NEW YORK--(BUSINESS WIRE)--Spruce Point Capital Management, LLC (“Spruce Point” or “we” or “us”), a New York-based investment management firm that focuses on forensic research and short-selling, today issued a detailed report entitled, “Diagnosing Progyny As A Strong Sell,” that outlines why we believe shares of Progyny, Inc. (Nasdaq: PGNY) (“PGNY” or “Progyny” or the "Company") face up to 60% to 80% downside risk, or approximately $7.00 – $14.00 per share. Download or view the report by visiting www.SprucePointCap.com and follow us on Twitter @SprucePointCap for additional information and important updates.
Spruce Point Report Overview
Based in New York City, Progyny is a fertility benefits management company that offers patients a benefits solution and access to a network of fertility specialists. In March 2015, Progyny was created through the merger of Auxogyn, a biotech start-up that attempted to develop a predictive, non-invasive embryo selection technology (called Eeva), and Fertility Authority, an online IVF referral network founded by former CEO Gina Bartasi (now CEO of competitor Kindbody). A year later, Progyny pivoted to fertility benefit management, billing itself as “the Uber of fertility.” Today, the Company’s benefit plan has failed to gain mass adoption. It has primarily been implemented by large technology companies, which fueled its early growth, but now presents a major headwind as layoffs reverberate through the technology industry.
Key findings from our report include:
- We believe that the fertility benefits marketplace is becoming increasingly commoditized and crowded. Despite being the largest pure play company in its industry, we believe Progyny has few sustainable competitive advantages or points of differentiation from its peers. Though Progyny’s approach to fertility (for better or worse) has essentially become the standard of care among the focused fertility benefit managers, it can be replicated. Since Progyny’s relationships with its clinics are non-exclusive, the Company lacks both operational control over costs and quality and any meaningful differentiation in its clinic network. While Progyny was an early mover in its space, other high-profile private companies have exhibited rapid growth and achieved both scale and impressive wins with their models. Based on our research and analysis, we have identified that these other players have competitive differentiation in terms of business model (e.g., Kindbody, with owned clinics), payer relationships (e.g., WIN Fertility, with strong payer links), international scope (e.g., Carrot, as arguably the leading solution for employees outside the U.S.), and breadth of solutions (e.g., Maven, taking a more holistic view of women’s health). Several of these players have gone even further to innovate in related areas, such as payments and personal technology that leverage apps and wearables.
We foresee numerous headwinds to Progyny’s revenue growth in 2023 and 2024, most notably being the massive layoffs underway at their marquee technology clients, including Amazon and Alphabet. Thus, we believe consensus estimates are too high. While analysts are projecting ~$239 million of revenue growth in 2023 for Progyny, we believe that three key dynamics (which contributed to ~47% of incremental revenue in 2022) will not repeat this year: early new client launches, large client employee growth, and drug pricing tailwinds. Instead, in 2023 the Company will have to content with numerous sizable headwinds:
- Widespread Layoffs: Since the Company offers a discretionary, premium benefit, the challenging outlook for the economy presents an especially troubling headwind for 2023. To start, the vast majority of Progyny’s clients come from the technology sector, which is already facing widespread layoffs and is likely to see slower new employee recruiting and growth as a result. Based on our analysis of announced layoffs at known Progyny clients (e.g., Amazon, Alphabet) extrapolated to its remaining client base, we estimate up to $52 million of revenue is at risk.
- Declining Benefit Utilization: Moreover, the Company also faces numerous headwinds to benefit utilization in the year ahead. For instance, with a recession looming, we believe it is reasonable to expect these economic challenges will directly impact non-time restricted family planning decisions. Based on our research, we have determined that utilization within the Company’s existing client base already declines as the benefit matures and is unlikely to change any time soon.
- Decreasing Pharmacy Benefit Prices: Pharmacy benefit revenues have previously offset disappointing performance of core medical revenues at Progyny. However, our analysis indicates that a large portion of the Company’s pharmacy revenue growth has historically come from a more than doubling in revenue tied to Assisted Reproductive Technology (ART) cycles, such as IVF. While our research indicates industry-wide price increases for the most common IVF medications, we question both the magnitude of this increase for Progyny (as it equates to per-cycle drug costs far in excess of industry averages) and, more importantly, the sustainability of these price increases.
- Our forensic financial analysis has identified numerous reasons for caution and skepticism beyond those already identified in the market. Last December, a bearish research report on Progyny identified a relatively narrow range of accounting issues related to revenue recognition, bad debt expense and stock-based compensation, contending that the Company has overstated its addressable market.1 Our findings are consistent with this report, but we also identified additional concerns with Progyny’s unbilled receivables, which rocketed to an all-time high in Q3 2022. Based on our assessment, Progyny would have missed consensus revenue expectations in Q3 (as well as five other quarters in the previous 10) without their contribution to revenue, and we have been unable to reconcile these figures with other reported metrics and management’s commentary. We question whether executive compensation incentives may have driven this behavior. Through our research, we have also identified numerous concerns with Progyny’s client and member reporting. Not only does member growth not track with client-reported employee growth, but the Company’s selling season commentary suggests much greater churn than management has disclosed. On top of that, revenue from its largest customers, Amazon and Alphabet, declined for the first time (ex-COVID) in Q3 2022. We believe Progyny has glossed over the threats to its client base and has likely understated client churn. We found high profile examples of lost clients, such as Activision, that provide a reality check on the Progyny marketing pitch. We have also identified specific risks at three major Progyny clients (in particular that Google Ventures is an investor in Kindbody) and note that nearly half of Progyny’s existing clients will roll off their initial contracts in the coming two years. Disturbingly, as Progyny’s financial results have deteriorated, we have noticed a marked and growing disparity between the Company’s reported Adjusted EBITDA and cash flow from operations.
