Revolutionizing Fertility & Family Building Benefits - David Schlanger, Executive Chairman @ Progyny

Thanks for joining me today. Thanks for having me, and it does feel good to be with people again. So it's been a long time. Pleasure to be here.

So I did start on Wall Street. I was a corporate finance and M&A lawyer during kind of the junk bond boom and these what they now call private equity but the LBO kind of world. One of my big clients at the time was Drexel Burnham. That's kind of how far I go back. This was the late 80s. And when Drexel broke up, one of the bankers that I became close with went to go work for an entrepreneur who was running one of the country's leading PBMs at the time. And they called me up one day and basically recruited me out of the law, and I went there to go become an M&A professional and kind of never looked back at the law. But that's how I started in healthcare, which was kind of accidental but also left what was at the time a fairly promising legal career, I think.

Well, I think you have to back up a little bit and maybe just a tad of my history. WebMD is probably relevant. So I had a very good career at WebMD. The company did great things and we solved real problems in healthcare. Financially it worked out well for me. The company was hitting all its numbers, record revenue, record profitability, the share price had done really well. But after 25 years together, we no longer had a tenable relationship. So when I left, I was in a good position in that I didn't have to do anything right away. I was financially secure. What I told myself at the time was that it was much more important who I worked with than what I did. I was going to work in a place where I liked the people, I respected the people, we all had a similar viewpoint about company culture and how you maximize performance. Pretty much right after I left WebMD, I heard from you folks about this opportunity that happened to be in New York, which was helpful to me since I lived here, was in healthcare, again helpful to me, and that was a small company in the fertility business which I really knew nothing about because it's a small piece of healthcare, but had a couple great investors behind it, you know, Kleiner Perkins and TPG. They quickly arranged for me to meet the two partners from those firms that were on the board, and we just hit it off personally. And I read up on fertility a little bit, I was intrigued, and I said to myself, these are kind of people I'd like to work with. I really have nothing to lose if I go there and it's not really a business. I'll tell them after a couple months I'm doing them a huge favor to tell them not to put any more money, but in the meantime I'll have met some good people from some powerful firms, and that can always serve you well. And it was just an instinct about the people. I read up enough about fertility to know that there was some good cultural and societal tailwinds behind it. Whether this company had a good business proposition I wasn't sure, but I was willing to go find out, and that's what happened.

Yeah, that's certainly true. And it probably never is because from the outside, how do you really know what's going on? And it's what I told Beth and Freda, those are the two partners. I said, look, you have to get in there and see because I could read all the board presentations, I could interview some of the people, but until you get in there and see everything had to be fixed. But there was one thing that was really intriguing. They had five customers, and two of which were two big tech companies, Facebook and Google, who are some of the smartest people you'll ever meet, and they were successful in getting them to buy their service. And I know having been in the healthcare business before that, and being in healthcare services, that they won't just buy anything, and it's hard to get them to buy. So I said to myself, if Google and Facebook see some value, there's got to be something there. So what we quickly learned at the first board meeting, what we told the board is we think there's a business there. And in fact I remember Fred Cohen, the partner from TPG, looking over at me in the board meeting and he goes, you think there's a business here, right? And I go, absolutely. And we laid out a plan that said we need this amount of money that will last this long to get us to profitability. And the good thing is the board said, well, take 50 more just so you have some cushion. And from then on we kind of hit the races. And I was lucky then when I came over that I wasn't the only one that got a divorce from WebMD. The chairman at the time, my CFO, Pete Deski, did also. And I told Beth and Fred that you got to bring him too because he really had the financial and operating skills to put all the systems in place to turn a good idea into a business. And I can handle kind of the marketing and positioning and competitive factors, but you really need Pete to kind of put all those things together. And at the time, the company was losing 20 million bucks a year, had 80 employees, 50 of which we had to get rid of. It was almost like starting from scratch, worse than starting from scratch in a few ways. But here we are, five years later, and we said that we expect 750 million in revenue at the midpoint of our guidance, with over 100 million in adjusted EBITDA. And despite the downturn in the market, we're still more than double our IPO price. So it's been quite a run.

