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

Welcome to the Credit Suisse Healthcare Conference. With us today I have Progyny. I'm Jonathan Yong, the healthcare technology analyst here. With us today, we have CEO, Pete Anevski; and CFO, Mark Livingston. And in the audience, we also have James Hart from IR. So thank you for attending and participating here, guys.

So, I guess, just to jump right into it. You guys reported 3Q results recently. Can you give us just a quick summary of how the results came in relative to your expectations and how things are trajecting?

Yes. Our results were very strong in the third quarter. We reported revenues of $205 million, which was a 68% increase over the prior year, and our adjusted EBITDA was $35 million, which was actually over 100% growth over the prior year. So good revenue growth, good margin expansion. We brought on some new clients in the quarter associated with our current year selling season. So that was an update to where we had expected. So we did exceed expectations of our guidance that we had put out the quarter earlier, and we raised guidance for the full year in accordance with that.

Okay. You had a number of clients launching in 3Q, that bolstered your results a bit there. Is this a new normal? And why is the shift happening away from the typical 01/01 start date when most benefits start kicking in, in your mind?

I wouldn't characterize it as a new normal. The difference between every other year where clients launched earlier than the normal calendar year was that, this quarter, we had a couple of larger clients do that. That's not that normal. So I wouldn't say that it's something that we would plan for on a regular basis that we have meaningful logos and associated lives with them going live earlier. That said, it's always, in my opinion, a validation of the importance of the benefit to these companies to launch it earlier rather than waiting for their normal calendar year benefit year in terms of one of the most important features of it, which is to attract and retain employees in what is still a competitive job market.

And so, are you seeing that shift where they -- because of the current job market, they actually have to say, "Hey, let's go ahead and push this out? And is that embedded into your guidance, I guess?

What's embedded -- the number of clients that we're aware of, there's a couple of small clients that are going live in Q4, and they're part of the guidance, but the full quarter impact of those that already went live is embedded in that guidance. We don't anticipate, besides the few that I mentioned that are small, any other meaningful change in Q4 beyond what's already in the guidance. It is an important component, again, more around validation of the importance of the benefit in any given year than it is sort of the revenue contribution. We view the revenue contribution of anybody going live early has just a upside to sort of guidance that we put out and positive, but it's more about validation of how important they're viewing the benefits to go early with it.

Okay. You spoke about having a number of not-nows at the end of the selling season. Why was that? And what's the most common reason for the not-now?

Most of the time when clients are doing not-nows, they're generally not -- more prospects take more than a year to sort of buy the benefit. That's normal. That's not a phenomenon this year. That's normal every year. So this is just that cohort of employers that we're looking at the benefit and valuating it, but didn't choose to launch it in the next calendar year. This year is sort of no different that the challenge is always predicting which ones will do that and which ones we're buying the year and what -- how many lives of those -- each of those prospective clients represent and predicting sort of how much you're going to get into the next calendar year from a start perspective. But in general, this is a normal phenomenon. We had an overall growth in the pipeline that was positive. The not-nows were what they were, and they end up becoming future pipeline for entering the following sales year, which is also positive. It's the way we look at it every year. We evaluate it versus the pipeline that we had. For example, last year this time, entering 2022 selling season for '23. And so, it's -- there's no specific reason that they generally give. They're just either competing priorities relative to what they're doing or just evaluating the benefit for the first time and sort of looking to getting the understanding of it, but we'll pick it up again as they say to us in terms of valuation sort of in January. And usually, those not-nows become the early wins that we talk about in our early calls when we talk about sales progression each year.

Got you. Is there typically do the employers usually rollout the benefit design to some of their members for a short period? Or is there pilot stages that they run through and then eventually comes out to the entire employee base? Or is it all at ones just...

Yes, it's primarily all at ones. When they roll out -- when they adopt the benefit, they're adopting it for their entire employee base, every once in a while there are some subset of lives for various reasons that they won't include, but the majority or 100% of their covered lives, if they take the medical benefit, the Progyny benefit goes with it.

Got you. On the MENOPUR shortage, what happened with the manufacturer and what impact do you expect that will have on utilization and your results in Q4?

