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

Thank you, everyone, so much for coming. My name is Sarah James. I'm the emerging health care delivery model and Provider Analyst at Barclays, and I'm really thrilled to have with us here Progyny. It's our top pick and really has been mine since your IPO. And we have CFO, Mark Livingston with us today and also CEO, Peter Anevski.

And I think we're going to start off with some questions about the macro because I always find that's where the debate kind of starts with fertility insurance. You guys don't know. Progyny is one of the leading providers of fertility insurance in the U.S. So how do you think about the TAM developing over the next 5 years? And then within that, what does the breakdown shift look like between people that can't get access and have no coverage versus employer-sponsored and self-pay?

Yes, I'll start with the TAM. So we estimate the current market for fertility in the U.S. is roughly $10 billion in 2022. That has been growing over the last 10 years through reported data through 2019 of roughly 9.5% a year on a compounded annual growth rate. That's a higher rate of growth than what you're seeing in normal fertility rates naturally. But when you break down those fertility rates, what you're seeing is that women 35 and over are actually growing in terms of their representation of how many babies they're having at a compound annual growth rate of 2.2%. That's one of the macro trends that are fueling the industry. But really what's fueling the industry beyond that is companies realizing that this is a benefit that's not a nice to have, this is a benefit that the must have, right? So more and more companies are realizing that. And as they're looking at whether you're already covering it in some form or another on a limited basis or you're not covering it at all, they're realizing that to be competitive and to be true to the compact of with their employees if they have medical covers they do have to cover fertility. And so what's happening is they're adding fertilities of benefit. They're either expanding it, if they have it already, but expanding it and covering it comprehensively or what they're doing is they're adding it if they don't have it at all. So it's an important component of their offering to employers. The other thing that's driving the industry's overall growth year after year is they're also adding commonly which prior to us -- Progyny and us doing the benefit. They're adding fertility preservation, which is an important component of overall fertility services that companies before weren't doing in any meaningful way. And then the last thing that's driving it is covering -- having the benefit that covers DE&I and is a benefit for LGBTQ communities that also have a significant need. And so all those factors are the macro trends that are driving the overall growth from fertility from what we see anytime soon that's going to slow down. There's only roughly 2.2% of babies in the U.S. come from system productive technology services versus natural babies, right? But the need is one and couples. And with the growth in access to care, you're going to see that continue to grow and outpace what's happening naturally.

I love that you bring up the LGBTQ population because I know for Barclays, we added Progyny this year, and that was a big factor in why we did is because it was the most HR friendly policy not to mention the savings that you guys provide. But I think that there's also this huge benefit for recruitment and retention. So one of the other companies I cover HCA also added you guys this year, and they -- it's a tough labor market out there for nurses. So how do your conversations go with employers on what it could actually mean for recruitment and retention for them?

That's definitely part of the conversation. The first part of the conversation when companies are considering fertility again, whether they have it or whether they want to introduce it, they want to understand relative to the member experience, right? What's that experience like, right? So we go through why it's very different under Progyny versus what is the alternative today, which is traditional carriers, right? Then they want to understand, as you're describing it, how this addresses other needs that they have. This is a women's health benefit. That's an important area that they're focused on. This is definitely DE&I and addresses the LGBTQ population. It's something that was there from the original design that we did. It was something that back then wasn't a popular sort of trend, but we did it in the beginning. It's a very important box that they check, and it's very important as companies continue to add diversity officers, et cetera, it's a focus of this, right? It's also ESG from the perspective of investors and sort of what's important in terms of what they're thinking about. So overall, it's a very important component for them in a world of the great resignation, in a world where the employee market is getting tighter and tighter. And within industries really it's important because what happens is if you think about industries, they generally are competing for the same employees, right, to the extent that it's competitive. And so to the extent that others in your industry are offering or not, you're definitely looking at it harder and we see that in the evolution of our business. So as our -- we're in 30 different industries right now in terms of our client base. As we add industries each year and each successful year more and more companies from those industries at it because they all talk to each other and they realize that this is no longer a nice to have, this is a must have. It's beneficial.

