Progyny: At This Price, Secular Tailwinds Are Too Compelling To Ignore (NASDAQ:PGNY)

Editor’s note: Seeking Alpha is proud to welcome Apollonian Research as a new contributing analyst. You can become one too! Share your best investment idea by submitting your article for review to our editors. Get published, earn money, and unlock exclusive SA Premium access. Click here to find out more » Sarah Mason/DigitalVision via Getty Images Introduction Progyny (NASDAQ:PGNY) has not received much love lately after reporting a topline miss in their Q1 2024 call on May 9th, with the stock dropping around 15%. Management attributed the miss to a decline in utilization rates that coincided with an Alabama’s supreme court ruling that embryos should have the same legal rights as persons. The utilization decline was more pronounced in red states, according to management. Yet, the long-term prospects remain stable in my opinion. Two secular tailwinds present significant opportunity, and these depressed price levels make PGNY look like an excellent buy. I estimate a 49-76% upside potential. Business Progyny is a third-party fertility benefits manager that contracts with employers (referred to as “clients”) whose employees have access to PGNY’s network of fertility specialists that must meet and maintain rigorous quality standards to remain included in the network. In 2023, they provided their client’s employees access to the network’s 950 fertility specialists, who practice in 650 provider clinics throughout the country. Once a member chooses to utilize their benefits, a Patient Care Advocate (PCA) is assigned to them that aid them through the fertility journey. For 2023, they reported having 450 clients with at least 1,000 covered lives (referred to as “members”), and contracts to provide coverage for around 6.4 million employees and their partners. Their benefits design includes offering over 20 different treatment bundles, called “Smart Cycles” with different unit values, that clients contract to purchase for each eligible member. When members contact a provider clinic in the network, they utilize these Smart Cycles as they see fit in consultation with fertility specialists. Revenue is split into two segments: Fertility Benefits Services and Pharma Benefits Services. The former provides access to procedures and treatments such as in vitro fertilization (IVF), and the latter provides members access to medications needed during their treatment. The pharma prescription benefit plan came out in 2018 and is called Progyny Rx, which reduces delays in medication deliveries to ensure timely self-administration, which crucial to optimize outcomes. It also includes a range of other support and education for members. In 2023, fertility benefits services accounted for 62%, and pharma benefits services accounted for 38%. While PGNY is active in all 50 states, they do not disclose revenue contribution by geography, while on the client-side they are overexposed to the tech sector. Current clients include giants such as Google, Microsoft, and Target. Competitors include traditional carriers such as UnitedHealth Group (UNH) and venture-capital-backed competitors such as Kindbody and Carrot Fertility. In a report from last year, the WHO concluded that 1 in 6 people globally are affected by infertility. Infertility is a growing problem, yet current healthcare insurers typically offer inflexible one-size-fits-all solutions that lead to numerous undesirable outcomes. Negative outcomes such as preterm and multiple births escalate maternity care, labor, delivery, and neonatal intensive care unit costs, and can also increase absenteeism at the workplace. PGNY have superior clinical outcomes compared to the national average, which lowers these costs for employers: SEC Filings As of December 31, 2023, PGNY had a Net Promoter Score of 80+, which suggests strong member satisfaction. Tailwind 1: increased adoption of fertility benefits among employers There is presently a lack of insurance coverage for infertility, which was only recognized as a disease by the American Medical Association in 2017. As of 2023, only 21 states had mandated insurance coverage for infertility. A study of 15 states that had enacted some form of infertility insurance mandate found that mandates significantly increased first birth rates for women over 35. As more choose to have children over the age of 35, this will pressure employers into adopting more extensive fertility benefits to attract and retain talent. PGNY with its superior outcomes and fertility network is excellently positioned to increase their client base as more employers start offering these benefits. Moreover, according to management, PGNY’s Total Addressable Market (TAM) is approximately 8000 self-insured employers with at least 1000 employees, which would only imply a current mid-single digit penetration