Astrana Health, Inc. (ASTH) Earnings Call Transcript & Summary

Good afternoon, everyone, and thanks for joining the 2021 Cantor Virtual Healthcare Conference. My name is Joe Downing with Equity Research team here at Cantor, and today, we'd like to welcome the management team of Apollo Medical Holdings, publicly traded under the ticker AMEH, and we will have Eric Chin, Chief Financial Officer; and Brandon Sim, Chief Operating Officer and Chief Technology Officer presenting for us today. I will let you guys take away. The floor is yours.

Great. Yes, thank you so much, Joseph, for the introduction. We're going to be going through just a brief overview of our business at a high level today and then leave some room at the end of the session for questions. So with that, we'll go ahead with the presentation. Carolyn, could you please? Perfect. Thank you. So ApolloMed at a high level is a physician-centric technology-powered healthcare company. We're focused on helping providers transition to value-based care arrangements, and actually succeed in those arrangements. To do so, we've built and we currently leverage our proprietary technology solution, to empower doctors to deliver high-quality care to their patient populations in a cost-effective manner. We've been operating for over 25 years, which means that we're well versed in taking risk on large populations. We serve over 1.1 million members in our risk-bearing populations, have over 7,000 contracted decisions and work with over 12 managed IPAs. And so despite some of the excitement around -- the recent excitement around value-based care companies, this is something that we've been doing for a long time, and we're working very hard in formalizing the lessons we've learned over 25 years of profitable risk bearing on our patient population to build out a scalable tech platform that will allow us to scale nationwide. Carolyn, could you move to the next slide, please? So as you may all know, the U.S. healthcare landscape has recently rapidly moved towards value-based care. The traditional model of reimbursement in terms of fee-for-service, had a variety of problems associated with it. A lack of clear incentives for improving chronic conditions, a trend of rapidly rising medical costs that outpace wage increases, for example, and rising patient dissatisfaction with the relationships that they have with their providers, which can turn transactional, in a fee-for-service reimbursement model. What we're trying to do is help doctors move towards and succeed in value-based care arrangements, where doctors will be incentivized to improve the general health of their patients and compensate and align their compensation structure with patient outcomes and satisfaction. Next slide, please? While a lot of providers realize the need to move towards value-based care models, they find it difficult to actually adopt those models and succeed in them. Common issues that they experience include, lack of data, lack of technology infrastructure to succeed in value-based arrangements, and even lack of sophistication to engage in them in the first place. That's kind of where ApolloMed comes in, if we can go to the next slide. ApolloMed is a value-based care platform, that allows doctors to successfully take risk -- that's driven by our leading proprietary technology platform that we've developed in-house with onshore engineers, and we champion quality outcomes, as well as population health. So we focus on using the large amounts of data we've collected over our 1 million plus population over many years, in order to drive actionable data outcomes for the providers that we serve. Finally, we also provide scalable value-based care services, and kind of back-end administrative functions for our IPA clients, which further allows them to scale across their patient population. Could we move to slide 8, please? Like I mentioned earlier, ApolloMed has been doing this for a long time, and so over that time, we've established long-term relationships with a very diversified payer mix. Our average tenure with key payers is around 15 years. We have over 20-plus payer relationships, and it's very well diversified and that less than 15% of our total net revenue comes from any payer. Next slide, please? Our unit economics are also very predictable and attractive. Because we're working in capitated arrangements with our payer partners, in which we derive per patient per month payment for our members that are committed to ApolloMed, our cash flows are very predictable and that we know exactly what our -- or we know very closely how our membership will translate into revenue. In addition, on a per member basis, the per member per month capitated payments that we received, are very well controlled at a population level as well. While compared to industry peers, we're able to better control our medical cost expenses, we're able to better control our OpEx, due to our scale, and we're also able to improve revenues through contracting and risk adjustment, in a favorable way compared to some of our peers. Next slide, please? In addition, there's a lot of additional levers for value that we can have, as we grow into new regions, as we grow into new clients and kind of acquire more lives. I won't go into every single lever here. Happy to take questions about this later. But we see a significant opportunity for improvement for doctors when they onboard into our platform, and we share a lot of that improvement with our doctors as well. And so this creates a kind of renewing flywheel that attracts doctors to join the platform and allows for us to continually create value, as they do so. Next slide, please? The last slide that we've -- that I just spoke about, has led to kind of a proven model of consistent growth