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

All right. Thank you, everyone, for joining, and thank you to the Progyny team for coming to our conference. As you guys know, I'm Stephanie Davis, I cover the health tech sector here at Barclays. We have the CEO of Progyny, Pete Anevski; as well as Michael Sturmer, the President. Thank you guys for coming.

Thank you for having us.

Thank you, Stephanie.

So I've got a start on the guidance question. [indiscernible] But you just published your guidance like 2 weeks ago at that. And there was a lot of concern about the implied [indiscernible] and the step-down. Can you walk us through that and what mix means?

Sure. So we guided both the quarter and the full year. And for the reasons that you said, we called out that there was an aberration in scheduled treatments in the first half of the quarter, where there was -- if you look at sort of overall, our cycles, utilization was -- we'll start with that, utilization is consistent with prior year. Prior year was up over the year before that. So that's a positive, right? So demand is there. But in terms of the fertility journeys that people are going on, the treatments that they're doing are lower contributing revenue or cycles than what we would normally see. We call it aberration because when you look at longer periods of time versus the short period of time in the first half of the quarter, they have much more consistency every year, really since we've been in existence, of what people tend to end up doing. And the reason for that is that fertility is a disease like any other disease, and incidence and prevalence that's going to drive the journey is going to be the same, relatively speaking, populations [ origin of what ] we have. So a short period of time, that's going to impact the top line, we have an aberration, is what we called out. We're already seeing, in terms of what's scheduled for the back half of the quarter, the [ reversal ] back to normal, right? And so our expectation and guidance for the Q2 through 4 is back to normal utilization at mix than what we're seeing for the first half of the quarter that we quantified that we felt was important enough. Otherwise, as you said, the Q1 versus the full year, it wouldn't have made sense.

So explain it like I'm 5. Is this basically just more egg freezes than the full IVF journey?

That's a good example of it, right? So it's -- whether it's more egg freezes, whether it's more transfers versus full cycles, it's whatever those individual people need, but you have a statistical anomaly in a short period of time that the mix, if you will, of treatments for those people is different than what you would normally see through all the iterations.

We're going to get a little technical for a second, so I apologize [ if there's ] anyone in the audience. But there has been, I guess, greater research recently that doing a frozen embryo transfer is just as effective as a fresh embryo transfer. Is there any risk that maybe more folks are doing a frozen versus fresh transfer to give themselves a bit of a break after the whole retreatment process?

The short answer is no. So the consistency -- the reverting back to the [ mean ], if you will, in the back half of the quarter is -- suggests that the normal distribution that we normally see, percent of cycles that are fresh versus retrieval-only cycles versus egg-freezing circles versus transfer cycles, is getting that normal. There's no suggesting that we think that, that's going to be different. In terms of effectiveness, I'm [ not sure ] what those studies are. The reality is that it's simply whether you do a full cycle or is a fresh cycle, where you do the retrieval and transfer at the same time, versus you do a retrievable cycle and at a later date, you [indiscernible]. So in terms of effectiveness or efficacy of medical sense, there is no real difference there.

Exactly. And then, maybe this will be another helpful way of framing it, even if you were doing the retrieval and then a later frozen embryo transfer, how does the economics compare to that bundle of retrieval plus the frozen transfer versus the full end-to-end fresh transfer IVF?

The delta of the cost of doing a retrieval and then a transfer versus a fresh cycle is [ none ], right? So a little bit more because you...

It will be [ more subtle ] in terms of that.

It's little bit more because you do in 2 different cycles. But when I say a little bit, [ we view it ] a little bit. The reality is that the comparison is really close.

That's super helpful. We don't have this happened before. This is not the first time you've had a typical utilization. We have a hot girl summer happen, right? We've had this happen before the IPO. Can you talk us about -- a little bit more about how that's normalized and how quickly you see this happen or the function of the model?

Yes. When we saw it -- so you're referring to the summer '21, this is...

[indiscernible].

Say that again? Named by Stephanie, hot girl summer. The -- at that point, when we reported and guided and talked about it, we were only seeing a couple of weeks of reverting that to the norm. But we predicted the trend would go back to normal, and it did. And it happens so infrequently, like I said, in our history. It's probably happened 2 times, once we made public back in '21; before that, when we weren't. And then at this time now, that infrequent which is what makes it an aberration, right? And so you never know exactly why it happens when it happens. But based on history, you predict it.

And besides the 1Q mix issue utilization has been increasing for a while, right? How sustainable are those increases?

