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

Welcome to the session for -- of the BofA Healthcare Conference. I'm Mike Cherny, the health care tech and distribution analyst. It's my pleasure to have Progyny management with us. We have Executive Chairman, former CEO, David Schlanger; and CFO, Mark Livingston. And so -- and then James Hart is in the audience for any other additional questions. I think we're going to keep this as informal conversation. So I know you reported earnings just last week, I'll check the time. The biggest topic, it seems like, has been recently in terms of the performance and the move pieces is utilization. This is a business that's growing extremely fast, adding customers at an incredibly quick clip. That being said, also, there's been some dynamics around COVID utilization. So as you think about those components, where do you think you are right now in the utilization cycle in terms of how fertility services are being used relative to what you would expect to see in the trendline?

Well, I think the simplest answer is that utilization has gone back to normal. And when I mean normal, I would say, pre-COVID levels. So on the fourth quarter call, we had talked about that there were still some Omicron impact on utilization at the end of the fourth quarter and the beginning of the first quarter. But when we did the call in early March, we had seen, for February and as we're looking forward to March, that utilization had returned to historical patterns, and that we had made a statement that the impact of COVID on utilization was largely behind us. As we sit here now in May, a couple of months later, that's still the case. So we feel that, again, the impact of COVID on utilization is in the rearview mirror. And what we're seeing now and the guidance that we put out for this year and for Q2 reflects kind of normal utilization patterns.

And along those lines, there's utilization of people using services, and then it's what services are they using. What has COVID taught you about how to see that level of the types of services? Of mix? Of how people want to really engage first when they have some type of fertility issue, family planning issue that comes aboard?

Yes. I think COVID's had actually no impact on how our benefit's used or what people need. I think that if you think about a fertility benefit, utilization is driven by needs. So you either have medical issue that allows -- that doesn't allow you to get pregnant or you have a social issue that requires you to need the help of artificial reproductive technologies to get pregnant. So that really what drives utilization. And the way our benefit works because it's structured as a complete carve-out, which means that the employees of our customers, if they're going to access fertility treatments and have their employer cover them for it, they have to do it through Progyny. So utilization and the mix of services is always going to be driven by need. It's always going to be driven by that dialogue between a patient and their doctor about what services are right for that patient. And it's not really impacted by external factors like COVID.

And maybe from a timing perspective too, in terms of staying on the mix topic, I know you had alluded to, on the earnings call, the dynamics of a lot of early visits as part of the ART cycles, the spot cycles that you had in the quarter. As you think about the way that you've been layering on new customers and the clip that you've been growing at, should we think about, over time, the cadence of the year being essentially a discovery period? Because you have these new customers that are onboarding, that are learning what service are available to them, they tend to do the new consults upfront before they potentially move into an IVF- or an IUI-type cycle?

So it's a good question. So the -- we've always had a bit of seasonality in the business where the first half of the year was slightly less than half of the revenues in the second half of the year, slightly more than half of the revenues. In large part, that's driven by the phenomenon that you're talking about. Because as new clients get onboarded, and this year, we onboarded more new clients than we ever had before, the initial step for their members to utilize the benefit is to go get an initial consult. That's how you start your treatment journey. And then as the course of the year progresses, many, if not most of those people that get initial consults, are then progressing on to treatment. So particularly, for new customers, early on, you see a higher level of new consults in the first couple of months of them having the benefit as their members get onboarded and they start accessing the benefit they haven't had it before. And then after the course of a couple of quarters, their utilization patterns start with much more like legacy customers where there's a mix of new -- of initial consults for new people deciding it's the time for them to begin their fertility journey. And those that have already started and are in the middle of the journey, have had their consult and then progressing on to treatment. So that's really the phenomenon. It's kind of -- I'm not sure it's as much discovery because, again, we're a full carve-out. And to access our benefit -- to access fertility services, you have to use us. But I think just the way the benefit rolls out, to start, you have to start with initial consult, so that's what happens.

Maybe to take a step back for a second because you mentioned the dynamics of the carve-out. When you're going in and adding new customers, what are the typical experience they have in terms of fertility coverage? Fertility focus before? Are there other carve-outs that you're displacing? Is it the typical lifetime benefit that we so frequently hear about in terms of fertility? Or is it just nothing at all?

