Good afternoon, ladies and gentlemen, and welcome to the Progyny, Inc. Third Quarter 2022 Earnings Call. At this time, all participants have been placed on a listen-only mode and we will open the floor for your questions and comments after the presentation. It is now my pleasure to turn the floor over to your host, James Hart. Sir, the floor is yours..

Thank you, Matthew, and good afternoon, everyone. Welcome to our third quarter conference call. With me today are Peter Anevski, CEO of Progyny; Michael Sturmer President; and Mark Livingston, CFO. We will begin with some prepared remarks before we open the call for your questions.

Before we begin, I'd like to remind you that our comments and responses to your questions on the management's view as of today only and will include statements related to our financial outlook for both the third quarter and full year 2022 and the assumptions and drivers underlying such guidance, including the impact of our sales season, client launches and our expected utilization rate and mix, our anticipated number of clients in covered lives for 2023, the impact of COVID-19 including variants, on our business, clients, member activity and industry operations, the impact of any shortages or disruptions in the pharmacy medication supply chain on our business and our financial condition, our ability to acquire new clients and retain and upsell existing clients; our market opportunity, size and expectation of long-term growth our plans for the expansion of our business, including expansion into other markets and services offered, our business performance, industry outlook, strategy, future investments, plans and objectives, which are forward-looking statements under the federal securities laws.

Actual results may differ materially from those contained in or implied by these forward-looking statements due to risks and content associated with our business as well as other important factors.

For a discussion of the material risks, uncertainties and other important factors that could impact our actual results, please refer to our SEC filings and today's press release, which can be found on our Investor Relations website.

Any forward-looking statements can make on this call are based on assumptions as of today, and we undertake no obligation to update these statements as a result of new information or future events.

During the call, we will also refer to non-GAAP financial measures, such as adjusted EBITDA, adjusted EBITDA margin, gross margin, excluding stock-based compensation and operating expenses, including stock-based compensation.

More information about these non-GAAP financial measures, including reconciliations with the most comparable GAAP measures are available in the press release, which is available at investors.progyny.com. I would now like to turn the call over to Pete..

Thanks, Jamie and thanks, everyone, for joining us today. We're pleased to report that Progyny had a very strong third quarter with record quarterly revenue of $205 million reflecting 68% growth over the third quarter of 2021.

In addition, our adjusted EBITDA more than doubled over the prior year to a record $35 million, yielding adjusted EBITDA margin of 17%.

Positive momentum in revenue was driven primarily by both healthy member activity, which has fully returned to levels that are consistent with what we expect to see as well as by a number of new client launch during the third quarter for accounts that were won in the current sales season.

Most of these launches were clients who wanted to make the Progyny benefit available to their workforce as early as possible and who chose not to wait until the start of their health plan year on 01/01. There was also a large client who launched during the quarter because of their plan year starts in the third quarter.

While early launches typically happen in every sales season, those usually are with smaller clients. We've had more non-January one starts overall this year, and this has included some larger clients.

We view the enthusiasm of these clients and launching our benefit early as validation of both our market leadership as well as the confirmation that the demand for fertility and family-building solutions is high as employers increasingly recognize that their benefits need to be both equitable and competitive even with the backdrop of some macroeconomic uncertainty.

While there are varying predictions as to whether a recession will happen at all or how long it'll last, companies are still relying on the productivity and satisfaction of their labor force, and they're aware of what's actually happening in the market today, where unemployment remains at or near a 50-year low.

The labor continues to be extremely tight and there is a significant surplus of unfilled jobs. The availability of fertility and family-building benefits as well as the quality of those benefits is increasingly becoming a significant factor that prospective employees use when deciding whether to join or remain with the company.

And while these macro forces are providing a tailwind for fertility as a category, we've seen our market share continue to grow as employers are increasingly choosing Progyny as their solution provider given our track record of success in helping companies more efficiently manage their healthcare spend while simultaneously enhancing the patient experience through our superior clinical outcomes.

At this point in the year, our new sales and client renewal season is largely complete.

The last year's record-setting sales season, which had been favorably impacted to some extent by carryover demand from COVID affected sales year in 2020, set up a high bar for success in 2022, we continued that momentum and secured a record 105 new client commitments during the selling season, representing an additional 1.2 million covered lives.

Quarterly, we expect to enter 2023 positioned for another year of strong growth with 370 clients and approximately 5.4 million covered lives, reflecting double the number of clients in covered lives from the start of 2021.

Before I go into greater detail about the selling season, let me first give a recap of our renewal activities and then briefly discuss employment growth within our existing customer base. For the seventh consecutive year, we expect to retain nearly 100% of our clients.

