Progyny, Inc. (PGNY) Q1 2020 Earnings Report, Transcript and Summary

Good afternoon, and welcome to the Progyny Inc. First Quarter 2020 Earnings Conference Call. All participants will be in a listen-only mode. [Operator Instructions] After today's presentation, there will be an opportunity to ask questions. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to James Hart, Vice President of Investor Relations. Please go ahead.

Thank you, Andrea and good afternoon everyone. Welcome to our first quarter conference call. With me today are David Schlanger, CEO of Progyny; and Pete Anevski, President, CFO and COO. 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 today's call contains forward-looking statements, including statements about our positioning to successfully manage the impact of COVID-19 and the associated economic uncertainty on our business, our financial outlook for the second quarter of 2020, the impact of COVID-19 on our second quarter results and beyond, our expectations on the timing of recovery of the fertility industry and the resumption of fertility services at provider clinics, our number of members and the impact of COVID-19 on our clients, and our ability to acquire new clients and maintain existing clients, the efficacy of our remote working environment, our market opportunities and size, business performance, our industry outlook, financial outlook, plans and objectives for future operations, and other non-historical statements as further described in our press release. These forward looking statements are subject to certain risks, uncertainties, and assumptions, including those related to Progyny’s growth, market opportunities, and general economic and business conditions. We have based these forward-looking different statements largely on our current expectations, and projections about future events and financial trends that we believe may affect our business, financial condition, and results of operations. Although we believe these expectations are reasonable, we undertake no obligation to revise any statements to reflect changes that occur after this call. Descriptions of these and other risks that could cause actual results to differ materially from these forward-looking statements are discussed in our periodic and current reports filed with the SEC, including in the section entitled risk factors in our Annual Report on Form 10-K for the fiscal year ended December 31, 2019, as well as our press release and 8-K that were issued this afternoon. During the call, we will also refer to non-GAAP financial measures such as adjusted EBITDA. Reconciliations with the most comparable GAAP measures are also available in press release, which is available at investors.progyny.com. I would now like to turn the call over to David.