Yes. I mean, historically, more than half of the customers we brought on have had coverage before, some level of coverage. Sometimes the coverage was very inadequate. Other times, it was a little bit more robust, but they're getting that coverage from their carrier. So again, for more than half of our customers, when we brought them on, it was a takeaway from the carrier. For the other piece of our new -- our customers when we bring them on, they've had no coverage. So it's not really a takeaway from another stand-alone vendor. There's very few of them and they haven't been in the marketplace that long. But so the takeaways are typically from a carrier.

And how does that sales cycle differ between convincing somebody that has covered fertility in the past that you can do it better versus somebody who has not covered fertility in the past, saying, you should do this and we can do it really well for you?

I'm not sure there's much of a difference in kind of the way the sales cycle rolls out. The conversation has changed over the years a bit that even if -- even amongst employers that haven't had the benefit, we have far fewer of the conversations about why you need to cover fertility. The need to have a robust benefits package, which includes fertility, is really becoming well established in the marketplace. I think most benefits managers either know directly or their benefits consultants are telling them that fertility is a very important element of a benefits package now to be competitive. It's a benefit that the significant part of your workforce that's in child-bearing years really values and wants. So again, the dialogue has really changed from not whether you should cover fertility because they all realize that they need to do it if they want to make the right cultural statement to the marketplace about how they view families, how they view their female workforce. So it's not really that dialogue, it's really a dialogue about now that you know you need to cover fertility, you should do it through us rather than through your carrier.

Mike, coming back to your point about carve-outs. We view that as a pretty significant competitive advantage for us. I don't think there are other companies like us that carve out in the way that we do. Obviously, for -- in order to be able to -- for this to be a pretax benefit, you have to be able to coordinate with the main medical carrier as far as accumulators, co-pays, et cetera, which we've done. It's sort of a unique position in that we have literally hundreds of integrations with virtually every carrier in the country to be able to do that. And it wasn't easily won and it wasn't easily built over these last several years. So we don't see other carve-out competitors or substitutes or what have you because they just can't secure that position.

And I found that fascinating since we first met a few years ago, the fact that you have other outsourced fertility and family planning providers that offers services, but none of them, at least that we've come across, do it on a pretax basis, it's all post tax reimbursement. I know we can't put you in the heads of some of these other companies, but why do you think that's the case? And maybe just to go even another step back, what allowed you to build that set of pipes that got you into that position that carriers where you are ASO-approved and well positioned to do that pretax?

I think it's -- first of all, it's difficult to get a carrier to integrate with you and share data with you. As you can imagine, there's hundreds of point solutions that would love to be able to coordinate their benefit with the carrier benefit and build those pipes, share data. But there's nothing in it for the carriers. Remember, this is in the backdrop of you're taking business away from the carrier. You're making them look like they don't provide a fulsome program for their employer customer. So how did we do it is really the question. So we were very lucky early on in our history and evolution that we had a few customers that were gigantically influential. And they basically said to their carriers, "You're going to integrate with these guys because we want the benefit. You're not providing us the value we need." it's not going to impact the economics. We're not going to change our ASO fees, but you need to integrate with us. And as you can imagine, with a big carrier, once you build that integration for 1 customer, it's kind of done and in place, and they tend not to fight the next customer. So one by one, we had some very influential customers. We had some very difficult conversations with some of the carriers, but the customers backed us up and said, look -- they actually got to the point where they said to some of the carriers, "You're either going to integrate with these guys or we're going to change carriers." Because they were so desperate to have what we were offering. So we were fortunate. We got the pipes built, we got the pipes built with the help of some influential customers. And once you get them in place, then it becomes easier, and it becomes easier to go to the next Blue's plan that you might not have and say, "Hey, look, your fellow's Blue's plans in these other states have accepted this integration." And we tried to make it easier. We came up with integration solutions that didn't overly burden the carriers. We recognize that we're asking them to do work at which they don't get paid for and puts them in somewhat of a negative way with their customers, so we try to make it easy on them. So it is a real competitive advantage for those companies that are trying to get those carrier pipes in place, they could probably tell you just how difficult it is, and they don't -- do not get receptive here when they call the carriers.

And so I guess, along those lines, as you think about when you go into a selling season, when you go into an RFP, you're selling more. I always thought that as substitutes versus competition in some respects that there might be another fertility or family planning service that's purchased, but it might look very different than what Progyny is in. And so how does that competitive dynamic shift when you're going in and they're selling a different package maybe built around different areas because they can't sell on that carrier integration that is so cost advantageous to the member and to the employer?

