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

Good day, everyone. Thank you for standing by, and welcome to today's Astrana Health Business Update Call. [Operator Instructions] Today's speakers will be Brandon Sim, President and Chief Executive Officer of Astrana Health; and Chan Basho, Chief Operating and Financial Officer. The press release announcing Astrana Health, Inc.'s definitive agreement to acquire certain businesses and assets of Prospect Health System is available at the Investors section of the company's website at www.astranahealth.com. The company will discuss certain non-GAAP measures during this call. Reconciliations to the most comparable GAAP measure are included in the press release. To provide some additional background on the pending acquisition, the company has made a supplemental deck available on its website. A replay of this broadcast will also be made available at Astrana Health's website after the conclusion of this call. Before we get started, I would like to remind everyone that this conference call and any accompanying information discussed herein contains certain forward-looking statements within the meaning of the safe harbor provision of the Private Securities Litigation Reform Act of 1995. These forward-looking statements can be identified by terms such as anticipate, believe, expect, future, plan, outlook, and will include, among other things, statements regarding the company's guidance for the year ending December 31, 2024, continued growth, acquisition strategy, ability to deliver sustainable long-term value, ability to respond to the changing environment, operational focus, strategic growth plans and merger integration efforts. Although the company believes that the expectations reflected in its forward-looking statements are reasonable as of today, those statements are subject to risks and uncertainties that could cause actual results to differ materially from those projected. There can be no assurances that those expectations will prove to be correct. Information about risks associated with investing in Astrana Health is included in its filings with the Securities and Exchange Commission, which we encourage you to review before making an investment decision. The company does not assume any obligation to update any forward-looking statements as a result of new information, future events, changes in market conditions or otherwise, except as required by law. Regarding the disclaimer language, I would also like to refer you to Slide 2 and 3 of the conference call presentation for further information. With that, I'll turn the call over to Astrana Health's President and Chief Executive Officer, Brandon Sim. Please go ahead, sir.

Good morning, everyone, and thank you for joining us today on short notice as we discuss our progress here at Astrana in building the nation's premier patient-centered health care platform. I'm sorry for some of the technical difficulties that we have been encountering accounting for the late start here. So thank you again for joining us. I'm excited to share more today about our recently announced definitive agreement to acquire certain businesses and assets related to Prospect Health System, including its California-licensed restricted Knox-Keene plan, Prospect Health Plan; its medical groups in California, Texas, Arizona and Rhode Island, Prospect Medical Groups; its management service organization, Prospect Medical Systems; its pharmacy, RightRx; and Foothill Regional Medical Center, a fully accredited acute care hospital with 177 licensed beds. In aggregate, Prospect Health, as we're calling it, is an integrated care delivery system which facilitates and coordinates the delivery of high-quality clinical care for all. With a network of over 3,000 primary care providers and 10,000 specialists across Southern California, Texas, Arizona and Rhode Island, Prospect, very similarly to Astrana, is enabling providers to deliver payer-agnostic, patient-centric care to around 610,000 members in value-based care arrangements across all lines of business, including Medicare Advantage, Managed Medicaid and Managed Commercial. We believe the acquisition of Prospect presents several strategic advantages for Astrana. First, the acquisition of Prospect significantly expands the Astrana Health provider network, enhancing our ability to offer increased access, quality and value to our members. This complementary network exists in geographically adjacent markets to our existing footprint, such as Orange County in San Diego in California, where we today have a very minimal footprint; as well as in San Antonio in Texas. This, we believe, will allow us to grow in a continuously sustainable manner. Additionally, Prospect's footprint allows for growth in new markets such as Rhode Island. Secondly, Prospect and its existing full-risk contracts will advance our ability to participate in value-based arrangements across Medicare, Medicaid and Commercial in a payer-agnostic way, allowing us to make greater investments in local communities and align reimbursement with clinical outcomes. Third, we are looking forward to partnering with the current Prospect management services organization and the Prospect ecosystem in order to offer Astrana's differentiated platform, combining clinical workflows, proprietary care enablement technology, core integration capabilities and a full-stack care delivery toolkit. We believe there exists an opportunity to deliver significant clinical and operational efficiencies for Prospect, including the ability to build out care delivery assets across Prospect's existing markets. Prospect is expected to be immediately accretive financially with meaningful cash flow generation driven by its core businesses and further upside from operational efficiencies and risk arrangement synergies over time. Prospect is expected to generate approximately $1.2 billion in revenue and expected to generate around $80 million in adjusted EBITDA in 2024. As we've talked about in past quarters, Astrana Health is at a transformative inflection point. Having just entered a new phase of scale with the closing and active integration of Collaborative Health System, we believe the planned acquisition of Prospect only serves to solidify Astrana Health's position as the leading national health care delivery company with a differentiated ability to deliver high growth, sustainable margins and, most importantly, high-quality, longitudinal and technology-driven patient-centered care. Pro forma the inclusion of Prospect, the combined entity would serve an estimated combined 1.7 million patients in value-based care arrangements across 13 states. But most importantly, our partnership accelerates our path and our mission to deliver high-quality, high-value and accessible care to all. We will remain steadfast in our dedication to our quality of care, our patients, our providers, our team and our long-term sustainability, foundational tenets that we believe are closely held and shared by the Prospect team. We're excited to share this news with you today, but even more excited to get to work and accelerating our path towards our vision for high-quality, high-value and accessible care for all Americans. I'll now pass it to Chan to discuss some of the financial and operational details of the transaction. Chan?