across our membership base and our physician base. As you can see here, really rapid membership growth and contract physician growth over the last couple of years, and even more rapid growth planned for the future. Next slide, please? In addition, there are demonstrable financial and clinical outcomes for the risk management system that we've created here. One example is in our next-gen ACO, which is publicly available data made through -- made available through CMS. For example, in the most recent reported performance year, 2019, we were fourth best in the nation in both gross savings dollars for CMS, the Medicare program, as well as in gross savings percentage, while having above-average quality score. This is all while growing our ACO [ line ] beneficiary count from around 23,000 to over 30,000 over the past couple of years. Next slide, please? Sorry, one more. In addition to financial outcomes, there are also a lot of clinical outcomes, beneficial clinical outcomes that we've achieved for our patients as well. As you can see on this slide, 50% fewer hospital admits per 1,000, 55% fewer ER visits per 1,000, 22% shorter average length of stay for our senior members and hospitals, and a much -- and a drastically reduced inpatient bed days per 1,000 as well. So in addition to improving financial outcomes for our patient population and aligned risk pools, we're also driving kind of demonstrable improvements in terms of clinical outcomes as well. Next slide, please? Behind all of these kind of financial and clinical outcomes, all of these are driven primarily by our team of case managers, [ UM ] folks, doctors, medical directors as well as our proprietary tech platform. So our tech platform allows for us to aggregate data at a large scale from a variety of sources, whether it's from a provider's office, a laboratory, a diagnostic center, hospital, etcetera, as well as combining it with our proprietary data analytics model, in order to inform all the staff that I talked about earlier and allow them to act in the best way possible for our patient population. So on the clinical side, we're able to better manage our risk. On the administrative side, we also take advantage of our scale and automation tools, in order to automate things like medical claims adjudication, authorization approvals, etcetera and that also lowers our OpEx, as we scale across new populations also. Next slide, please? Sorry, one more. Cool. So now I want to talk a little bit about the market opportunity, now that we've demonstrated some of the actual outcomes that Apollo has been able to achieve in its current population. Next slide, please? One more. Currently, we're serving mostly counties in California, and the very narrowly defined serviceable addressable market in these current counties is around $17 billion. If we expand out to California or even the entire United States, I mean, we're talking about almost a $1 trillion opportunity in terms of simply provider services, which we have yet to even scratch the surface of. Next slide, please? We've established a strong foothold in California, as you can see on the slide, and are in 9 of the top 25 U.S. counties by population. But next slide, please. There's still quite a lot of opportunity for us to capture a much larger share of a $1 trillion services market. We plan to, for this year to really expand our membership base, in terms of members that we are either managing or taking risk on. And we think there's a much wider whitespace ahead of us as we formalize our model, build out the infrastructural tools to allow us to scale, and continue to build expertise in different geographical regions. Next slide, please? Sorry, one more. One example of such geographic expansion is the recent strategic investment that we made in New York. We closed the deal in August, in which we would partner with a New York-based IPA, in overserving around 500,000 Medicaid members throughout the 5 boroughs in New York City. We're working very hard and partnering closely with them to move them from fee-for-service arrangements to value-based care arrangements, as I mentioned earlier, and we think that we'll be able to drive a large amount of value, as well as provide improved clinical outcomes and financial outcomes for that MSO and IPA, as we partner with them going forward. Next slide, please? So in summary, ApolloMed has a long history of profitable risk sharing, a proven model with predictable, attractive unit economics, as well as further upside from scaling and improved risk sharing. We've created a scalable and repeatable playbook that we'll execute again and again in markets throughout California, but also throughout the U.S. We've got an industry-leading technology platform, driven by data accumulated over many years. That all leads to a flywheel effect that will continue to allow us to expand on our substantial lead, and there's still a lot of white space ahead in the value-based care space. And so in summary, we're very excited about the opportunity this provides for us going forward. Next slide, please? If you look at some of these numbers are maybe not super up to date, but if you look across our industry peers for others involved in the value-based care space, you'll see a lot of other folks who have varying degrees of efficacy, in terms of dealing with member populations and taking risks. I think you'll see here that, based on the number of years of experience we have in our past profitability, we're very well positioned in order to really seize market leadership in terms of the space, if we don't already have it. Next slide, please? At this point, I'll turn it over to Eric Chen, our CFO, to go over some of the high-level financial details. And then afterwards, we'll open it up for questions.