Well, if you look at 4 quarters of last year, right, utilization was up over the previous quarter in the year prior, right? Utilization is somewhere reported in -- when we announced the year-end results, is consistent in Q1 so far versus a year ago, is sustainable. I think the macro trend of people waiting later and later in life to have a baby, and therefore, higher percent of them needing to help them assist in [ production ] technologies, I think is going to support at least the consistent [indiscernible]. Whether or not it goes up or down, it's always basis points. It's been staying within a tight range. But it's going to be relatively consistent, I think, because the demand is still there because this [ time ], we'll try and continue.

The broader demographic trend, that suggests higher utilization, longer term. So why only they can [ flat ] utilization this year?

What we're seeing so far, so we're not going to guide something that we're not seeing. So to the extent that we're seeing consistent year-over-year utilization at that point in the quarter, there's no reason for us to predict an increasing utilization, which is, as we always got, based on the visibility we have at that time, whether it's when we do it at year-end for the full year, whether we do it every quarter after, we can only guide to what we're seeing. .

So should we think about utilization upside as more upside to your numbers because you're unlikely to ever want to guide to that? What would have to change for you to say, "You know what, we're going to bake in some utilization [ number ] there?"

We'd have to see higher utilization. So we don't -- certainly, it's no different than we don't ever guide to adding new clients that have started early, right? As an example -- even though it happens, right? We also don't guide to something that we're not seeing. We'd rather articulate the [ pieces ] of our guidance, and then people could sort of figure out and anticipate what they want to anticipate as opposed to us guessing at an improved utilization that we've not yet seen.

I think it's important to just address all conspiracy theories about your stock, how it's moved for the past year. Maybe let's talk about utilization in your new client cohorts versus the more tech-heavy client [ cohorts ] you have. Are they meaningfully different?

Every year, if you think about the trend in terms of new client acquisition, we've been adding more and more clients across industries as opposed to concentrating in clients early in our business that were disproportionately [ tapped ], right? As you do that, your overall utilization rate for that population each year that you add is lower than your blended utilization rate for the company. What happens over time though is each of those cohorts, when they come in, their utilization does increase over time, which is why the overall utilization rate still stays in that tight range, even when you're adding, now across 45 industries and clients versus sort of a higher proportion of [ tenant ], which tends to have a higher proportion of younger employees that are going to be in [ child birth ].

So on a like-for-like basis, you had to go for like a year 3, [ year 3 ] client of your original cohort versus your new. Is the utilization similar?

For the same client?

For -- no. For 2 different clients, but same year of having the benefits.

Well, there are definitely differences by a client in the same year because they're in different industries. And as a result, demographics of the population are different. And as a result, higher or lower proportion of population [indiscernible]. So that's always the biggest driver of utilization in any client. The overall cohorts, which is how we analyze it because the populations are big enough that we add every year, they're in a tight range, right? So the blended rate of utilization for the new cohort of clients that we had every year stays in a real tight range also. That's below the book business, but it comes up with [indiscernible]. That's what I was trying to tell you.

Is there any -- and this is -- this could be a tough question, forgive me. Is there any chance that you'll be a higher mix of things like cryopreservation with your tech clients because they are -- they do tend to skew a little bit younger as opposed to the full IVF?

The short answer is no. The people with the medical need and the individual people across the population are going to behave the same. The industry isn't trying something different. The difference by industry is more the overall utilization as a percent of that population. But what they do is they -- it became a need after that, and what they do goes back to the first part of the conversation, which is their incidence and prevalence of what they need on their fertility journey.

Super helpful. All right, hard question is over. Let's talk about your government [ lives ].

This is -- I'm going to give it to Mike.

So yes, we added our first government opportunity last year, which we were really excited about. There's the sort of first question when you're trying to get government businesses, do you do any government business? And so now we get to check yes and going forward on that one. But obviously, government business is different for a number of reasons, in particular that it is governed by how the -- how they benefit the structure to OEM. And so for this business, we did sort of modify our model for our client. And really, we're focused on, first sort of -- if you think about it, it's first phase. We're really doing case management and utilization management-type services for them basically, which is only a small portion of all the services that we [ deliver ]. And we really view it as an entry point, as I said before, a way to sort of start to work with [ government business ]. And if it goes the same way as the commercial book has, which is sort of benefits tend to increase over time, we would expect that the government business goes at the same way. And we would be in a good position, to the extent they do expand those services, to fulfill a broader need and more traditional [indiscernible].

