Progyny: In Its Third Trimester And Poised For Healthy Growth
Summary
- Infertility impacts ~12% of women aged 15 to 44 years in the U.S.
- Progyny beat first-quarter earnings estimates by 93% on a 72% YoY revenue increase.
- Plenty of value for buy-and-hold investors and options traders alike.
Some things don't change. One of them is the desire to have children and start a family. - David Schlanger, Progyny CEO
Today we take a look at Progyny Inc. (NASDAQ:PGNY), a relatively new IPO as of last October in the fertility insurance benefits sector. Progyny offers a novel approach to traditional employer-based fertility insurance which we will examine below.
On March 31st, Progeny posted diluted earnings of four cents a share on a 72% revenue increase year over year (YoY) beating analysts' estimates by ~93% for the first quarter of 2020. This spurred a number of institutional investors to initiate new positions in the stock including Goldman Sachs (GS), Oppenheimer (OPY), and the California Public Employees Retirement System among others.
Data by YCharts
Progyny offers value for long-term, buy-and-hold value-seekers and an options play for those less risk averse.
Infertility
Ask anyone who sought medical help starting a family and they will tell you; infertility is big business. According to the Centers for Disease Control and Prevention (CDC), "infertility is defined as not being able to get pregnant (conceive) after one year (or longer) of unprotected sex," a condition effecting "about 12% of women aged 15 to 44 years in the United States." Infertility, while sometimes thought of as only impacting women, can be caused by a host of different factors in both the male or female partners.
Source: EMD Serono, Inc.
One of the major contributing factors to fertility impediment is the decision to delay starting a family. The unfortunate reality, as potential parents age, is statistically their chances of experiencing fertility issues increase. In the past 14 years women across demographic categories have increasingly waited longer before having their first child.
Source: CDC/NCHS, National Vital Statistics System (PDF)
As this trend continues the potential market for products, services, and medications to treat infertility including In Vitro Fertilization (IVF) and Intrauterine Insemination (IUI) will become an even more integral part of family planning. Notice, at relatively the same time women were delaying the age at which they had their first child, the incidence of IVF in the United States was also increasing.
The average cost of a single IVF treatment is between $10,000 and $15,000 not including the required medications which range from $1,500 to $5,000, according to the New York Times.
IUI is another, cheaper alternative but can still cost thousands of dollars depending on the specifics of the procedure. All-in-all in the United States the current fertility market is between $12 billion and $15 billion with Assisted Reproductive Technology (ART) comprising ~6.7 billion with a CARG of 10.5%. Progyny estimates today's ART market could be expanded to ~12 billion if insurance coverage increased to cover the entire country.
Source: Progyny Investor Presentation
These market data also indicate the cost of ART procedures put them out of reach for a number of families when required to pay out-of-pocket. Thus, many companies use fertility coverage as a benefits differentiator to attract top talent. A recent survey by FertilityIQ shows patients are more grateful, more loyal, and stayed longer at companies who offered comprehensive fertility benefits like IVF.
Source: FertilityIQ
A robust fertility benefits framework not only increases employee loyalty and satisfaction, but it can also drive total company-provided healthcare costs down. Preventing complications from high-risk or multiple-birth pregnancies such as absenteeism, lost productivity, and short and long-term disability claims can save companies on overall healthcare costs.
Source: Progyny Investor Presentation
This is where Progyny's value proposition comes into play.
Progyny at a glance
What they do
Progyny is "a leading fertility benefits management company in the US … redefining fertility and family building benefits, proving that a comprehensive and inclusive fertility solution can simultaneously benefit employers, patients, and physicians" according to their website.
Progyny's novel approach to fertility treatment offers mix-and-match fertility bundles or "Smart Cycles." These bundles are custom tailored and fully covered by Progyny. Instead of offering a max plan dollar amount like traditional insurance-based fertility plans, Progyny's approach ensures employee-patients have adequate coverage to complete treatment cycles typically including multiple treatment segments and requisite medication. This approach prevents exhausting lifetime coverage limits mid-treatment, requiring employee-patients to cover the remainder of a full fertility course, out-of-pocket.