We also continue to see very healthy appetite among existing clients who are looking to expand their project relationship through upsells including a handful of clients who are adding coverage for the Canadian population. Altogether, more than a quarter of our clients are increasing their benefit in some way in 2023.

We believe our extraordinarily high retention rate is one of the most underappreciated aspects of our business. Our clients include some of the most data-driven and analytical companies in the world.

We believe in our sustained success at both renewing those relationships year after year in addition to expanding with a large portion of the base each year demonstrates both the high levels of satisfaction we achieved as well as the strength of our client relationships, which is driven by the value that we continue to create for those clients.

By way of illustrating this point, our renewals this year include one of our largest clients, we chose to deepen the project relationship through a five-year renewal as opposed to the more usual three-year term in recognition of our track record of delivering substantial value both to the client and its workforce to our superior clinical outcomes and better member experience.

Although new sales activity has been the predominant driver to our growth historically, employment growth at existing clients has been a contributor as well.

Looking to 2023, as it relates to employment growth within our base, while some of our clients, including some of our largest ones, have made public comments about following the pace of hiring, or their expectations to keep headcount flat, none of our clients have indicated publicly or in their conversations with us that they're planning for any large-scale reductions to their workforce at this point.

Accordingly, we currently anticipate that the employment levels of our existing clients to be relatively consistent versus 2022 with little or no contribution to revenue from organic growth in 2023. Turning now to new sales.

We believe the record number of new commitments we've received demonstrates that our opportunities continue to be significant and the market remains substantially underpenetrated.

We believe these results also show that Progyny remains a provider of choice for the largest and most successful companies in the world and that we remain in our strongest and best competitive position given that no other benefit solution has been able to build a fully managed solution that delivers high-quality outcomes.

[Indiscernible] clients we're adding represent the broadest and most diverse cohort in our history including aerospace and defense, food and beverage, healthcare, agriculture, telecommunications, energy, cybersecurity, financial services and more.

And as we discussed last quarter, we also won our initial clients in a number of industries that are very large and underpenetrated, including hotels, airlines, labor unions, university systems and even our first professional sports team.

We expect this cohort of newest clients will further enhance the strength and diversity that already exists within our base as our clients in 2023 participate in more than 40 different industries.

Consistent with prior seasons, we continue to see a broad range in the size of the newest clients who span from 1,000 lives to well in excess of 100,000 lives. We believe this demonstrates the relevance of fertility as an essential benefit for any type of employer regardless of the industry they're in or the size of their operations.

Similar to last year, approximately half of the newest clients had a previous fertility benefit before moving into progeny, and the other half of our newest clients are adding fertility to their health benefits for the first time in 2023.

Given that the market overall is evenly divided with roughly half of large employers providing some type of fertility benefit and the other half not providing any coverage at all, we believe our success with both groups this year underscores our growth opportunities with larger employers.

As further evidence of the healthy appetite for fertility benefits and its resilience in this macro environment, our newest clients have also continued to select robust levels of coverage for their workforce with most choosing to provide two or three smart cycles, which is consistent with our historical average.

We're also pleased to have achieved our strongest ever adoption rate for Progyny Rx this year. Of our newest clients, 97% are taking the pharmacy benefit, driven by the savings we deliver over the traditional PBMs as well as our superior member experience that, amongst other advantages, eliminates the risk of treatment delays.

Active the newest cohort launches, we anticipate that 90% of our overall clients will have the integrated solution up from 84% today.

Before I turn the call over to Mark, I want to provide a perspective on a recent development that's affecting the supply chain of the commonly prescribed facility medication, firing the manufacturer of Menopur, one of the largest drugs in our formulary, has notify us that they have temporarily paused delivery of that medication, thereby creating a shortage in supply as they wait for the FDA to approve changes that were made in the manufacturing process by one of their suppliers.

[Indiscernible] review of their data to-date indicates that the safety and efficacy of the product remains unaltered, and [Indiscernible] has indicated that they're not aware of any evidence indicating with the changes in the manufacturing process pose any risk to patients.

Lastly, [Indiscernible] has noted by us that they're working with health authorities, including the FDA, to resolve the situation as quickly as possible and will keep us informed.

In the meantime, clinicians are able to employ a combination of alternative medications to replicate the effect of [Indiscernible] through the administration of these drugs, though the administration of these drugs is more complicated for the patient. It's worth noting that this is the only drug of its kind in the U.S.

that's approved for use and the drug has been used widely and successfully with patients for many years. It's also important to stress that neither [Indiscernible] nor the FDA recalled any doses of the medication that had already been distributed to the market.

quarterly, and looking at previous situations that have similarities to this one, we believe it's reasonable for us to anticipate that this situation can be resolved relatively quickly.

