Evolent Health, Inc. (EVH) Earnings Call Transcript & Summary

Good afternoon, everybody. Welcome to the Evolent Health presentation of the JPMorgan Health Care Conference. My name is Annie Samuel, and I cover health care IT here at JPMorgan. With us this afternoon is President, Seth Blackley; CEO and Co-Founder, Frank Williams; and CFO, John Johnson. We'll be taking questions after the presentation across the hall in the Georgian Room. And with that, let me turn it over to Frank.

Great. Thanks everyone for being here. I know it's been a long conference, long day so we'll try to be, I don't know, interesting, funny, something to lighten the room a little bit. A lot of blue suits out there but good to be here. We tend to use the conference where we tend to have some new people to the story to just give a little context for Evolent's business. And again, many of you are familiar with these themes. But really, when you think about the big problem in U.S. health care, it is an incentive problem. You have traditional payers, which are responsible for premium risk. They're trying to manage spending and care. They try to do it through a rules-based system with providers, providers incented to provide a lot of care based on how they actually get paid and then the patient's sort of left in the middle to sort of navigate between their bill and the payer and the care if they think they need from the provider side. So it's actually been a system with a lot of friction that hasn't really managed the objectives that I think we all have in the health care system very well. And you can see some of the results. And all -- again, all of you are familiar with them. First, we have one of the highest cost systems in the world and one that if you just look at the increase in projected Medicare spending and what's going on with Medicaid state budgets, it will literally break the federal budget and many state budgets. So it's unsustainable and has to be slowed. And yet at the same time, we're not delivering great outcomes either. So you look at a lot of the key outcomes measures, and then we're spending a lot, not delivering much. On the specialty spending side, a lot of you cover the pharmacy side. I think over the last few years, oncology, drug spending alone has gone up 60%. Many of the therapy regimens over $150,000 a year. The pace of development is really hard for most clinicians to track. And a lot of times, you therefore get spending out of control in managing oncology populations and also not necessarily the right diagnosis, the right therapy for the patient, just given the complexity. And then very poor customer satisfaction. I think we all experience it but dealing with billing, all the things we experience from the patient perspective, also not really delivering a consumer proposition and some of the traditional brands, payer brands because of the system and the friction have some of the lowest customer satisfaction ratings as a result of the misalignment. So when we think about the opportunity to transform the industry, it really is through a more aligned model. And we tend to focus on 3 things: one, total cost of care. So can you delegate risk to providers, give them an opportunity to manage care, better align incentives, provide them the tools to do that more effectively. We have a lot more tools that are disposable to really run at total cost of care. Specialty care management. So can we actually work in between payers and providers and provide a knowledge layer and interventional layer that's deep in content but that ultimately helps to align right therapy, right dosage, all of those things, right diagnosis with the patient. And then can we make things simpler and eliminate some of the friction, again, by bringing providers to the table by not just creating a denial sort of may I relationship, but one where you really ease the burden on providers. So to do that, you actively have to engage payers, patients and providers, and you ultimately need to integrate these functions. And that's really why Evolent was started. It was really to be a bridge between payer, provider and patient to have a clinician-oriented model and one that would build trust to use clinical depth to do that. And to work effectively with payers to help them manage cost, but to do it in a way that's transparent, inclusive in a trust-based relationship with both providers and patients. So that's ultimately what we set out to do when we started the company. If you look at Evolent today, we really got started end of 2011, beginning of 2012. And you just look at some of the stats. We have over 40 partners across the U.S. We talked about the fact towards the end of this presentation that we expect just our service business alone for 2020 to be north of $820 million. So it's been a very fast growth trajectory for Evolent. 3.7 million lives, supported about half of -- a little over half of those lives in Medicaid, about 35% in Medicare and then the remainder in commercial. 3,200 employees, and really an important part of the growth strategy is we work across national payers, regional payers, providers that have their own health plans and then directly with physician-based organizations, provider organizations. So it is a diversified customer base and one that really isn't dependent on the acceleration of value-based care. I mean it's happening but a lot of what we do is selling directly into the existing managed care market today. And so that ultimately gives us a very large market and growth opportunity, but one that's highly diversified. In terms of, I think, the things we wanted to emphasize in terms of the investment thesis. First, started with IP that had been developed over a 10-, 15-year period at UPMC, one of the largest payer providers in the United States, heavy-duty analytics, stratification, clinical programs, engagement methodologies, things that cascade directly into workflow. We're delivering differentiated value as a result and of the investment we've made across the last 8 years to demonstrate clinical impact from all of this work. It's great to have data. It's great to have stratification, but ultimately, you need to drive it in workflow across complex populations and a complex delivery system, and we've done that very consistently. Second, it's a very large market. It's well over $100 billion market. Again, we're lightly penetrated in the total opportunity, and we have a leadership position. And so there's an opportunity to grow at a very strong rate for several years to come. You can see that in our historical numbers. But we feel very confident in our medium-term growth strategy. A lot of market momentum. We just mentioned just the strong pipelines we've had with many of you. That continues into this year. Again, for us to have visibility on 20% service growth at this point, to have the confidence to communicate it now just means we've had a very strong year in terms of cross-sell and new additions, we have several late-stage deals in the pipeline but feeling good there. And then lastly, it's really been the formulation from the very beginning that as we scale top line, as you develop this centralized infrastructure and set of capabilities, as you add lives, as you add scale, then the bottom line expands as well and you have very attractive long-term margins. And again, based on what we said we'd do in the fourth quarter and going into next year, feel very good about the bottom line as well. So with that, I'm going to turn it over to Seth to just go into some of these points in more detail.