Progyny operates one segment which provides two products, their fertility and pharmacy solutions. The fertility product offering is a concierge service comprised of their proprietary treatment Smart Cycles; access to Progyny's physician network; care management services, including real-time eligibility and treatment authorization; digital member-facing tools; and detailed spend analytics for companies providing the service to their employees (10-Q).
The pharmacy offering is an add-on service to the Progyny fertility benefit. The service includes, prescription fulfillment, simplified prescription authorization, delivery, educational services, and patient support.
Progyny's client base includes 130 clients across 25 industries covering 2.1 million employee patients. Their clients are leaders in their respective industries and include Microsoft (MSFT), Google (GOOGL), Uber (UBER), Roche (OTCQX:RHHBY), PayPal (PYPL), Newscorp (NWSA), and Unilever (UN) among others.
Source: Progyny Investor Presentation
How they make money
Progyny generates revenue in two ways. First through utilization, client companies pay for employee Smart Cycles and medication based on predefined rates by service type or medication. Second, Progyny coverage includes a population-based component where clients are charged a monthly fee per employee.
Source: Progyny Investor Presentation
Utilization accounts for 98% of company revenue with the service fee accounting for the other 2%.
Quarterly Results and Analysts Sentiment
On March 17th, 2020 due to the COVID-19 pandemic the American Society of Reproductive Medicine (ASRM) recommended suspension of new treatment cycles. This resulted in Progyny's client benefits usage rate dropping to 15% from the end of March through the beginning of April.
Despite shelter-in-place mandates in large parts of the United States, Progyny turned in a strong quarter reporting $81 million in revenue, a whopping 72% increase from Q12019.
Both product lines enjoyed nice growth with the services line generating $59.4 million and pharmacy benefits generating $21.6 million, a 47% and 217% increase YoY. The balance sheet is strong with over half of their total $180 million in assets being cash ($91.6 million). Progyny also has no debt which is probably symptomatic of being an early stage insurance company. This serves them well in challenging economic times like today. Progyny beat analysts' earnings estimates by 93% in the first quarter with EPS of 4 cents on a forecast EPS of 2 cents. The second quarter is expected to be challenging but they should get back in the swing of things in Q3.
Source: Y-Charts
On the May 12th earnings call CEO, David Schlanger shared that the ASRM confirmed all network practices could reopen with increased safety measures as of May 11th further pointing toward a Q3 recovery. Progyny management expects all network clinics to be fully operational by the end of June and does not anticipate losing any of their 2.1 million members.
Analysts are bullish on Progyny with a consensus price target of $29.67, expected YoY earnings growth of 93%, and 6 buy/overweight/outperform ratings.
Two ways to play
Considering the total US-based fertility market is between $12 billion and $15 billion the runway on this one is shorter than other healthcare plays. I would look for Progyny to eventually adjust their capital structure in favor of debt as they search for new product lines and expand into adjacent markets. This could be bumpy if they do not hit their stride but if done properly could allow this one to run a bit longer. That said, there is plenty of time to profit before Progyny needs to pivot.
Value Investors
There is plenty of value here and I tend to agree with the analysts on Progyny, there is not much to dislike about the company. They have a strong balance sheet, good operating capital, an innovate product suite in a growing market, and a strong war chest to weather the COVID-19 downturn. The second quarter will be rough so to maximize upside I would recommend waiting and buying the dip after the August 14th Q2 earnings call.
Options Traders
A covered-call approach, known as a buy-write order would work well for Progyny. Leveraging the Dec. 18th, 2020, calls with a strike price of $25, offers a potential upside of ~36% over the next 6 months. Targeting an $18.39-$18.89 net debit, the strategy offers comfortable downside protection. Unfortunately, PGNY options are thinly traded so getting in may be challenging, but well worth the effort for a ~65% annualized return.
This article was written by
Analyst’s Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
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