So in terms of what happened, one of the suppliers for MENOPUR changed their manufacturing process. The company Ferring, who's the parent company of MENOPUR decided in the abundance of caution to stop shipping the drug while they went through the changes in manufacturing from the supplier with the FDA, they didn't pull any of the drugs that were already out in the supply chain. And their review of their data says there's no safety and efficacy issues that they had a concern around. They -- my understanding is they're working with the FDA to get through the approval process. The impact of it is not on utilization because docs already have alternatives relative to utilizing MENOPUR. MENOPUR, as I understand, is used in 75% of the IVF cycles in the country, but 25% of them docs choose to use other combinations of drugs that are for fertility and don't utilize MENOPUR. So there is alternatives already around it. So there's going to be no impact relative to utilization. There will be a small impact to us in the short-term relative to top line revenue just based on the shift and mix of the drugs.

Understood. On inflation, are you seeing any pressure on your cost structure or in your clinical rates?

We're not of any note. We have our providers are generally on a 2-year cycle in terms of contracted period. And each quarter different providers come up for renewal. And so, far throughout the year, we haven't seen any real pressure to speak of note where we're worried about any sort of margin compression or anything else like that. There are always sort of individual clinics and/or a few clinics within a group network that needs to be addressed. But overall, there's no concern relative to that. Now, let's say, if that did happen, we do have the ability to also raise rates with our clients. And -- but we don't expect any real pressure based on what we've been seeing so far on renewals.

And from a company operating standpoint, we're a pretty low headcount level company, particularly as it relates to the amount of revenue that we generate. We target, from a cash compensation standpoint, to be about in that 75th percentile. And same thing when we've assessed merits and things like that as the year has gone on, trying to stay, if you will, as more of a leading employer than one behind. So, like every other company, we're certainly watching that closely, but no significant pressure to note as it relates to just the operations of the company with our own employees.

Okay. You mentioned raising the rates, is that only during the renewal cycle? Or can you do it interim? And are the contracts usually 1 year in nature?

Some of the contracts have restrictions around raising rates once a year, most don't. So we have the ability should we see a change in -- or pressures, inflationary pressures from the network to pivot and do that for most of the book of business during the year. And then some of it, we'd have to wait until the following year. So there'll be a short-term impact. But remember, if that was happening, it would happen vis-a-vis a portion of the network depending on when they renewed and depending on whether or not they were largely impactful. But again, based on what we've seen so far this year, that's not a concern of ours.

Okay. With the potential for a recession over the next year, have you seen clients taking any steps to reduce the fertility benefit?

It's a great question. So the answer is -- the short answer is no, and not only have existing clients, so far, we expect to end the year with near 100% retention. It's been our history since we went live in 2016. Second, relative to what the clients are offering each on a company-by-company basis, nobody has pulled back on the benefit relative to what they're offering the members. Third, 25% of clients have added to the benefit in some form, some more meaningful relative to financial impact. So they may be added the pharmacy product that they didn't have it, maybe the added fertility preservation that they didn't have it, maybe they added another cycle to their true-cycle media, for example. But other things, too, they could add adopting service, they could add tissue storage, they could add tissue transfer, et cetera, so they're small things, but collectively across the company, not only did they not pull back, but 25% of clients added something vis-a-vis the benefit that they're offering to their members for next year.

Okay. And then as the utilization focused business, how do you think about the impact of headcount reductions within your client base for '23?

Yes. So far, based on public announcements, if we look at, and we certainly look at and track our largest clients, but also based on conversations we're having with them, we don't see any risk around our member base from a lives perspective, from existing clients going down. We're also not planning for any growth -- organic growth, where we generally have seen organic growth in the past from our existing clients, nothing super material, but a contributor. And so, we're not planning for that either. We think, to the extent that nobody has announced certain things if they're thinking about any sort of reduction will be offset by those that have already announced that are -- some of which are larger clients that although they're going to slow their rate of growth, they still plan to grow. So we think on balance, we're planning for a flat year relative to lives under management from the existing base.

Okay. And then what accounts for the sequential step down in margins from Q3 to Q4 in your guide?