- We are doubtful of Progyny’s marketing claims and question the scientific support of its treatment plan, given its blatant conflicts of interest. First, within its marketing materials, Progyny heavily markets its pregnancy outcomes by comparing them to both national averages and those of non-members at Progyny in-network clinics. Given CDC guidance that a comparison of outcomes between clinics is flawed, we believe these comparisons are so misguided that they make Progyny’s claims invalid. Second, some Progyny outcomes are essentially a direct byproduct of its treatment approach. For instance, Progyny provides contracted financial incentives for a single embryo transfer, so it is unsurprising their rate is higher. Similarly, a comparison of the outcomes of Progyny patients with a premium benefit (often valued at $50,000 or more) to disadvantaged cash-pay patients who may be unable to afford ancillary services is patently unfair. Third, given major Progyny clients are skewed toward large technology companies, workers using their benefit are, on average, younger, wealthier and less diverse than national averages, meaning their healthcare outcomes are fundamentally not comparable. Finally, we find that Progyny has made a number of highly questionable methodological decisions, including using incomplete and/or massaged data, using advantageous recording periods and other definitions compared to the CDC data, and comparing results from different time periods, among others. In fact, even the actuary Progyny hired to validate its data analysis noted numerous deficiencies and highlighted that they did not actually audit the underlying data. We believe that Progyny’s strategy of progressing patients directly to IVF, the most aggressive and expensive course of treatment is highly questionable. In fact, the American Society for Reproductive Medicine (ASRM) concluded, “current evidence does not support IVF as a first-line therapy for unexplained infertility.” Moreover, we believe Progyny may potentially be ignoring the substantially greater treatment intensity and resultant physical burden and health risks related to IVF. What's more, numerous studies have called into question the utility of preimplantation genetic testing. Thus, we question whether its aggressive embrace by Progyny is simply a revenue grab that ingratiates the Company with clinics that are seeking growth. For reference, we estimate that such tests contributed $142 million of revenue in 2021, representing 40% of medical revenue.
- Our concerns at Progyny also extend to management’s past association with WebMD and its subsidiary, Medical Manager, where fraud occurred. The top three executives at Progyny, as well as a board member, held senior management roles at WebMD and/or its predecessor company Medical Manager, where a massive fraudulent accounting scheme involving 16 members of senior management was uncovered from 1997-2003. While none of the Progyny individuals were implicated or indicted, we are troubled that their functional roles placed them close to the scheme and that they were seemingly the only senior managers not involved. We also question their track record at WebMD, an internet advertising company. Under the guise of providing consumers with healthcare information, we believe that WebMD was a clickbait factory that – during their tenures – was criticized for sensationalizing medical conditions, touting unproven medicine, and manipulating its user base to the benefit of its big-paying pharma clients. We are troubled that these same individuals are once again managing a business that has the veneer of helping patients navigate a complex healthcare landscape, when in reality their actual offering is based on questionable science and rife with conflicts of interest. As troubling as the lack of true scientific expertise is at Progyny, we are especially alarmed by the background of its Medical Director Dr. Alan Copperman. Not only is Dr. Copperman employed by Progyny on a part-time basis, but he has also faced two malpractice cases.
We estimate between 60% – 80% downside risk to Progyny’s share price. Wall Street analysts are positive on Progyny and have published aggressive growth assumptions for FY2023, despite the weakening economy and the fact that technology companies are already bearing the brunt of layoffs. Revenue estimates have only been reduced by 5% in the past 12 months, while EBITDA expectations are largely unchanged. Insiders have reduced their stake from 52%, prior to the IPO, to 14%, as of the 2021 proxy filed in April 2022. Given the persistent insider selling and the issues we’ve identified, we see no reason why investors should be buying. By applying a range of 14x – 28x to our 2023E Adjusted EBITDA, we arrive at a price target of $7.00– $14.00 per share (60% – 80% downside risk).
Please note that the items summarized in this press release are expanded upon and supported with data, public filings and records, and images in Spruce Point’s full report. As a reminder, our full report, along with its investment disclaimers, can be downloaded and viewed at www.SprucePointCap.com.
As disclosed, Spruce Point has a short position in Progyny, Inc. and owns derivative securities that stand to net benefit if its share price falls.
About Spruce Point
Spruce Point Capital Management, LLC is a forensic fundamentally-oriented investment manager that focuses on short-selling, value and special situation investment opportunities. Spruce Point Capital Management, LLC is a member of the Financial Industry Regulatory Authority, CRD number 288248.
1 Jehoshaphat Research Report, December 7, 2022