Thanks, Brandon. Next slide, please. So starting here on the left, you'll see our total revenue growth trends with consistent increases from 2018 through 2021. Of note, is the significant increase in 2020, which was driven primarily by the $20 million shared savings from the settlement of our 2019 ACO performance year, along with full year of the acquisitions that occurred in 2019 of Alpha Care IPA and Accountable IPA. On the right-hand side, you'll see our strong performance through 2021, with the bottom line net income, and some highlights here are in 2020, we had $13 million of shared savings, earned in the settlement of the 2019 ACO performance, as well as a $25 million decrease in our medical claims expense during 2020, as a result of decreased utilization from COVID-19. Our 2021 guidance projects improved results due to the positive trends that we are seeing across the business, as well as our strong organic growth and financial results that we have achieved thus far in 2021. Next slide, please? Here are some details of our revenue, which we can go through some highlights. Our capitation revenue increased 2.5%, primarily driven by organic growth in 2021. Our risk pool settlements and incentives had a 35% increase due to a $6.8 million increase in risk pool settlements from decreased utilization at our hospital partners from the beginning of the pandemic, as these revenues reflect a 15 to 18 month lag to settlement. Then we drop down to management fee income, which remains steady, but we continue to pursue additional MSO contracts here in Southern California and beyond with our technology platform, as an attractive way to win business. From a fee-for-service perspective, this is not a big piece of our business, but we did see a post-COVID return to normalcy at our surgery centers and heart center. This all came down to the bottom line, net income, which benefited from the revenue increases as well as a $1 million G&A savings primarily due to the result of efficiencies gained from the company's technology platform. These were offset by increases in operating expenses due to costs related to our debt refinancing in the second quarter of 2021. Next slide, please. From a guidance update perspective, I just want to remind everyone that there are no acquisitions built into this guidance. From a revenue perspective, we project steady increases, no major changes to the revenue mix, but some healthy organic growth in the revenue. EBITDA and related EBITDA margin. Those are some factors and assumptions that go into there are post-COVID return to normalized margin over the second half of 2021, and this is also offset by improvements in our margin as a result of the technology platform. Next slide, please. Here's a chart showing the breakdown of our revenue. From capitation, we have over 80% in stable diversified long-term contracts with multiple health plans. Then we have the risk pool, settlement and incentives, which include full risk arrangements with our hospital partners as well as the APA, ACO shared savings. Management fee, this is typically low-double-digit percentage of revenue contracts with our third-party IPAs. And then as I mentioned earlier, the fee-for-service is a huge surgery centers and a heart center that we own and control. Next slide, please. From a business mix by payer type, we're well diversified in our payer mix by line of business. And we're proud to serve Medicaid lives and historically have been profitable in that line of business. Next slide, please. Walking through our balance sheet. In the second quarter, we completed a 5-year $400 million revolving credit facility. We retired our prior debt of $236 million, along with a payment of $58 million in cash and $180 million draw on our new revolver and opened a new facility with an availability of $220 million. All said, we saved about 50 basis points on this transaction from interest expense on a go-forward basis. Next slide, please. Here, I'll walk you through the cap table. Some of the highlights are our current market cap of approximately $4.4 billion. And then, we add in the bank debt of $188 million, less cash of $88 million, and we arrived at a $4.5 billion implied enterprise value. Next slide, please. In conclusion, our historical financial performance, coupled with the ability to raise guidance throughout the pandemic and continue to beat analysts' expectations and our strategies for nationwide growth contribute to a tremendous investment opportunity. I thank you all for your time, and I'll turn it back to Joseph.

That was great. So we have a question. It's more a housekeeping question, just to kick us off regarding Slide 14. So for the benchmarks on that slide, are they national or for California? That's -- yes, that was the question.

Yes, those benchmarks are from CMS, and those are national Medicare benchmarks.

Okay. And again, if there's any questions from anyone on the call, definitely should come in. In the meantime, I think it's worth just because there's so many competitors in your space drilling down a little bit more so into what differentiates Apollo from these competitors, whether that be the tech stack, the way you guys interact with providers or just the business model as a whole. So I think that's worth spending a little bit more time on.

