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

Good afternoon, everyone. Thank you for joining us for this session of the BofA Virtual Healthcare Conference. I'm Michael Cherny, the health care tech and distribution analyst. I have with me Allen Lutz, who covers a number of our digital health and other growth names. Much more importantly, though, we have the management team of Evolent Health, Seth Blackley, co-founder and CEO; as well as John Johnson, CFO. I believe Seth and John as well are going to take us through a quick presentation, and then we're going to have some time for Q&A. As always, any questions you want us to address, feel free to ping me on the conference website or on e-mail at Bloomberg, or otherwise, we have plenty to keep the conversation flowing. So with that, I'll turn it over to Seth.

Great. Thanks, Mike. Thank you, Allen. Nice to be with everybody. Just real fast, maybe 60 seconds on Evolent for those of you who are new to the business and what we do. We've been around for about 10 years. We're a pure-play value-based care company that we support payers and providers in reducing the cost of care and improving the quality of care by integrating on the provider side and helping change the way health care is delivered. We hit about $1 billion of revenue last year. If you look at the company and the 3 pieces of our business. The business has one component called New Century Health, which is around reducing the cost of cardiology and oncology. We have a second piece of the business, which is Evolent Care Partners, which is really working with primary care physicians to take advantage of capitation on the primary care side. And then we have Evolent Health Services, which is really about using our tech and tools to reduce the cost of care. So that's a quick thumbnail in the business. In terms of the priorities of the company. John and I and the rest of the management team have 3 basic priorities that we've been focused on for the last year or more. First, is driving strong organic top line growth in the business. And we've been doing that. We grew about 29% Q1 of last year to Q1 of this year organically. We'll talk about that in a second. In terms of the long-term outlook, we have a lot of confidence based on the pipeline and our products that there's a long-term mid-teens growth rate opportunity, all organic. Second, has been really focused on the cost structure of the company, delivering margins. We have a path to mid-teens EBITDA, and we've had a cost plan that's been in place for a period of time. And that's ahead of schedule, and we feel really good about where we are after doing $15 million of EBITDA in the first quarter. And then the third part of the plan has been around efficient capital deployment, and we'll talk about it. But we have really refocused the business on these 3 growth areas that I mentioned. We've divested a couple of assets that we had previously, and we'll talk about those today. We've got a really clean balance sheet based on that. We did put out some information just recently as part of this conference and post earnings because we've just recently changed how we do our segment reporting to provide additional detail and transparency on the business. So John, I'm going to just hit that in 3 or 4 minutes, and then we can get to Q&A. So if you have the slides that were part of the presentation, you flip in to Slide 3. We just shared a couple of highlights again that are kind of germane to the recent disclosures that we've made. You see the 29% organic growth quarter-over-quarter. You see the comments on the pipeline where we had 2 very significant partnership announcements in the last quarter. I feel really good about the pacing towards what we need to do for the year. In terms of profitability, we were in the 7% range on EBITDA in the quarter, which is kind of ahead of plan relative to where we are. And I talked about the balance sheet, where we have a good balance sheet in place. If you go to Page 4, And you look at the growth of the business. Not only have we talked a lot about the 29% organic, but really go back a couple of years even organically and look at the growth rate, and it's in that same range. As part of this fact book that we've uploaded on Page 4 here, you can see some detailed breakout for those new segments that we've released across '20 and of course, the first quarter of '21. And then on Page 5, and I'll hand it to John to hit the last 2 slides. Just a reminder on those of you who are new to the story, the 2 new segments are really on the clinical side, where we're taking and managing the cost of care directly and we're guaranteeing the results. And that work is, again, around the specialty space, cardiology and oncology, but also primary care within New Century, which is over half the business today. We have these 2 solutions, one of which is a capitated model, more akin to a Landmark or an agilon in terms of the business model. And then we have a tech services component, which is really SaaS-based. And we'll talk about both of those at the moment. And then the second part of the Clinical Solutions is Evolent Care Partners where we really are working with a network of primary care physicians to take and manage the total cost of care. That premium, it's about $900 million of premium equivalents that's coming to us and 90,000 lives comes to us and we work with our network primary care physicians underneath. And I mentioned Evolent Health Services on the right-hand side previously. I'm going to pass it to John for just a second to hit the other 2 slides.