Absolutely. And it's interesting aspect of peer pressure because I've seen it in third-party data with adoption where 1 employer leader will upserve benefits and then the next year, you have 2 or 3 of their peers and then it [indiscernible] from there. So as you think about that across your book, what industries are the ones where demand and adoption curve is going to have the biggest impact over the next couple of years?

Well, if you look at the evolution of the company, right, in terms of where we added clients, it started out mostly with tech companies, mostly on the West Coast, Silicon Valley companies that were -- that tend to be more forward-looking relative to benefits, right? As we've expanded throughout the years that we've added across many different industries, where Pharma is a good example where we added Pharma, I think, the first client that we added, I think, it was 2018, our 2018 selling season, we now have a handful of pharma companies and that continues each year. I like to sort of quote the -- an industry that nobody thinks about, but as a good example, commercial real estate. We have sort of 3 other words commercial real estate companies that are clients started out with one, right? So what happens is naturally as you break into an industry, you mentioned HCA. HCA is hospital system in the country, hospital systems were a challenge. They're going to now sort of become something that's an opportunity for us, right, as an example. So all of them -- as the leaders in those industries tend to adopt earlier, the rest tend to see what's happening and realize that they have to be competitive and are also realizing from the benefit consultants that this is really something you should be looking at as part of your overall content of offering, but certainly a catalyst within your industry is going to be those others that you're competing with that are already adopted.

Yes. I know it's something I ask the CFOs every quarter. So as you think about...

We're going to hire you for sales.

As you think about the value proposition, how do you describe this savings that you generated to the employers? How do you cut the data?

Well, there's an important part of the proposition, right? It starts with, again, the member experience, which is very important, and it ties into the value proposition. What we do is we describe why the member experience is better, what it means to be a better member experience, why we have an NPS of over 80 and have had it consistently, right? And in health care, that's unheard of. And the reason for that is that we do -- the totality of our solutions does drive better outcomes. What are better outcomes in fertility? Well, there's a big difference between when you attempt to get pregnant and you do get pregnant at a higher rate. The big difference between when you're pregnant your miscarriage rates to significantly lower rate. And so by definition, your live birthrate is at a much higher rate. And then on top of that, it help your [indiscernible] So you have way lower multiples, twins and higher order multiples and way higher singleton rates that also translates into savings, right? So what happens is your member experience is much better. You're already going through a stressful experience of not being able to have a baby naturally, and you can then get pregnant faster with the baby with a healthy single baby as opposed to twins where there's a risk of premature babies and baby potentially ending up in the incu, right? But from a company standpoint, that all translates into savings. A higher live birth rate means less attempts at getting pregnant, 25% less to be exact. And so as a result, when fertility is very expensive and each time you attempt to being pregnant will very expensive, both the medical and the drug, that's a significant savings. When you're talking about having a much higher singleton rate and minimizing the risk of premature births and having babies end up potentially in the incu that significant dollar savings downstream because: A, you're not, by definition, a high risk pregnancy because you're pregnant with multiples; and B, you're potentially avoiding a very costly baby they call effectively you referred to a million dollar babies because you don't end up in incu. All those good experiences for the member translate into significant savings for the employer. But the other important thing where we start out is our reimbursement rates that we charge our clients are consistent with what carriers charge. And we had unit savings on the Progyny Rx side relative to the drug. And then we also have waste management programs that manage how much is to spend in terms of what's needed versus what's prescribed when it's less. And so there's significant savings. So all of that totally adds up significant savings for the clients. But we sell first around the experience very important and then the rest of it in terms of good outcomes translates into those savings in that value profits.

Mark, maybe we can talk a little bit about 2022. What are some of your base assumptions as you think about that year with respect to utilization or other key factors?