Yes, absolutely, happy to take that. So in terms of our competitors, I think there's a couple of key ways in which we're differentiated from them. The first is in terms of the business model itself. Rather than actually owning clinics and building clinics de novo and hiring doctors to staff those clinics, we take quite a different approach when we're talking about the ApolloMed platform. We're talking about an asset-light, primarily affiliate model in which all we're doing is enabling doctors' offices which already exist in the local community to onboard onto the ApolloMed platform, access contracts, access all of our data analytics and engineering tools and increase their net income as well as participate in value-based contracts through the ApolloMed platform. What that means is that instead of enforcing a one-size-fits-all branded kind of experience across the nation, where there will be literally ApolloMed branded clinics and whatnot, we actually allow doctors to remain independent, keep their own branding, keep their own practice level economics, but simply use our tools in order to gain scale, to gain access to sophisticated analytics and to access value-based contracts and succeed in them. One analogy I'd probably give here is the difference between running a taxi cab fleet versus having a bunch of independent car drivers all onboard into a platform like an Uber or a Lyft. Instead of buying -- going out and buying a bunch of cars, hiring a bunch of taxi drivers and putting them into cars and then finding passengers, what we're doing is we're partnering with people who already have cars, that is doctors who already have independent practices and allowing them a flexible platform in which -- through which they can increase their net income and participate in value-based care arrangements and to [ fuel them ] in a way they otherwise might not have been able to do. That allows us to be asset-light, allows us to scale much more rapidly and kind of allows us to not have to make a large investment in OpEx that we might otherwise have had to do. In addition, I think this is actually a huge differentiator in terms of patient satisfaction as well. Here's an analogy I'll make to make it very clear. If you, for example, run a fast food chain and you are setting up McDonald's in every single city, for example, in the U.S. If someone happens to not like McDonald's, they wouldn't be able to go to a different McDonald's and have a different experience. So it would be the exact same experience commoditized and made very efficient at kind of the brand level. In terms of our approach to kind of delivering care relative to some of our competitors, we truly believe that it's best if we partner with physicians who have already existed in these communities have refined over many years, the approach that they take to best manage and that connects with the very diverse communities that we serve and not take that away from them. We allow them to continue their own practices, continue their own branding, continue their own clinical programs for the most part, while offering them benefit to scale that they otherwise wouldn't have. Therefore, if a patient doesn't particularly -- the relationship between a patient and his or her provider doesn't work out perfectly, they can still go to another doctor's office within our network and to find a completely different experience that may be more suited to them rather than being kind of shut out if their -- the way that they need to receive care doesn't fit in perfectly with the one-size-fits-all model that we're imposing them -- on to them from a top. And so I think in many ways, both from a financial perspective and a patient satisfaction and clinical outcomes perspective, the more flexible model actually leads to better patient outcomes and better financial outcomes for all. In addition, I would also mention that the model that we've built over 25 years, one is differentiated in that we've been around for 25 years. A lot of the competitors you see on these slides do not have that breadth of experience that we do. And two, I think we've proven over those 25 years that we can be profitable managing very large populations in differentiated lines of business. So we're not Medicare-focused only. We manage Medicaid, Medicare, commercial and exchange -- ACA exchange members as well. And so we have a very diversified member base. We're able to be profitable in all of those lines of business, which is something that I think is quite a big differentiator compared to other folks who are only looking at Medicare or [ kind of like city block ] who are only looking at Medicaid. The infrastructure required to support all these lines of business certainly is more complicated, but that kind of leads into the final moat, which is kind of the technology platform and operational processes that we've developed over many years in order to manage profitably these diverse member populations. And so for those 3 reasons, I think ApolloMed is quite a differentiated opportunity from some of the other competitors we have on the slide and that you may be evaluating.

Right. No, I think that's definitely a good overview. So we've got a couple of more questions in the queue here. So one, just do you mind touching on the organic growth target for the business?

Yes, sure. So historically, to be quite frank with the folks here, the company was physician founded and physician run. Their main is physician run. But in the past, probably before [ around 2 ] years ago, there wasn't really a huge [ ambition ] growth. I mean the doctors are very focused on providing quality care to the local communities in which they serve, which is primarily the Los Angeles area. With Eric and my hirings as well as the team that we've built out currently of all-star caliber folks, we're really kind of putting a new focus on growth, putting a new focus on a 3- to 5-year and beyond strategy and executing on a sustainable organic and inorganic growth plan. To this day, or as of even the beginning of this year, there was not a single employee here that was dedicated to growth, dedicated to strategy. And when I started 2 years ago, there was not a single software engineer at the entire company. And so I think in many ways, despite the longevity of the risk bearing that we've been able to take on over the last 25 years, in many ways, there's still so much untapped potential in terms of actually driving organic growth. In the absence of any kind of staff responsible for driving growth, so literally kind of purely organic growth, we've seen around single digit -- mid-single-digit percentages over the past couple of years. Going forward, now that we're starting to make investments in that area, we think we'll see double-digit percentages for organic growth due to a variety of reasons. The opportunity for participation in various CMMI programs such as direct contracting as well as kind of strong organic growth in our legacy and new regions that we've expanded to this year.

