PGNY - Progyny: No Issues With Growing Healthily Ahead

2023-06-29 08:40:25 ET

Summary

• Progyny is well-positioned to capitalize on the growing demand for fertility solutions.
• PGNY's expansion into the labor union market, estimated at around 100 million lives, significantly increases its growth potential.
• PGNY's partnership with Evernorth also enhances its market strength and appeal.

Thesis

Progyny ( 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. 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. I maintain my buy rating on PGNY stock given the enlarged TAM and resilient demand outlook.

Demand continues to be strong

The demand for fertility solutions has strong dynamics that work in PGNY's favor. Infertility affects 1 in 6 people worldwide, according to a study cited by WHO (note that this is up from the 1 in 8 figure given in PGNY S-1). While this figure is worldwide, if we assume developed countries are more sophisticated with such solutions, then, the US (which PGNY mainly operates in) should see a similar uptick. The simple math suggests that the TAM has increased by ~30%. In my opinion, PGNY is in a great position to take advantage of this growing market because it differentiates itself from the competition by reducing patients' out-of-pocket expenses while simultaneously enhancing their chances of having a successful pregnancy.

In addition, I think PGNY is still on track to meet its annual targets for new client acquisition and expansion of covered lives in the near future. The management is confident in its ability to outperform its FY22 results, and they have stated their intention to increase the number of new customers and the total number of covered lives by more than 1.2 million in FY23 (source: 1Q23 earnings call). Fair enough, the presence of a busy pipeline and a large number of early commitments supports this optimism. Viewed together, I see a very strong growth potential for PGNY in the coming years.

TAM expansion

With PGNY's foray into the labor union market, where the TAM is estimated at around 100 million lives—a substantial increase from the current 5.4 million lives—I see a lot more optimism for future growth (source: 1Q23 earnings call). This literally means PGNY mature earnings can effectively ~20x at the same penetration rate. The best part is that the labor union market supports the PGNY flywheel effect for fertility solutions. In my opinion, it is likely that if one union adopts the fertility benefit, the other unions will adopt it as well (since one union has already "validated" that it is ok). Importantly, as management pointed out, the unit economics will be very similar to self-insured employers, with utilization varying based on the industry of the union. As such, margins will not be diluted.

Evernorth partnership positive

PGNY has been selected as the preferred solution in fertility and family building by Evernorth’s Family Path suite of services. The partnership between PGNY and Evernorth is an impressive demonstration of the company's market strength. Firstly, I expect PGNY's sales to be boosted by their partnership with Evernorth, which also makes it easier to interact with potential customers. Secondly, the involvement of a major carrier like Evernorth also bolsters PGNY's standing in the industry, as it shows that the company is being viewed as a potential partner rather than a threat. This support from a major player in the industry is a major vote of confidence in PGNY, and it highlights the value proposition and market appeal of the company.

Valuation

I believe the upside is still appealing even after the recent rally. There is big changes to my growth assumptions from the previous model as I expect PGNY to continue growing at a rapid pace, albeit slower than historical rates given the larger revenue base (not that PGNY is still adding ~$300+million in revenues). My multiple assumption remains at 2.8x forward revenue, but I do see a potential for higher multiples if the investment sentiment turns favourable for high growth stocks.

Risks

It's possible that the PGNY structure will make some businesses wary of giving up the stability of a predetermined budget for benefits. Employers who already offer IVF benefits in the form of fixed dollar amounts may be hesitant to make the switch to PGNY's innovative approach due to budgetary concerns, while companies that have never provided such coverage before may find it easier to adopt PGNY's approach.

Conclusion

PGNY has positioned itself as a leading fertility benefits firm, capitalizing on the growing demand for fertility solutions. With an enlarged TAM and a resilient demand outlook, I believe PGNY has a strong growth potential in the coming years. The recent foray into the labor union market further expands the TAM, potentially multiplying PGNY's mature earnings. Overall, I maintain my buy rating on PGNY based on its growth prospects and strategic positioning.

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