Thank you, Jamie and thank you everyone for joining us this afternoon. We hope that each of you your families and your loved ones continue to be healthy and safe. I'm pleased to open today's call by reporting that everyone at Progyny is doing well. COVID-19 has had an unprecedented impact around the world. As the pandemic began to unfold, we made the decision to work from home starting in mid-March. As people described later, we were well prepared to make this shift to a virtual work environment and we are extremely proud of how our team has managed this transition. They have not only continued to provide the same high quality service that our clients and members expect, but also maintain their motivation and commitment to Progyny’s mission. On this call, our focus will be to help you understand the specific impacts that COVID has had on the facility industry and our business, including our members and clients, as well as how we have responded in managing the business and the return to normalcy that we are beginning to see. When we last spoke with you on March 5 and issued financial guidance, the pandemic was still in its earliest stage in the U.S. and our clinics weren't seeing any meaningful impacts to their patient volumes. Over the course of the subsequent two weeks, COVID was declared a pandemic, state and local authorities began issuing stay-at-home orders, and then on March 17 the American Society for Reproductive Medicine issued guidelines recommending that fertility clinics should cease initiating new fertility treatments. The significant majority of the clinics in our network chose to adhere to ASRMs guidelines, and our volume of fertility treatments and dispensing of the related medications declined significantly over the latter part of the quarter. Given all of the uncertainties created by the pandemic, its duration, its geographic reach and our member’s access to treatments, we withdrew our financial guidance shortly thereafter. Although many clinics remained open on a limited basis for emergent needs and to perform initial consultations, often via telemedicine, most patients weren't able to progress to actual treatment, and that drop in patient activity negatively impacted our first quarter results. Through the end of March and into the first half of April, we saw significant reductions in the utilization of the benefit by our members down to as low as 15%, when compared to the early part of Q1 were 15% of what we consider to be normal levels. Despite this, we are reporting a 72% increase in revenue over the first quarter of 2019, as well as significant growth is Adjusted EBITDA and net income and more than $12 million of positive operating cash flow this quarter. These results were due to the strong start we had to the year prior to the impacts from COVID-19. In April, the New York Department of Health declared that fertility is an essential health service and stated that clinics have the authority to treat their patients and perform procedures during the pandemic. Then on April 24, ASRM updated its guidelines which were reaffirmed on May 11, advising that practices could reopen for all procedures so long as it could be done in a measured way that is safe for patients and staff. Fortunately, many clinics had already begun preparing new protocols to address patient and staff safety, such as reducing the number of people in the clinic at any one time, screening patient’s before each appointment, and requiring that patients wear mask and the PPE be used by clinical staff. Most clinics have published their safety protocols on their websites for patient’s convenience. These preparations have put fertility clinics in a stronger position to open sooner rather than later with all their services. Over the last few weeks, we are already seeing week-to-week acceleration in the volume of patient appointments and medication dispensing. This acceleration of member activity demonstrates that members are anxious to return to treatment and is evidence that the pause in treatment they endured hasn't been their desire to achieve their family building goals. By the end of June, we expect to see all of our network clinics open and providing their full range of services, and patient volumes should continue to ramp up as members feel more and more comfortable with the safety protocols established by their clinic of choice, though it is still too early at this point to know when member utilization will return to normal levels. Our members waiting for treatment has added a significant amount of stress to a journey that is already enormously challenging for many people and Progeny has been there to help support them. Our patient care advocates have been in frequent contact with their members and have been providing emotional support and guidance, including around the issues of how COVID could impact their unique treatment journeys. We've held webinars on mental health and wellness and are helping members understand how to effectively use telemedicine to start a fertility journey. These events have had very strong turnouts, which is another positive indicator of how eager our members are to resume their treatment journeys. We've been able to provide this high level support because despite the drop in volumes in revenue, we made the decision to keep the full Progyny team intact. We did this with the belief that the disruption to our industry will be shorter than it will be for many other industries, and because we felt it was important to preserve the talented organization and unique culture we have built and to continue to be there for our members doing what we knew would be an especially trying period. Our member satisfaction scores that continue to trend at or above the levels they were prior to the pandemic, showing that our members have been appreciative of our efforts. We've also been there for our providers. We've been in frequent contact with our network physicians through both direct and conversations, as well as through surveys. We've been sharing the survey results with our network to help our physicians understand how their peers have been impacted, and how they are approaching COVID related issues and challenges. We know that clinics are reopening or actively preparing to reopen, and we believe that our network is well-positioned to effectively manage the backlog of [Progeny member volume] we expect to see. Practitioners are telling us that they are adapting to safely accommodate the expected patient backlog. For example, many will be practicing with AB teams extending hours, both during the week and on weekends as necessary in order to manage the volume. In addition, many are leveraging telemedicine and in some cases, condensing the typical multiple office visits for consultations into a single office visit. In addition, for some of the largest clinics on the East Coast and West Coast, medical tourism has been a meaningful portion of their practice volume, specifically from patients traveling from Europe or Asia. As travel restrictions remain in effect and medical tourism remains curtailed. This will create additional capacity at these clinics to manage