Yes. So one of the things we also talked about, which we can get -- we talked about it a little bit a couple of minutes ago, is around MENOPUR and the non-availability of that. It does have a bit of an outsized impact on adjusted EBITDA and gross margins just because of the relative contribution of the 2 different drugs, MENOPUR, of course, not being available in the replacements that Pete was talking about. So it's a little bit more of an outsized impact than you would normally see through gross margin drop through. We also, each fourth quarter are beginning to build our staff ahead of the launch of -- mainly all of our new clients on January 1. We obviously have launched some of them already here through Q3. Some of that hiring happened where it maybe typically happens across Q3 and Q4, happened a little bit more towards the beginning of Q4. So we'll see more of a full quarter impact of those, again, in advance of next year's revenue. And then we also had a little bit of expense timing shift from Q3 to Q4, nothing sort of particular to call out, but we did have a particularly strong Q3 from that perspective. And some of that will come back in Q4. And that's effectively all baked into what our guidance is showing.

Okay. When you think about the selling season in prior years today, what's really changed in your mind? And what was the concern then? And kind of how has it evolved as you move forward as a company?

So let me talk about what didn't change that's positive, right? So that's important. The number of clients that took the benefit as a percent was roughly 50-50 of clients that had a benefit before and switched to Progyny versus 50% that didn't have any benefit at all. That's consistent with last year's percentage. Really important if you think about this macroeconomic environment that we're in, that many companies still are choosing to add the benefit when they didn't have the benefit before. The -- what they're offering relative to what clients generally offer in their first year in terms of number of cycles in terms of whether or not they're going to offer pharmacy in terms of whether or not they offer fertility preservation and all the other details of sort of the benefit, that didn't go down in any noticeable way relative to mix of what they're offering. So there isn't conservatism relative to -- let me offer something and start but less than what we've seen in the past, that's really positive. Relative to positive trends, the number of industries we now have clients in will be 40. We were 30 in 2022. So we're expanding into new industries. We've talked about some of them where we have our first automaker. We have our first in hospitality. We literally have our first sports team, et cetera. There's a handful of new industries that we've expanded into, that's really positive. So overall, there's no noticeable negative trend from a sales season perspective. Things were generally positive, and I think it's demonstrated in the sales results, but also the details of those results.

Okay. And when we think about the comparison between Progyny, what Progyny brings to the table versus other vendors or the insurers themselves? What in your mind is -- what are you doing so much better than your competitors or the insurance companies themselves?

Sure. We are -- whether it's the competitors or the insurance companies, right? We are the only point solution out there that has a direct contracted network of clinicians that cover nationally from a geo access perspective and conserve nationally any company in the country. We have a collaborative relationship with that network where we both contract, but otherwise just collaboratively get bidirectional data going back and forth, but data from the EMR so that we can monitor and manage and ensure compliance around best practices, which is what yields our biggest part of our value proposition, which is favorable outcomes that we've been performing and improving on since our first year in market, which was 2016, favorable outcomes versus national averages. If you look at the -- for those who may not know, every cycle in this country, the clinics report outcomes to the CDC and they all report it publicly once a year. And national averages have not been improving in the U.S., but ours continue to improve even as we grow in scale and size. All of that's really important vis-a-vis either the carriers, who -- not that they couldn't be smart enough and do it if they wanted to, but aren't focusing on it relative to an area that they're focused on. They're not approaching fertility in a different way that they do the rest of the conditions in healthcare that they manage. Their model doesn't incent them the sort of change how they do fertility versus anything else. And so, they haven't been investing in sort of making the change that we can see, which is why national averages, which is effectively the carriers haven't been improving. And then vis-a-vis the competitors, they all have different models that are trying to do different things and catch the wave of demand in the fertility space, whether they're a reimbursement model, or just a negotiated rate from some clinics or whether they're a model that is sort of a combination of clinic-owned and try and be a benefit manager, which, in my opinion, creates a conflict of interest relative to competing with the most important part of the solution, which is the providers in your network. But either way, nobody has sort of the solution that we have relative to scale and improving capabilities, improving success year after year since the first year in market in 2016.

