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Operator
Good afternoon, ladies and gentlemen, and welcome to the Progeny, 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.
James Hart
Thank you, Matthew, and good afternoon, everyone. Welcome to our Third Quarter Conference Call. With me today are Pete Ineske, CEO of Progeny, Michael Skirmer, 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 management views as of today only, and we'll include statements related to our financial outlook for both the full 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 rates and mix. our anticipated number of clients and 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, and 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 of services offered, are business, performance, industry outlook, strategy, future investments, plans, and objectives, which are forward-looking statements under the Federal Securities Law. Actual results may differ materially from those contained in or implied by these forward-looking statements, due to risks and uncertainties 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, both of which can be found on our Investor Relations website. Any forward-looking statements we 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 excluding 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.progeny.com. I would now like to turn the call over to you.
Matthew
Thanks, Jamie, and thanks, everyone, for joining us today. We're pleased to report that Progeny 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 an 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 would expect to see, as well as by a number of new client launches during the third quarter from accounts that were won in the current sales season. Most of these launches were clients who wanted to make the progeny benefit available to their workforce as early as possible, and who chose not to wait until the start of their health plan year on 1-1. There was also a large client who launched during the quarter because 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 1 starts overall this year, and this has included some larger clients. We view the enthusiasm of these clients in 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 will last, companies are still reliant 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, and 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 a 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 progeny 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 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 and 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 populations. 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 achieve, 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 who 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 through 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 slowing 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 under-penetrated. We believe these results also show that Prodigy remains the 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. The 105 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 want our initial clients in a number of industries that are very large and under-penetrated, 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 ProgenyRx 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. After 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 fertility medication. The manufacturer of Menopur, one of the largest drugs in our formulary, has notified 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. Ferring's review of their data to date indicates that the safety and efficacy of the product remains unaltered, and Ferring has indicated that they're not aware of any evidence indicating that the changes in the manufacturing process pose any risk to patients. Lastly, Ferring has notified 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 Menopur 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 Faring nor the FDA recalled any doses of the medication that had already been distributed to the market. Accordingly, in 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 drugs, 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 discuss the quarter in more detail, and provide our expectations for the balance of the year.
Jamie
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 and 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 1st 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 plan begins in the third quarter, so this was a natural go-live date for them. Accordingly, we had 282 clients as of September 30th, 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 top line, medical revenue grew 52% over the third quarter last year to 129.3 million, which, again, was due to the growth in clients and 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 non-cash 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 non-cash 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 reconciled the impact of non-cash stock compensation on our gross margins and operating expenses. With our strong top-line 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 22.2% 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 and 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 30th, 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 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 to 124 million. For net income, we now expect between 26.3 million to 28.5 million, or 26 and 29 cents 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 that income ranging from a loss of $700,000 to income of 1.6 million, or between a loss of one penny and two cents 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.
Matthew
Thanks, Mark. As we look to 2023, Progeny has continued 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. 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 positioned 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 affirmed that Progeny 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?
Operator
Certainly. Ladies and gentlemen, the floor is now open for questions. If you have any questions or comments, please press star 1 on your phone at this time. We do ask that while posing your question, please pick up your handset if you're listening on speakerphone to provide optimum sound quality. Once again, if you have any questions or comments, please press star 1 on your phone. Your first question is coming from Anne Samuel from JP Morgan. Your line is live.
Anne Samuel
Hi. Congratulations on the terrific results and the great selling season. You know, you highlighted in the release 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.
Matthew
Yeah, 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 went live ahead of their normal plan year, 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 wanting to launch this benefit earlier.
Anne Samuel
That's helpful. Thanks. And then just one question about, you know, you talked about the financial impact from the MetaPure 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, you know, how quickly do you think it can be resolved?
Matthew
Yep. 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, you know, historically, when there are certain drugs that are the only drug in market approved for a certain condition or treatment, you know, 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.
Anne Samuel
Helpful. Thank you.
Operator
Thank you. Your next question is coming from Michael Cherney from Bank of America. Your line is live.
Michael Cherney
Hi, this is Charlotte on for my congrats on the quarter. And 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?
Matthew
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 prices. Relative to deals we won or lost to a competitor, and those are really high. But the not nows are many different reasons why they do a not now, and those are much greater and set us up really nicely for next year. Sometimes we get clarity on the not nows. 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-a-vis the not nows.
Michael Cherney
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?
Jamie
Yeah. So, again, we've seen, you know, margin expansion, you know, really period over period as we've grown. You know, and it's across, you know, each and all of the lines that we have. I mean, as our revenue has grown, we've been able to, you know, 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. You know, 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, you know, the quarter did benefit a bit from some timing of expenses. But, you know, 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.