While we don't anticipate the temporary disruption to have an impact on members' ability to pursue treatment, we do expect a slight financial impact as a result of using the alternate trials given the different unit economics for these drugs, which the guidance we're issuing today already contemplates, as Mark will discuss in more detail shortly.

With that, let me now turn the call over to Mark to discuss the quarter in more detail and provide our expectations for the balance of the year..

Thank you, Pete and good afternoon everyone. I'll begin by walking through our results for the third quarter and then provide our expectations for the remainder of the year. Third quarter revenue grew 68% over the prior year to $205.4 million, making this our first quarter to exceed $200 million in revenue.

To put this into perspective, after we launched our solution in 2016, it was five years before we reached our first $100 million quarter. Since then, it's taken less than two years to add that next $100 million.

We believe this underscores not only the momentum that's been driving the business but also our ability to successfully and rapidly scale our operations. Our growth in the quarter was primarily due to an increase in the number of clients in covered lives as compared to a year ago.

Weighted average covered lives increased by more than 200,000 driven by the launch of nine new clients at various points during the quarter. In every selling season, there are typically a handful of clients who want to launch their benefit sooner than the customary January one date.

As Pete discussed earlier, we view the higher-than-usual number of clients launching early this year as a strong validation of how relevant the fertility benefit is in the market while also affirming the conviction employers have to improve their health plans in this environment.

There was also a large client that we won in the current season whose health benefit plans begins in the third quarter. So this was a natural go-live date for them. Accordingly, we had 282 clients as of September 30, representing an average of 4.5 million covered lives during the quarter.

This compares to 188 clients and 2.9 million covered lives in the year ago period, reflecting 57% growth in lives over the past year. Looking at the components of the topline.

Medical revenue grew 52% over the third quarter last year to $129.3 million, which again, was due to the growth in clients in covered lives while pharmacy revenue more than doubled in the quarter to $76.1 million. Our higher growth in pharmacy reflects an increase in the number of clients with the integrated solution as compared to a year ago.

Turning now to our utilization metrics. More than 11,000 art cycles were performed during the quarter, reflecting a 61% increase as compared to the year ago period. Female utilization, which is the rate that most closely corresponds to our financial results, was 0.44%. This compared to 0.46% a year ago.

As a reminder, utilization rates vary from quarter-to-quarter due to a number of factors, including the time of the year and the timing of new client launches as we typically see a ramp-up period as our newest members begin to have access to the benefit. Turning now to our margins and operating expenses.

Gross profit increased 61% from the third quarter last year to $46 million, yielding a 22.4% gross margin. The 90 basis point decrease from gross margin in the year ago period primarily reflects the impact of noncash stock-based compensation partially offset by efficiencies that we continue to realize in the delivery of our care management services.

As a reminder, our third quarter margins are typically higher than what we see in the fourth quarter as we onboard the incremental headcount that we need to successfully support the significant step-up that we expect in covered lives in advance of January 1st.

Sales and marketing expense was 5.4% of revenue in the third quarter as compared to 3.6% in the year ago period. The increase reflects higher noncash stock-based compensation as well as continued investments we are making to expand our go-to-market resources.

G&A costs were 11.5% of revenue this quarter, reflecting a slight improvement from the year ago period. We continue to realize efficiencies across our administrative functions, which more than offset the impact of higher stock comp expense in the current period.

The press release we issued today reconciles the impact of noncash stock compensation on our gross margins and operating expenses. With our strong topline performance and the efficiencies, we've realized, adjusted EBITDA more than doubled from the year ago period to $35 million this quarter.

The 17% adjusted EBITDA margin is our highest ever, reflecting a 350 basis point expansion from the 13.5% margin in the year ago period. Adjusted EBITDA margin on incremental revenue was 22% this quarter -- sorry, 22.2% this quarter, demonstrating the leverage that we continue to achieve as we build the business.

Third quarter net income was $13.2 million or $0.13 per diluted share. This compared to net income of $16.8 million or $0.17 per share in the year ago period. The lower income in EPS as compared to a year ago primarily reflects the higher stock comp expense in the current period as well as a higher tax benefit recorded in the prior year period.

Turning now to our cash flow and balance sheet. Operating cash generated during the quarter was approximately $21 million. This compares to $24.2 million generated in the year ago period. Over the first nine months of the year, operating cash flow of $28.9 million compares to $17.2 million in the year ago period.

Our cash flow in both periods reflect the timing impact of certain working capital items, specifically as it relates to our pharmacy partner arrangements.

The substantial growth in pharmacy revenue, both on a year-over-year basis as well as sequentially from the previous two quarters of this year, and the payment terms associated with our rebate creates a lag when looking at current period cash flow versus adjusted EBITDA.