Yes, sure. So obviously, we had some periods of challenges around utilization throughout the earlier quarters of the pandemic, certainly in Q2 of '20 that was much more pronounced because of the closing of clinics. And then we've had a couple of whether it was the Delta wave or certainly Omicron which affected our Q4 results. But I think the 1 thing that we've learned from that is that they're really quite short-lived. The resiliency in the pursuit of treatment is just so strong. And actually, if you kind of step back and from a perspective and just look at what our quarterly utilization rates have been over the last 8 to 10 quarters or so, since we've been public, save for that 1 quarter in Q2 '20, they've actually been really consistent. So that's kind of the baseline for us of where we see some of those impacts from COVID. Again, it's our hope that it is everybody that we're kind of putting all that a bit behind us. So bringing that to 2022, so we put out our guidance a couple of weeks ago. So the high end of our guidance sort of assumes like normal levels of utilization, normal levels of mix, which is what we've been seeing now as we sort of got into the second part of Q1. Again, after December and a January that were impacted by Omicron, once we got into February, things really came back very quickly to what we would consider a more normal level. So that's sort of what goes into our high end. And then when we consider the rest of our range, there's a variety of factors that could come into play, slightly less utilization, perhaps impacted by future variants that we don't know of today, maybe slightly unfavorable mix here and there as different clients maneuver their way through the year. It also takes into consideration we have quite a number of clients that are starting in Q2 and Q3. The vast majority have already started. But we did have a fairly decent block of clients that we're starting here in Q2, and we put a number to it on our call about $40 million to $45 million of our full year revenues are being contributed by these newer clients. So to the extent that for whatever reason, they choose to delay their start by a 1 month or 2. Obviously, there's some impact that we could see from that, but those are sort of all the pieces that kind of go into our factoring of the range for '22.

And the shift to later start in the year is really interesting because you guys used to be predominantly Jan 1 starts. It's when a lot of benefits are overall. What do you think is driving the change in timing? And do you think it's temporary? Or it's something that we could see as just part of the story in the next few years?

Yes. I mean, I don't think this is necessarily a macro trend in what we're seeing. It really is just sort of idiosyncratic of these particular clients. Some of them are upsells, by the way. And so there's a little bit more flexibility in when you can go live with those. Again, the vast majority of what we sold throughout last year did, in fact, go live in January. So that's sort of the normal pattern. Now there are some that where their plan year isn't January 1, and we do see those. We've launched those in the past where they'll have a plan year of April 1, for example. And it's more -- it's cleaner, if you will, for them to launch on their plan here. But yes, I wouldn't look at this as being somehow indicative of a trend. We'll -- we do have small clients that launch throughout the year. It's a little bit more easier for them to be able to do so. And likely, we'll have some throughout the rest of the year, we don't know any right now. But other than the ones I've already mentioned but they tend to be much smaller. And I think that's probably more the norm.

The majority of these companies are non-calendar year plan our company. So for them, it's normal to launch April 1 because that's when their plan is.

You touched on this idea of upselling, which is a really exciting opportunity. So maybe you could talk about what you see out there for selling within your current client base where the main opportunities lie? How that feeds into your strategy of product development?

Yes. So upsells for us are when you take the benefit in the first year or subsequent years, you don't take the entire benefit. So for example, your options are, how many cycles or smart cycles you're going to offer each employee and you can increase those cycles that you're offering. Your options are you going to include Progyny Rx or not. Your options are whether or not you're going to include fertility preservation or not and other smaller nuances, but those are the bigger dollar ones, right? And so to the extent that you don't take them in the first year, you tend to upsell or add them to your benefit in subsequent years, many reasons for that. Many stakeholders in the company make a decision around what you're going to roll out in the initial year. And a lot of times for benefit managers, it's easier to get it live and adopt it within their company sort of with a more limited benefit and get it added. And so that's the opportunity, right? So our entire client base doesn't have all of it. And so there's always opportunity around the existing client base. But there's also opportunities around expanding your offering and then having that expansion be something you add in to your existing clients but it's also. So one of the things that we talked about on our last call was we're adding male factor infertility as an extension to the smart cycle in addition to what we're doing relative to female fertility. So for those who don't know male factor infertility is when a couple is having trouble having the baby because the male is -- as some sort of issues that are physical in nature that could be addressed versus female factor infertility. The female maybe has some sort of physical issues that have to be addressed. And the third time, it's unidentified. But when the male is identified, there's a subset of urologists out there. They're focused on reproductive urology, and they're the ones that generally the clinics are going to refer to as they're used to referring to ones in the area. They're about 10% of the urologists that are out there are sort of subspecialty reproductive urologists. They're not always part of the traditional medical plan nor are all the services they provide part of the traditional medical plan. So this is asked by our clients in terms of addressing when that gap, if you will, exist, can you offer something for the male as the extension because that does happen because that's something that they heard from some of their members in terms of [indiscernible]. So we're doing that. We're in the middle of developing that, and we'll be in a position to sort of roll that out soon and that should start to have an impact. It's not going to be a huge incremental impact, but it's an impact like anything else that adds -- everything adds up. So it's an opportunity.