Stephanie Davis
Great, thank you.
Operator
Thank you. Your next question is coming from Jalen Drating from Truist Securities. Your line is live.
Jalen Drating
Thanks, and thanks for taking my questions. Clearly, 2023 now locked in at least from one-one starting 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?
Matthew
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 but switched to progeny, 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 23, even with, you know, some of the macroeconomic concerns that are out there, you know, because they've been in the headlines, as we know, all year long, and recently, you know, and even with that, we still had a successful selling season, so, you know, employers 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.
Jalen Drating
Great, that's helpful. And then my quick follow-up on the, in general, competitive landscape, there have been some large client wins, employer wins by some of your competitors. I know you mentioned that your win rate has been pretty good, but if you guys have not won a client in this selling season specifically, what were some of the reasons? Were you being selective in RFPs or were there some particular 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.
Matthew
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 would be everything from any limitations on geo access, certain treatment exclusions, you know, medical necessity being added, et cetera. And so all those things 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 a different way than 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.
Operator
Great. Thanks a lot.
Matthew
Thank you.
Operator
Your next question is coming from Scott Schoenhass from KeyBank. Your line is live.
spk11
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?
Matthew
The utilization level, you wouldn't see a tick up in the utilization levels. Part of why we quantify the impact of Menopur is is if we didn't have that impact on the top line, 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.
spk11
Yeah, that does, and that takes me to my next question. So you're run rating around 16% annually from an EBITDA margin perspective. Do you think this is a fair run rate for the business moving forward on an annual basis, realizing there's seasonality from quarter to quarter, or just the disruption in many of your distribution and moving towards alternative medications? I think you mentioned the lower pricing unit economics, but is there any cost structure impact? with having to procure these additional alternatives? Thanks.
Matthew
Yeah, there's a small cost structure impact. But again, you know, 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 wouldn't think about this as an issue on a long-term basis. This is a short-term, what I would call a short-term bump. relative to, you know, margin contribution? And then I'll let Mark ask the first part of your question.
Jamie
Yeah, so we've, obviously, each of the last several quarters and this quarter as well, we always sort of point to the margin on the incremental revenue that we're generating as being, you know, maybe a better indicator of the longer-term, you know, 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, you know, that and maybe a little bit in that area is probably a better place to be.
Operator
Thank you. Your next question is coming from Glenn Santangelo from Jefferies. Your line is live.
Glenn Santangelo
Oh, yeah. 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, you know, 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 clarifying. 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?
Matthew
Sure. If you look at, there's a couple of buckets of addressable market that we talk about. The one we reference the most is there's 8,000 large self-insured corporate companies in the U.S. that represent roughly 80 million covered lives worldwide. we're penetrated, you know, the numbers that we sort of quoted, 370 large self-insured clients and next year roughly 5.4 million hybrid 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, 25 million lives, you know, amongst, you know, 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 the last piece is, as we talk about, each year we win a significant number of companies that already cover 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 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 rates in 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're the folks that are going to be doing, you know, asking their HR departments about this benefit, whether they have it and it's not, you know, in my opinion or their opinion, adequately covered, or whether they don't have it at all and continue to push for getting it covered, which is why I believe, you know, that our growth and success will continue.
Glenn Santangelo
That's really helpful. Maybe I just ask one follow-up on those statistics. I mean, you said of the 8,000 large employers, there's 80 million covered lives. Any idea... you know, what percentage of those already have some type of benefit in place because it, you know, your wins are clearly coming from white space and from maybe some lives that are covered by the major carriers. And I guess, you know, the, the, the concern that some investors have, you know, that managed care ultimately wakes up one day and stop seeding, you know, these lives to some of these, you know, pure play ability players. And so people are just really trying to understand like, what's really the market opportunity. Thanks.
Matthew
Yeah, let me hit the second part of your question first. Well, I'll do the first part because it's easy. So based on studies that are out there by the largest benefit consultants, 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... Wait, what was the second part of the question? Oh, as it 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 tried 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 named 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 they have much bigger fish to fry, if you will, in the overall health care landscape that they don't seem to be that focused on changing their approach around this benefit.
Glenn Santangelo
Super helpful. Thanks a lot.
Operator
Thank you. Your next question is coming from Sarah James from Barclays. Your line is live.
Sarah James
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 22 EBITDA or an annualized go-forward EBITDA.
Matthew
If you're talking about the impact to cash flows, it'll always have an impact as we are growing. So to the extent 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.
Jamie
But from an EBITDA standpoint, the arrangements exist, and it's effectively part of our results and part of our guidance. 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.
Sarah James
Got it. Yeah, I wasn't worried about the cash collection. I just more thought it was tied to a favorable terms negotiation for it.