Additionally, given the large number of new clients and lives onboarded during the last couple of quarters, cash flow also reflects that short-term negative impact that we typically see with these new launches as it can take a quarter or so to get the integrations with the newest clients and their carriers running efficiently.

As of September 30, we had total working capital of $245 million, reflecting $141 million in cash, cash equivalents and marketable securities and no debt. Turning now to our expectations for the fourth quarter and full year 2022.

Given the strong results we've achieved over the first three quarters of the year and the number of new clients we have sold that have already gone live, we're pleased to be in a position to raise our 2022 guidance for the third consecutive quarter.

For the full year, we are raising both the low and high end of the revenue range and now expect between $775 million to $785 million, representing growth of between 55% and 57%. On that basis, for the fourth quarter, we are projecting revenue of between $202.4 million to $212.4 million, reflecting growth of between 59% and 67%.

This anticipates the full quarter impact of the nine clients that launched in Q3 as well as a number of small clients that have launched in Q4, taking our expected average member count for the fourth quarter to $4.6 million.

The ranges for both the year and the fourth quarter also reflect an estimated negative impact of $7.5 million to $12.5 million in revenue from the Menopur shortage that Pete discussed earlier, assuming the shortage persists over the balance of the year.

Although we don't expect this shortage to negatively impact member utilization, there are different unit economics with the alternate combination of drugs that are being used during the shortage. We are also raising our guidance on profitability for 2022. We now expect adjusted EBITDA of between $121 million to $124 million.

For net income, we now expect between $26.3 million to $28.5 million or $0.26 and $0.29 earnings per share on the basis of approximately 100 million fully diluted shares.

For the fourth quarter adjusted EBITDA, we expect between $28.4 million to $31.4 million and net income ranging from a loss of $700,000 to income of $1.6 million or between a loss of $0.01 and $0.02 of earnings per share based on approximately 100 million fully diluted shares.

This guidance reflects that we issued a broad-based equity grant in the fourth quarter which we expect will increase our stock compensation expense and which is reflected in our guidance ranges. We did a similar broad-based grant a year ago, which, in hindsight, turned out to be when the market was at all-time highs.

Accordingly, we issued the new grant to help ensure that the equity component of our compensation structure continues to serve as a retentive tool. As a reminder, our net income ranges do not contemplate any discrete income tax items, including any income tax benefit related to equity compensation activity.

To the extent that activity occurs, we will continue to benefit from those discrete tax items over the remainder of 2022. Let me now turn the call back over to Pete for some closing remarks..

Thanks, Mark. As we look to 2023, Progyny continue to distance itself from its competitors and demonstrate its market leadership. We expect to be managing fertility benefits for 5.4 million people and approximately 370 companies in 2023, a far greater scale than any other point solution provider.

As we think about continuing to grow our market share, even with the record results in our most recent selling season, there are always a certain number of accounts who decide this wasn't the right time for them to take the benefit. And this selling season was no exception.

As in prior seasons, these prospects are choosing a competitive solution rather they ultimately determined this wasn't the right time for them to add or change their fertility solution generally because of some other need they have to address in their health plans.

The dialogue with those accounts remains very positive and a number of them have indicated they are eager to begin revisiting their discussion with us in January, which sets us up with a larger and healthier pipeline than what we had at this time last year and positions us well to start next year's selling season with momentum.

As we look into next year, we continue to believe that we are at a very early stage of penetrating our core market. Once our newest clients go live, we will still have just a low single-digit percentage of the 8,000 employers in our target market.

To conclude, we're pleased with both our results this quarter as well as the progress that we've made in the execution of our strategic initiatives, particularly as it relates to our success with our selling season and client retention, which affirm that Progyny continues to be the provider of choice for many of the largest and most successful companies in the world.

With that, we'd like to open up the call for your questions.

Operator?.

Certainty. Ladies and gentlemen, the floor is now open for questions. [Operator Instructions] Your first question is coming from Anne Samuel from JPMorgan. Your line is live..

Hi. Congratulations on the terrific results and the great selling season. You highlighted in the release that you saw some early launches this year. And I was just wondering what's driving that and if we should expect that to be the new normal going forward..

Yes. It's -- I would never expect it to be the new normal, although we did have a number of new clients that went live and most of them that did go live were -- went live ahead of their normal plan here, which is 1/1. For the most part, we never plan for that because you can't predict how many there will or won't be.

One of the clients and the largest one that went live, did go live on their plan year, which is a fiscal year, not a calendar year. And so that's why the number of clients and lives that went live earlier is bigger than normal. That doesn't always happen, and we don't plan for it.

But obviously, it's a good indication of where companies are thinking in terms of why they want to benefit earlier..

