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

Good morning, everyone. Welcome to the JPMorgan Healthcare Conference. My name is Anne Samuel, and I am the Healthcare Technology and Distribution Analyst here at JPMorgan. We are thrilled to have Progyny with us this morning. CEO, Peter Anevski is going to do a presentation. And then afterwards, we'll do Q&A with the team. If you have a question, please feel free to raise your hand. Someone will bring you a mic. I'm sure there's lots to talk about. So with that, let me turn it over to Pete.

Okay. Thank you so much, Anne. Thanks, everybody, for joining. Michael Sturmer, our President; and Mark Livingston, our CFO, are here with me. And after the presentation, we'll do Q&A. We're happy to be here. This is a very exciting time for Progyny, and we appreciate the opportunity to share our thoughts. We'll begin. We're going to pause here so you can take note of the caution regarding forward-looking statements and non-GAAP financial measures we may discuss today. For anyone that might be new to our story, Progyny was created to solve very real problems with fertility benefits offered through traditional health plans. They are our largest competition today and the primary option for employers prior to us launching in 2016. We're a mission-driven company seeking to make anyone dreams of parenthood come true through healthy, timely and supportive family building journeys. And we've achieved early success growing revenue at an 80-plus percent compound annual growth rate over the past 7 years, and we're proud of that. We're able to achieve this by pioneering value-based care and family building solutions. And we've implemented a data-driven approach to plan design and benefit management. And from day 1, we focused on providing care that's both equitable and comprehensive. And so our benefit is available to everyone, including the LGBTQ plus population and single parents. And for the past 7 years and through today, we're the only family building solution, publishing outcomes for every one of our members and for every treatment that they go through. This gives our clients and you all an unprecedented level of transparency into the efficacy of our program. We've also established a unique and unparalleled level of collaboration with our provider network. This is in contrast to the relationships that you generally see that are antagonistic between providers and health plans across the U.S. The fertility journey, if you don't know, is complicated and very specific to the individual going through treatment. And fertility patients typically haven't had any experience with going through this part of health care. So what we do is we provide an extraordinary level of education and emotional support through dedicated patient care advocates to help make the patient's journey as easy as possible because it's a difficult one. As a result of our focus on the quality of care, Progyny is driving a better patient experience and more effective spend for our clients, the plan sponsors. We're also producing tangible improvements in the metrics driving our clients' business through more efficient recruitment, higher retention and better employee productivity. And that's important today. Now let's take a deeper dive into our rapid growth. We went live in 2016 with just 5 clients and 110,000 covered lives. And now including this past selling season, our strongest ever, with 105 new client commitments, half of which hadn't offered fertility benefit before, we now have over 370 clients with 5.4 million covered lives. And even with a 50x increase in covered lives since 2016, we're only mid-single-digit percent penetrated against our initial target market of large self-insured employers. In other words, early innings. We started in just 2 industries concentrated on the West Coast. And today, we're in over 40 industries with clients and covered lives throughout the United States, and we'll get into that later. This growth reflects the strong demand for family building benefits, a demand that's persisted throughout varying macroeconomic cycles, including the global pandemic that we all just went through. And our unparalleled solution, achieving 7 consecutive years of superior clinical results across hundreds of thousands of patient journeys has earned us an NPS score of plus 81. We've achieved a near 100% client retention rate every year, and we've never had one client, not one from Progyny, go back to their carrier. And even in the face of a more challenging macroeconomic environment, none of our existing clients reduced their benefit for 2023. And in fact, more than 25% of our clients increased their program with us in some way. And remember, generally, they're making these decisions in the third or fourth quarter, so employers certainly were aware of the current economy when they made these decisions and chose to prioritize this benefit. When you consider the record results from the selling season, again, with half our newest clients adding fertility for the first time and many existing clients adding to the benefit with none reducing it, plus the near 100% client retention rate, this validates in my opinion, a couple of things, both resilience of family building benefits even in this economy and our differentiation when compared to other alternatives. It's not surprising when you consider those plans attempt to control cost of care by restricting utilization with dollar maximums, step therapies, prior offs and treatment exclusions. Their approach results in inferior live birth rates and high-cost, high-risk pregnancies and multiple births, which negatively impact employers. The good news in all of this is that employer adoption does continue to grow. So what's driving the demand? It's increasing prevalence and societal macro trends. Let's unpack that. The CDC reports nearly 1 in 5 women of child-bearing age are unable to conceive. On top of that, 26% of pregnant women are having difficulty carrying to term. Add to that, male factor infertility, which accounts for 1/3 of infertility amongst heterosexual couples, black women who are twice as likely to suffer from infertility but less likely to have coverage, and lastly, same sex couples or single patents who will require treatment to achieve success. Now without coverage, it's expensive for everyone and for many unaffordable. So it's no wonder that family building benefits are critically important to employees. How important? 