Thanks so much, Brandon. I'm very excited to partner with the Prospect leadership team in the coming months to really work through close as well as integration as we build a differentiated platform that includes unique clinical workflows, a combined care enablement suite that offers the ability to scale and integrate as we continue to grow. Through this partnership, we believe there exists an opportunity to deliver significant clinical and operational efficiencies. Under the terms of the purchase agreement, subject to satisfaction of customary conditions, Astrana plans to acquire the Prospect Health business and assets for a purchase price of $745 million. We expect to fund the transaction using the combination of cash on hand and $1.095 million 364-day bridge commitment provided by Truist Bank and JPMorgan. Prospect is expected to generate approximately $1.2 billion in revenue with expected adjusted EBITDA of approximately $81 million for the 12 months ending December 31, 2024. This reflects just over a 9x adjusted EBITDA multiple. The pro forma net leverage of our combined business is expected to be around 3.4x at close, and we are committed to being under 2.5x net leverage within 24 months. The transaction is expected to close in mid-2025, subject to regulatory approvals and other closing conditions. With that operator, can we open it up for questions?

[Operator Instructions] Our first question comes from the line of Ryan Daniels with William Blair.

Brandon, this is Jack Senft on for Ryan. Congrats on the announcement. I think your previous long-term EBITDA margin target was around the 10% to 15% range or so. With this acquisition, and even the acquisition of CHS, is that still the goal? Or I guess like how should we think about margin expansion going forward as these 2 acquisitions kind of integrate into the Astrana Health platform?

Jack, good to hear from you again. We had previously guided to that for at-scale cohorts and margins in the 10% to 15% range. With the acquisition of CHS, especially, but also partially Prospect, we will be bringing on many new cohorts of members, especially as we grow at the pace that we're growing. I believe the pro forma revenue of the 2 businesses combined for 2024 would be over the $3 billion mark. And so I think there are going to be certain challenges and opportunities, frankly, that we'll have as we integrate the businesses and ensure that we are applying our differentiated clinical and technology platform to the business, should it close. And so I think to answer your question, in the near-term future, we are not expecting an enterprise-level 10% to 15% EBITDA margin. However, we think that, that is still the appropriate amount for an at-scale population once it's been in the Astrana ecosystem.

Okay. That makes perfect sense. Just like a quick follow-up here, too. You mentioned the Prospect Health plan comes with another RKK license, and I know you already have the Medicare and Medicaid RKK license in California. So with this acquisition and getting yet another RKK, does that speed up the integration and moving the existing business onto these licenses? Or does that really not matter that much just since you already have the license in place? If you can just kind of touch on the process there.

It will definitely help in terms of having an established RKK in the contiguous geographies. As we work through our integration efforts, we'll, of course, be working through if we bring down the number of RKKs that we have. But at this time, there's merit in terms of the Orange County, San Diego-focused RKK that exists within Prospect as well as the 2 that we have in the business.

Our next question comes from the line of Jailendra Singh with Truist Securities.

Congrats on the transaction. I wanted to follow up on this comment in your slide deck about $12 million synergies by 2027. Maybe elaborate more on what are the drivers there? And why are there not any much synergies like immediately after the closing like in 2026? Are there any capital investment commitments as part of the transaction? Just trying to understand the opportunities you guys have with this business to expand margins longer term.