That's helpful. Thanks. And then just one question about -- you talked about the financial impact from the Medicare issues, is that just on the Rx side? And then just wondering if you expect to see any impact to utilization from that disruption.

And then also just when -- how quickly do you think it can be resolved?.

Yes. We don't expect any impact on utilization from it. That impact is only on the Rx side. And we don't have any further insight into when it will be resolved.

But as I said in my comments, historically, when there are certain drugs that are the only drug in market approved for a certain condition or treatment in the past, these type of situations where there's changes in manufacturing process, have been resolved relatively quickly.

And so our hope is that's the case in this situation, but we don't have any further insight than what we provided..

Helpful. Thank you. .

Thank you. Your next question is coming from Michael Cherny from Bank of America. Your line is live. .

Hi, this is [Indiscernible] on for Mike. Congrats on the quarter. Thanks for taking my question.

Now that we have the selling season results for 2023, can you talk a little bit more about the end of the selling season, particularly as it relates to your close rates? And then any trends that you were seeing with not-now clients?.

Sure. It's hard to sort of distinguish close rates in different parts of the selling season because you never know exactly why they didn't buy. What we look at is we look at our rates of close relative to deals we won or lost to a competitor, and those are really high.

But the not-nows are many different reasons why do not now, and those are much greater and set us up really nicely for next year. Sometimes we get clarity on the not house. Many times we don't. But they're just other priorities. But for the most part, we feel really well positioned for next year vis-à-vis the not-nows..

Got it. That's helpful.

And then could you just talk a little bit more about what was driving the EBITDA margin expansion? And then just any further color on the efficiencies that you mentioned?.

Yes. So, again, we've seen margin expansion really period-over-period as we've grown. And it's across each and all of the lines that we have. I mean, as our revenue has grown, we've been able to expand both through care management services.

We don't need to hire as many people on a growth rate perspective as the number of lives we bring on or the revenue that, that generates. Same thing also in terms of customer acquisition costs and sales and marketing and we've been quite efficient on G&A.

I would say that the quarter did benefit a bit from some timing of expenses, but maybe a little bit of that would then come back in Q4, but I'm talking about relatively minor amounts here. Nothing to call out as far as some kind of special trend..

Great. Thank you. .

Thank you. Your next question is coming from Jailendra Singh from Truist Securities. Your line is live. .

Thanks and thanks for taking my questions. Clearly, 2023 now locked in at least from 1/1 start year point of view. But I wanted to get your thoughts beyond 2023, and I understand it might be a little early to talk about 2024 selling season.

But are you getting any indications from your conversation with employers that there is a chance that employers might press a pause button for late 2023 or 2024 rollout in terms of benefit expansion or fertility benefits in particular given the macro environment and recession concerns..

We really haven't had conversations with anybody about 2024 to speak of. So I really can't comment on that.

All I could tell you is that if you look at all the indicators of what happened in this selling season for 2023, whether it's the expansion of industries from 30 to 40, whether it's the number of clients being up 25% from what we sold in prior year, whether it's the fact that we sold half the clients never had the benefit before the other half had some form of benefit for Swiss to Progyny, et cetera.

All indications are what we were saying in our prepared remarks, which is the fact that it's a tight labor market and the fact that this is a really important benefit that people look for, companies continue to acknowledge, recognize and take action on.

And that's why I believe that, that will continue beyond 2023 even with some of the macroeconomic conserves that are out there because they've been in the headlines as we know, all year long and recently. And even with that, we still had a successful selling season.

So importers do realize that even with some of those concerns, they may have to be smart about what they're doing, but certainly adding this benefit doesn't appear to be something that they're eliminating from their choices..

Great, that's helpful. And then my quick follow-up on the -- just in general competitive landscape. There have been some large client wins, employee wins by some of your competitors. I know you mentioned that your win rate has been pretty good.

But if you guys have not -- if you guys have not won a client in the selling season, specifically, what were some of the reasons. Were you being selective in RFPs? Or were you -- there was some spread to grow things which did not fit with your kind of focus area.

Just trying to understand the reasons any different from prior years in terms of you not getting those clients..

Sure.

There's various different reasons why I would say the most common reason for us is a lot of times, we'll get prospects that will want to offer the benefit in a certain way that we don't view as a comprehensive benefit, right? So that would be everything from restrictions in terms of the amount of money they want to spend in terms of dollar maxes, that would be everything from narrow networks, that will be everything from any limitations on geo access, certain treatment exclusions, medical necessity being added, et cetera.

And so all of those things make it make it both not a comprehensive benefit as well as a benefit that in many cases, could potentially be an inequitable benefit, right, in our opinion.

