitor both the quality of those calls, what's happening on those calls using artificial intelligence and just plain old-fashion listening. And we're paying attention to the scores those PCAs get, not just the NPS score, but other detailed scores, managing their behaviors very carefully and training them and making sure they're doing the right thing. And it's all reflected in the scores we get. We've been able to continue to grow that organization, grow our business, and at the same time, improve our quality scores as we've gone along. Not easy to scale your business, get much bigger, grow your business substantial percentages every year, yet provide a higher level of service. We've been able to do that, and that's a testament to the effort of the PCAs and the folks that are managing them. They are kind of the backbone of the organization, if you will.

And if I can, full pun intended here, for those of you keeping score at home, those NPS scores are 81, both on the fertility side and the Rx side of the business. And both of those actually represent improved scores even since pre-COVID. So even in these challenging times, people have looked to us, and we've been able to deliver for them that level of support that David just outlined for you.

Got it. We're going to be running a little low on time here, but I want to -- don't to miss this. One of the things that's been very appealing on Progyny for a while has been the very low fixed cost base. For your size, and the customers you cover, 150 employees, something like that, left a check, and a few more. As you think about the lean nature of this business, can you talk about the ways that you continue to extract more value on the EBITDA side, more conversion on free cash and establish that ongoing growth and health of the P&L that you've already had, but even during the depths of COVID last year showed how resilient it could be in the face of challenging utilization?

Yes. I'm just going to start off from second, and I'm going to turn it over to Mark to talk about some of the margin comments. But we do run it in an extraordinarily lean organization. It's not quite as lean as some of those numbers, Mike, which are probably dated. But certainly, we have shy of 300 people in the business and -- again, highly lean organization. A fair amount of them are PCAs because they're delivering the patient care. But as we've grown, from the very beginning, when Pete and I got involved with the business, the goal was to create a leverageable organization and an organization that can support very significant growth. So whether it was the financial organization, the technology stack, we put in place, it was always with the thought that we are going to have to continue to grow and create a leverageable organization, generate improving margins. And we've been able to do it both on the cost of goods -- on the cost of sales side, but also on the G&A side. And you've probably heard Pete said, our President, I know Mark loves to quote this, that if you can't get leverage on the G&A side, you really don't have to run a business as you grow. But we've been able to do it also on the cost of sales side because we've used the leverage of the business to extract better pricing and better terms from our suppliers like our doctors and our pharmacy partners. But also, we've been able to create efficiencies in even how we run the PCAs in our call centers. So again, you can see it across the business.

Yes. I think David hit on a lot of the high points there. Fair to say that -- and I like the way that he put it. We do run our PCA groups and those that are member-facing like call centers. From an efficiency standpoint, we've got all the appropriate enterprise-level systems in place, whether it's our call center management, software, et cetera, to help with that. But we've taken care over the years to be sure that we're not cutting in the wrong place. So usually at a call center, you're looking at time to resolution. You're trying to keep the call low and the length flows so that you can get more efficiency out your people. We don't do that. We don't encourage our PCAs not to take every single moment that a member needs to make sure that they get the answers that they need or they're properly educated or just wanted to talk things out. I mean that's keeping your NPS and your mission ahead of the margins there. But nevertheless, we're able to do it. And I think we had 210 employees as of the end of last year. We usually don't disclose it until once a year. But this will be the time of the year where we'll start building up in anticipation of the selling season concluding and bringing on the customers and all the members, which, again, usually we go to bed on December 31. And we're one sized company. We wake up on January 1, and we're X percent bigger just because everybody goes live on January 1, you got to be prepared for it. So we'll be ramping up a little bit on our employees. But you can see that year-over-year, as we've grown, you'll see Q3 and Q4, occasionally, you see a little bit of growth. But again, being able to retain our customers and then leverage out, whether it's on the gross margin line and all the volume that comes from that and the buying power that we get; or sales and marketing, where, again, the cost of acquiring a customer is born, pretty uniquely in the first year and a little bit based on the comp structures that we have in place with our sales teams. And then as David said, in G&A, we've been able to continue to grow and to leverage across all of those lines. And we expect to continue to that. Our margin on incremental revenue is, I think, if you look at your midpoint for the full year, should be somewhere in the very low-20 percentile, 21, 21.5, that's higher than what we're seeing from an adjusted EBITDA margin today and is still indicative of where we think it's going to go. So more to come on that front.

Awesome. And yes, I apologize for understating your employee base, even though TAM was the same. With that, we've run out of time. But Dave and Mark, very much appreciate your time today, very much appreciate the update on Progyny and all the success that you've had since you've been public.

Thanks very much, Mike, and thanks for having us at the conference. We appreciate it.

Yes. Thank you.

Great. Thanks very much.