There's a lot of ways you could say it, but for me, successful businesses always solve problems. And I think Progyny is a great example of that. So infertility is a gigantic health issue in this country. One in eight couples suffer from infertility, and that's just the couples that have medical infertility. Then all the social infertility, same-sex couples, single moms by choice, but anyone that wants to have a child that can't do it naturally. And the number of people that affects is going up every year as the age at which people try to get pregnant goes up. That biological clock's a real thing. So fertility is just a very big problem. And for employers who 75 years ago made this pact with their employees, we, not the government, provide you your healthcare. And we provide your healthcare across pretty much all the common and even uncommon diseases and ailments that we may suffer from. So if you're asthmatic, if you have cancer, diabetes, heart disease, tear up your knee playing tennis over the weekend, your employer's healthcare coverage covers it. But fertility was a strange thing. Even though it's a disease, it just wasn't covered. And when it was covered, it was covered really poorly. And fertility is so unique. The physical and emotional demands of a fertility journey are very unique. The one-size-fits-all approach that large managed care companies put to managing disease with very restrictive rules that are meant to control costs, not drive outcomes, it may work when your kid has pink eye or strep throat, but for many complex things it doesn't work. And that approach can actually create bad outcomes and in the end more expense. When it comes to fertility, if you can be better at it because of the cost of treatment and the negative downstream medical effects of treatment done poorly, you can create an enormous amount of value. So we started out with this notion that we're going to focus on better outcomes and moving the needle on outcomes and being a real value-based healthcare company. And as you said, we've consistently had much better clinical outcomes than the national averages, to the point where there's real financial value for employers. And it's not just financial value. As a member, as a woman going through treatment, if you need to go through one cycle of IVF versus two, that's a pretty big deal physically and emotionally. So we continue to grow because we continue to be better than everybody else. We're really offering employers just a better way to provide what's a really important coverage to their employees. And even though it may only affect one or two percent of your employees, it's a very important segment of your employees. It's people that are kind of your mid-level managers that are driving the value of the business, and they're vocal. And you hear it every year. When something affects one out of eight people, you're going to hear about it. And so they're hearing about it, and it's really become kind of one of those benefits that people change jobs for. And they're aware of it when they take a job because they know there's a good likelihood when it's their time, when they finally decide that they want to have a child, there's a decent chance that they may not be able to do it naturally. And if they have to actually go through IVF, it's crushingly expensive if you don't have coverage. So I think that's what drives this business. Like most good businesses, solve a real problem and provide real value.

Well, I think there's two things. I certainly think in a very competitive labor market, even with what's going on around us, the best companies are competing for the best talent. And they used to compete pretty much on what your job is and how much they pay you, but they don't do that anymore. Employees have gotten way smarter, and benefits are an important way that companies differentiate themselves. And their employees are asking for fertility coverage because of the expense, because of the pretty high likelihood that it may impact them. So it's one of the things they're listening to. And when they look at their own medical plans, which the best employers do, they realize how much they spend on maternity, how much they spend on fertility. But I think it's even beyond that. I think we're in an environment where women have been discriminated against in the workplace for decades. Companies have not been viewed as family friendly. And if you don't cover fertility, I think you're making a very negative cultural statement about who you are as a company, that you don't really value your female workforce because fertility treatments are uniquely borne by women. Men don't get IVF, women do. If you don't cover fertility, I think you're making a negative cultural statement about where you stand about people having families. Whereas on the flip side, if you do cover fertility and cover it in a robust manner and encourage your employees to, when it's your time, have a baby, I think you're making a pretty strong cultural statement about who you are as a company and how you view your role in the community and what healthcare is really all about. So companies get that. And because our benefit is inclusive and you can be a same-sex couple, they want to make that statement to the LGBTQ+ community also, that they're an important population and they're going to provide them important benefits that can allow them to build their families also, because those populations have family building dreams too. So I think those things drive it. It's a competitive workforce, it's the right thing to do because it is a healthcare condition, and it makes a strong statement about who you are as a company.

Yeah, it's a good question. So state regulations usually around insurance regulations. So if you offer insurance in the state of New York, for instance, you have to offer fertility coverage. The complication for most people is that they don't get health insurance, they get healthcare provided by their employer. And when they use a big carrier like in New York, Empire Blue Cross or United, they're not insuring your coverage, they're just providing administrative services. They provide the network, they provide claims processing, they handle all the financial elements for your employer, but your employer is really providing that. And your employer is not subject to those insurance regulations. So technically in New York, employers don't have to offer fertility coverage. Now what happens though in reality is the mandates are very good because a large employer is going to look at the insurance mandates and go, well, I'm certainly not going to have lesser coverage. JP Morgan, New York City's largest employer, they're not going to have lesser coverage than the restaurant in the lobby which has 100 employees but because they provide health insurance has to provide fertility coverage. So it sets like a baseline in that state, and it's a really good policy that state is supportive of family building. So the mandates are great. They don't directly affect our business, but they have a strong indirect impact on encouraging employers to do the right thing.

Yeah, in Connecticut it's probably similar. And you know, it's all economics, right? You have a thousand employees, you have enough employees to spread the risk. So if you buy insurance for those thousand employees, you're just paying someone else a premium to take the same risk you could take on your own. So pretty much every employer that has, if they have a smart CFO that has a thousand employees or more, is going to self-insure because otherwise you're paying too much. It's cheaper to do it yourself.