their backlog of us patient. As we are beginning to see clinics reopen and members reengage, we believe fertility will be on the leading edge of the recovery relative to other areas of the economy. As it relates to the overall economy, I'd like to spend a moment discussing how COVID has impacted Progyny and player points. We have all seen the unprecedented job losses, unemployment claims reported in the news. On some level, all companies have been meaningfully impacted by COVID. Fortunately, however, taken as a whole, Progyny’s customer base has avoided the worst of these impacts. As of March 31, we had 2.1 million members. We are pleased to report that as of today, there has not been a reduction to our 2.1 million members and we believe there will not be a debt reduction in members as a result of COVID. We are basing this on a review we performed on each of our clients, taking into account our normal conversations with them, as well as what they have said publicly anything about the impacts of COVID to their workforce. There were two important conclusions from this review. First, the clients that represent the significant majority of those are revenues and membership, haven't announced any workforce reductions or meaningful furloughs. In fact, several of our largest customers have publicly said, they're hiring or committed to make no workforce reductions in 2020. Second, for those industries that have been most impacted by COVID-19 to this point, specifically hospitality, travel, restaurants, retail clothing publishers we believe that the impacts of Progyny’s revenues from any announced layoffs or furloughs at clients in these industries will be de minimis. In addition, many of these companies are continuing to provide full medical benefits to any affected employees for an extended period of time further reducing the potential impact of Progyny. Obviously, the broader economic situation is still evolving, and we will need to continue monitoring what's happening with our clients. Turning now to the impacts of COVID-19 to our 2020 selling season. At this point in the year, we are actively selling as we would be in any year, both pitching new clients, as well as re engaging with prospects, who previously gave us a not now during the prior selling season. Consistent with how it typically happens, we continue to expect that the majority of client decisions will be made at the end of summer or early fall. Although much of what we are doing up to now is fairly consistent with prior sales seasons, we have had to make certain adjustments to our selling process itself. For example, we aren't attending conferences and have shifted from meetings that would normally be in person to virtual and telephonic meetings, but despite these challenges, our sales team is out there engaging with prospects, and our sales executives have been successful in getting meetings with potential clients. Despite the fact that the pandemic has created a certain level of distraction for many HR teams, we believe that the level of sales activity we are seeing in this environment is positive and encouraging and is comparable to what we saw last year at this time. We have however, adjusted the focus of our go to market efforts by more narrowly prioritizing our sales activities and being sensitive to those companies we approach. We aren't pitching to airline or hospitality companies, for example. Instead, we are focusing on industries that are better positioned in this environment, and where we've done well historically, such as technology, consumer packaged goods, pharmaceuticals, software and financial services. We are also focused on targeting a higher percentage of our companies who are currently offering fertility coverage, leveraging the strength of the cost savings within our value proposition. Our program offers significant savings compared to a carrier program, which is always important, but those savings become even more relevant in an uncertain economic climate. Historically, two thirds of our clients have some level of fertility coverage prior to adopting Progyny and in nearly all those cases, the programs were through their carrier, so we clearly understand how to successfully market ourselves to that audience. Last year, early in the selling season, we received a handful of commitments from clients who had previously told us not now in a prior sales season. We are experiencing a similar level of early commitments for 2021 that we experienced as of this time last year. And in just the last few weeks, we were awarded business for 2021 by two of these companies. A handful of early client commitments doesn't make an entire sales season, but these early commitments, and in particular, the two we recently received are a good indicator that there are companies out there who are willing and able to make a decision even in this difficult environment. It's impossible to know what the world will look like in late summer and early fall when our new client prospects will be making their benefits decisions for 2021, but with what we can control right now, we are seeing good activity, including the handful of early commitments already received, the receipt of new RFPs, and the prospects we're moving through the sales stages of the pipeline. Another area we can control is by continuing our emphasis on up-selling to existing customers, by adding Progyny RX for example, or by convincing them to cover more cycles. With Progyny RX, our program provides hard dollar savings when compared to a traditional PBM, and we believe that this is particularly compelling message in this economic environment, as companies are looking for ways to be more thoughtful with what they spend. We are collectively going through unprecedented times. However, some things don't change. One of them is desire to have children and start a family. In addition, all of the macro trends that have helped contribute to our growth remain intact. The high and growing rates of infertility, the lack of adequate coverage in the U.S. with this highly prevalent medical need, the need for inclusiveness and equality in the workplace, and the need for employers to get the most from their health care dollars. We believe that as we collectively emerge in this crisis, Progyny’s mission and how we accomplish it cost effectively for our clients becomes even more important. As we look back across other times of national crises we see that people tend to use these periods to think about what is really important to them. In these moments, family and family building become even more relevant to people than it was before. We believe employers will embrace the societal trends that result from the COVID-19 pandemic, and that family building benefits could take on even more significance. Finally, we have 135 clients today with the thousands of companies covering facility through their carriers; we can demonstrate tangible financial benefits to the Progyny program, which is why we continue to believe that we’ve got meaningful opportunities going forward. With that, I'd like to turn the call over to Pete to walk you through the financials in greater detail.