And so many times when we're asked to do the benefit in a different way that we believe is the best way to do it we try and talk to clients and convince them from our point of view, the right way to do the benefit. And sometimes, most of the time, we get them to agree and sometimes we don't. So, I would say that's probably the most common reason why..

Great. Thanks a lot. .

Thank you. Your next question is coming from Scott Schoenhaus from KeyBanc. Your line is live. .

Thanks. Congrats on the strong quarter and new client wins.

Just curious, given the pull forward with a record number of clients launching early rather than Jan 1, should we see utilization levels tick up in the fourth quarter, which would be seasonally abnormal as new members ramp with the services?.

The utilization level -- you wouldn't see a tick up in the utilization levels, part of why we quantify the impact of Menopur is if we didn't have that impact on the topline, the overall sequential revenue growth would have been bigger, and that's where you would have seen it.

So, if you think about utilization as a function of the number of lives that you have under management in a moment, the utilization levels themselves as a percent wouldn't go up, if that's what you're asking. But certainly, the overall cycles and volume is going to go up because you have more lives under management. I hope that answers your question..

Yes, then that does. And that takes me to my next question. So, your run rating around 16% annually from an EBITDA margin perspective. this is a fair run rate for the business moving forward on an annual basis realizing there's seasonality from quarter-to-quarter or does the disruption in Menopur distribution and moving towards alternative medications.

I think you mentioned the lower pricing unit economics, but is there any like cost structure impact with having to procure these additional alternatives. Thanks. .

Yes. There's a small cost structure impact. But again, if you go back to my remarks, which is why I gave my point of view in terms of how long I think this will last. I don't think this will be a long-term disruption. And so I don't -- I wouldn't think about -- I wouldn't think about this as an issue on a long-term basis.

It is a short-term, what I would call a short-term bump relative to margin contribution. And then I'll let Mark ask the first part of your question..

Yes. So, we've -- obviously, each of the last several quarters in this quarter as well, we always sort of point to the margin on the incremental revenue that we're generating as being maybe a better indicator of the longer-term EBITDA margin, but I think I would also caution you sort of quarter-to-quarter to be careful.

I think if you look at our full year guidance, and sort of interpret what's there. You're looking at sort of mid to upper 19 percentage or so for this year. And that's probably that and maybe a little bit in that area is probably a better place to be..

Thank you. Your next question is coming from Glen Santangelo from Jefferies. Your line is live. .

Yes. Thanks. Hey Pete, I just want to follow-up on some comments you made with respect to overall sort of penetration. I think in your prepared remarks, you said the market remains substantially underpenetrated. I mean clearly, you had a great selling season.

But a big question we get from investors is, what's sort of the sustainability of this type of growth.

And so I was wondering if you could maybe put a finer point on those comments around penetration maybe to the extent like how many self-insured clients you think are out there? How many lives does that represent where you think we are in terms of penetration? Any sort of statistics like that, that you can give us?.

Sure. If you look at -- there's a couple of buckets of addressable market that we talk about, the one we referenced the most is there's 8,000 large self-insured corporate companies in the U.S. that represent roughly 80 million covered lives.

We're penetrated the numbers that we sort of quoted, 370 are self-insured clients and next year, roughly 5.4 million covered lives, right? And so that's sort of some idea from that market Then there's an additional -- in terms of the labor market, there's an additional roughly 20 million, 25 million lives amongst -- across all the different types of labor that are in the U.S.

that are a whole other market that we just started to penetrate this year. And so when we talk about the low penetration, we're referring to that universe.

And last piece is, as we talk about each year, we win a significant number of companies that already covered the benefit in some form, primarily with their current traditional carrier as well as we win a significant number of clients last two years now, almost half and half that covered -- didn't cover the benefit at all.

And so it's really the combination of all of those things that continue to reinforce our belief that we're still very low and early in terms of penetration in the overall market. And we consider finally the continued trend of fertility related to the U.S., which are declining and have been declining.

That's the reason why the demand for the benefit and the awareness around the need for the benefit amongst millennials continues and grows.

And they are the folks that are going to be doing asking their HR departments about this benefit, whether they have it and it's not in my opinion, or their opinion at or whether they don't have it at all and continue to push for getting get covered and which is why I believe that our growth is success will continue..

That's really helpful. Maybe I just ask one follow-up on those statistics. I mean you said at the 8,000 large employers, there's 80 million covered lives. Any idea what percentage of those already have some type of benefit in place? Because your wins are clearly coming from white space and from maybe some lives that are covered by the major carriers.

And I guess, the concern that some investors have that managed care ultimately wakes up one day and stop seeding these lives to some of these pure-play ability players. And so people are just really trying to understand like what's really the market opportunity. Thanks..