I mean, look, ultimately, the main selling point for us is the -- is our -- the ability that we've demonstrated over 6 years now to generate clinical outcomes that far exceed national averages. We're the only company that, number one, can influence clinical outcomes because of the way we work with both patients and providers. But also the only company can actually measure what happens and track what happens. So it really starts with that notion, that one big differentiator between us and the others is that we can move the needle from a clinical outcome perspective. And we can demonstrate it with access to real-time data. So the notion of how we do it, which is the carrier integrations and some of the other things, is the second piece of the sales process, but it's not the first thing you lead with. But certainly, when it comes to big companies, they want the integration with Progyny to be easy. So when we say, "Hey, look, we already have pipes built with your carrier. This is going to take very little of your time." It's certainly an advantage when we sell vis-a-vis some of the other things that our competitors are doing. It's more bulky, clumsy. It may be a financial reimbursement program. It's not integrated with the health plan. It's not easy for a large company to actually take that kind of vendor on because new billing and new systems have to be built. With ours, they don't have to do anything. The billing goes through their carrier. It's really very simple.

And along those lines, I find interesting, you have a couple of customers. I know that have been disclosed publicly where they'll use Progyny as their core fertility service, but then they use somebody that offers fertility, but also offers other services for those other services. So how does that integration and overlap work given that, at the end of the day, both companies are attempting to have the same goal, which is healthy family creation?

Right. There are certainly some companies out there which they call themselves maybe fertility service companies because the notion of fertility could really be read to take into account the entire maternity journey from trying to conceive through conception through managing your pregnancy to have a healthy pregnancy, all the way through helping you, after you have a child, get back to work and those types of things. They're not really a fertility benefit. They're not providing coverage of fertility treatments. They're providing support services. So some of those companies like that you talk about, they -- we have customers together. So the customers have us for managing their fertility benefits. So the coverage of fertility treatments, the support of patients going through a journey of IVF or other fertility treatments. And they also have some of these other companies that provide kind of a more -- a broader set of maternity services to support women and couples through kind of the more longitudinal journey of trying to have a child. So they really are fundamentally different. Some of the vernacular gets a bit confused, but they are not providing coverage of fertility benefit.

And maybe to wrap on this dynamic and tying into the selling season, you made some preliminary comments on the call about off to a strong start. One of my favorite terms of any of the companies I cover is your not now customers, the customers that are building in terms of multiyear pipeline. As you think about where you sit today, May 11, heading into what will be the most active part of the selling season, where do you think the -- for at least this year, from a focal point perspective, the new employer potential targets you're talking to are the most important factors they're looking for whether they go with Progyny or like not go with anything?

Yes. Look, I think the first thing that's important to know is that we're coming off of a record selling season. Last year, we added 1.2 million lives. The momentum has continued into 2022 with respect to sales activities. So in all the ways that we measure kind of sales progress, whether it's wins to date, there's always a few early -- some early wins from those not nows, all the way through kind of the number of accounts and the number of lives that are represented in active discussions throughout the various stages of how we measure pipeline. All those indicators are up strongly year-over-year. So we feel really good sitting here on May 10, where we sit in the -- where we sit from a selling season perspective. And where we sit with having enough activity to meet our internal sales goals. So again, feel good sitting here on May 10, where we are. I think the value proposition, how we differentiate ourselves, hasn't really changed. I mean the competitive environment for us has been largely static for the last few years. It's -- we're still competing against the carriers. The carriers have not done much to change or improve their offerings. We're seeing really very little activity in that sense. And the few kind of direct competitors we have are the same ones we had a couple of years ago. Their business models and value propositions remain largely the same. So we're still out there. I'm talking about all the things that differentiate us. The 6 years of continually improving clinical outcomes, the ease of integration, et cetera. And ultimately, that we can provide an employer the opportunity to have a better benefit and save money and have happier employees. So those messages continue to resonate in the marketplace as evidenced by the continued momentum we have from a sales perspective.

Turning to pharmacy, and you talked about record level of new member adds, you also had a record level of pharmacy attach rate. At this point time, why are any new customers, in particular, not adopting pharmacy if they choose not to?