Have you ever had a client that started with more of that IUI and [ benefit ] before?

Well, so their current benefit is a little bit -- is very unique, first of all. But their [ term ] benefit in unlimited IUI and then [indiscernible] coverage for what they call 3 cycles, the pharmacy coverage, which again is a unique way to describe that. And so that -- we really don't have any other client that has that kind of structure around it. And again, more traditionally, our clients run on full cycles, whether that's 1 cycle, 2 cycles, 3 cycles. But again, working with federal government, their structure is a little bit different and goes through, obviously, a few different evaluations.

So how do you make sure the financial profile wouldn't be [ valuably ] lower?

Well, in this case, because we're delivering different services for them, it does have a different financial profile, to your point. But again, that's why we really looked at this and added the investment, investment in sort of bringing on our government -- bringing on the first government clients, working with them as they are evaluating the success or not of their model and what gaps might exist. And then ideally being in a position to expand that down the road.

And there's more of a [ PMPM ], right?

No. It's -- this one is -- we think about it more as like case rate, if you want to think about it that way. So whether that's case management or utilization management, as someone comes in the program, we sort of charge on that basis. But again, the goal here is working with them and working with OPM that we look at what's happening in the commercial sector and create a more complete benefit offering over time.

What does that mean for the [ margin ] profile of that business that is more case rate versus the utilization?

Maybe you want to...

Yes. It's a higher-margin profile, but the overall revenue contribution is a lot smaller. So you're not going to really see a big change in overall margin. But if you look at that program by itself, it's a higher-margin pro forma because it's only a case rate from revenue perspective.

So it sounds like the hunting license is really the biggest part of this contract. Talk to me about the pipeline.

So our overall pipeline, obviously, early in the year. But as we talked about a couple of weeks ago, the pipeline has started off strong again. And again, early in the year, but we feel good about where pipe is versus prior years. We had a strong number of [ not nows ] coming out that we've talked about before. Those [ not nows ] tend to make up the bulk of the early part of the pipeline. And the sort of new business opportunities from a pipeline perspective really actually just started coming in now. So whether that's government business or our general commercial business, as we sit today, we feel good about where the pipeline is.

And for the government business, you need specialized sales folks that have done more federal business? Or is this something where anyone...

No, we've done those sort of vertical alignments before, but for the government business, we handle that through our health plan model or our health plan group. Again, they function in sort of similar ways.

So let's talk then about some new verticals, right? You were very tech-heavy in the beginning. You've diversified a lot. Our channel checks show that a lot more indices are starting to offer fertility benefits. Are there any specific verticals where you see kind of a pretty big opportunity in the near term?

The opportunity is huge for every vertical, right? If you think about it, the need for fertility in this country is no different than it is around the world. The utilization of [ reproductive ] technology is only 2-plus percent a year in the U.S. But in countries like Israel and Denmark, where we have broad coverage in a single payer system, it's 10%. The only difference is why it's 2%, not 10%? In the U.S. is expensive than we have coverage. You're exactly right, you're not going to get [ insurance ], basically people can't afford that [ loan ], right? So every industry is a huge opportunity because the penetration is still small across the board, no matter what industry you look at. So the opportunity is huge in every vertical and including the new TAM that we've been going after, which is the labor [ tap-only ] populations. But overall, there's no sort of one industry that we're looking at calling, "Oh, that's where the opportunity is." It's across the board.

So some of the pushback I get on your shares is, is this something that everyone adopted during the pandemic and now we're moving on from it. How would you counter that?

Just the way I'd just add, the reality is that if everybody had adopted it, it would be closer to 10%, and we're nowhere near it. And so what's happening -- when you hear about coverage, right, and the [indiscernible] results to the studies, they never break down the details of it because it gets full too complicated, right? The reality is this, even when companies cover a little bit, cover it or not cover it comprehensively, many of them, right, they tend to cover it more comprehensively with Progyny than they do overall. But either way, overall, even when there's some coverage, there's a lot more to go, even if those that are covered, there's still more companies not covering. And of the ones that are, they're covering a portion of it, they're not covering it fully. And so the trend that's continued for us and in general for the industry is that, over time, the same companies, same cohorts that you look at are covering more and more over time. We talked about upsells every year and what portion of our existing base expanded their benefit, and it's been 20% to 25% for the last, I don't know, 2, 3 years. And so that's the trend. The trend is more companies covering it at all. And then of those that are covering it...

Including carrier coverage, 50% not covering it.

