ALHC - Progyny Stock Should Deliver Superior Returns For Investors

• More companies in the U.S. are offering fertility benefits to employees to attract/retain talent and advance the diversity, equity, and inclusion agenda.
• PGNY has singled itself out as a pure-play fertility benefits management company, building an enviable client roster with 273 clients representing 30+ industries.
• PGNY's business model has enabled it to achieve superior clinical outcomes for fertility treatment vs national benchmarks, allowing it to achieve a nearly 100% client retention rate.
• PGNY has been able to grow profitably without debt, which is rare for young companies. It also enjoys great margins relative to peers in managed care. This justifies its rich valuation.
• After yet another record Q2, PGNY has raised guidance for the full year. We believe this strong performance will continue and recommend the stock as a strong long-term buy.

Progyny, Inc. ( PGNY ), a benefits management company specializing in fertility and family-building benefits solutions for U.S. employers, has reported yet another record quarter, beating consensus estimates on both revenue and EPS. Its Q2 2022 revenue came in at $195 million, a 52% jump from $128.65 million a year earlier.

The company, which is already profitable on an EBITDA and net income basis, went public in October 2019 and has since this time moved from strength to strength in terms of its operational and financial performance. In its most recent earnings call, management raised the lower end of its Full Year guidance - a strong indication that the positive growth trajectory will continue.

The stock, however, has not kept up with the underlying business's strong growth trajectory. PGNY is down more than 40% YTD, a move we believe is attributable to the broader sell-off in growth stocks in the first half of 2022 rather than investors' bearish assessment of the company's prospects.

With yet another record quarter, improved guidance for the full year, and the major market indices steadily recovering from June lows, we believe PGNY will bounce back in the second half of 2022. It rallied 18% post-market following its stellar Q2 beat.

Predicting whether or not this earnings rally will hold in the short-term is, plainly speaking, a coin-toss. However, in the mid-to-long term, we are confident the stock will appreciate in value as the underlying business continues to grow rapidly. This growth will primarily be fueled by the increased demand for fertility treatment and family-building benefits among U.S. employers.

U.S. employers turning to fertility benefits

Infertility is a common health problem in the US. Data from the CDC indicates that, among heterosexual women aged 15 to 49 years with no prior births, about 1 in 5, or 19%, are unable to get pregnant after one year of trying. Furthermore, about 1 in 4, or 26%, of women in this group have difficulty getting pregnant or carrying a pregnancy to term. Infertility also affects men.

Treatment, while available, is often expensive. Common treatments include medicine, surgery, intrauterine insemination (where specially prepared sperm are inserted into the woman's uterus), or assisted reproductive technology ((ART)).

ART, which includes all fertility treatments in which either eggs or embryos are handled outside of the body, is typically what most people refer to when talking of fertility treatment. The most common type of ART is in vitro fertilization ((IVF)).

Because of challenges with affordability, employers have in recent years started including fertility treatments such as IVF in their employee health plans. This trend has picked up in recent years as companies focus more on diversity, equity and inclusion and use fertility benefits as a tool to stand out in a competitive labor market.

A survey by Mercer in 2021 found 42% of large companies with 20,000 or more employees covered IVF in 2020, compared to 36% in 2015. A further 19% covered egg freezing, up from 6% in 2015.

PGNY, in its presentation at the 2022 J.P. Morgan Virtual Healthcare Conference, noted that half of all large employers today in the U.S. offer fertility benefits. In 2015, that figure was somewhere between 25 - 30%. By next year, the figure will be closer to 75%. The data used for these estimates was drawn from Mercer and Willis Towers Watson.

Evidently, the demand for fertility benefits among U.S. employers is growing, underlining the opportunity for PGNY. While legacy benefits management companies are blending fertility benefits into their overall health package, none of them offer a specialized service in the same as PGNY does.

An enviable client roster

Specialization has differentiated PGNY in the market, allowing it to build an enviable client roster that includes some of the most renowned companies across a cross-section of industries.

PGNY had 273 clients as of June 30, 2022, as compared to 182 clients as of June 30, 2021. As it is now in the busy selling season (Q3 and Q4 are when companies typically review their insurance plans), we anticipate this number to increase.

"Our current pipeline size and commitments received to date continue to be favorable relative to the record level of activity that we experienced a year ago, which, we believe, demonstrates that employers are looking to provide the benefits that will meet the needs and expectations of their workforce, " said CEO Pete Anevski in the latest earnings call.

The company also claims to have a near 100% client retention rate, which is impressive. Its client base is also diversified in terms of industries, with more than 30+ industries covered according to investor presentations. This limits concentration risks.

Unique business model - delivers three solutions

PGNY has been a great success because of its unique business model, which simultaneously delivers three solutions i.e. effectiveness of treatment, affordability and value for employers, and strong incentives to fertility clinics.