How should we think about it big picture, what's happening with revenue per cycle as your products start to expand? And then also, you mentioned cycle count. So the potential to lift there. Is this something that could be meaningful to your revenue per cycle?

It could be meaningful incrementally relative to additional revenue per cycle because, again, it will be an extension of the smart cycle. They're going to utilize already. So to the extent that the male, it's either male only if you want to go get assess yourself, it will be available. But also if you're part of a couple that is getting assessed at a reproductive endocrinologist and it assess that the male may be the issue, you could be referred to reproductive urologists, right? And so from that perspective, it could be incremental. But overall, it's an opportunity for us in terms of average revenue for per cycle from that perspective. But what you're going to see and we get this question regularly as we continue to expand our client base and the members are across the country more. And then we're in our earlier years where a significant portion of the members that utilize the benefit were primarily East and West Coast where clinic rates and reimbursement rates are generally higher than they are in the South and Midwest. You're going to see the overall average medical revenue go down slightly because there's more and more coverage across the country. It's not a function of anything else. Any issue underlying the business is a function of mathematical averages in terms of reimbursement rates will create no pressure in terms of margins because it's all designed to sort of achieve the same margin level. It's just the average medical revenue per cycle is going to get impacted as we continue to spread out and add more clients all across the country in different industries, where they have employees all across the country, not generally concentrated mostly East and West Coast as well as the case in our earlier years.

Another area of expansion is geography. You guys just announced that you're heading into Canada, very exciting. How should we think about that reach? Is it very targeted geographically within Canada? Because I know government health care varies from territory to territory. And then also, are you looking beyond that? Are there other markets that could be appealing?

Yes. So we did announce that we're introducing the benefit in Canada. We're in the middle of, again, establishing and developing that. Our initial view of what we want to address would be our global clients that have Canadian populations, but we'll ultimately put together go-to-market resources and strategy to also go after Canadian companies that have large populations. It's really us dipping our toe in the water to what is an international expansion. Canada was the easiest place to start. It's primarily English-speaking country. You're right to point out that as we learned as we rolled it out in Canada, Canada is like 10 countries -- 10 provinces with different regulations and different sort of limitations, but nonetheless could be managed. But it was a good opportunity for us to start -- to offer as much of similar to a benefit that we're offering in the U.S. starting out with Canada. There are other countries in Europe that we would also look at. We're going to see how Canada goes and then ultimately decide whether or not we want to expand internationally with as close to a benefit of what we have in the U.S. whether or not we want to expand in different ways. This is, I would call it, a pilot and sort of towing the water in terms of international expansion.

Okay. So Mark, you guys have a very strong balance sheet for a company that has high growth as you guys are. You're one of the few names that are out there that's generating cash flow. How do you think about balancing growth versus stability of the balance sheet or opportunity for leverage for, let's say, a transformational type of acquisition?

I'll let Pete take some of this. We're not in a position. Certainly, we're very strong from a balance sheet standpoint. Excellent operating cash flow, good conversion from adjusted EBITDA and to cash flow. I'd just point out this last year, we had negotiated some more favorable economic agreements with our pharmacy partners which did require a bit of an investment in working capital to do that. It's effectively the timing of receipt on rebates. But again, although those factors are there, I think there's a lot of -- we have a lot of tools in our toolbox to go after whatever we may choose to do. But I don't think we're in the place where we feel like we need to make some transformational leap or into anything. But again, our powder is pretty dry here to go after anything of interest. And Pete I don't know if you want to talk about that?

