Description

With tryptophan running through our veins and the COVID hangover about to end (hopefully) we think its time to get down to business. Queue Flight of the Conchords song, “Business Time”: https://www.youtube.com/watch?v=AqZcYPEszN8

Only problem is global fertility (and particularly domestic fertility rates) rates have been on a perpetual decline (there are a number of reasons for this we can get into later) and this is a core benefit that employers are looking for to help differentiate them in the highly competitive talent battle.  How does one solve this issue?  Enter Progyny (PGNY).

PGNY specializes in benefits for fertility. Fertility is a high growth market (10%) driven by tailwinds of families being started later in life and nontraditional families. There are lots of inefficiencies that lead to poor outcomes, and PGNY has data to show that its outcomes are better. Most companies do not cover fertility but coverage is growing, both due to state mandates and the companies desire to retain / attract employees. While there is competition writ-large, PGNY has no direct competitors who have copied their model. Additionally, the financial model looks attractive with limited capital invested, great growth and growing margins with no debt.

Infertility impacts 1 in 8 women making its prevalence higher than many chronic conditions, including diabetes (1 in 11), COPD (1 in 15), depression (1 in 20), and cancer (1 in 230). As mentioned, the market for fertility is growing at 10.5% driven by tailwinds such as family planning at later stages in life and nontraditional paths to parenthood. In 2017, the average age of first-time mothers was 26 years, up from 25 in 2000 and 21 in 1970. 2016 was the first year that more babies were born to women aged 30-34 than to women 25-29.

Most women who go to fertility clinics pay themselves or have limited coverage. Because IVF is so expensive (like stupid expensive for those not in the know), they often transfer multiple embryos to get the most bang for their buck and reduce out of pocket expenses. This leads to bad outcomes compared to PGNY: within its network vs. the national average there was a 26% improvement in live birth rate, a 45% reduction in miscarriage rate, and a 78% reduction in multiple births. This leads not only to much happier and satisfied customers but also massive cost savings, as single babies cost $35,000 to deliver versus $150,000 for twins and $560,000 for triplets (non-linear birthing cost curve makes additional babies quite the tall order for insurers and expectant parents).

One the big reasons for the better outcomes is SmartCycle, where PGNY doesn’t charge like a typical carrier with a price cap that patients are worried about going over. Instead, patients typically get three cycles where the doctor decides what is the best approach (could be genetic testing, IUI then IVF). Additionally, PGNY has a database where they track all outcomes and push patients to doctors with better outcomes, while only allowing clinics with good data into the network. This pricing and data driven approach appeals to doctors, with 30% of their network not participating in conventional networks (which supposedly is because of restrictive plan designs). PGNY achieved several major integrations with carriers (including Aetna and Cigna) 3-4 years ago due to the influence exerted by the large employer clients at the time which has also helped them to grow.

PGNY’s core market is self-insured employers of scale. However, PGNY is only ~1% penetrated into its core market opportunity, with 84 employer clients out of a market that encompasses ~8,000 US self-insured employers (there are ~69M addressable lives in the US, of which PGNY has penetrated ~2% or nearly 1.4M lives). The technology industry has been a fast adopter of fertility benefits, with Google accounting for 24% of revenue in 2018 (45% in 2017), and Microsoft accounting for 14% of 2018 revenue.

They have demonstrated rapid growth in covered lives growing its membership ~14x from ~100K when it first launched only around 4 years ago to nearly 1.4M today. Another good sign is that ~65% of new customers expanded their fertility coverage when they switched over to PGNY and ~35% had no prior fertility coverage. PGNY has near 100% retention of all of its clients and serves 20 of the top 30 companies in technology, 14 of the top 20 in consumer/retail, 9 of the top 15 in industrial, 7 of the top 15 in health, 7 of the top 10 in media, 4 of the top 10 in insurance and 3 of the top 10 in legal.

