PGNY - Progyny: A Winner For Years To Come

Summary

• Compared to many newly listed public companies in recent years, Progyny is thriving as client count and revenues have grown tremendously.
• Progyny is the market leader in the fertility benefits arena, with a proven and successful management team.
• With flexible and unmatched fertility treatments provided at a lower cost compared to traditional providers, Progyny has a competitive advantage.

With the rise of retail investors over the last several years, as well as the increased interest in environmental, social, and government ((ESG)) investment practices, more investors are "buying what they believe in." From electric cars to cannabis and green energy, investors are putting their dollars to work as they invest in companies they believe will benefit society in the years and perhaps decades to come.

Investing in what you believe in is a nice thought, but the cold hard truth is that there are often serious issues with young companies. Issues can range from a poor management team, to supply chain constraints, or simply too much of a competitive landscape. Over the last several years, many new companies have gone public, and Special Purpose Acquisition Companies (SPACs) in particular have risen in popularity. However, as you can see from the graph below, the returns have been terrible:

I know 2022 has been a horrible, no-good, very bad year for investors, and recent SPAC and IPO companies have suffered. For many of these newer companies, at the time of their debut, the market was hot, but investors now have to wonder if these companies were ever worth investing in. If not, where can an investor find a company that is profitable, with a proven management team, that is already returning equity to shareholders all while benefiting society at the same time?

Look no further for I have the company for you - Progyny!

The Company

Progyny, Inc. ( PGNY ) is a fertility benefits company that went public in 2019. Progyny offers fertility and pharmacy benefit solutions to employers and employees with the goal of enabling families to have more successful pregnancies at a lower cost. As stated in the company's previous 10-K statement , "Our mission is to make dreams of parenthood come true through healthy, timely, and supported fertility journeys."

The company's first product was their fertility benefits solution. With this solution, members can select from 19 "Smart Cycles." These Smart Cycles allow members together with fertility specialists to select the treatment unique to that specific member. There is no "one size fits all" approach. These cycles can be mixed and matched and can be provided at different times. The results from Progyny's Smart Cycles have been superior, as their rates of pregnancy per IVF transfer are better than the national average and their rates of miscarriages are lower.

Progyny's prescription benefit plan came out in 2018 and was dubbed Progyny Rx. Progyny Rx was created to help members get the medication they needed when it was needed. As members with traditional providers often have to wait for weeks for their medication to arrive, Progyny Rx helps members avoid such delays.

Additionally, Progyny is able to assist single mothers and the LGBTQ+ community, which are two groups often unserved by traditional fertility benefit providers.

Also, Progyny has been able to structure their fertility benefit solutions as a pre-tax program which can be integrated into employers' medical insurance. This is unique to the market as new emerging competitors such as Carrot Fertility and Maven Clinic have post-tax reimbursement programs. Progyny members usually need fewer treatments and as such are able to save money compared to traditional providers.

For employers, working with Progyny means having happy employees with healthier pregnancies while saving money in the process. As stated above, Progyny's pregnancy rate per IVF transfer of 61.4%, compared to the national average of 53%. This suggests Progyny members require on average 1.58 rounds, while the national average stands at 1.85. The American Society for Reproductive Medicine reports that the U.S.'s average cost for one IVF cycle is $12,400. These data lead to average savings equal to $3,000 for Progyny patients. Also, undergoing fewer rounds of treatments means medication costs will be lower.

Regarding fertility specialists, Progyny provides members with access to the nation's most desired fertility providers in the United States with roughly 900 fertility specialists who practice at 650 provider clinic locations throughout the country. Progyny's network includes 46 of the top 50 fertility practice groups by volume in the United States according to 2019 CDC data.

Moat and Opportunity

Accordingly to Progyny's last 10-K filing, the company believes it has an opportunity to address a market of 8,000 companies in the United States with at least 1,000 employees. This would represent a target market of roughly 75 million covered lives.

The below shows the number of Progyny's current clients and covered lives in dark blue compared to that opportunity:

As stated on the company's recent 10K, Progyny believes, "We are the leader in the market for employer-sponsored fertility benefits and family building solutions." Later in the annual report, they follow up with the following passage, "We do not believe any single competitor offers a comparably robust, integrated fertility and family building benefits solution…"

As shown in an investor's presentation in early 2022, Progyny is quickly becoming the fertility benefits provider of choice:

The below shows the number of clients, industries, and covered lives when Progyny launched in 2016:

When Progyny went public in 2019, those numbers quickly escalated:

As you can see, Progyny continued to increase these figures in 2022. It has added an impressive list of clientele such as Google, PayPal, and Microsoft, just to name a few.