Yes. Let me hit the second part of your question first. Well, I'll do the first part, it's because it's easy.

So based on studies that interacted by the largest benefit in sons of the larger employers that are out there, only 40% cover this benefit in any form, right? So, let's start with that one first, right? As it relates to -- what was the part of the question? As relates to the health plans, interestingly enough, this past year was the first year we didn't see any change amongst the health plans trying to do anything around their offering in our competitive situation.

So if any did anything, we weren't aware of it. So when I say that, I mean, in prior years, some of the health plans tried to create some marketing around their solution didn't make a lot of changes to how they're doing the benefit or administering the benefit, but try to put some marketing together to sort of feature what they're already doing.

In the past, some of the larger carriers put together programs and name them certain things to try and compete in this space. There are large carriers that have -- and have had for years, fertility solutions out there that we don't see that often competitively. This is the first year where we didn't see any new activity from any of the large carriers.

And my belief has been and continues to be the reason for that is that the ASO model doesn't give them any financial incentive up or down to offer this benefit or not.

And so -- and they have much bigger fish to fry, if you will, in the overall healthcare landscape that they don't seem to be that focused on changing their approach around this benefit..

Super helpful. Thanks a lot..

Thank you. Your next question is coming from Sarah James from Barclays. Your line is live..

Thank you. I was hoping you guys could touch on the timing of the pharmacy rebate negotiations rolling out in practice. So did they have any impact on the sequential margin or DSO? And when will it fully be ramped.

It would be helpful if we could get some color on how much impact that's having on 2022 EBITDA or an annualized go-forward EBITDA?.

If you're talking about the impact to cash flows, it will always have an impact as we are growing. So to the sense that we're growing year-over-year and sequentially in quarters, that drag related to cash flows will continue because the payment terms are 180-day payment terms. Our current agreement has another year in it.

I can't comment on the timing of when the negotiations will start. But there's another year through the end of 2023 under our current arrangement..

But from an EBITDA standpoint, the arrangements exist and is effectively part of our results and part of our guidance. There's no there's no ramp up, if you will, associated with that within the year. It's really just the operating cash flow impact because of the delay between earning and receipt of six months.

And by the way, we've been getting all of this money pretty faithfully, it just comes a couple of quarters later..

Got it. Yes, I wasn't worried about the cash collection. I was just more thought it was tied to a favorable term negotiation for--.

As Mark said, the terms are in effect to the full year, there are no sequential terms, and it's a 3-year arrangement going through the end of 2023..

Okay. Good. And then I wanted to unpack your comments on the sales and marketing expense as it relates to your go-to-market strategy? You guys have really high retention. I know your sales team is leverageable.

So how should we think about increased funding for go-to-market strategy? Is that an indication that you're thinking of expansions like men's health or middle market? Or just how should we read that strategic change?.

A couple of things, right? Some of that is expansion. We talked about standing up our benefit, I mean had a few small upsells, but positive upsells from our existing clients in the Canadian market. So investing in the go-to-market strategy in Canada is part of it.

Some of it is continuing to develop our capabilities across different channel partners and distribution partners, and that's going to take some sales effort. And then the rest of it is just as you continue to grow, you do need a bigger marketing function to support all those things in terms of go-to-market.

They also need to support your providers and all your clients for -- and the members from a marketing perspective and all of those things require investment..

Thank you..

Thank you. [Operator Instructions] Your next question is coming from Stephanie Davis from SVB Securities. Your line is live..

Hey guys. Congrats on an awesome quarter..

Thank you..

I have a question for you. You keep talking about shortages in drugs on formulary like Cetrotide and Menopur and then you're putting up record EBITDA quarters.

So is there a way to tie that out and cite what your margins could look like if you didn't have all these headwinds? Or should we think of this rate as likely peak margins?.

Let me just clarify the timing of the Manipur shortage. It just happened literally now, so end of October.

And so the impact of it relative to the third quarter results didn't impact it, right?.

Cetrotide, right?.

I'm sorry?.

The Cetrotide was there as well..

Cetrotide, I think for the full quarter -- negligible shortage. So for the most part, most of the quarter, we were okay. There was a little bit, but nothing meaningful, not much to sort of quantify..

It was anticipated in our guidance..

Yes, and it was anticipated in our guidance. So the Menopur, the bigger impact of it is obviously the top line impact. There is an impact on the margins. Shortages are going to happen from time to time. They don't always happen with drugs that are or aren't on formulary in terms of replacement drugs.

But at the end of the day, I could quantify it, but to the extent that the shortages have been short-term in nature, I don't think it's instructive because most of the time and most of the drugs that are spent, the significant majority is on formulary. And all they're doing is impacting on a short-term basis some of these quarters.