Okay. And as we think about the carved in versus carved out, it sounds like your customers largely have some form of fertility benefit via their carrier relationship. So how does that process go about where you're effectively trying to displace the carriers benefit design with your own, obviously? So how does that go?

Well, it's -- your question is accurate relative to one important piece. So they have some form of coverage. That some form of coverage generally isn't the comprehensive coverage. As a result, there's a lot of inefficiency in company spend already with that sort of design. So when we have the opportunity to talk to prospective clients and educate them on what the impact of a Progyny program would be vis-a-vis their current offering and their current spend, we're able to demonstrate that there's cost efficiency under our model. Again, we talked about the outcomes. We have a 25% higher live birth rate than national averages. That means, on a very expensive treatment of fertility, both on the medical and Rx side, you have to try 25% the last time to get a baby, right? That's what that means. We have a much higher singleton rate and a much higher lower multiples rate. That means you're creating a much higher rate of healthy pregnancies by definition, that don't have the risk of premature babies ending up in a NICU, where there's significant downstream cost. NICU babies are affectionately referred to by benefit managers and others in the industry is $1 million babies for a reason. It's very expensive to be in a NICU, that is the most expensive hospital bed in the hospital. So once we are able to demonstrate and educate prospective clients and the difference between a truly managed benefit versus some of the current carrier designs, we've been winning clients in terms of carving out. Throughout our history, we won more clients up until last year and this year where it was roughly 2/3 carved out from somebody else who had it already, 1/3, no benefit at all. That's been our history of growth. The last 2 years, it's been 50-50. In absolute numbers, the number of carve-outs are still growing, but the absolute is -- but the percentage is shifting overall -- based on the overall demand and understanding and meeting the benefit for your employers -- employees, sorry.

Okay. I mean, there's always a concern that a large insurer can try and enhance their benefit design to stem the loss that -- stem the loss of that particular benefit that you're bringing in. We've heard consistently that the insurers are hearing from their employees or their employers or their clients rather that they want to consolidate a move away from point solutions. Do you see this kind of happening in the market where they're starting to try to enhance their benefits and really focusing on that? And then how do you think about this competitive dynamic?

Over the years, we've seen some adjustments to plan designs that are simple in nature versus what we do, where there may be they used to have a lot more 4-step therapy in terms of requiring 3 or 6 IUIs before you can try IVF, for example, on the plan design and other sort of really small tweaks, but nothing of any substance relative to change in approach around managing the benefit and working collaboratively with the clinicians like we do that we've seen. We've also seen some efforts over the years around adding some more marketing around what they're doing and trying to position themselves as more of a fertility solution. But again, we haven't seen any real substantial change relative to the approach in terms of how they manage the benefit. And then this past year, the first year, we haven't noticed any of the carriers do anything different. So this was sort of the first year in all time where none of the larger carriers, at least that we've been in a process with where we've heard somebody trying to do something different, whether it's marketing or tweaking their plan design in some way. So yes, they could, at some point, make that decision to do that. The current ASO model, again, doesn't incent them to do that. So they would have to either take a loss or charge differently for fertility vis-a-vis everything else that they cover to start competing because it does take some effort. And even if they do it, they would all have to do it to really impact us, right, not just any of them individually. And also, we have a 7-year head start in terms of what we've built from an infrastructure perspective, systems and data perspective, that helps drive the success that we have. And so, either way, vis-a-vis antibody, we have a 7-year head start, which is why we continue to be the leader in this space.

Yes. I just want to emphasize a point that Pete just made and kind of reacting to your question, sort of I think the theory of the presumption is, is that, they would try to do something to stem the leakage or I think you said. But the reality is there isn't leakage. They're still getting paid the same ASO value, whether they're covering it or they're not covering it, and that's what Pete said. There's no financial incentive to put the investments behind something that they're not suffering from.

It's a good point. They don't charge any more or less if they -- if fertility is part of the offering. So it's a really good point.

Okay. That makes sense. On the idea of the pre- versus post-tax benefit design, you guys have talked about this before, I believe. How critical of a differentiator is this to the actual benefit design for Progyny specifically?