Well, healthcare is a highly regulated industry. And it's funny, people always worry about what's happening with privacy and security regulations. If you just rely on the government to tell you how to keep data secure, it will never be secure. We always look at what's the state of the art in technology, and you have to have state of the art technology, not just live up to what regulation is. Regulation is always well behind where you can be. Because if you have a data breach, a company like Google doesn't really care about did you follow the regulation. They just want to know you had a data breach and how did it happen and what are you doing about it. You have to be able to look these companies in the face and say to them, we did everything we could. And it's obviously clearly the right thing to do. This is people's personal information, and fertility, like all but maybe even more so than a lot of healthcare, it's a very sensitive area. I was watching something this morning where a woman was talking about having gone through multiple miscarriages and said she was ashamed by it. It's very stigmatizing, so people don't want this information out. So every business I've ever been involved in in healthcare, despite the regulation around it, we've always gone far above and beyond the regulations to make sure that things were safe and secure. And then there's all these arcane regulations about the third party administrator or PBM that are really just licensing and it's just a way for states to collect money, frankly. They don't really impact your business at all.

I think we've just come off a decade or more of easy money policy, which I think really fueled the stock market and lots of innovation too. And as a result, multiples got very high. Being an old M&A guy myself, I've said lots of times I don't understand how companies get valued these days because you used to figure out what the terminal value of cash flows were and discount that back to the present and you would have some sense of what a company's worth. But that's not really how it's done anymore. I think valuations got really pretty lofty. And what you're seeing now is both a reflection that easy money days are ending, that there are other asset classes available to investors that provide yield beyond stocks. And at the same time, I think investors are realizing that they have to be more thoughtful about companies that make money and provide a return on capital. So multiples are not just being based on revenues. People are thinking about profitability and margins. So I think that's what you're seeing in the marketplace now. What's happened is unfortunately, like Progyny for instance, we've been profitable for a long time. We've always viewed a business objective is to be a profitable business, not just to sell a lot. You can't make up for losses on your gross margin line with volume. So you're a CFO, you know that. So we've always focused on profitability. So I think what's happened now is that people are just selling everything. I think once we find the bottom of all this, it's going to be an era of people going to start picking stocks again, and stocks based on some real fundamentals. Can you grow your margins? Are you profitable? It's why you hear companies like Uber now saying to their employees, hey, we got to make money. We can't just have more rides. We have to make money. Have more rides and make money doing it. So I think it's all good. It's tough to watch your stock get cut in half when business is still really good. But I think ultimately it's a healthy thing if you get back to investing in companies that are really doing one of their most fundamental purposes, which is to return on capital and to do that through profitability.

Well, we're at the very early stages in the fertility market. Progyny has 300 customers. There's thousands of self-insured employers that could benefit from what we do. So I think you're going to continue to see fertility coverage being provided by more and more employers. I think you will continue to see them carve it out from their health plans who are remaining in the current situation being bad covering it. So I think you're going to see much more coverage. When it comes to technology, healthcare in general technology develops very rapidly, and the same thing goes in infertility. The ability to genetically test embryos has even in the five years that I've been involved, utility has dramatically improved. And you continue to see things like that going on in fertility. More things are happening to further differentiate the better providers to create better outcomes. And I've always believed in healthcare that technology is an enabler as opposed to the end game, because healthcare is still delivered and will always need to be delivered with human touch. The doctor has to physically look in your ears, look down your throat, palpate your chest. Many of those things will never go away. Surgeries are done in person. IVF has two surgeries, always going to be done in person. But technology can be a terrific enabler and can make it better. So whether it's instead of going to the doctor's office when you're going through fertility treatments to get your hormone levels checked when you're going through all those hormone injections, you're going to be able to monitor that at home and not have so many visits to the doctor's office. And I think that's a great enabler. It makes the experience better, makes compliance better. So I look at technology in healthcare that way. And because I fundamentally believe in the role of doctors in the healthcare system, unlike other areas of our world where technology makes people go away, for instance, you don't need customer service centers so much anymore because it's automated. I don't think that's the case in healthcare. We run a call center because people need to talk to somebody. It's complicated, their situation's unique, they can't figure it out online. Now, how can technology help them? Sure, they used to call in to pay their bills, they don't do that anymore, they pay their bills online. So technology helps them. They appreciate those things. They don't have to call up to schedule anymore, they schedule online. So all those things get helped by it. Our ability to analyze data and make our service better by using all the data we have, we rely heavily on artificial intelligence on calls to see the quality of those calls and what members are talking about and are they happy, are there any problems. So we use technology all the time in our business. But ultimately, when you go get IVF, when you speak to one of our fertility counselors, there's always going to be a very significant level of human intervention.

Thanks for having me.