Progyny Inc: Expect Fast Growth Despite A Weak Macro Backdrop (NASDAQ:PGNY)

Thesis highlight

Progyny (NASDAQ:PGNY) has 52% upside. The market for managing fertility benefits is growing quickly due to societal and cultural shifts, such as the postponement of having children and the rise in acceptance of alternative methods of having children. PGNY’s approach results in better health outcomes and lower costs for employers. PGNY’s Smart Cycles stand out in the market as they include the entire treatment process and have fixed costs that have been agreed upon in advance through contracts in the form of treatment bundles.

Company overview

PGNY is a US-based fertility benefits firm. The business provides patients with a benefits package that includes counseling from a Patient Care Advocate as well as links to a group of fertility specialists. PGNY’s operations are geared toward lowering the overall cost of healthcare for businesses.

Lack of effective solutions

Standard fertility benefit packages typically offered by companies are intended to limit employee access to services rather than improve productivity. Therefore, their plans have restrictive features like monetary caps for a lifetime, required step therapy protocols, and minimal to zero coverage for cutting-edge procedures. Plan designs have also fallen short on ensuring timely medication dispensing, access to top-tier fertility specialists, and comprehensive patient support. Given the rapid development of fertility research, traditional plans have fallen behind, resulting in suboptimal clinical outcomes, higher initial treatment costs, and higher costs. As a result, the money put into fertility programs by employers goes to waste.

However, leading fertility specialists are underrepresented in traditional health insurance networks, which can hinder the success of fertility programs. Doctors are hesitant to join these networks because of the limitations of their plans and the coverage they offer, both of which prevent them from giving their patients the best care possible and frequently force patients to settle for less effective treatments. Doctors who specialize in fertility may be reluctant to accept traditional health insurance due to the administrative burden it places on their practices. Conventional health insurance networks restrict access to fertility specialists who could increase a couple’s chances of having a healthy baby, despite the fact that people struggling with infertility are willing to travel long distances for high-quality care.

The market is huge for this

In my opinion, PGNY has a great chance of becoming the go-to service provider for an all-encompassing solution that helps businesses with the unique challenges and nuances they face when it comes to fertility treatment and related services.

PGNY’s primary area of focus, the market for managing fertility benefits, is growing quickly as a result of various societal and cultural shifts. Some examples of these shifts include the postponement of having children by some individuals, the rise in acceptance of alternative methods of having children, and the prevalence of health issues that have an effect on fertility. Furthermore, as people are more comfortable talking about infertility and employers are more willing to provide financial support, there will be a greater need for fertility treatments, which will provide more openings for PGNY to grow their customer base.

PGNY approach drives down overall cost

For the betterment of its members, clients, and network providers, PGNY has instituted its own fertility benefit. They came up with this Smart Cycle system to ensure that patients could get at least one full cycle of treatment with no out-of-pocket costs, which would include any and all necessary diagnostic procedures and cutting-edge medical equipment. Patients are much happier with the new benefit structure, which is a major plus for the people in charge of the benefits. Better health outcomes and lower costs for employers are a result of PGNY’s individualized service model and incentives for providers that are aligned with their goals.

Each individual who seeks care at PGNY is provided with a personal patient care advocate [PCA] who oversees all aspects of their treatment. This PCA has received advanced training from the clinical staff here at PGNY, and thus is able to educate, guide, and emotionally support the patient. Additionally, patients have access to a comprehensive online portal that serves as a resource throughout their fertility treatment process.

Overall, I believe PGNY approach is what results in better health outcomes and also net cost savings to employers. To begin with, the live birth rate is 27% higher than the national average as a direct result of higher pregnancy and lower miscarriage rates during its patients’ treatment cycles. Secondly, it is more cost-effective for hospitals and insurance companies to care for mothers and new-borns when patients only use one embryo during implantation rather than multiple embryos. This is because the costs associated with providing these services tend to rise when there are more pregnancies, especially those that result in multiple births.