Thanks, David. I'll begin today by reviewing our move to a virtual environment, which was a seamless transition because we already have the right tools and systems in place to accommodate a virtual office and working remotely for every employee. Our cloud-based IT and fastest to architecture provided us with the flexibility we needed to be able to work effectively in a remote environment. We already had a robust business continuity plan in place that was implemented so that all of our teams have been able to perform their functions in a HIPAA secure environment without any compromises to data security, functionality, or any degradation to levels of service. As a result, there was no disruption to our day-to-day processes, or to our business controls. In addition, all the services we provide to our members, clinics, and clients continued as normal without any interruption. Our PCAs, for example, continue to have access to all the tools and resources they need to continue supporting members while working from home. As David mentioned, we've kept the Progyny team intact, despite the drop in treatment in volumes at the back end of the quarter. We made this decision in anticipation of the resumption in services at the clinics, as well as the corresponding ramp up to normal treatment levels. As that ramp happens, our care management team will be ready to support our members and the clinics. We had the flexibility to make this decision given the strength of our balance sheet. As of March 31, we had 91.6 million of cash, an increase of 11.3 million for our balance sheet at December 31, and total working capital of approximately 120 million with no debt. Because of our substantial cash bounce, our near term positive cash flow, zero debt and an untapped $15 million credit facility, we have full confidence in our ability to manage through any temporary disruption to our business during this period. A significant majority of our expenses are variable in conjunction with treatment bonds. You don't incur any clinical lab costs without treatments, and there are no minimum guarantee payments in either our provider or specialty pharmacy networks. Within cost of services, the only portion that isn't 100% variable is employee- related costs for our fair management functions and PCAs, provider relations and provider account management teams. Across the organization, we're taking prudent actions to manage our costs where it makes sense to do so, which affirm the expenses where it won't have a meaningful impact in running the business. We're continuing to hire and are reviewing all the positions to see what rules need to be filled now versus those roles that could be deferred until later in the year. We have significantly reduced travel expenses and are being disciplined with all discretionary costs across the organization. Turning now to the results for the quarter. We were on track to deliver a strong first quarter both from a financial perspective, as well as the number of treatments performed prior to the impact of COVID-19 in our business. I'll walk you through the highlights, but please keep in mind that comparisons to prior do not reflect our potential given the dramatic reduction in volumes due to COVID-19 that we saw toward the end of the quarter. We generated 81 million in revenue, an increase of 72% when compared to 47.2 million in the first quarter last year. We had 132 clients at the end of the quarter and approximately 2.1 million members at March 31 versus 78 clients and approximately [1 million] members the same time last year. Facility benefits revenue increased 47% to 59.4 million, with the growth being driven by a high number of clients and covered lives. Pharmacy Benefits revenue increased from 6.8 million in the first quarter last year to 21.6 million this quarter, due primarily to an increase in the number of clients with the Progyny RX benefit as compared to last year. Approximately 70% of our clients now have the RX benefit compared to 60% of our clients a year ago. Turning to our utilization, cycle counts and utilization patterns were on pace for a strong quarter, until we experienced the drop – the sharp drop in volumes over the latter part of March. Utilization rate was trending slightly above last year, until we saw the impact of the pandemic. As a result, we ended up with a slight decline in utilization during the quarter. In the first quarter, the utilization rate was 0.46% for all members and 0.41% for female utilizers as compared 0.53% and 0.47% respectively a year ago. There were 4,443 ART cycles performed in the quarter, a 69% increase from the first quarter last year. The pandemic also causes a different mix in ART cycles delivered during the quarter versus the prior year period. For example, there is a higher percentage of cycles that were cancelled mid-treatment and while each of those contributed a small amount of revenues in completed cycle, they are fully included in the ART cycle count, consistent with CDC reporting methodology. Turning now to our expenses and margins. Our gross profit is 16.6 million, increased 67% from the prior year period. Gross margin was 20.5% and reflected a modest decrease of 60 basis points from the 21.1% gross margin reported in the first quarter of 2019. The slight decline