Management

David Schlanger is Progyny's current executive chairman and former CEO. Schlanger has over 25 years of experience in healthcare and was the former CEO of WebMD. The company excelled under Schlanger's leadership, as the charts above illustrate.

Schlanger was CEO from the IPO date until he was replaced by the then Progyny COO, Peter Anevski. Anevski also comes from WebMD as well where he was the CFO.

The company has continued to thrive under Anevski's leadership in 2022, and the reviews from Glassdoor clearly indicate employees love working for the company and approve of the job Schlanger and Anevski have been doing:

Financials

Compared to many of the IPO and SPAC companies over the last several years, Progyny is thriving. The company has an outstanding balance sheet , while revenues and net income having continued to grow as you see from the company's figures from last year's Statement of Operations :

In Q3 2023 , Progyny had a very strong quarter, as revenue grew to just over $200M, which is an increase of 68% compared to Q3 2021. Most of this revenue was generated from fertility benefits services revenue and pharmacy benefits services revenue accounted for the rest. Fertility benefits services revenue was roughly $130 million, an increase of 52% compared to prior year's third quarter. The increase in clients in covered lives helped drive this growth. Pharmacy benefits services revenue was roughly $76 million for the quarter, an increase of 70% compared to prior-year third quarter. The growth was due to the increase in the number of clients with integrated solutions.

Client count continues to rise as well, as Progyny finished Q3 2022 with 282 clients, which represented an average of 4.5 million covered lives. This compares to 188 clients and 2.9 million covered lives in Q3 2021, reflecting a 57% increase over the last year. In terms of utilization (which may vary quarter to quarter based on factors such as time of the year or timing of new client launches), more than 11,000 cycles were performance in Q3 2022, which is a 61% increase compared to Q3 2021.

Valuation

Most would consider Progyny to be an expensive stock, as it currently has a trailing P/E ratio of roughly 75. This compares to an average trailing P/E of 28 for other healthcare providers. Most analysts view Progyny either as a "Strong Buy" or a "Buy," but none currently have a "Sell" rating. Also, based on many analysts' projections, the current stock price is far below analyst price targets.

One of my favorite investing books is 100-Baggers by Chris Mayer. To be clear, in this book Mayer states that he prefers low multiples but does state, "Great stocks have a ready fan club, and many will spend most of their time near their 52-week highs, as you'd expect. It is rare to get a truly great business at dirt-cheap prices."

I'm not stating this company will be a 100-bagger for investors, but I do believe it's a brilliant business. Thus, I'm willing to pay up in this situation.

Risks

There is always a risk of traditional players such UnitedHealth (UNH) make a more aggressive play in the fertility benefits arena. Also, emerging competitors like Carrot Fertility and Maven Clinic could improve their offerings, although I find it unlike they would be able to surpass Progyny's solutions in the near term.

Likely, the more pressing risk is concentration risk. As stated in the prior 10-K filing, two companies accounted for 24% and 11% each, or a combined 35% of total receivables in 2021 and 14% each, or a combined 28% total receivables in 2020. However, considering Progyny has a strong client retention rate and network effect with clinic partners, I'm also not too concerned with this risk.

Conclusion

Recent data shows that families are waiting longer to have children . According to a new report from the U.S. Census Bureau, the median age of women in the United States giving birth has risen to 30, with more mothers having children in their 30s and even early 40s. I don't see this trend changing anytime soon, which is why more and more families will want fertility benefits coverage.

Progyny has a superior offering with proven results and at lower costs compared to traditional providers. Given Progyny's mix of flexible Smart Cycle offerings coupled with Progyny Rx, it's difficult to see a new provider disrupting the market in the near term and stealing Progyny's market share. Furthermore, with the advantage of providing fertility benefits pre-tax, Progyny is in an excellent position to grow client count and revenue.

As other articles have stated, the valuation is a concern as a trailing P/E of 75 is high. I would much prefer to buy at levels earlier in 2022, for example, the trailing P/E was near of 50 at 6/30/22 which would be preferable. That being said, the valuation isn't a deal breaker.

I believe Progyny is a wonderful company that is currently benefiting and will continue to benefit future mothers and their families. Thanks to Progyny's stellar offerings, members are given flexible, unmatched options at a lower cost compared to traditional providers. More importantly, Progyny has superior pregnancy and miscarriage rates compared to the national average.

Progyny, Inc. is a company you can feel good about owning in the years to come. I believe investors will reap the rewards of owning this gem of a company.

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