But as you see in the guidance, not in a really material way..

Understood. And then more of a housekeeping question now to me.

Is there any way to think about the mix of the new cohort that had the pharma benefit versus non, but what would drive someone to not have it at this point?.

So the good news is there were very few. We're up to 97% in terms of the uptake of pharma of our new clients, highest ever. I think last 92% or something..

92%, 93%, yes..

92%, 93%, but certainly close to 100%. There are very few clients that don't take it has always been the same as in prior years, but as we continue to perform and show impact. That's why I believe our uptake continues to grow.

But the reason why clients don't buy it usually is because there's two decision-makers at clients relative to taking on the benefit, one that represents the medical side.

one that represents the pharmacy side and to the extent that both aren't included for whatever reason and whatever other priorities may be going on, on the pharmacy side, there are at times existing and new clients that don't take both the entire benefit with pharmacy. That's the most common reason..

So, is there still an opportunity to expand into that? Or is this kind of -- should we think of this as nearing the top?.

There's always an opportunity to expand it. Last year, we had a significant amount of -- and it's evidenced by our -- the growth in pharmacy versus the growth in Medical this year. We had a significant upsells. There was a lot more opportunity, there's a little bit more opportunity this year. We had success in it again.

We'll always continue to present the positive impact of going with the project Rx program to our existing clients and hope to win them all..

Awesome. Thank you guys..

Thank you..

Thank you. Your next is coming from Deb Weerasuriya from Berenberg. Your line is live..

Hey thank you for taking my question and Good quarter here heading into Q4 after the selling season. I just want to put some context around a couple of things I've been talked about already. One, penetration, which all indications kind of point to a market that's pretty early.

And then you mentioned kind of the expansion of the sales force slightly and then the other thing is if you just look at the client memorized, although this is a good selling season, it's relatively in line with the 1.2 million lives that were added last year, I guess, as someone sitting and looking at all that together, I would just expect if this penetration is still early for kind of member live ads to accelerate still through the next few years.

Do you think maybe it's kind of flat in terms of year-over-year because there's some softness from macro this year or is there kind of a further sales effort needed, you think, to drive further member lives given penetration so little. Just trying to bridge that gap. Thank you..

Yes. Here's how I would frame it, and I can't quantify it for you. There's two reasons why the year-over-year from a lives perspective, is flat. One is the macro environment has to have some impact. I think the greater not now suggest that. And so that certainly is a thing, right? But again, hard to quantify it.

because literally, we had one or two of many, many prospective clients that mentioned sort of budgets and that kind of thing as a concern, and we heard that from nobody else. So I view that as anecdotally, not systematic.

The second reason is that, if you recall, last year's selling season did benefit, although we could ever quantify by how much by the muted take from the 2020's selling season because during that year, many companies chose not to make any changes to their benefits in terms of their employees for 2021 because they were dealing with the impact of COVID and a remote workforce.

So if you look at sort of the really -- excuse me, let me just clear my throat for a second.

You look at the really low sales from 2020 as a result of COVID, and you average the two years and maybe wait a little bit more into 2021 because you would have expected some growth we view this year as growth considering that overhang that benefited last year's selling season. So I would say it's a combination of the two.

But overall, still significant success relative to the base of lives we came into the year with and the base of lives and accounts they're exiting the year with..

Okay, that's helpful. I guess the next question just following up on that is it's certainly looks to get a little bit more competitive from a market standpoint with both well-funded startups coming into the market.

From a growth commercial engine standpoint, how comfortable are you with the current scale? Or do you feel like some acceleration would be helpful. Again, just putting it in context of kind of the penetration being low, could that be beneficial? I just would love to get your thoughts on what you're thinking about in terms of commercial presence..

Sure. Every year, we reflect on the sales year. And every year, we make investments. Some of them I mentioned already relative to both marketing and feet on the street relative to our sales force, including how it's organized, including how they work with specific channel partners, et cetera. This year is no different.

We'll make those investments for the next selling season, and we continue to invest in our go-to-market strategy, and this year will be no different. And so -- and every year, we get smarter at how to approach the market and we get smarter anything changes in the market, et cetera. And this year will be no different.

And we're already in the process of that hiring and investing so that we're prepared for next year selling season..

Great. Thanks for taking my questions..

Thank you. That concludes our Q&A session. I will now hand the conference back to James Hart for closing remarks. Please go ahead..

Thank you, Matthew, and thank you, everyone, for joining us this afternoon. If you have any questions, feel free to reach out. You all know how to reach us. Thank you so much. Talk to you next quarter..

Thank you, ladies and gentlemen. This does conclude today's event. You may disconnect at this time and have a wonderful day. Thank you for your participation..