was primarily due to our decision to maintain our care management functions during the pausing treatments caused by COVID-19. Sales and marketing was 4% of revenue in the first quarter, reflecting an improvement of approximately 100 basis points as compared to the first quarter last year. We continue to see economies of scale in sales and marketing giving nearly 100% client retention rate, as well as greater efficiencies in our operations. G&A this quarter was 11.7% of revenue, an increase the 210 basis points from the year ago quarter, due primarily to the 1.7 million in additional costs associated with operating as a public company. Adjusted EBITDA of 7.1 million this quarter increased 64% from the 4.4 million reported in the first quarter last year, or adjusted EBITDA margin of 8.8% this quarter reflects a slight decrease of 40 basis points from the 9.2% margin in the prior year period. A slight decline in adjusted EBITDA margin reflects our decision again to keep the overall workforce intact, despite the lower than anticipated revenue due to the disruption in treatment volumes from COVID-19. Net income was 4.1 million, an increase of 61% or 1.5 million from the prior period. Net income attributable to common stockholders was $0.04 per diluted share, on the basis of 99.7 million of weighted average diluted shares outstanding, compared to $0.01 per diluted share on the basis of 15.1 million weighted average diluted shares outstanding in the prior year period. The improvement reflects the higher net income, as well as the absence in the current period of a warrant valuation adjustment expense related to the convertible preferred stock warrants that were in place prior to our IPO. Despite the impact COVID had to our volumes in the first quarter, we generated positive operating cash flow of 12.1 million, which compared to operating cash use of 6.2 million in the prior year period. The increase was primarily due to the continued improvement in our implementation processes with new clients. We have historically seen a negative impact of cash flows in the first quarter following the clients warranted the benefit. This is because it usually takes a bit of time to get the payment processes running efficiently with new clients. In the first quarter, even though we added a record number of new clients and members, our continued improvements in integration solution with the carriers mitigated the normal impact of cash flows in the first quarter of implementation by ensuring the remittance processes with new clients and their carriers will run smoothly. Cash flow this quarter was also favorably impacted by the timing of items we highlighted in the last quarter, which amounted to approximately 6.7 million and included payments to providers and questions of our rebate receivables. Turning to our expectations going forward. For all the reasons David discussed, we believe that fertility industry will recover more quickly relative to other areas of the economy that have been negatively affected by COVID-19. Based on the member and clinic activity we are currently seeing, we are comfortable that our minimum second quarter results will be at least 45 million in revenue, 4.2 million in net loss, and adjusted loss before interest taxes, depreciation and amortization of 1.39. However, although we are encouraged by the acceleration in the volume of appointments, we are seeing, significant uncertainty remains as to the timing of the resumption of services at our network clinics, as well as how long it will take both clinics and patients to return to normal practice volumes and member utilization levels. As a result, we aren't in a position to provide annual financial guidance at this time. I'll close with how we think about coming out of this situation even stronger as an organization. During this period, we have deepened our relationships with the clinics and our network by helping them understand what's happening across the industry. We have strengthened our relationships with our clients, by being there for their employee during an uncertain and stressful time. We have supported our members by helping them manage distress and uncertainty in this unprecedented situation. We continue to believe that all the macro forces that have been driving our success remain in place. People will come away to the pandemic realizing that family building is even more important to them than it may have already been. Our superior outcomes and best-in-class member experience let our clients measure the return they're getting, both in terms of the hard dollar cost savings we generate, as well as the higher employee satisfaction and retention. Our primary competitors, which are the carriers, are likely to be even more focused on their core business, and the less focused in re-tooling their practices to address fertility in the way that we do. And despite the impact of this pandemic, we are well capitalized. Because of our business model, we aren't significantly impacted from a cash flow perspective and we have in fact remained cash flow positive. As a result, we believe we are well-positioned to successfully manage the impact of the pandemic on our business. With that, we'd like to open up the call for questions. Operator, can you please open the call.