rate. Yet, some raise the concern that this is, in fact, not a realistic TAM for PGNY, and that targeting the 1000–5000 employee segment will put too much pressure on margins. In 2023, PGNY reported a total utilization rate of 1.33%, which entails that a client with 1000 employees would only have their benefits utilized by 13.3 members annually. Critics have pointed out that in 2018, 73% of member growth came from employers with 50k+ employees, down to a mere 28% in 2021. This may mean that when all the easy 50k+ targets have been contracted with, all that is left for growth is the less attractive mid-market. Yet, the trend critics point out reversed in 2022, when 64% of member additions came from 50k + employers, back down to 23% in 2023 – but then the 10k-50k segment contributed 38% of additions. SEC Filings Even if we estimate a more moderate TAM, there is still ample of room for increasing penetration. Census Bureau data suggests there are 1122 firms with more than 10k employees that in total employ around 40 million. Taking the current number of members at 6.4 million, this suggests a penetration rate of 16% in the larger client segment. Moreover, PGNY can still target the lower employee count segments, although likely with lesser margins. PGNY’s prospects remain appealing if they can sustain their high retention rates and increase market penetration while seeing an uptick in utilization due to the tailwinds discussed in the next section. There are also other avenues for growth. In the Q3’23 call, PGNY expanded into serving the federal government, adding 300,000 covered lives. Beyond a healthy TAM for its core services, Progyny also has room to expand into offering ancillary services relating to preconception, maternity support, postpartum, male infertility, and menopause. Moreover, PGNY has unparalleled fertility data and clinical outcomes that could be appealing outside the US. Tailwind 2: increased utilization of fertility benefits The second tailwind is an expected increased utilization of fertility benefits. The number of births due to Artificial Reproduction Technology (ART) cycles is expected to grow substantially because many are choosing to have children later. The main form of ART is in vitro fertilization, which is a complex set of procedures where an egg is fertilized in a laboratory and then reintroduced to the uterus. One cycle of IVF typically takes 2–3 weeks. While birthrates are in decline in the US, that decline is within a younger cohort of 15–29 years of age that conceive naturally to a greater extent and therefore have less need for IVF. By contrast, women who choose to have children between ages 30–44 have increased, and this group is significantly more likely to need services such as IVF. From CDC data: CDC Data As a result, the number of ART cycles performed annually and its contribution to the Total Fertility Rate (TFR) is expected to continue growing in the coming years. In 2021, 413,776 ART cycles were performed, up 25% from 330,773 in 2019. One 2023 report estimated that the US Fertility Clinics Market was valued at $7.9 billion in 2022, and forecasted a cumulative annual growth rate of 13.6% to reach $16.8 billion at the end of 2028. In the 10K’23 under the heading “Our Market Opportunity”, management compares the US where 2% of babies are born utilizing ART to Denmark (where 10% is), and Japan (where 8% is). Jehoshaphat Research has argued that this comparison is non-viable as IVF is free in these countries, and instead they suggest that “it is reasonable to assume that the US gradually increases the rate of births via ART towards 3% and generously perhaps 3.5%”. More recent studies provide us with a better estimate. Tierney (2022) estimated the potential impacts of ART on US Total Fertility Rate, concluding that “ART TFR will rise from 0.023 accounting for 1.29% of the mean projected TFR in 2020 to 0.048 or 2.64% of the TFR by 2040. However, for the TFR of women over 30, this percentage is estimated at 2.68% in 2020 and 5.60% by 2040.” Lazzari and colleagues (2023) projected ART trends in Australia, concluding that “the contribution of ART-conceived births to completed fertility will increase from 2.1% among women born in 1968 to 5.7% among women born in 1986.” Cultural similarities, and the fact ART cycles are not free in Australia, contribute to the viability of the comparison. In my opinion, while the US will not reach the levels of Japan or Denmark, this secular tailwind is more than sufficient to sustain growth in the coming decade. I also believe that other factors make projections more likely to under than overstate ART’s contribution to total fertility. One survey found that 38% of millennials said they don’t want to have kids because it’s too expensive. As the current wealth-owning generation gets older and passes on their wealth, 30- to 40-year-olds will have many of their