Yes. Actually, just what you mentioned there with direct contracting, if you wouldn't mind elaborating a little bit more so on that with Apollo moving forward with that and kind of the opportunity you see going down that route.

Absolutely, yes. That model and other theme of my models are ones we've kept close tabs on and are very excited about because they represent exactly what our company mission is, which is to move fee-for-service arrangement schemes back to something that looks a little bit more like a value-based or managed care schemes like a Medicare Advantage plan, for example. And so to us, the DC looks a little bit more like an MA plan than even the next-gen ACO, and that's something that we're very excited about. In terms of the actual logistical details of participation, we're currently embargoed by CMS in terms of releasing information about our participation or lack thereof. However, I would just say that we are prepared if we are going to be unembargoed to participate in that program going forward. But again, we can't release that information publicly at the moment. We'll be starting to update the investor community if and when we're able to do so. In terms of what that hypothetical opportunity would look like at a high level, if we were able to participate, we think it's a tremendous opportunity. We have around -- we had around 30,000 aligned beneficiaries in our next-gen ACO, and the DC would allow us to not only expand on that through a larger provider network that we have now, but also allow us to market directly to individuals and have them participate in our DCs through voluntary alignment, which is something that we're very excited about as well. So kind of with our history of care management and kind of profit sharing with our participating ACO doctors, we hope that if we were to be approved for the DC, we would have a large provider network to be able to capture even more members and organically kind of grow that membership base by appealing directly to members as well as through voluntary alignment mechanisms. Hopefully, that answers some of the questions about direct contracting.

Yes. No, that's helpful. We'll have a few minutes left. I just want to get to 2 more questions here. So one, if you want to mind touching on the relationship with AHMC.

Sure. Yes. AHMC is primarily a hospital operator, a local community hospital operator. I think they have between 5 and 15, I forgot the exact number. They're acquiring hospitals by the day, but in that range of hospitals throughout California, we have no ownership stake in AHMC whatsoever. AHMC does not as an entity own ApolloMed shares either. Eric, please correct me, if I'm wrong there. The only relationship that we would have is that, one, they are a trusted hospital partner of ours in our communities that are served by agency hospitals; and two, that one of their leaders is on our Board of Directors. Linda Marsh and that disclosure is made kind of in our Board of Directors' filings. And so that's the extent of our relationship. They're a very valued partner that we hope to continue partnering with in terms of providing quality acute care services to our service populations.

Yes. And then we got 2 minutes left. So I just wanted to touch on a little bit of your capital allocation strategy moving forward. Maybe touch on your recent affiliation with CAIPA MSO or in terms of similar partnerships you might be pursuing in maybe other areas of the country that are similar to that. I know you touched on it a bit in your presentation, but I think any capital allocation plans and growth strategy talk would be helpful.

Yes. I think there's a delicate balance that we strike when we're doing capital allocation, especially when we're thinking about investments for the future, investments in growth versus kind of ensuring that we remain profitable to investor expectations. And so over the past couple of years, for example, we've allocated capital more towards, for example, technology investments, building out a platform in-house that we didn't have before. Of course, to remain profitable, and as Eric mentioned, kind of outperform analyst expectations over that time period, we've had to make cuts in other places. And so far, we've been lucky enough that there have been enough near-term wins with the technology infrastructure that we've built to significantly reduce OpEx in order to offset most of those increased investments in terms of our technology platform. Going forward, however, I think certainly, we would be continuing to allocate as much if not more investment into building out our tech platform and to building out our back-end care management workflow tools into building out our point of care provider-facing tools to make them better equipped to serve their patients and further drive actionable data to their fingertips. We would also be thinking a lot in terms of making accretive acquisitions to allow us to have footholds into new geographic regions and then employing a hub-and-spoke model from there, driving organic growth in those regions once we've entered them with a trusted partner. And as you mentioned earlier Joseph, CAIPA is an example of that. Eric, any other comments you have around capital allocation?

No, I think you covered it perfectly. Thanks.

Yes, I think with that, we're out of time. So we'll wrap it up. Eric and Brandon, really appreciate the time. We wish you the best of luck with everything in the future.

Thank you so much, Joseph, for having us. And thank you all. Feel free to reach out to us, if you have any questions.

Yes. Thanks, Joseph, and thanks, Cantor.

Thanks, guys. Take care.