Its flagship product is its fertility benefits solution. Once a client signs a contract, PGNY offers the client's covered employees (known as members) access to an actively managed network of top fertility clinics in the U.S. PGNY curates providers on a predetermined set of quality measures and contractually obligates the providers in its network to submit outcomes for every treatment cycle for every patient.

The company bundles together a range of fertility treatments such as IVF and egg freezing and sells these bundles to employers, based on their needs. The bundles, called "Smart Cycle bundles", are customized to meet the diverse needs of members while maximizing effectiveness and minimizing costs. The company currently offers 19 different Smart Cycle treatment bundles which may be used in various combinations depending on the member's need. Members, in consultation with their Patient Care Advocates, or PCAs (in-house staff from PGNY), can choose their preferred provider clinics within the company's network and utilize the specific Smart Cycle treatment bundles necessary for the treatment plan they determine throughout their fertility journey.

PGNY also offers Progyny Rx, an integrated pharmacy benefits solution that can only be purchased by clients that purchase the fertility benefits solutions. Progyny Rx provides members with access to the medications needed during their fertility treatment. As part of this solution, the company provides care management services, which include formulary plan design, simplified authorization, assistance with prescription fulfillment and timely delivery of the medications through its network of specialty pharmacies, as well as medication administration training, pharmacy support services and continuing PCA support.

PGNY makes money when members utilize their benefits. It also makes money from its pharmacy benefits solution. Of the $195 million revenue recorded in Q2 2022, $126.8 million or 65% derived from its fertility benefits solution while 68.2 million or 34% came from its pharmacy benefits solution. By 2021, more than 80% of new clients also added on the Progyny Rx, the company notes in investor presentations.

• Effective treatment

PGNY's business model is effective because customized bundles - as opposed to, for example, "x number of IVFs" in a generic plan - means treatment does not stop halfway but is designed to meet the precise needs of members (after diagnosis). The PCAs help a great deal in guiding members through the journey.

The fact that PGNY actively manages its network and uses data to screen the quality and effectiveness of treatment also leads to clinically superior outcomes as contracted providers have an incentive to perform well and stay in the network in order to get repeat business.

PGNY's members get pregnant meaningfully faster, experience significantly fewer miscarriages, and have healthier pregnancies and babies, as compared to national averages.

• Affordability for employers

Effective treatment translates to affordability. This is for the obvious reason that ineffective treatment is money wasted since companies still have to pay even if there is no successful birth.

Additionally, frustrated employees who have to dip into their pocket because a fertility plan is ineffective or is generic and has run out before they could achieve the desired results are likely to move to another company that offers something more comprehensive. By offering a comprehensive service and clinically superior outcomes, PGNY has won the hearts of employers - explaining its near 100% retention rate.

• Incentive for providers

Fertility clinics that are included in PGNY's network have an incentive to stay in it, given the repeat business and professional prestige that comes with serving some of the nation's most prolific brands. The fact that PGNY relies on a data-driven approach to assess the effectiveness of treatment means that fertility in the network clinics also gets free evidence-based marketing, which is very advantageous in the medical field.

PGNY recently engaged Milliman, Inc. , an independent global leader in actuarial services, to evaluate the methodology it uses to compare its outcomes to national benchmarks. Since 2016, PGNY has been the only benefit solution to publicly providing its outcomes data.

A premium worth paying for

We are bullish on PGNY but must admit that it is not a cheap stock . It's trading at 58x P/E ((TTM)), 25x EV/EBITDA ((FWD)). This introduces some downside risks.

However, this premium is worth paying for. To begin with, the business is growing rapidly and members are increasingly utilizing the service, as the below snapshot from its earnings release indicates.

PGNY estimates that there are 8000 large self-insured employers in the U.S. that constitute its target market at the moment. It is yet to capture even 5% of this. Moreover, as the diversity, equity and inclusion agenda takes stronger root, we are likely to see government and union employers, universities and non-profit entities turning to players like PGNY. There are also opportunities outside the US. PGNY has barely scratched the surface yet it has built a formidable brand.

Also, PGNY has been able to scale its relatively young business profitably - something few young companies can do. Moreover, compared to other benefits companies such as Alignment Healthcare ( ALHC ) and Clover Health ( CLOV ) among other peers in the managed healthcare industry, it enjoys great margins. Importantly, it has grown without debt.

Finally, from a historical viewpoint, the stock is on the lower end in terms of valuation.

Despite a rocky first half of 2022, PGNY is in a gestational period and should deliver superior returns in the long-term in line with the strong growth of its underlying business. This may not happen in two or three quarters (the next nine months) but will materialize in the long- term assuming the growth trend stays in place. We are long with a 3-5 year investment horizon and continue to buy at current levels.

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