All right. Thank you, Frank. So I'll hit on the first 3 of these investment themes. I'll pass it to John for the fourth one. So on the first theme, critical to our business, obviously, in the long term is that the solutions that we take to market are truly differentiated and are unique over the long term. Across the 3 solutions on the far left, I'll go -- well, one by one, is our total cost of care solution. In this space, we really work primarily with independent primary care physicians. And we're providing our technology and services, clinical IP to those independent primary care physicians and some hospital systems. The real differentiation here is that imagine you're a primary care physician group and you're thinking about value as a critical part of the future strategy, one option is you can become part of the health system, you can become part of a payer. You want to stay independent and do value. You really need to have the ability to integrate your technology, the clinical IP and drive an actual result and also pool your risk with other providers. And so the Evolent solution we have with those physicians does all of those things. An example, a result, you can see at the bottom. For the Next Gen ACO program, which is part of this solution, roughly $100 million of gross savings delivered across 2017 and '18. The middle solution, specialty care management, this is underpinned by our New Century Health acquisition from 2018. The work here is really with payers, managed care organizations. Take an example, a partner like Humana. Humana is battling specialty drug costs through oncology but also cardiology costs as all payers are. Our partnership with Humana, but also other payers across the country, helps deliver and guarantee 10% to 15% savings through a deeply clinical model. Our differentiation is clinical. I'll talk more about that in a second. And then third and finally, on the far right is our services solution, administrative simplification. In this area, we're really, again, working largely with payers but also risk-bearing providers. These are organizations like Maryland Physicians Care or Premera, who we've announced partnerships with in the past, often regional organizations that desire scale and sophistication on the clinical and the administrative side and are looking for a partner to do that. And you can see an example result from that work. So just very briefly, one bit of detail on each of those 3 areas. In our total cost of care space is a case study from a provider partner in Indiana that touches about 100,000 value lives today. One part of that has been the Next Gen ACO program, which if you're familiar with that, CMS says to those providers if you spent $400 million last year, that's how much you're getting next year. If you spend more, you pay. If you spend less and the quality is up, then you keep the difference. And that model really, think of it as total budget care, has been the model that this provider has pursued. Evolent's Identifi technology, clinical IP, analytics, all those things wrapped around this partner integrated into Epic on the EMR side, and we've gotten great results. They've been -- they were the #3 Next Gen ACO program, which we're proud of, top 5 for every year, very strong results. And I think speaks to the integration of all of those components across the total cost of care that I mentioned. A second example. This is for the specialty solution for New Century Health. I think the first thing before going into the example, many of us probably know this from our personal lives when there's a cancer diagnosis, difficult moment for any family, friend, anybody that gets a diagnosis. Unfortunately, up to 30% of diagnoses or the course of treatment can be wrong in any given situation. And that -- it's complicated, right? It's very complicated. So what we've done with New Century is we work with the payer. If a member within that payer network is diagnosed with cancer, that treating oncologist uploads the care plan for that particular cancer treatment. And that care plan comes to New Century Health. We compare that care plan to our evidence. And our evidence is on the left-hand side of the screen here. We take all of the national guidelines. We do our own scientific advisory board, and we boil that down to what we think of as Level 1 pathways. These are best courses of treatment for that patient. And in many cases, in the middle, you'll see that, let's take a given small cell lung cancer, there might be 8 or 9 or 10 or 11 different possible courses of treatment that, that patient may receive. And the treating oncologist may be considering all of those. We first take out the ones that aren't the best for survival rate, quality of care for patient. That might cut those 9 down to the 5 you see at the next row. We then take out the ones that are toxic to the patient in some way, quality of life, that may leave 3. And then we find of those 3, which are the ones that have the right cost profile, meaning they -- same efficacy but lower cost. And you may be left with 2 out of the 9. If the prescribing oncologist, the treating oncologist is picking 1 of those 2, New Century doesn't do anything and that happens 80% to 85% of the time. 13% of the time, there's some course of treatment being pursued that's not 1 of those 2. And