Yes. So I -- we've talked about this in the past that at some companies, particularly as they get larger, there's typically a different individual that's in charge of the PBM relationship. So to go through the sales process and get be able to successfully sell both access to the medical benefit and access to the pharmacy benefit might require a separate sign-off. It might require another person to get involved. And sometimes those PBM relationships are complicated and something could be going on internally that doesn't allow them to make both decisions at the same time, yet they really want to bring the Progyny benefit on. So they may say, "Hey, look, we can't make a change to any of -- to our PBM relationship this year as it relates to fertility medications, but we'll talk about it next year." But in the interim, we still want to bring the benefit on. And we make it easy for those customers. We will work with their existing PBM to the extent that we can and make sure that those patients are getting access to their medications and helping support them. As you can see though, there are fewer and fewer of those customers that are having trouble making both decisions at the same time. Our attach rate this year was 93% for new customers on the PBM benefit. So we're having great sales success. We also had significant success over the last couple of years. Upselling legacy customers that didn't originally bring on -- take the pharmacy benefit, but now have brought it on. And that's reflected in the fact that if you look across our book of business, over 80% of our customers are now pharmacy customers also. And that's gone up dramatically since the IPO were -- was around 60%.

And along those lines, is there a meaningful opportunity left on the upsell potential within legacy basis? I mean I think about it too, especially because some of these customers originally signed up with Progyny before you had a pharmacy offering.

Yes. Look, there's 17% of our customers that we believe should have the pharmacy benefit and can both save money, both the employer and the employee, but also provide a much better experience to the employee as they're going through a pretty difficult journey through fertility treatment. So the reason we initially launched the pharmacy benefit before we understood the economics and that we could actually save our employers' money and eliminate waste and do all the things that we've come to learn that we can really influence was really about the member experience. Members were having a tough time getting access to their drugs. And it was causing them to delay their cycles, it was causing undue stress. And my roots were in the PBM business when I first joined health care and I said, that's a problem that's easily addressable. So we believe there's enormous value both financially as a member experience and pharmacy benefit, and we're kind of not going to stop those conversations with any of our legacy customers about taking pharmacy benefit until they all have it.

I think since the IPO, you've talked about what could Progyny do at some point down the road. And it's been almost 3 years now, I guess? You talked earlier this year about evaluating opportunities in Canada, as one example. As we think about the next few years of Progyny, how should we think about that evolution, especially at a time where, eventually, law of large numbers will just catch up to you on the amount of employee growth that you can add any given year, and the bigger you get, the harder it is to grow at the same rates.

Yes. Well, look, before we talk about what we need to do or what we may want to do from a new service perspective, I think everybody needs to keep in mind that we have 265 customers, which we're very proud of with 4 million lives. The addressable market is in thousands of customers, 8,000 corporate employers and then you can add in labor unions and universities and not-for-profit hospital systems. So the market -- the potential market is very big. I believe we can continue to bring on new customers and grow for quite a while and have sales success because, again, the value proposition is very well established. And at the same time, with respect to that core offering that we're selling, we're constantly improving it. So we've talked about one of the things that we've realized is that there are certain issues that impact males in the fertility journey that have not been -- that have really not been adequately addressed. We're adding coverage to some of those services this year. So while the overall notion of what we do, which is covering fertility benefits stays the same, we're constantly improving that. So that effort is ongoing and will continue. We're always looking at new markets. So Canada, for instance, is a great example of that. It's close by. With respect to fertility treatments, they're not covered by the government health system. And we think there's an opportunity to extend what we do there and companies have the same incentive to support their employees financially through their fertility journeys as they do here. So new markets are going to be important to us. And as it relates to new services, we continue to have very productive dialogue with our customers. We have a very active client advisory board about what other problems we can help them solve. We're not going to launch something unless it actually solves a real problem and provide meaningful value. Our brand, our presence in the marketplace is well established as one of the few companies that actually demonstrates value, solves a real problem. And we're the examples of -- for many of our customers, of what the move to value-based care should look like. So as we think about new things to do, it's always going to be with an eye towards, is there a real problem that we can make significant improvements to clinical outcomes, patient experience and again, solve real-world problems for our customers. So that's what we're looking at. We're not going to talk about specifics until we have something that we want to more broadly roll out. We'll probably try a few things under the covers. And as we kind of learn and see what works, we'll tell the market about what we're doing.

Got it. Yes. So we're not trying to understate your TAM opportunity, just more thinking about how the evolution of the business more than anything else.

Yes. I think, look, we are cognizant of the fact that we have an extraordinarily good customer list. We have great reputation within those customers. And that's an asset that we should leverage to the extent we can, again, solve additional problems for those customers.