To better understand PGNY let’s look at its progenitors!  In 2015 Auxogyn and Fertility Authority merged to create PGNY. Fertility Authority was run by Gina Bartasi who then became the CEO of PGNY. Fertility Authority was an online patient matching platform. Auxogyn had an FDA approved test that modeled embryo development. As far as I can tell, the Auxogyn product was dropped and they focused on the data / benefits side. According our primary research, Gina agreed to stay for a few years but left in early 2017 to be replaced by David Schlanger who was the CEO of WebMD (who brought along several other execs). PGNY’s main backers were Kleiner Perkins and TPG Biotech.  TPG has already distributed some shares but continues to hold 18% of the outstanding shares. Kleiner has similarly made a small distribution (1/10th their holdings) but holds ~16% of outstanding shares and the Chairman of the BoD is the Kleiner Partner (Dr. Beth Seidenberg) who led the deal – she actually has left Kleiner and now leads her own VC fund Westlake Village BioPartners.

What attracts us to PGNY is it is a very large underpenetrated TAM (thanks backwards US healthcare system – the US is primarily cash pay or fixed dollar benefit which SEVERELY limits utilization rates) that is growing in importance due to infertility trends and increasing desire for employers to use fertility benefits as a differentiating benefit.  Assisted reproduction technology (ART) cycles have grown 9% in the US during the past decade and ART cycles in the US are DRAMATICALLY below peers (see chart below):

PGNY currently has LSD penetration and will grow the market as they scale.

PGNY is the only integrated fertility benefits manager and they directly handle claims from clinics and interfaces with patients.  This allows doctors to make outcomes based decisions as opposed to cost based decisions (no surprise when it comes to children parents prefer to focus on outcome vs costs).  This all results in dramatically better outcomes, lower costs, and happier clients. A true win-win-win.

The chart below from PGNY does a good job visualizing this:

In speaking with dozens of clinicians, benefit consultants, clients, and competitors it became clear to us that PGNY has a special and unique model:

•  “Progyny began by harvesting the low hanging fruit but the low hanging fruit are the ones who establish trends in benefits”

• “Once we saw that the tech sector was adopting fertility benefits, we had to move quickly”

• “For every dollar we spend on Progyny we’re saving at least a dollar and I’d say even two dollars”

• “If you include the benefits that don’t have a direct monetary value, I’d say it’s somewhere in the 4x investment, so a 4:1 ROI”

• “One case of triplets cost us $2.6mm alone which makes Progyny a no brainer”

PGNY has had 100% customer retention since inception.  They have had 70% LTM revenue growth with lower utilization due to COVID (not surprisingly people put baby making on halt during this pandemic).  PGNY has guided to minimum 50%+ growth in 2021.  In the most recent quarter, PGNY reported 62% YoY revenue growth, 69% gross profit growth (margin up 100bps) and 91% EBITDA growth (10.7% margin from 9.0% last year). FCF generation was great as well with $15mm during the quarter. In terms of expectations, rev was $99mm vs. $92.5mm, and EBITDA was $10.6mm vs. $7.4mm. Q4 was guided to $95mm - $100mm versus consensus at $99.6mm and EBITDA was guided to $9.0mm - $10.3mm, consensus is at $8.1mm.  Not a single client has churned or reduced benefits for 2021, and they were able to add a decent number of new covered lives during a difficult selling period (at least 400k on top of 2.2mm base). While the growth of covered lives is around 20%, their base revenue number for 2021 is above 50% as current clients expand benefits and add Rx services.

PGNY requires capital efficient and like other benefits managers the margins look optically low because gross margin is really net revenue – this also explains why they have an amazing EBIT margin to FCF conversion. Gross margin and EBITDA should grow much faster than revenue as demonstrated in the most recent quarter’s operating leverage.  Longer term, Progyny is targeting high-teens EBTIDA margins, with 23.0-23.5% gross margins, SG&A at 2.0-2.5% of sales, and G&A at 3.0-3.5% of revenue. PGNY has the potential to expand internationally and into genetics testing but those are complete free options you are not paying for.  We believe that PGNY currently trades for a 6% FCF yield in FY23 – this is too cheap for a company that will grow topline revenue 40%+ per annum for the next 4+ years and that growth almost entirely drops to FCF given the capital efficient model.

In this low rate stonk environment we think a high quality, defensible grower with massive secular tailwinds will trade for a dramatically higher multiple.

Catalyst

Continued added lives which accelerates growth (esp post COVID) and that drives high FCF conversion.