Yes, over 50% not covering it. Of that 50%, you see that 2% [ behind ], right? So it's just -- it's math, where incidence and prevalence for the CDC in the U.S. is 1 in 5 couples are suffering from infertility. And that math was suggested to be closer to 20%, but not everybody ultimately does have a baby. But even -- nonetheless, it's only 2% because the coverage is still isn't there, but growing every year, which is why the number was [indiscernible]. Fertility industry itself has been growing at compounding annual growth rate of 10.5% a year overall. And that's why we break down just...

[indiscernible].

Healthy growth. Not there relative to the overall need, to your question. Has most companies have? The answer is absolutely not.

We talk about often Progyny as almost like an opposition to the carrier benefit, but you've also started partnering with [ payers ]. Could you talk about a little bit?

Yes. I would never call us an opposition to the carrier benefit. We're simply a benefit that has the ability to focus in one [ specific ] area. But the carriers are managing many diseases, right? So we could just do, I think, a better job versus what the carriers are doing for that reason, right?

[indiscernible] I much prefer your benefit.

Thank you. But by partnering with the carriers, absolutely, makes sense through that reason. End of the day, at some point, they have to decide sort of how much energy to run for anyone [indiscernible] versus sort of managing across the board. And where it makes sense, their partnering in that in the [indiscernible].

What do you think made [indiscernible] opt for a more comprehensive coverage? Like when I think about the carrier benefit, what I hated about it is that they offer minimal [ service ]. What would you make some changes if you want to?

I think it starts with the evaluation of the health system and does is -- did that system work. But what they -- what [ this year ] really saw, and these are the type of health plans that we're looking to partner with, is they went to the same place that we took [indiscernible] to, which is it's about the outcomes. And when you focus on the outcomes first and you look at all of those sort of hurdles, they call it, or minimal services that the health plans put out there, at the end of the day, if you're looking at what the end result is, we get to a successful result [indiscernible]. We get there with quality, and we get there with significantly lower [ fertility ] rates. And really, at the end of the day, that's what carriers want. Now, when a carrier looks and says how do we get to -- or looks at a health plan, looks and says how do we get there, oftentimes, they go to the things that have worked in other areas before, and that's sort of the -- [ one ] object [ EM-type ] models, where the constrained benefit structure model. We've shown that you can get to that same end result through a model that has actually more coverage, not less, but you're accelerating the path to success. And so this deal was really looked at that way [ based on our ] results in the market. We've won that with their clients and did a comprehensive sort of evaluation and came to a conclusion of that [indiscernible]. Now, I don't think you're going to see us partner with every health plan in the country because that is -- that requires a very specific orientation from the health plan. So you'll see us [ work ] here with them, but you have to have that [ concept ], which is there's a little bit [ different ] money for health plans for a lot of really good reasons, and they've had success in their model in other areas. But as you know and as we see all the time, fertility does operate differently for a number of different businesses.

Do you think as you have enough proof points from the [indiscernible] of the world that you'd be able to have more of an opportunity in the market in these larger brands?

For sure. I mean, just like seeing our employer model, when we break it to a new industry, it sometimes takes a bit of time. Health systems, you think might like to [indiscernible] you would have thought they would have been an early adopter, but more of a earlier adopter from industry perspective. But once we put some [ proof ], once we were able to get the first health system in and with the benefit, you did see a rapid sort of increase from other health systems. Health plans and partnerships are anywhere [indiscernible] any different in that realm. So certainly, the first one leads to the second, that leads to the third and so on down the road.

And we have time for about one question left. You guys, when you came out of the IPO, one of the biggest questions was uses of cash. And you talked about M&A. We're still waiting for the M&A. But assets are a lot cheaper now, too. Is that still on the roadmap?

Looking for opportunities, using our balance -- absolute [indiscernible]. But while we do that, in case that we haven't found an opportunity [indiscernible]. Whether it's value and [indiscernible], it's what those companies are doing. We haven't been sweeping. So we've been developing product, and we'll be best in that product. But to the extent that opportunities shows up, we'll absolutely [ utilize ] the balance sheet and take advantage of that.

When you look at adjacencies that you're going to do, what's your [indiscernible]?

Well -- go ahead.

It's the ones that you're seeing us actually being announced here, right? If you sort of go forward, it's more formalized preconception program, [indiscernible] postpartum and sort of the places that we've wanted in between that sort of spectrum that we'll continue to look for, but those are the most logical sort of adjacencies to [indiscernible].

Well, that's all the time we have. Thank you so much for coming.

Thanks a lot.