In terms of synergies, we're, of course, being conservative. So there's opportunities on the revenue side as well as in terms of combining both ecosystems into one. And so as we work through the close process, we'll definitely have a more wholesome picture around synergies. In terms of capital commitments, again, no commitments at this time. And as we work and get closer to close, we can highlight what commitments, if any, would be necessary.

Okay. And then this one is for Brandon, I guess. Just curious on the industrial logic of acquiring an acute care hospital. Obviously, the company has had profit-sharing arrangements with hospitals in the California market in the past. Is this one of those hospitals? And does this hospital currently see Astrana patients?

Jailendra, thanks for the question. To answer your question, the hospital does see some Astrana patients. I would not say it is a large volume of our current patients at all. As I mentioned in the prepared remarks, we actually have very limited geographic presence in Orange County today where that hospital is located despite Los Angeles County being geographically adjacent to Orange County. However, to your point, that hospital does see a lot of the included perimeter in the perimeter of Prospect Health patients. And so part of the industrial logic for including the hospital as part of the transaction is that we would have an opportunity to further drive integration with that hospital given that it sees today much of the Prospect Health members, including the 610,000 value-based care members that it serves today. We have similar arrangements with hospitals in our existing membership. We are able to accomplish much of the same without necessarily owning the hospital, in many cases. In this particular case, given some of the dynamics and the color around this transaction, we decided that it made sense to include the hospital in the transaction perimeter.

That makes sense. And one last one, if I could. Does Prospect participate in ACO or MSSP programs? If so, can you provide any color in terms of lives or savings?

Yes, sure. Prospect does participate, to our knowledge, in an ACO REACH program. It does not have its own ACO REACH license. It participates through a different convener type entity. It is a very minimal number of lives, I would say, certainly in the single to very low, maybe like teens, of thousands of lives. So I believe, certainly less than 30,000 to 50,000 lives, perhaps even far less than that. In terms of MSSP, it also does participate in MSSP ACO, again, very minimal number of lives. Most of the 610,000 value-based care lives are in Managed Medicaid, Managed Commercial or Medicare Advantage books of business.

Our next question comes from the line of Michael Ha with Baird.

Congratulations on the acquisition. Just want to follow up on your point, Brandon, what's the split between Managed Medicaid, Medicare Advantage and Insurance Marketplace on the 610,000 lives? I assume it's somewhere like $150 to $200 revenue PMPM, so it would be helpful to get that split first.

Michael, thanks for the question. We actually have the pro forma membership split of the pro forma 1.7 million members on the supplementary slide deck. I'll just mention the numbers on the call here, so it's easier. Around 17% of the pro forma 1.7 million members would be in Medicare, around 28% would be Commercial members, and around 55% would be Medicaid. And you'll notice that, that probably sounds kind of similar, frankly, to the mix of members that we have in Astrana's stand-alone portfolio today. I mean it's really because of the similar cultural alignment that both organizations have around serving the entire patient panel, enabling doctors and empowering doctors to have an easier time serving the entire panel and the entire community, and ensuring that those synergies and ability to influence the physicians' behavior and improve their outcomes in value-based arrangements are met across all lines of business. And so it really is a multiline of business, payer-agnostic book, very similar to what the Astrana book is today.

And maybe I'll just tie in a few into this question. Are they all full risk or some partial risk? Did you quantify the magnitude of significant investments? And in terms of the acute care hospitals, just to clarify, this is just a one-off type acquisition of a hospital, it's not in any way shifting your vision or you're not trying to develop this as a new care delivery vertical going forward?

Sure thing. So on your first question, we haven't disclosed the exact split of full risk versus partial risk, but I would say that it is quite similar to the split that we have today. And we continue to see opportunity, as we do in our core story, to continue moving members from a partial risk to a full-risk environment, which the team has already been doing on a stand-alone basis as well. To your second question on the acute care facility, absolutely not, the acute care facility is not a reflection of a strategic shift towards owning hospitals. It just so happens that in this particular case, the asset was seeing a lot of the patients. And again, given the dynamics of the transaction, we felt it was prudent to include the hospital in this particular instance. But to kind of leave no doubt, there is no strategic shift whatsoever to owning or operating hospitals long term. Our business is that of taking on risk, improving quality, improving care and improving access for members in a capital-light fashion with outpatient providers.

