Progyny, Inc. (PGNY)

Progyny, Inc.:

The best and most rewarding way for us to accomplish our primary goal of making our clients money is to own companies that solve big intractable problems and have a great impact on many peoples’ lives. Perhaps we can debate just how profound the societal benefit is of, say, giving consumers the ability to save 30% on their flooring while also providing better service and product. Few, however, can challenge the societal benefit of Progyny’s service offering, and anyone who digs deep will also appreciate the magnitude of their financial opportunity.

Even its defenders must acknowledge that the U.S. healthcare system is occasionally very irrational. The current treatment of infertility and the state of fertility benefits coverage is a prime example.

Infertility is stated as “a disease of the reproductive system defined by the failure to achieve a clinical pregnancy after 12 months or more of regular unprotected sexual intercourse.” Infertility is included in the International Classification of Diseases, just like cancer or diabetes. And for those who suffer from this disease, they know that without treatment they may live another fifty or sixty years in perfect health otherwise but never be able to accomplish perhaps their single most important life goal.

You would think something this important and this enormous would receive robust public discussion and support. But infertility has grown in the shadows. Unlike cancer or diabetes, our society as well as societies going back to the beginning of time have long had a stigma associated with infertility. Cancer was bad luck, but infertility was a sign of inferiority or even punishment from some higher being. Fully insured health care plans and corporate self-insured plans provided little or no coverage, and the fertility industry has necessarily grown up as a private pay market, which has led to monstrous issues related to expense and access.

As the world has slightly awoken, states have begun mandating some coverage for infertility be included in insurance plans. Employers, perhaps out of guilt or fear of lawsuits, have responded by including some sort of benefit, typically a fixed amount lifetime benefit of somewhere between $10,000 and $25,000. A fixed lifetime benefit effectively communicates “Look, you’re on your own. Good luck. Submit receipts to us and we’ll
reimburse you up to $10,000. We know that’s a drop in the bucket compared to your costs which will likely be multiples of that, but hey it’s a tough world out there and we can’t do everything. And, hey, dealing with infertility strikes us as a nice to have, not a real disease.” As a result, most people dealing with this disease go through it with no guidance and having to pay for most if not all the treatment out of their own pocket. Imagine the stress if you had to deal with the most important issue of your life with such little support.

And then there is the practical, financial view. Anyone who might think “that’s sad, but it can’t be unicorns and rainbows for all” needs to appreciate the following: If there is one product or service that proves the admonition against being “penny wise and pound foolish”, treatment of infertility is it. Follow me through a typical scenario: A woman tries to conceive naturally for 12 months, or 6 months if she is 35 or older before being declared
medically infertile. Her employer provides her with a $25,000 capped fertility benefit. Her company’s insurance carrier (true to its ethos of restricting access and engendering stress) requires her to go through two cycles of intrauterine insemination (“IUI”) and fail before she could be authorized for in vitro fertilization (“IVF”). She already cannot work with her doctor-of-choice because many of the top performing clinics don’t accept managed care insurance (30% of providers in Progyny’s network do not take carrier coverage) as they have thriving cash pay practices and do not want to deal with the hassle of working with the carriers. So, to simply start the process she needs to choose a sub-optimal clinic who has a track-record of worse outcomes. And most likely, this doctor does not believe IUI will be effective because, with an average success rate of 5% to 15%, it usually is not. The mandated step therapy of IUI wastes 2 months and burns through $8,000 of her $25,000
coverage. Once IUI fails, she now has the carrier’s authorization to pursue IVF, but IVF on average costs $25,000. So, she works with the finance department at the clinic (yes, fertility clinics have finance departments on-site like a car dealership because this is such a problem) to secure a loan to pay for the rest of the treatment. Since this is already expensive and the carrier does not cover it, she decides to skip genetic testing of her embryos. This results in a failed pregnancy, she is now out of $8,000 of her own money, has gone through a traumatic emotional and physical experience without any emotional support or guidance, and now needs to borrow more to go through a second IVF cycle to get pregnant, now with no help from her employer or insurance.

With her second loan secured, she wants to ensure she gets pregnant this time because she can’t afford to take on any more debt before taking on the costs of a new child. So, she again makes the trade-off of care for cost, and instructs her doctor to transfer multiple embryos. This time she was successful and was able to give birth! But, to preemie twins... And this is incredibly common as IVF is the number one cause of multiples, and multiples
are the number one cause of preterm births. This results in neonatal intensive care unit (“NICU”) stays for the baby, an extended time off for the mother, and poor productivity if and when she gets back to work.

And here is the rub. Who pays for those bad outcomes – the days or months in the NICU, the chronic issues associated with underweight, preterm babies, high risk pregnancies, et al., when an employee of a self-insured company goes through this process? The employer pays. Restricting access on the front end saved some money, but those savings are swamped by the costs on the back end. And this is to say nothing of the non-financial costs.

Enter Progyny. Progyny was created to solve one problem: better fertility experience and outcomes for patients. It is a seemingly Sisyphean task to attempt to change the healthcare system, but Progyny realized they could by first approaching the self-insured employers who bore the cost on the back end, especially those who were competing for talent. Studies show that to a woman in her early thirties, fertility benefits can often rank above salary, title, location, or any other aspect of benefit coverage.