46% of employees would forgo higher pay for generous health benefits. Millennials, the largest population in the workforce, prioritize family building benefits when they decide where to work. And 45% of workers look for a company not surprisingly, that offers fertility benefits and 80% of employees choose the company, again, not surprisingly, that prioritizes diversity, equity and inclusion. These things are really important to people, and our solution addresses all of them plus much more. And even though more and more companies are recognizing the need to offer this benefit in order to attract and retain the best talent, the market is still significantly underserved with only less than half of our employers today, providing even some type of coverage for family building. When companies decide to add or improve their family building program, employers have alternatives, including their carriers, but here's how we're differentiated. Progyny redefines fertility benefit management by leading with the member experience, having collaborative partnerships with the best providers and managing every aspect of a comprehensive solution. This produces, again, a better member experience and delivers superior results at scale every year. We achieve this starting with our plan design. It's focused on optimizing treatment success, and it's uniquely flexible for the complicated journey that I mentioned for each member. And members have unlimited access to a dedicated patient care advocate that provides both the education and emotional support necessary to empower decision-making that drives those outcomes, which means a healthier pregnancy. Next, we work with our provider network collaboratively to positively influence the standard of care that they provide. We contract directly with them to receive comprehensive reporting on every project patient that they treat. This uniquely allows us to actively manage and monitor what's happening in our network for adherence to best practices and ensures that our members truly receive the best possible care. Lastly, we provide our doctors with the latest tools and technologies, which are included in our treatment bundles also designed to achieve optimal care. And although there are alternatives to Progyny, we're the only solution with all of these core competencies and have a proven track record of delivering value through these clinical results. Value-based care remains a goal for many in health care. For us, it's a reality. Progyny is actually delivering on that promise. And we've continued to deliver on that promise each and every year. So I keep saying we have better results. What am I comparing to? Well, the clinics in the U.S. are required by law to report the results for all our cycles annually to the CDC. And when we compare the national averages reported to the CDC, Progyny members see significantly higher pregnancy success, experience substantially fewer miscarriages, which are very difficult, by the way, for the person to go through and have healthier pregnancies overall. You can see how our program translates into measurably better results as compared to the national averages reported. And remember, the national averages are essentially akin to the results of the carrier plans. For members, this means our patients get pregnant faster but more importantly, avoid the strain of unnecessary rounds of treatment. They're already going through a very difficult time. And when they get pregnant, it's primarily singletons. This reduces the rate of high-risk pregnancies, extended NICU stays and chronic care conditions that often result from multiple births. When you think about it, avoiding unnecessary treatments and reducing costly high-risk presences saves money. The typical Progyny client will realize 25% to 30% savings compared to a carrier program. This doesn't even include the savings associated with improved recruitment and retention, higher productivity and a lower absenteeism, which we are also impacting significantly for our clients. Since our inception, national averages have been relatively consistent and not improving. This demonstrates, in my opinion, either a lack of focus or structural limitations in their approach, which is why they haven't improved. However, our program continues to improve and significantly outperform year after year. And in fact, we've been and still are the only fertility solution in the market that's been measuring and publishing these outcomes. We've taken an additional step this year by having an independent third-party actuarial firm issue a report which validated our reporting, and that reports available. We believe companies should expect nothing less from their family building benefits provider since they're investing in this area. And this is just another example that further advances us as the industry leader in fertility solutions. Now let's switch to the overall trend in health care costs. Over the past decade, employers in the U.S. have grown used to single-digit increases in health care costs every year. 2023 will be no different. Medical costs are expected to go up 5% to 8% according to Mercer's recent survey, not with Progyny though. We provide additional value by helping our clients mitigate the effects of medical cost inflation and we've been doing that every year. In 2023, we expect to hold client rates either flat or slightly down even in this economy across our network. Well, how do we do that. We continue to rapidly penetrate the market. For example, just in the last 2 years, we've more than doubled the covered lives we provide for our practices. This gives them significant incremental patient volume they would otherwise not see, which on a marginal cost basis is very appealing. So that's why we're able to continue to garner favorable rates from that. And that's how we're able to keep medical costs in check for our clients. While cost control is critical, we're even more differentiated to the other competing models in family building in other ways. We believe the effectiveness of a family building benefit can be measured in 2 ways, depth of management, and access to care. For management, models at the high-end, us, extensively coordinate collaboratively with the provider and have contractually committed data sharing. This enables network monitoring for adherence and outcomes management again for every patient. Conversely models at the low-end, not us, do very little to influence patient care, because they are not in a position to do it honestly. And with access to care, models at the high-end, again us, have provider networks with broad geographic reach, significant choice, including the most sought-after clinics and comprehensive coverage. While models at the low-end have narrow networks or rented networks and I don't know why anybody honestly pays extra for somebody else's network and no relationships and plan designs that create a scarcity mentality, forcing patients into making compromises in their care. When you plot both of these factors, it helps to reveal the differences in the competitive landscape. Take a look at the models in the lower-left