Yes. As Mark points out, we certainly in the position with no debt, good cash on the balance sheet and generating cash flow to do a lot of things if we want to do them. There's nothing that we're looking at that we're shying away from relative to our ability to get a deal done. Our focus for the last couple of years has been managing through the pandemic. We are now focused on the adjacencies that we've talked about in the past, whether it's women's health, whether it's maternity, whether it's behavioral health, et cetera. And we're going to look at those opportunities vis-a-vis what we think they could do for us. I want to make sure we don't offset the model. We want to make sure everyone know offset our ability to grow revenue, we're at a profitable rate and continue to expand margins. But other than that we're going to look at what makes sense when we find something and if it is an acquisition and if it is a big one, we have every confidence based on what the bankers tell us all the time, based on our experience, we have every confidence that we can get a deal done if we need to. But as Mark said, we're early first inning in our opportunity, the way we see it and nowhere near sort of being in a place where we need a "transformational acquisition", but wouldn't shy away from something if it made sense because I think one of the greatest assets that we have is our client base. We have a large base of clients across industries that we have a trusted relationship with and are in a good position to leverage those relationships in order to be able to offer something that makes sense beyond what we're doing today and they would listen, which is a really nice place to be.

How do you think about the potential for long-term EBITDA margin expansion? So you guys have flagged, new clients are coming in sort of in that like high teens range for EBITDA, incremental margins, which is higher than where the company the whole is now. So as you think about the mix of new versus existing or how much product they're all buying, where do you think you could go long term?

We never set a target. But as you're pointing out, we like to just point people to sort of what we've been achieving. The model lends itself to creating leverage through everyone in the P&L, whether it's cost of operations, sales and marketing or G&A, we don't see anything that suggests that we won't be able to continue to do that. And we'll continue to do that and continue to leverage our position in the marketplace. And then our ability to leverage across all 3 lines, our business and generate expanding margins on the EBITDA line as we continue to grow. And like I said, there's nothing that we see to suggest that, that won't be able to continue.

Great. In our last few minutes here, I wanted to give you the floor, have an opportunity to talk about what you think the Street is missing or what's being undervalued within your stock?

Yes. So I think -- and this has been changing a little bit, but I think 1 of the things that are underappreciated, and Mark alluded to a little bit before, is the resiliency of the model, the demand by members to achieve their family building degrees and leverage the benefit when their employer offers well beyond any limitations like the global health pandemic or any other limitations that they may see. The resiliency of utilization lends itself to what is that plus our high client retention rate historically on itself to a pretty predictable model, right? So although we're not a subscription model, we act like 1 in many ways, right, and that's a pretty significant asset, right. That plus our ability to continue to have successful upsells to our client base, right, says that the existing client base is a pretty big asset and the predictability within the model has proven by sort of the majority of people still utilizing the benefit even when there's a Omicron variant as significant as it was, as wide spread as it was, as quickly as it spread still says the majority of people still utilize the benefit, right? That's sort of one of the most, I think, underappreciated things, right? Sometimes overemphasized again, the reverse sort of the bumps in the road. But the important thing is, as I said before, also on top of that, the client base that we have and the relationships that we have with them really put us in a good position to not only continue our relationship with them and what we're doing with them today, but also put us in a good position relative to other things we're looking at as we look at those things, we're going to look at them judiciously, but we're going to look at them. And so when we do develop those things, whether we do it organically or whether we acquire somebody, they are a real opportunity for us as we look to expand our offering beyond fertility.

Great. Well, thank you guys so much for joining us. As my top pick, I'm very excited to welcome you to Barclays and...

Thanks for having us.

Thank you.

Thanks for the insight.

Thank you. And thanks for your support, and thanks for being a client.