[Operator Instructions] And our first question comes from Sarah James of Piper Sandler. Please go ahead.

Thank you, and great quarter guys. You know, I'm really encouraged by the conversations that you're having with new customers, and the pipeline growth that you're seeing, can you give us a little bit more color on that? Do you think the mix of industries might be better? Particularly, I'm wondering if you end up more tech weighted that has a younger population and usually a higher utilization count. Is that something that could be impactful as you grow in 2021? And just more broadly, how this scope of conversations you're having this year stack up to this time last year?

Hi Sarah, it’s David. As we said on the call, we are having a lot of very positive conversations. And the good news is that we've been diversifying our customer base across industries for the last several years. And even in this very unusual situation, there are a lot of companies that are really well-positioned to, to emerge in the pandemic very strong and our head strong business is through it and they are not just tech companies. So, certainly we're trying to focus on all companies from industries that we believe are well-positioned. So, you know, beyond the tech industry, there's industries, like consumer packaged goods and pharmaceuticals, and financial services that are extremely strong, and that are, you know, kind of business as usual from a selling perspective, and are receptive to talking to us. So, obviously, you know, you want to be sensitive to, you know, a particular industry and company situation, we're doing that, and as we said on the call, having, you know, success getting in front of prospective clients.

Great. And the clarity that you gave on the trough in March at 15% was helpful, and then you said it's been improving week by week, where do you guys stand now compared to normal this time of year?

Well, it's a difficult number to put out there, and I'm not going for one reason. We've seen three sequential weeks of, you know, double digit growth off of that trough. And it's been continuing, but sort of the latest week, if I just gave you that number, so it doesn't make a trend, right? But we have our expectations in terms of Q2 and sort of the minimum number that we put out factors in, you know, a reasonable expectation that continued acceleration, not at that same rate, but a reasonable expectation that we're real comfortable with based on sort of all the things that we're seeing be it prescribing and dispensing, be it scheduled appointments, be it call activity, etc. And so, I think that's probably the most responsible answer I can give you, relative to details on what we're seeing.

The only thing I would add Sarah is that, it's obvious by what we're seeing, and as we said in the prepared remarks that our members are anxious to get back into treatment. Their physicians are anxious to get their practices opened, and both of those things are happening simultaneously. And that's all driving that acceleration in member activity. So, they're all good signs, given what's happening in other areas of the economy.

Thank you.

Our next question comes from Anne Samuel of JP Morgan. Please go ahead.

Hi, guys, thanks for taking the question. I was wondering maybe if you could touch a little bit on what your providers are seeing in terms of patient apprehension about coming back into the office. And how quickly do you think that the providers can work through that backlog of volumes and maybe what that means for cadence in the back half of the year? Thanks.

Yeah. I'll take the – I’ll take the second part of the question first in terms of capacity. We had, you know, some more comments, address clinic capacity just in general, right. So, one of the things that create capacity for U.S. patients and Progyny members is the fact that, you know, a good percentage of volume in our business, not dissimilar to sort of what U.S. population resides is East and West Coast. East and West Coast clinics do a significant majority of medical tourism from, you know, patients either from Europe or Asia, and that volume for some clinics is 20%, 30%, but not insignificant. Obviously, with travel bans going on and everything going on in the world, you know, that creates capacity in and of itself. The second thing is that the clinics have been – are prepared to do everything they can from an extended hours perspective in order to give confidence to members as they come in for treatment, in order to be able to handle the volume, so that they spread out the hours that they're going to operate to be able handle you know, any backlog that they have to work through relative to, you know, the paused treatments that happened during this period. And lastly, their expectations are that their cash business will suffer a bit during this time period, because even if you still have a job, but if you don't have coverage, you're probably going to be a little bit more conservative with spending money versus covered members. So, their expectation is that the ramp back to normal levels will be, you know, first and foremost for them from their perspective covered members, then cash members, then any medical tourism. So, all of that sort of creates inherent capacity relative to, you know, the network. As it relates to what else they're saying, all of them have different strategies around ramp up, you know, all of them have different protocols, many of them common, but they're going to roll them at different paces to make sure that they don't do anything relative to building confidence, you know, with their members at their clinic. And so, you know, I would say the most common thing that we heard is that all of them, either they're up and running fully today with their full suite of services that are ramping up volumes based on the protocols and or they're opening up their full suite of services within the next couple of weeks, but by quarter end or expect to be, you know, fully operational with all of their services, and have worked through whatever kinks may exist from the new protocols they're putting in place in order to be able to handle volumes. So I would say that’s probably the most common thing we heard and sort of giving up tiny expectations from their perspective of what they believe is going to happen. And Anne as we said in the call, to help these kind of patients concerned, they are making their protocol forward. They are telling patients what to expect when they get there and how the doctors are and how the clinics are going, what steps they are going to go through to make sure that patients and staff have a safe experience. But they are also publishing them on the west.