quadrant that are typically reliant on out-of-network practices and single-case agreements. There is no patient-specific data collection, no monitoring and reporting. The result is really low benefit management across a narrow network with no measurement or management or provider performance and no ability to impact outcomes. In contrast, we're in the upper-right where we get data sharing into our contracts for all member journeys, and this allows for a comprehensive score carding that we do at our clinics, plus the ability to favorably impact success rate, which results in the most efficient use of healthcare spend for our clients. We apply this framework to the various models in family building. This reveals how differentiated Progyny really is. The carriers largely sit in the middle of these quadrants as their programs achieve some of the goals of access and care management. But they're ultimately restrained because their approach includes dollar maximums and one-size-fits-all utilization management. And based on the national averages, we see the limits with this approach. The reimbursement programs and the own clinic hybrid models with rented networks has significant limitations as well. Their plan designs incorporate many of the worst features of a carrier plan without any of the corresponding advantages. Let's switch now to our ever-increasing penetration across industries. We're definitely benefiting from the network effect. Since launching our solution in just 2 industries, as I mentioned, we're now in over 40 and the clients that we've added this past year represent the broadest and most diverse cohort in our history. This graphic shows the year we won our initial clients within each of the 40 plus industries. And as you can see, we penetrated new verticals at a steady and consistent pace throughout our existence. Our clients come from both white and blue-collar industries, all the new economy companies. And that's what demonstrates that family building is a human need and truly universal. New industries are important to us in terms of both diversification as well as helping to lay the groundwork for future growth, because there is also a network effect within industries. Companies tend to compete for the same pool of talent and employers generally know who the leader in their industry is and use those as benchmarks. Some employers generally won't typically be the first to add a new benefit like fertility. But once they see the leader in their industry is separating themselves by adding coverage, they're going to respond soon by adding the benefit in order to re-establish parity and remain competitive. You see here a few examples of how this pattern has played out for us in different industries. On each occasion, once we won our initial client, we've been able to expand in that industry every year. Diversification is important both for our growth, but also reducing our concentration of risk within any one area. We continue to grow in tech. That said, since our IPO in 2019, approximately 90% of the aggregate members that we've added through new sales have come from outside of tech. And although tech remains one of our largest verticals overall, our concentration in any industry, including tech is less than 20% of our member base. Why do I mention this? Well, we know this is of interest to people since we've been hearing script of headlines regarding layoffs in tech. The reality is that the impact of these layoffs collectively on our member base has been negligible. And we believe it's going to be more than offset by the growth in other industries that are continuing to hire, such as healthcare, hospitality, and services as evidenced by the most recent jobs report last week. Here we see just a small sample of the more than 370 employers that we work with today. Our clients are industry leaders, with many of them routinely listed as Best Workplaces for Women or LGBTQ Plus. Many of these companies are driving the U.S. economy and are amongst the most sophisticated buyers who do the most comprehensive reviews when they make their benefit decisions. We believe the caliber of this group emphasizes how Progyny has become the brand of choice for family building benefits. Finally, on the last slide, our results demonstrate the scale we've achieved, the scalable infrastructure that we've built and the inherent operating leverage within our model. Starting on the left, you can see the pace of our topline growth. At the high-end of our guidance, we're expecting 57% growth in 2022 compared to 2021, which is 45%. We also achieved profitability at a very early stage. And even with our continued investment in our business every year, we've been continually expanding our margins. We've also been highly efficient from a capital perspective, generating significant positive operating cash flow. For example, we expect approximately $50 million in just the fourth quarter of this year alone, which will yield a 60 plus percent conversion of operating cash flow to adjusted EBITDA, at the high end of our guidance for the full year. This is an improvement over last year, which was 38% conversion. So in conclusion, today's presentation highlighted several key themes that we think are important to our investors. Let me summarize. There are multiple societal macro trends fueling the need for family building solutions. And we don't see any signs of that whatsoever slowing down. The growing need and demand amongst employees has impacted the pace at which we're adding new clients and lives across industries. This plus our near 100% retention rate, demonstrates the resiliency of fertility and family building and the growing appeal amongst employers to offer this very important benefit. In fact, looking at just the last month or so, the number of conversations we're already having with prospective clients is really encouraging and reinforces that employers even in this economy are continuing to prioritize this area of benefits. Our comprehensive approach uniquely positions us to continue to deliver superior results and value versus all available alternatives. And our financial results underscore both the strength of our business model as well as our continued ability to execute at-scale. In 2023, we continue to invest in our current offering. We'll be rolling out enhancements around preconception and male infertility services. We'll also be making investments within maternity and women's health, in areas where we believe we can make a difference. We are in the strongest competitive position that we've ever been and we're incredibly excited for what our future holds. We look forward to providing you with insight into our expectations for 2023 on our earnings call next month. With that, Michael and Mark and myself will take some Q&A. Thank you.