Matthew
As Mark said, the terms are in effect for the full year. There are no sequential terms. It's a three-year arrangement going through the end of 23.
Sarah James
Okay. 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?
Matthew
Well, there's a couple of things, right? Some of that is expansion. We talked about standing up our benefit and 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, but you also need to support your providers and all your clients and the members from a marketing perspective, and all those things require investment. Great.
Sarah James
Thank you.
Operator
Thank you. Once again, ladies and gentlemen, if you have any questions or comments, please press star then one on your phone at this time. Your next question is coming from Stephanie Davis from SVB Securities. Your line is live.
Stephanie Davis
Hey, guys. Congrats on an awesome quarter. Thank you. Thanks. I have a question for you. You keep talking about shortages in drugs on formulary, like Cetratide and Menopur, and then you're putting up record EBITDA quarters. So is there a way to tease 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 margin?
Matthew
Let me just clarify the timing of the menopause 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? The third quarter results were positive.
Stephanie Davis
Cetratide was there, right?
Matthew
I'm sorry?
Stephanie Davis
The cetratide was there as well.
Matthew
Cetratide, I think for the full quarter, was, you know, 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.
Jamie
And was anticipated in our guidance.
Matthew
Yeah, and was anticipated in our guidance. So the MediPure one, 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 are have been short-term in nature, I don't think it's instructive because most of the time, 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 can see from the guidance, not in a really material way.
Stephanie Davis
I understand. And then more of a housekeeping question out of me, is there any way to think about the mix of the new cohort that had the pharma benefit versus non? What would drive someone to not have it at this point?
Matthew
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 year was 92 or something. 92, 93, yeah. 92, 93, but certainly I think 100%. The 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, the 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, you know, the entire benefit with pharmacy. That's the most common reason.
Stephanie Davis
So is there still an opportunity to expand into that, or is this kind of, should we think of this as nearing the top?
Matthew
There's always an opportunity to expand in it. Last year we had a significant amount of, and it's evidenced by the growth in pharmacy versus the growth in medical this year. We had significant upsells. There was a lot more opportunity. There's a little bit more opportunity this year. We had success in it again. You know, we'll always continue to present, you know, the positive impact of going with the ProgenyRx programs to our existing clients and hope to win them all.
Stephanie Davis
Awesome. Love hearing it. Thank you, guys.
Matthew
Thank you. See you.
Operator
Thank you. Your next question is coming from Deb Rewisuria from Barenburg. Your line is live.
spk01
Hey, thank you for taking my question. Good quarter here heading into Q4 after the selling season. I just want to put some context around a couple of things that have been talked about already. You know, one, penetration, which, you know, all indications kind of point to a market that's pretty early. And then, you know, you mentioned kind of the expansion of the Salesforce slightly. And then the other thing is if you just look at the client member lives ad, you know, although this is a good selling season, it relatively in line with, you know, the 1.2 million lives ever added last year. I guess, you know, as someone sitting and looking at all that together, I would just expect if this penetration is still early, you know, for kind of member live ads to accelerate still, you know, through the next few years. You think, you know, maybe it's kind of flat in terms of the 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 ad given penetration so low? Just trying to bridge that gap. Thank you.
Matthew
Yeah, 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 nows 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 never quantify by how much, by the muted – take from the 2020 season, excuse me, 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. If 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, you know, still significant success relative to the base of lives we came into the year with and the base of lives and accounts that we're exiting the year with.
spk01
Okay, that's helpful. I guess, you know, the next question just following up on that is, you know, it certainly looks to be a little bit more competitive from a market standpoint with, you know, both well-funded startups coming into the market. You know, from a growth commercial engine standpoint, you know, how comfortable are you with the current scale or do you feel like, you know, some acceleration would be helpful? Again, just putting it in context of kind of the penetration being low you know, could that be beneficial? Just would love to get your thoughts on what you're thinking about in terms of commercial presence.
Matthew
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, you know, feet on the street relative to our sales force, including, you know, how it's organized, including, you know, how they work with specific channel partners, etc., 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 every year we get smarter at how to approach the market, and we get smarter at any changes in the market, et cetera, and this year will be no different. And we're already in the process of doing that hiring and investing so that we're prepared for next year's selling season.
spk01
Great, thanks for taking my questions.
Operator
Thank you. That concludes our Q&A session. I will now hand the conference back to James Hart for closing remarks. Please go ahead.
James Hart
Thank you, Matthew, and thank you, everyone, for joining us this afternoon. If you have any questions, please feel free to reach out. You all can go ahead. Thank you so much.
Matthew
Talk to you next quarter.
Operator
Thank you, ladies and gentlemen. This concludes today's event. You may disconnect at this time and have a wonderful day. Thank you for your participation.
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