Our next question comes from the line of Jack Slevin with Jefferies.

Congrats on the transaction. First one, maybe just on the financing piece. Can you maybe speak to just a little more details on that bridge loan and then what the sort of expected cost of financing is going to be? I'm just trying to get a sense of sort of how this impacts the ability to cash flow going forward.

Jack, in terms of the bridge, it's a 364 bridge with bank partners that we have worked with in the past in terms of, for example, the TLA that we worked through associated with the CFC transaction. We feel, based on the performance of our core business as well as the acquisition, we'll be able to finance this mainly through bank debt, similar to the structure that we put into place with CFC. I would assume very similar terms to what we have today in place. Of course, post-close, our leverage will be in the 3.4 range. So as you can see, in terms of our current TLA, our coupon will be a little higher than where we are today.

Okay. Got it. That's helpful. And maybe just one more point on that front. So I see the 3.4 moving to less than 2.5x leverage in 24 months. Can you just break down sort of, at least at a high level, how you are thinking about how much of that is driven by cash generation and how much of that is driven by incremental EBITDA growth both in sort of the core business and potentially on Prospect?

Yes. I would say about 50% to 70% is built on the growth of core EBITDA and with the high cash flow conversion rate. You can get the rest of the way.

Okay. Got it. Awesome. I appreciate that. Last one for me. I don't know if it's strategically or operationally, but this deal, CHS, you're broadening the regional footprint. And it seems like there possibly could be quite a bit of integration work. I just wanted to get your thoughts on sort of how you're thinking about that process, what the plan is with some of the Prospect leadership or some of the more senior members of that team there. And sort of any thoughts you can share on sort of what the biggest blocks are to get done to make sure that things are integrated successfully while sort of managing both the CHS turnaround and then integrating this deal?

Thanks for the question. You're right. It has been a very active year for us both in terms of inorganic deals and organic partnerships with new provider groups that we signed and announced this year. I had alluded to in the past, in prepared remarks and on quarterly calls, that the pipeline was very active. And we believe that because we are building the nation's leading sustainable provider patient platform, we think that we attract the right types of groups, again, in both an organic and inorganic fashion. And so I think part of the growth that you're seeing now is a reflection of the quality and the momentum that we're seeing in our business and the fact that we think we're truly building the bellwether business in our space in terms of profitable, sustainable, quickly growing value-based care entities. To your point around integrating them successfully, that's something that we've had a lot of experience with. Certainly, to be fair, not at this size, but you may recall that, along with our third quarter earnings last year, we announced the acquisition of Community Family Care and its associated restricted Knox-Keene license and IPAs and medical groups. We've had a lot of practice integrating groups that is aided by the proprietary technology platform that we've built completely in-house. It's something that gives us incredible flexibility, data visibility and operational capacity as we integrate new groups into our system. We don't have to wait for a vendor to update their systems if something goes weird. We don't have to figure out how to do all the data mapping every single time and wait months for a vendor to respond. These are all things that we have in-house capabilities for with a team of over 100 technologists, data scientists and machine learning experts that have been doing this for years. And so we really think it's a muscle that we've built. I know this is, again, by far, one of the larger acquisitions by enterprise value, but it's something that we believe strongly is an advantage for us relative to others in the space, and we think that allows us to continue growing in a very accelerated fashion while continuing to remain profitable.

Our next question comes from the line of Ryan Langston with TD Cowen.

Just on Foothill Regional, at least according to the American AHD, running looks like a large operating loss, but kind of a positive 1% net margin. Is there a large sort of Medicaid footprint or something driving maybe support funds or supplemental payments to that particular hospital? And then can you give us a sense of the free cash flow profile of the consolidated acquired business?

Sure. You're right. It's a very astute observation. That facility primarily serves a large percentage of Medicaid-eligible patients. It does qualify for certain supplemental payments that are customary for when you serve this kind of population. And it's something that, again, really fits into our thesis around providing high-quality care in a coordinated way for all populations. You'll recall that around 30% of our revenue today on a stand-alone basis comes from Medicaid. And on our earnings call yesterday, we discussed some of the impacts of recent legislation such as Prop 35 on our Medicaid book of business in California. And that's something that we continue to see in this hospital.

Okay. And then can you tell us just the free cash flow profile of the business?

So I'll let Chan answer the financial question. Thank you.

In '25, we expect free cash flow to be in the $50 million to $60 million range.