What's really critical, if you think about it, right, being integrated with the carrier under the overall medical plan where your plan design and all your member responsibility, co-pays, deductibles, out-of-pocket maxes, et cetera, are part of the overall medical plan is really important. When you lose that you don't have -- you're a post-tax benefit, employees get either a surprise or get told ahead of time, either way, it's not good news that if they use the benefit, it's going to show up in their W2, that's not positive. So it's a pretty critical component of design overall that you're -- although you're carved out, you're part of the overall medical plan from a member responsibility perspective so that you can still preserve the pretax component.

Okay. We somewhat touched on this earlier. But as we think of the customer mix in the different verticals, you've started more in the tech landscape and expanded to more verticals. Is there a difference in the sales process? And is there a difference in the receptivity for benefit design between verticals?

The receptivity, there's only a difference relative to certain industries tend to be more forward thinking, if you will, of first adopters and other industries tend to be later adopters. And so, we've seen that in our space. Relative to the sales process, it's company by company relative to what they're focused on. Some companies are focused on ROI. Some companies are focused on member experience. Some companies are focused on what I talked about before, which is premature babies and NICU babies in avoiding that. And so, it all depends on -- some companies are focused on DEI and whether or not you have an all-inclusive benefit. And so, it all depends on sort of what the pain points are for those prospective clients. You tailor your sales process around it. Sometimes, certain industries sort of think alike relative to what that pain point is, most of the time, it's unique to the company.

Okay. Kind of lodging on to the vertical concept and just that you were more exposed to tech. We've obviously heard a lot of noise on what's going on in tech and the layoffs that are happening. How much exposure do you have to that segment of market? Is it 50% of the client base, 60%? I'm just curious how that shakes out.

No, no. It's nowhere near 50% overall. But again, the -- for us and the reason why we continue to, not expect any decline in the overall base, not just the tech lines is our specific clients relative to their comments, the strongest comments we heard were from Meta publicly, the ones that they made. But nonetheless, even they say with their hiring freeze that they still expect to be generally flat next year. The other comments that we've heard are generally slowdown in growth, but not pausing or stopping in hiring. So we're not concerned overall that around the exposure. Yes, some of our largest clients from the start were tech. But that concentration of that industry vis-a-vis other industries continues to go down each year, and will go down again next year, considering the lives that we have.

Okay. As you think about the overall future of the company, some of your competitors are bringing to bear the benefit design in owning the clinics, right? We talked about that earlier. How do you think about this dynamic and idea of owning the clinic versus not owning? You talked about there's a conflict of interest in it. Any further to add to that?

No, that's pretty much the issue. If you are going to have a collaborative relationship with -- and they're an important component to you delivering the value to your clients and to your members that you need to deliver, you can't be in the competitive situation with them also. So you can't be opening clinics where they have clinics and expect them to be in the network and then look to take advantage of your ability in your position to be able to steer members in one direction or another, the clinics understand that. It's not nuanced on them. They get it. And so, they're not going to be that willing to jump in. If we made that decision way before anybody came to market with a model that does both own clinics and is trying to be a benefit administrator. If we were -- if we thought differently about that decision, we're in a position, both financially and in relationships with our network that we can start acquiring clinics. If we thought that, that was the right answer, we don't think that's the right answer.

Okay. And then last question here in the last minute here. How do you see the business evolving on a go-forward basis? And do you see other areas where you could or should expand to? How do you see that evolving?

Well, we see the evolution both within the space, whatever else we can do, we stood up male fertility as an extension to the offering. It will be live in 2023, as an example. To the extent that there's geographic expansion opportunities, we stood up Canada this year, and we'll start to sell in market next year. That's another example. But we also see other adjacencies in women's health as opportunities that we're looking at and we'll continue to look at whether it's squarely within expanding in reproductive health, whether it's other women's health categories, we think that's a good adjacency for us to look at.

Okay. Great. With that, we're just about out of time. So I'd like to thank Progyny, Pete and Mark for joining us today. And up next, we have Alignment Healthcare.

Thank you for the opportunity.

Thank you.

Thanks.