That makes sense. That's really helpful. And then I guess on the expenses side, how should we be thinking about how much of your expenses are variable? You talked about kind of holding the line on some of your expenses that you're prepared for the recovery in volumes, but as your revenue comes down, how much of that is variable to serve as [an opportunity]?

You'd have probably imputed right. When you think about what we put out for a minimum for Q2, it’s almost breakeven on an EBITDA perspective at a $45 million revenue line, you know, our historical gross margin, obviously is going to come down a little bit relative to this level of revenues. So, you could probably impute it. You don't break the number out, and haven’t, but at the end of the day, I think what we thought was a meaningful data point was putting out essentially what is breakeven revenue for us, which is coincidentally what we are looking at for Q2.

Great. Thanks very much, guys.

Our next question comes from Michael Cherny of Bank of America. Please go ahead.

Good afternoon. Thanks for all the color so far. I want to go back a bit to the – some of the comments you made about utilization and ramping capacity, you know, one of the things that I'm curious about and dive a little deeper, can you talk through some of the activities, not just from a time perspective and how long they're open, but, you know, are there any hindrances or barriers that your fertility network providers have to worry about? We constantly hear about the lack of PPE available for professionals, for patients, or any of those in place? And is there anything you can do to your side to help them as they think about revamping their practices beyond just helping them manage the patient flow?

Yeah. There aren't any concerns on PPE. So, I'll start with that. And we surveyed, we've talked to many and surveyed, you know all of our largest clinics around the country and so there isn't concern as it relates to keeping their employees safe and their staff safe as they are providing treatment and having the equipment to do that. So, that's the first thing. They're not concerned around restrictions as it relates to supplies of any kind. They're simply concerned around, making sure which is why they're ramping it slowly from a patient volume perspective, they have a demand. They're telling to have demand, but they're scheduling it slowly. They're more concerned about making sure that their staff has operationalized all the safety protocols that they're putting in place, and ensuring that those run smoothly before they continue to schedule more and more patients is sort of basically what they're telling us as a limitation, short-term that they believe as they operationalize and work through these protocols, you know, will create more capacity, it’s in their controls [indiscernible].

Thanks, Pete. And then just one other question, I think you did a great job highlighting your strong liquidity cash position. I know in the past, you've talked about evaluating M&A, and other potential services you could look to bring into the fold, is there anything that the organization's learned through the COVID outbreak and through the utilization drop off you saw that opens your eyes about other potential services or activities that makes sense to be within your business, whether it's other high touch client model or you know, anything to help providers? Anything that this outbreak has really uncovered in terms of where there's other holes across your channel that you think you can do a better job helping with them what's currently in the market?

This is David. I think that the things that were driving our thinking a couple months ago are still driving rethinking and the opportunities to both make our service, you know, a more fulsome and stickier from both a member and client perspective, remain similar with respect to women's reproductive health and many of the things we talked about before, you know, supplemental mental health benefits for people going through this. Obviously, this has been a particularly stressful time, but those types of things, some of the vertical opportunities we talked about before, where we're outsourcing services, we can bring it out. They all make sense to us, and I don't believe that the COVID situation really exposed any weaknesses in our service. Now, from an M&A perspective, the COVID situation may have created some more opportunities for us, given the fact that some companies may be more financially strapped than they were before and suffering some financial hardship. There may be some assets on the market that from a valuation perspective might start making more sense. So, that's kind of how we're looking at enhanced M&A opportunities or there is some damage, you know companies that were damaged financially, but that still have a good service and product or product that might make sense.