Thanks everyone. Just want to remind you, if you have a question, please raise your hand and we'll have somebody bring you a mic. I'm going to kick it off with the first question. But first I want to thank you for providing that incremental color on your customer base. I think that was really, really helpful for everyone. It's been a question that we've been getting a lot and I think it will really help people understand how much you've diversified your business since the time of the IPO. But maybe just kind starting really high level. When we look at the backdrop for fertility and the opportunity for you to penetrate the market, 50% of the market is untapped at this point. Can you discuss some of the factors that are causing employers to wake up and realize that this is an important benefit that they really should have for their employees?

Sure. It's some of the stuff that I mentioned in the presentation. The question is, discuss some of the factors that continue to create awareness around why this is a benefit that's become really a need to have, not a nice to have. And the answer really is, the trend of couples and people choosing to have babies later and later in life is driving a very real medical need in order for people to be able to achieve their family building journey and dreams, right? And so at the end of the day that reality and its increasing prevalence, again not my data, the CDC's data, plus alternative path to parenthood growing more and more common all drives the need and employees are squarely focused on these benefit. If you look at social media, you see how many employees talk about the benefits that are being rolled-out, talk about the deficiency in those benefits that will be rolled out by others not with Progyny and are really squarely focused on the details of what they're getting, because it is really important to them.

Maybe another question just as we're thinking about macro and kind of moving into a potential recession. I think a lot of people look at birth rates. I think that that's the right metric to look at instead of understanding maybe the urgency of an IVF patient and how they're making maybe different decisions than everyone else. So can you talk about that, are people going to make different decisions heading into a recession? I would think if they have a benefit, they would kind of continue to plan for a bit. How are you thinking about that?