Our next question comes from the line of Matthew Gillmor with KeyBanc Capital Markets.

Congrats on the deal announcement. I was curious how you're thinking about leveraging the Prospect Health Plan business if you saw an opportunity to expand the health plan to serve as a health plan for some of the Astrana members and if you thought that would give you additional levers in terms of just operating the business and managing costs.

Sure. I can take that question. So just to clarify, the Prospect Health Plan is similar to the 2 restricted Knox-Keene licenses that we have today. It's a restricted Knox-Keene health care service plan. And so it's not an actual insurance plan stand-alone. It does, however, have full rights to engage in full risk, kind of global risk contracts with full-service health plans in its capacity as a restricted Knox-Keene license plan. And so it would serve a very similar role to other restricted Knox-Keene licenses that we own today, including For Your Benefit and Community Family Care health plan, in which it would allow us to align our outcomes with our financial results in a way that rewards us if we're able to take care of members in a more cost-effective, higher quality way. And so that's exactly how we would use that plan. I'm not sure if I answered your question.

No, you did. You hit it. And then maybe one other follow-up. I think there was a reference to making some investments into Prospect and their infrastructure to enhance quality of care for patients. Can you maybe just give us some flavor for what those investments might be?

Sure. To be clear, as Sean mentioned earlier, there have been no solid commitments made. I think this is a more general statement around ensuring that our infrastructure, both from a technology, operations, clinical teams and care delivery capabilities are making their way into the Prospect ecosystem. Prospect is a business that has been operating for a long time, and it's something that we look forward to learning from them, but also taking some of our infrastructure and hopefully investing in their abilities. And I think we'll come up with a much better ecosystem for all patients.

Our next question comes from the line of David Larsen with BTIG.

Congratulations on the deal. Can you talk about Prospect's ability to bear risk? Are they good at it or not? Are they making money in risk deals? And then can you talk a little bit about the hospital itself? One of the things I've always liked about Astrana is that you have very effective hospital lists that basically keep the facility costs under control. Can you maybe just talk about that aspect?

Dave, thanks for the question. So in terms of the ability of the Prospect Health entity to take risk, that's something that they do today in a big way. As I mentioned earlier, they're taking risk on 610,000 members across Managed Medicaid, Managed Commercial and Medicare Advantage, as well as a much smaller book of ACO REACH and MSSP ACO. If you look at the numbers, under 25,000 members combined in all of those programs, to clarify an answer that I had given earlier on the call. On those members, which is their primary form of business, like us, capitation revenue makes up over 90% of their total revenue. They are generating around $81 million of adjusted EBITDA in 2024, estimated. And so it's something that they have been doing profitably for a long time. In many ways, we see a similar cultural alignment in the way that they really roll up their sleeves and operate in the communities, tailor their solutions to what works at a local level. And I think we can even turbocharge that with our technology platform and clinical capabilities and infrastructure that we built over the past decade. On the second question around the hospital, I may defer that question to Chan. I'm sorry. Could you repeat the question, Dave, around the hospital? I'm sorry, that's my fault.

So one of my concerns with risk is that a lot of times, hospitals will say that they like risk and they'll say that they like getting into these value-based care arrangements. But then when push comes to shove, the CFO wants heads and beds in facilities. It sounds to me like Prospect is different. They're managed differently. Just any thoughts or color around that acute care component that always worries me. It sounds like Prospect is different. It sounds like it's more of like a Kaiser type of situation. Just any more color there would be helpful.

Yes. No, I totally get your question, Dave. Yes, it's a very thoughtful question. In terms of the hospital, you're right, the facility works as a direct extension to the value-based care ecosystem that exists within Prospect today. And it interfaces with the overall medical management team within the Prospect organization and works almost in terms of like a hub-and-spoke model. So it's very much not operating in terms of a heads and beds basis.

Ladies and gentlemen, that concludes our question-and-answer session. I'll turn the floor back to Mr. Sim for final comments.

Thank you all again for joining us on short notice. We really appreciate the questions. I know there might be a lot more, and we are available to answer those questions for the rest of the day and over the next week. We are really excited by the opportunity we have to bring high-quality care to more Americans. We think the pro forma scale of our businesses is really special, and we're really looking forward to driving that impact for decades to come. Thank you, everyone, and have a wonderful Friday and weekend.

Thank you. This concludes today's conference call. You may disconnect your lines at this time. Thank you for your participation.