David, maybe – just a follow up to make sure, I might want to hone down even a little bit further, you know, the whole world appears to be moving to some type of virtual care and telemedicine. Your patient care advocates have long been at the forefront of that, are there any other tools that you can see institutionalizing for them? That just because of how much of healthcare being now delivered virtually, that suddenly now becomes another opportunity for Progyny?

Look, I think you're right that our PCAs and a big portion of our business model embrace the notion of, you know, kind of remote care very early. You know, over the last years, we've automated many of those interactions that need to be automated and kept on a human level, the ones that really matter and really move the needle from a member perspective and having a good experience. So whether it's the emotional support piece, whether it's, you know, really, really getting good clinical education and support around making the right decisions. I think we found the right balance you know, between what you need to automate, what you should keep, you know, with the human touch, and the reality is that fertility treatments are always going to be delivered by doctors and medical procedures. So, that that will be somewhat of a limiting experience, but, you know, having said that, you know, I talked before about, you know, enhancing the mental health support, you could, you know, we certainly as we think about that, think about telemedicine and telemedicine platforms will do that. So, I don't know if that answered your question Mike or not.

It certainly helps. Thanks so much David.

Our next question comes from Ralph Jacoby of Citi. Please go ahead.

Thanks. Good afternoon. Yeah. So, it sounds like expectations for clinics in your network to be up and running for the end of June. I was hoping you could just give us some sense there, you know, rough ballpark of what percentage of the clinics are sort of open and available to see patients today, just wondering how sort of how much of a ramp from where we are today to get to sort of full by the end of June.

They're all open and available. They're just not open and available to full suite of service, right. So, many of them were open and available early in April, and up until now, basically doing telemedicine consoles. And even those were partial consoles, because the diagnostic services as needed for consoles weren't being done during this time period. There – so when I talk about them being fully open with their full suite of services, it's really doing all treatments that they normally would do by the middle of May, and then ramping up the volumes, you know, taking into consideration the new protocols that they put in place by the end of the quarter. And so, that's probably the best way I can, I can frame that. It's hard to say what percentage because they're controlling sort of the capacity, if you will, right now, in terms of getting through backlog, just by virtue of making sure that their protocols are operationalized as I mentioned before. They all will tend to be up and running, again by mid-May, but that doesn't mean that their volumes will be going through there, like they normally see. It just means that at that point, they'll be ramping up volumes in terms of what they're scheduling, in anticipation of, you know, creating still, you know, confidence with any other members that that come through there and any – [indiscernible] you know, that talk to their friends, etc. And so, that's probably the best way to think about it, but in terms of being open, open, all of them are going to be, you know, expect to be open with a full set of services by the middle of May. That doesn't mean the volumes will be there. And that's really the important part that we try to make sure that everybody understands.

Okay, fair enough. And then I just want to ask about the pharmacy benefits really outperformed our model. I think you talked about penetration going up to 70% at this point, any change in initiatives or focus there or appetite, you know, seems high, obviously? And then anything in the quarter in terms of maybe pull forward of some of that, you know, related to fertility benefits, or is that not the right way to think about it? Thanks.

No. Yes, it is what I would think about it. So the answer is the percentage of clients that we put out, not all clients are equal, some are larger, some are smaller, there was a pull forward in an earlier launch than originally expected for one of our larger clients that was an existing client that as an up-sell took the pharmacy benefit. That combined with a client in other words client that went live in Q2 of last year, and I was cycling, in Q1 of this year versus the prior year that had the RX benefit, is why the increase in pharmacy revenue is as significant as it is.

Okay, that's helpful. Thank you.

This concludes our question and answer session. I would like to turn the conference back over to James Hart for any closing remarks.

Well, thank you, Andrea. And thank you everyone for joining us today. Please don't hesitate to reach back out if you have any questions, and we look forward to speaking with you again soon.

The conference has now concluded. Thank you for attending today's presentation and you may now disconnect.