economic concerns alleviated, which in turn can drive the desire to have children in an age group that is also likely to require fertility services to a greater extent than their younger cohort. The “Wealth Report” from 2024 concluded that “Over the next decade or so, a massive transfer of wealth and assets will occur as the silent generation and baby boomers hand over the reins to millennials. The shift will see US$90 trillion of assets move between generations in the US alone, making affluent millennials the richest generation in history.” Valuation PGNY has traded at an EV/Revenue multiple between 2.1 and 12 since 2020 and is currently trading at historical lows. YCharts As there are no like-for-like publicly traded peers, inferring a likely trading multiple is difficult based on comparisons. PGNY’s self-selected peer group from their proxy filings (AZTA, CERT, CRVL, HAE, HQY, MRVI, MASI, MPLN, NEO, OMCL, QDEL, RCM, RGEN, TNDM) trade at an average EV/Revenue multiple of 5.06 according to YCharts. Some of the self-selected peers are also technology companies, which makes a poor comparison. Seeking Alpha’s selected peer group trade at a forward EV/Sales of 1.74. Management guided full-year 2024 revenue at between $1.28 billion and $1.31 billion. Nine analysts estimate 2025 revenue at $1.46 billion, an 18% increase from an estimated $1.24 billion in 2024. In the model below, EV is arrived at by multiplying the expected 2025 revenue of $1.46 billion by the multiple specified in the “Forward revenue multiple” line. SEC Filings, Analyst Estimates I think it is reasonable to assume that PGNY will be trading at a multiple between 2.5 and 3, implying an upside of 49-76% upside. This is because of the nature of these tailwinds, which are prolonged and will support growth over the coming decade. Risks There are some risks involved: layoffs at large clients, lower margins in the mid-market, and changes in federal health insurance policies. Competition from other health insurers, venture-capital-backed competitors such as Kindbody and Carrot Fertility, as well as traditional carriers such as UnitedHealth (UNH). If PGNY does not retain its superior clinical outcomes, its services will become redundant as the cost-saving proposition for employers will be dampened. Moreover, their model only has minor differentiation and can be copied by others to achieve similar outcomes. There is also some concentration risk, with one client accounting for 13% of revenue in 2023. Another eye-catching aspect of PGNY is the high level of stock-based compensation at 11% of revenue in the last two years, up from a mere 2% in Q4’20. A severe drop in share price means they must issue more options to retain their talent, diluting current shareholders. Finally, in an Alabama supreme court ruling, the court held that stored embryos should enjoy the same legal protections as children, which would have the effect that medical professionals performing IVF may be exposed to legal action. This led to some Alabama hospitals putting IVF treatments on hold. Management partially attributed missing guidance in Q1’24 to reduced utilization rates in red states, where there is uncertainty regarding IVF going forward. Commenting on the topic on the Q1 2024 call, the CEO stated that: “I don’t believe this will have an impact on the overall industry. I don’t believe any other legislation or any other state will have anything relative to moving this direction.” Yet, Alaska has introduced similar legislation, and a similar proposal was voted down in Colorado. According to one source, more than 15 states have introduced legislation aimed at granting fertilized eggs the same legal protections as born persons. Recent research has also confirmed a national trend of decreases in ART clinics since the Supreme Court overturned Roe v Wade. While there is some uncertainty around this going forward, I agree with management and suspect the position will be politically untenable. In Alabama, for example, a bill was passed with substantial bi-partisan support that protects IVF providers from legal action and prosecution. Similar strong bi-partisan support, including among anti-abortion republicans, has also been seen in Texas. Moreover, if management is correct and utilization in Q1’24 was dampened by these worries, it should constitute a temporary tailwind in red states as legislatures establish clarity on the topic, enabling patients and practitioners to safely engage in fertility treatments. Conclusion PGNY looks very attractive at these levels. The secular tailwinds in a desire to have children later, employers increasing their fertility benefits, and a generational wealth transfer that will alleviate economic concerns surrounding childbearing, are too compelling to ignore. I estimate a 49-76% upside in the coming years.

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