in that case, we will reach out to the practice or directly to the physician, often peer-to-peer, one of our oncologists will reach out to the treating oncologist and recommend a course of change and those changes are followed very frequently. You can see on the far right-hand side of the page, when they are followed, very significant savings in terms of change from Level 2 pathway to level pathway. So patients getting better care. Evidence is changing all the time, so the physician actually appreciates the help in thinking through what the right course of treatment is. And across the year, if we do this, tens of thousands of times and you're saving $10,000, $15,000, in some cases, per treatment, it's a very significant savings back to the payer community and ultimately, to the physician. Our business model, we'll talk about this at the end. We have won a New Century share often in the performance improvement. And then a third and final example for the third solution on our administrative services side. We really are supporting here again, regional payers or risk-bearing physician organizations that would like to achieve sophistication and scale, and it's hard to do that if you're insourcing and trying to do everything yourself. So as a partner, we do everything from the clinical technology, which is underpinned by Identifi, to paying the claims, which also is integrated with Identifi to utilization management, again, all tied together. And one of the big differentiators here is that typically, the other options that these organizations may have are not integrated and they're not as clinical. And our Identifi platform is really at the heart of that. You can see a long list of things that happen here. One of the things we're proud of is we were the first organization to earn NCQA accreditation for population health, which, again, I think, speaks to the clinical nature and differentiation of the platform. So across those 3 segments, it's a big market, $130 billion is what we estimate the market at. Evolent, obviously, is actually below $1 billion in revenue. So we have a lot of running room, I think, is the main message on the slide. The mid-teens growth rate that we talk about, we feel like we can run at that for a long time given this market size and market potential. The only thing that may be different, if you've carefully tracked our market sizes over the months and years, is the middle bucket. When we announced the New Century acquisition, we talked to approximately a $10 billion market. We have since added commercial and Medicaid. Originally, they were just focused on Medicare. We've also added Part A, so the inpatient part of the equation. So that's taken, in our view, the market size from $10 billion up to $50 billion. So we feel good about the growth rate, partially for this reason. Relative to that, the pipeline, very quick update here. We had 7 new partnerships announced last year. Right now, the pipeline feels very good. When we look ahead, it's in a good place with strong opportunity ahead. We've had very good cross-sell over the last 12 months as well. And I think importantly, each of these opportunities, it's diversified. We get asked a lot, does it matter what happens with value-based care policy? It really doesn't matter that much for us. All -- most of these solutions, vast majority of it are sort of relevant sort of in any policy outcome. And lastly, the 3 areas are really -- are integrated. If you're a physician group that is managing risk, you are -- and you're a primary care group, you probably are worried about specialty costs, you can bring New Century in underneath that. You might want to delegate claims, you get delegated claims from the payer. You can bring in our services business for that. If you're a health plan working with us on the administrative side, you might bring us in to do the New Century specialty piece. So these things tie together, and that's been a nice part of our pipeline as it's tied together. Last slide for me, I'll pass it to John. Just a quick update on Passport, there's really nothing new here. This information's all been out there. But if you're new to this, Passport 20-year relationship in the State of Kentucky, a fabulous plan, deep local market connections. Evolent's been a partner for a long time. On the services side, for a whole host of reasons, Evolent brought -- acquired Passport Health Plan at the end of 2019. That closed on December 30 at 70% stake. 30% is importantly still owned by our provider partners, and that's how the governance is set up as well. And as we've gone through that process, we've been able to turn the plan to profitability, which is a really important point. The plan is in a very good place. As we said, owning plan's not a core part of what we do but given the very unique circumstances in Kentucky, we think a very interesting opportunity. The information at the bottom is where we are today. The new governor released a new RFP just a couple of days ago, which is due on February 7. We believe results will be out in April. And importantly, they mentioned in the RFP that the new contracts will go live in 2021, 1st of 2021. So as John goes through his numbers, all this reflects having the Passport relationship for all of 2020 under all scenarios. So with that, I will pass it to John.