Progyny created a benefit plan design that is entirely focused on best outcomes and removes the perverse incentives in the existing system. Each plan is customized to each patient and follows rigorous best practices including genetic testing up front. Progyny assigns each patient a patient care advocate (“PCA”) who guides the patient through the process. On average, a patient speaks with her PCA 15 times during a treatment cycle, and
that comfort helps drive a Net Promoter Score in the 70s whereas healthcare insurers typically are close to zero. Progyny partners with its network of IVF clinics regarding best practices and data sharing. This network loves receiving Progyny clients because there are no restrictive protocols, and there are no marketing costs, collections costs, or risk. Hence, they eagerly pass on the discount to private pay rates which forms the basis of how Progyny
gets compensated and contributes to their ability to save the system so much money. Progyny’s powerful early clients like Google applied the pressure necessary to get carriers such as United Health to integrate systems with Progyny, enabling this carveout to be part of the broader health plan and ensuring that the benefit could be funded with pre-tax dollars. In 2018, Progyny added a pharma benefit to coordinate the administration of fertility drugs which greatly reduces waste and over-prescription and saves employers typically 25%+ on these costs, while assuring proper usage and timely delivery of necessary drugs.

The results of the Progyny program are staggering and easily verified and quantified because the Center for Disease Control (CDC) collects all results and data from all clinics in the nation. Outcomes for greater pregnancy success include 14% better pregnancy rate per IVF transfer, 30% reduction in the miscarriage rate, 23% better live birth rate, and 88% single embryo transfer rate compared to 58% average nationally. The result is a much
lower multiple birth rate at 2.4% compared to 12.2%. The data makes it easy to show to customers that they are going to spend less on money on higher risk preterm births. And because Progyny is the only company who manages this process throughout the full episode, they are the only ones with such data. Competition, be it from the carrier directly or some concierge added on to the carrier’s plan because of patient dissatisfaction with
carriers and at additional expense to the employer, loses track of the patient once the patient exits the insurance program and starts paying privately. Hence, they can never produce the outcomes data that Progyny has. Further they don’t have the network quality or collaboration. And when it comes to something like this, why would you ever hire anyone who doesn’t have the experience, the data, the network, the reputation for quality, once you have “seen the light” of managing the treatment of infertility. And with the nation spending more than $33B on the direct costs of high-risk pregnancies, very low birth weight newborns representing less than 1% of all births but accounting for 36% of total newborn hospital payments, and preterm deliveries and indirect costs of ~$6B due to lost productivity, more and more employers will see that bright light. And this does not even include the real but slightly less tangible benefits for employers in terms of ability to recruit talent and improved morale. We had one long time HR executive tell us that in his 35 years of overseeing plans for large employers, no new benefit ever got anywhere near the enthusiastic and emotional positive response from his employee base as when he announced the addition of Progyny to the benefits package.

Progyny has an incredible amount of growth ahead of it. Just within the self-insured employer market, it has only 132 out the more than 8,000 sizeable plans and covers only 2.1M lives out of the nearly 70M covered by self-insured plans. Furthermore, it can expand horizontally into other areas related to pregnancy and child- rearing that are poorly managed and can leverage their existing relationships, trust, and base of trained PCAs.
Clients that we have spoken to have made it clear that they would be keen on having Progyny manage additional aspects of their employees’ family journey. And within fertility, with scale will come excellent opportunities for vertical integration of associated services such as testing which would increase profitability while improving product quality and outcomes through tighter integration. And fertility is a growth market anyway due to
demographics and preferences for having children later.

We can’t believe our luck as to timing. In a stock market where visible growth might trade at prices never seen before, we believe COVID has created an opportunity to buy cheaply a company on the verge of more than a decade of visible, straightforward, even inexorable growth.

Part of the discussion of timing relates to the current headwind the company faces and which explains the stock being well below its pre-COVID prices. Fertility treatments got lumped in with elective surgeries, and many IVF clinics were forced to shut down or curtail activity which would lead to a proportional decline in revenue for Progyny. We aren’t terribly bothered by this because the company’s variable cost business model, low cost
structure and balance sheet strength are such that Progyny had the flexibility to do the right thing and keep the team and PCAs intact once the pandemic hit and clinics shutdown. And while other things may be deferrable, the decision to have a child is very much time sensitive. Unlike the provider network for most medical procedures, the fertility network has plenty of excess capacity to absorb increased demand as things open. And going to a fertility clinic is obviously much less risky than going to a hospital. We have no doubt that current business will bounce back strongly. And this is a benefit, once offered, that will never be withdrawn.

But the impact of COVID on new sales cycles is much less clear, more nuanced, and much more interesting. Based on where the stock is trading, the market believes understandably that Progyny will hear a lot of “Sorry. Unsure times. Can’t add any benefits.”. And we expect they will hear plenty of that, especially from CFO types who have never been exposed to Progyny or analyzed their healthcare expense data. But this gives no credit to
Progyny for being able to lead more with cost savings and disregards the fact that there are plenty of companies who are killing it, especially in technology where Progyny enjoys great success and where the competition for talent is as extreme as ever. And with only ~2% penetration of their current target market we think they will sail through this, at least when viewed through the lens of our investment time horizon.

But the discussion above also ignores societal changes. We are approaching a watershed moment for this industry. The discussion of offering coverage for treatment of infertility is changing. The world is focusing more on discrimination and inclusion. #MeToo was part of our initial thesis, but Black Lives Matter may end up having a more dramatic effect. The conversation is changing from “wouldn’t you feel good doing the right thing for your people (and saving money and going up in the employer ratings surveys)?” to “Do you really want your benefits package to be patently discriminatory by not providing coverage for a disease that impacts one in eight people of child-rearing age and which is perhaps the most important benefit to women under 45 and to members of the LGBTQ community? And for a disease that affects African American women twice as often as non-Hispanic white women?” The dam might break sooner or it might later. It might happen through the market or it might happen due to legislation. But the dam will break. And when this huge market needs management and coordination, Progyny will be uniquely positioned to profitably oversee billions of spending. We love the win/win/win Progyny provides their partner clinics, their employer clients and their employee patients. We look forward to a fourth win – our very substantial long-term profits.

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