Competition

Progyny’s Smart Cycles are distinct from others in the market as they include the entire treatment process, and have fixed costs that have been agreed upon in advance through contracts in the form of treatment bundles. Given that the cost of fertility treatments can vary by location, while an employer’s benefit is often fixed, management has said that this benefit design ensures fair access to fertility benefits, and guarantees that members have coverage for the full treatment. This results in better outcomes and increased patient satisfaction. Additionally, Progyny does not place any monetary limits on any medical benefits apart from fertility treatments. This is what the management believes to be the best fertility benefit package in the industry, but it may deter some customers who are attached to their current, fixed benefit structure. Progyny’s unique approach to benefits may make it easier for companies that have not previously provided IVF benefits to adopt their model.

Revenue to continue growing strongly

According to my estimations, the company earns incremental margins of close to 100% on PEPM (per employee per month) fees, which are fees collected in addition to the bundled revenue collected for medical and pharmacy benefits.

It is important to note that while PGNY does make a profit on the majority of its patients’ treatments, it does not make a profit on every cycle. This is due to the fact that its gross margin shifts significantly depending on the location of the clinic where treatment is administered. PGNY negotiates each of these fees individually, and the terms of the resulting contracts vary widely. PGNY does not meet the regulatory definition of an insurance company, and is instead considered a third-party administrator, despite taking on some risk related to medical costs. As a result, the firm is exempt from the insurance industry’s minimum medical loss ratios and capital requirements, which limit the gross margins at which it can operate.

New employer additions, combined with the seasonality of the company’s existing salesforce, should propel the Medical division’s revenue growth in the future, with positive effects spilling over into the Rx division. There’s plenty of room for PGNY to expand its corporate relationships, as the company currently serves 282 clients across 40 industries.

Weak macro is not an issue

At the JP Morgan Health Conference in January 2023, management said they were encouraged by the early momentum of the upcoming sales season and that they had not yet seen any material impact from macro. When asked how a recession would affect utilization, the CEO stressed that family planning decisions are rarely made based on the broader economic climate. In addition, they mentioned that coverage is growing, which would further support utilization despite recession worries as opposed to the ’08-’09 financial crisis when families paid for their own procedures.

Furthermore, PGNY specifically mentioned the 105 new clients it acquired during the current selling season as evidence of its success. According to previous projections, by the end of FY23 the company expects to have 370 clients covering 5.4 million lives. I think the guide reasonably accounts for the potential impact of a recession on employment levels by assuming no organic life growth within PGNY’s existing client-base.

Valuation

My model suggests that PGNY is worth $51.29 in FY24. The core part of my thesis is that PGNY is able to continue growing at a fast pace, generating recession-proof growth rates. This is backed by the huge whitespace available for PGNY to continue capturing share and also its strong value proposition to stakeholders. My confidence is PGNY being able to grow is also backed by management raising guidance during 3Q22 earnings announcement (which implies 4Q22 to grow in excess of 50+%)

Risks

PGNY has already acquired all the low-hanging fruits

It’s possible that PGNY has already won over the majority of the early adopters, making it more challenging or time-consuming to bring on the next 280 customers. As the company grows beyond these pioneers, the sales process and cycle may become more drawn out.

Reluctance of employers

It is possible that some companies will be hesitant to abandon the security of a set dollar amount for benefits because of the PGNY design. PGNY’s innovative approach to IVF benefits may be more easily adopted by companies that have never provided such coverage before, while employers who already provide IVF benefits in the form of fixed dollar amounts may be hesitant to make the switch for budgetary reasons.

Conclusion

As a result of social and cultural shifts, such as the delay of having children and the increased acceptance of alternative methods of having children, the market for managing fertility benefits is expanding rapidly. The Smart Cycles offered by PGNY stand out from the competition because they encompass the entirety of the treatment process and have fixed costs that are agreed upon in advance through contracts.