Thanks, Seth, and good afternoon, everyone. As we look at our financials, we report in 2 separate segments. The Services segment, which includes the solutions that Seth was highlighting for us; and our True Health segment, which is a commercial health plan in New Mexico. If we drill first into the Services segment. We have a number of different ways that we can grow this part of the business: we can add new partners, we can add lives with existing partners or we can cross-sell new solutions into existing partners. And all 3 of those combine to contribute to a substantial track record of growth across a number of years here, a 44% CAGR from 2015 through our most recently closed quarter of Q3 in last year. Services revenue for us tends to be recurring, mostly per member per month fee-based revenue often with a performance component, as Seth mentioned earlier, with long-standing customer relationships. And this combined to give us a high degree of visibility into our forward revenue in the Services segment. The True Health segment has principally health plan revenue, and during 2019, also included transitional reinsurance agreement that ended during Q4. We won't bring that into 2020 with us, but we do expect continued growth within the base business of True Health. That growth -- sustained growth within the Services segment, combined with the scalability of our platform is also what drives our long-term margin potential. The early days of Evolent are all about investing and building the platform and driving the growth that led to, in 2017, EBITDA breakeven and margin expansion into 2018. As we came into 2019, we had slower growth, it was back-half weighted, which led us to really focus in 2 areas: one, reinvigorating the growth, bringing back to double-digit growth by the end of the year; and really staring at our cost structure around automation and other opportunities to remove costs, which between Q1 and Q3, we did taking more than $60 million of operating expenses on an annualized basis out of the business. A combination of both the growth and the focus on the costs side led to our Q4 guidance of between $8 million and $11 million of adjusted EBITDA, which is a margin of about 4%, back in line with where we wanted to be and a nice starting point as we come into 2020. As the business continues to grow the scalability inherent in the platform, we'll continue to drive EBITDA margin expansion from those Q4 levels. We've also been able to accelerate our path to market leadership and add to the differentiation of the business through using our balance sheet. The New Century Health and Valence Health acquisitions as examples were highly strategically aligned. They are mission aligned, there was attractive cross-sell opportunity, and there remains in both businesses, strong potential going forward on the growth side. We've deployed more than 75% of our capital towards these major business objectives with strong returns. We've also deployed a smaller percentage of our capital towards health plans, and as Seth mentioned, including True Health and most recently, Passport Health. And we have no further plans to acquire additional health plans. At the end of last year, we closed on $125 million senior debt facility drawing down $75 million at close, that bolsters our balance sheet coming into this year and allows us to really focus on driving the growth strategy over the next couple of years. Frank previewed our 2020 number earlier in the presentation. We'll release Q4 results on our earnings call in late February, and we'll also give comprehensive guidance there, including for our True Health segment. With the visibility that we have into our Services segment today, we are expecting a minimum of $820 million of revenues for that segment, which is a 20% organic growth rate over our expected 2019 results. And with that, I'll turn it back over to Frank.

Thanks. Okay. So I think a couple of things to emphasize that hopefully we covered. One, differentiated value proposition, lots of tools-based companies out there, thousands of them, we ultimately committed to delivering an outcome, which means you have to have the analytics, the clinical depth, the intervention strategies, and you actually have to help your customers execute and ultimately perform in value. I think we're one of the only firms out there that closes that full loop. And when we originally launched the business, that's what we heard from clients as to what they really needed. Not just technology, but a [ full sale ] solution to driving clinical value. Large market, which I think Seth emphasized, diversified. I think we feel very good about our medium-term growth outlook. A strong market momentum. So to, again, have this level of visibility on the core service business a minimum of $820 million at this point. We also have some other late-stage deals, some things that can happen across the year to increase that growth rate but full confidence and visibility into the 20% for this coming year. And then as John demonstrated, a lot of work on making sure we have a very efficient cost structure. We continue to scale the business and ultimately drive margin expansion consistent with a business that's tech-enabled, there's a people component, but tech-enabled and will ultimately have scalability long term. So thanks, everybody, for participating. And we're taking questions, I believe, across the hall, in the Georgian Room. But that covers the presentation. Thanks, again. Okay.