Yes. So the question is, is the current economy going to impact people's decisions to pursue treatment, because they're dealing with other inflationary concerns? So in the past year -- inflation isn't new, it didn't come this month. You've been dealing with all year long, hearing about all year long. That was probably one of the most common questions in addition to, are we going to sell the business, where we ended up with a record sales year. Most common question is, are people going to not pursue treatment because they had member responsibility, because it costs money to have a baby. The answer for us was, no, in fact, we raised guidance 3 times and that guidance range is a function of utilization increase, not decrease. So there is no evidence of that. We don't see any evidence of that and I think the reality is, as I said jokingly to somebody last night, people aren't going to forgo their family building journey, understanding their likelihood of success goes down dramatically each year just because of the cost of milk, to be honest. They want to build the family, and they're going to do it.

Maybe we could just kind of talk about in past recessions, particularly 2009 and 2001. Cycles, first-off, rebounded very quickly once the economy rebounded. But I think it's also important to talk about how the fertility market is different from back then, a lot more cash pay? So what proportion of the market may be back then was cash pay versus now and how could it potentially look different this time?

Yes. So the question is comparison to the financial crisis in '08 and '09 versus today's economy. It's a great comparison for one reason. Back then, fertility was primarily paid by people themselves. There was very, very little coverage. And even in that time, which is much more significant and impactful to today from an economic perspective, the industry still grew, grew slower, but it still grew. Unlike today where you do have coverage and have increasing coverage, I think that's probably the biggest indicator that fertility as an industry is resilient and will be resilient through this economy.

And the only thing I'd add to that too is that in the prior recessionary period, you had much higher unemployment rates, which is -- this is obviously a very different type of situation. So to the extent that you maintain that very high employment rate, the dynamic of having coverage and high employment is very different.

Maybe just one more macro from me before I open it up to the room. You embedded flat organic growth in your 5.4 million lives target for next year. Can you talk about how much contribution you've had historically from organic growth and how that might be a little bit different this year?

Sure. In the past each year, when you look at the lives we entered the year, organic growth has contributed something in the 100,000 to 200,000 lives a year and every year varies a little bit based on what's going on in those individual companies. So it's not material. The material part of our growth, the driver is us adding new logos and upsells and the organic growth is the smallest piece.

Can raise your hand if you have a question in the room? Okay, great.

I have a question in the back. I'm hiding behind the wall. 2-parter. So the first one is, I think you are clearly very outcomes driven. Could you just talk about when you maybe make the decision to eliminate a provider from the network, like do you give them some of remediation period? Is that something that's instantaneous and how often has that happened? And the second part is just the agreements you have with these clinics. It seems like you might agree on grades individually with these clinics, but then you offer bundled pricing to your clients. I guess on what percent of the base might you be losing money, like is that less than 1% of your member base, like if it's an overly complicated procedure that maybe your clients are paying you X dollars for, but the clinics are going to charge you X plus maybe $20,000?

So I'll do the first question first and then Anne will help me with the second one. I couldn't make it out. So the first question is, how do we monitor the network? And when the network isn't performing relative to adhering to best practices and driving good outcomes, how do we remediate? The answer is, all of our clinics in our network get quarterly clinic scorecards. Our provider account management team meet with them and goes through those results. And to the extent that there is remediation necessary of anytime, we do Boardman probationary periods and to the extent that they don't improve, they get excluded from the network. It's sort of as simple as that. What was the next question?

I think the second question was a little bit, because you talked about value-based care, what is the risk if a patient procedure is more expensive than what the employer paid you for, I think was the question.

That our risk from a margin perspective, that doesn't occur on a significant frequent basis in terms of surprises like that. Our margin has been relatively steady and improving, if you look at our gross margins when we report, our overall margins et cetera. So, yes, that is our risk, that's the model and that's how it's designed, but it's not a substantial risk for us or hasn't proven to be.

And I think just to clarify it from a rate card perspective. So we contract with the providers for specific treatments at specific locations, particular rate. And we also charge our clients in the same way. So it's a particular provider for a particular treatment costs. So it isn't that we are broadly charging one rate across the country for a particular service and, if you will, managing the margin up and down across the country. It's a little bit more tightly designed than that.

We had a question in the front of the room.

So if you compare the number of babies born through IVF in U.S., it's less than 2%, which is about approximately 50% of the average in other markets in the world on that side. How do you think that Progyny will support that growth going-forward? And what would you think that the number of IVF babies born will be 5 years from now in U.S.?