Turning then to the P&L, I want to make sure we talk a little bit about this. You have a very unique revenue and cost structure in the sense that gross margins in the 20s percent range based on revenue recognition, but also an obscenely thin overhead, operating leverage -- operating expense base. How do you -- how should we be thinking about that the evolution, especially given the pharmacy mix opportunity to grow relative to that margin structure?

Well, I'm going to let Mark answer the margin question. I just want to make 1 comment to your comment about we have a very thin kind of expense base. I prefer to call that we have extraordinarily efficient and productive employees that if you look at our revenue per employee, it's very, very high. So we built a really high-performance team, and that's what's driving that. But Mark, why don't you talk about kind of long-term margin prospects?

Yes. So since -- even before the IPO, we've sort of pointed towards the margin on incremental revenue as being indicative of where we see the company go. And I think if you look back over the last few years, we've been sort of marching towards that. Our guidance this year would imply almost 20% margin of incremental revenue over last year. And so for the full year, we're somewhere in the neighborhood of 15%-or-so, again, given the full year guidance. We -- we've now already talked about how efficient we are from an employee standpoint. And as we continue to grow, we'll continue to leverage that even further. A key component of our cost structure, our employee structure is our PCAs. Those are -- we reflect those up in our cost of services lines. And we've seen year after year that although they become more and more a significant component of our employee base, we don't need to grow that as fast as we're growing membership or clients or revenue because we can service it effectively. So there's leverage that we'll continue to gain there. But also, in gross margins, we -- we're continually in discussions with our providers around the rates that they charge. We bring them tremendous volume. We bring them well-covered, well-informed patients to do their business. And so we've continued to have success. And as those agreements renew and bringing down those costs, we've talked about our pharmacy arrangements, particularly last year, we had a big step-up in the economics around that, again, given the scale that we've continued to build over these last few years. Now we've -- we'll always look carefully at how much of that incremental margin we can get through these negotiations, how much we'll keep for ourselves and how much we pass along to our clients. We're very cognizant of that equilibrium of continuing to deliver value for all of our stakeholders, frankly. And then sales and marketing and G&A, we continue to show leverage as we've grown there. So that margin on incremental revenue still remains as the EBITDA margin on incremental revenue remains as sort of that target as we go forward. And again, we're continuing to march towards it.

Yes. And along those lines in a sea of high-growth companies, the margin structure does stand out, so does the cash flow generation. As you think about the focus we have, especially in the high-growth company on cash flow, how do you -- how should we see that evolve over time? And obviously, it definitely speaks to your growth investments, but is the general thought we should think about is that the expectation of the cash flow generation is to continue to utilize it to fund and support growth?

Yes. Absolutely. And we have -- we've gotten a number of questions on this, so it's good to sort of talk about it. We have a bit of a unique profile around cash flow and that it isn't sort of evenly distributed throughout the year. So there's a couple of important factors that drive it. Obviously, our revenues step up significantly from December 31 to January 1 as we bring on new cohorts of clients. So there will be some natural investment in working capital just associated with that. We also, in the first quarter of every year, are dealing with getting all the integrations up and running and the ramp-up of clients. So -- and we've said this for years, there's always some temporary timing issues associated with that. But I think one of the bigger timing items that's worth calling out is the impact of the pharmacy arrangements that we signed last year, including rebate agreement. Now those helped us change the economics around the Rx business pretty significantly. But one of the things that we agreed to in that process was to extend the payment terms out on what we receive on those rebate agreements by about an incremental 90 days. So the impact of that is that we receive our rebates not just 1 quarter after they're earned, but actually now 2 quarters after they're earned. And that's part of the dynamic that we saw last year. And so now, for example, in the first quarter of this year, our rebates were earned on very high Rx growth, which you pointed out, but the cash that we collected on that was actually what we earned in Q3. So there'll be a bit of a disconnect from that step-up in revenue to cash received as we go through the first couple of quarters of each year. And then it will, as we said, last year, it will normalize in the back half. So the way I think about it is the operating -- over time, the operating cash flow over a year, let's say, we used to target or think about it in terms of maybe 80% or 85% operating cash flow in relation to adjusted EBITDA with the growth that we're seeing in Rx and the dynamic around these agreements in the payment terms. That's -- gauging that is probably somewhere around 60%-or-so, plus or minus, again, as we continue to grow Rx going forward.

Got it. Well, I think we're just about out of time. But David and Mark, really appreciate the update. And I see all the data points on all the growth that you've got.

Good. Thanks for having us, Mike.

Yes. Thanks for having us.