Thanks, Seth. Good afternoon, everyone. I'll keep moving quickly here so we can get to Q&A. So if you flip to Page 6 of the presentation, just a snapshot of the margin work that we've been doing in the business that Seth referenced. Trailing 12-month EBITDA for the last 5 quarters now feel like we've really gotten the business to a nice place, with some good running room in front of us to continue to deliver here. Our sources of margin expansion across the business really come in 3 core areas. The first is around some identified and in-process cost actions to result in the optimal unit cost structure by the end of this year. Those were -- that work is principally across this year in our Evolent Health Services segment. The second core source of margin expansion, I'm going to talk more about in a moment, but it's new partner maturation in our Clinical Solutions segment. And third and finally, given the fixed cost structure of our business, as we grow at our targeted mid-teens top line growth rates, we would expect to add about 1 point of margin annually, 1 percentage point through that scale leverage. All in all, we believe we're on track here to reaching our target of mid-teens EBITDA margin in 2024. So now I wanted to talk a little bit more detail here on the final page, Page 7, about our Clinical Solutions segment. Our fastest-growing segment, you can see the chart on the left side of the page, a 41% CAGR from 2018 through the first quarter of this year annualized. A strong market uptake here and some nice tailwinds on the macro environment here, we focus on both oncology and cardiology in the specialty space. Two of the hardest specialties to manage as the share of care cost that is going towards oncology continues to grow rapidly. And our solutions are really proven to make a difference in that area. And we also focus on the primary care segment, which is the large and growing market there as well. On the margin side, the way that our risk-based arrangements work in the Clinical Solutions segment is our initial margin with the clients is anywhere between 30% and 40% of the run rate margin of that client. What that means is if we start with a client in year 1, the flow-through from that client is going to triple over the next couple of years. The reason for that is -- and we're happy to talk more about this and how we generate the savings as we're driving our pathway adherence and really optimizing the network, working with the physicians in the network in a really cooperative manner, we're able to really improve and change the patterns of care towards the most -- the highest quality and the lowest cost options that create this sort of savings over the long term. As Seth mentioned, we also have a fast-growing product within New Century in our tech and services suite. This is deployed at the end of Q1 across 8.2 million lives and has flow-through margins of 60% plus. So we're very excited for that product to continue to grow. And at scale, our primary care solution here within our Clinical segment can drive between 30% and 40% gross margins. So overall, and if you reference back to Slide 6, this is what we mean by new partner maturation and an important part of our EBITDA margin expansion opportunity going forward. So with that, I think we're at the end of our presentation here, maybe I'll turn it back to Mike and we can launch into Q&A.

Perfect. I think that's a great starting point. Thank you for the background. I guess when I think about having done this last year, and maybe more importantly, 2 years ago in person, a lot has changed about the company. Assets have come in, assets have come out. Seth, your title has changed. John, you as well. So maybe just give us a little bit of a background of why the pieces that you have in place now, why the go-to-market strategy now is the right one, especially against the backdrop of the assets? Passport in particular, that I know had some volatility in particular out of your control, that found its way to what, hopefully, should be a better home for it on a long-term basis.

Yes, Mike, I'm happy to take that. It's a great question. I think the primary answer to your question is that we have these 3 solutions. Each of the 3 have sub-5% market share and the growth and profitability across that we do have and the market share that we do have sits with an end market that's incredibly stable and is growing even. And those are customers like Humana and Florida Blue and Centene and Molina. And some of the recent announcements we had, like on the risk-bearing primary care sides. I think the biggest answer to your question is you got 3 products, the pretty modest market share that are each the market leader in their segment, and we've got good end markets. And the biggest part of the evolution of the company from a couple of years ago has been to sort of shift the end market for our solutions. Primarily, we were selling into the health system market initially, pre-IPO and really right post-IPO. And the biggest shift we've had is to really serve the risk-bearing primary care segment and the payer end segment, which we think is incredibly stable. And it's also growing, everything about MA is growing in and of itself at 8% a year. And so the ability to sit with those end markets, Mike, I think, is the primary answer to your question. Now with respect to like the 3 solutions and are they market-leading? What I would say is around cardiology and oncology with New Century. We have, I think, clear market leadership around that work and the depth that we can go into, particularly with oncology. And so our win rates on a head-to-head basis, to be able to go from sub-5% market share to 10% to 15% to 20% over time, we feel really good about, and we want to keep that lead. But we're going to keep investing in the product side. On the Evolent Care Partners side, it's a small part of the company, but again, not a lot of competitive pressure in what we're doing, which is not developing new clinics, not employing the physicians but partner with independent physicians. There's a lot of running room there. And the third business, Evolent Health Services, again, had good win rates and the differentiation relative to the solutions in the market are in a good place. So we feel great about it. We've got a great team, and it is a slightly different team. But in general, we're in a really good place to hit the medium-term metrics that we've been talking about.

Perfect. And maybe starting with Evolent Care Partners, in particular. It seems like this dynamic of empowering value-based care risk taking, clearly, it's been a component of Evolent since you're a private company. Clearly, it's been a component, I think, as well, of market growth. How do you think about yourself and the competitive landscape in there? And I guess alongside that, as you talk -- you focus on growing that area of the business, you're sitting on a treasure trove of data across the entity that's been amalgamated over a number of years. How does that provide you competitive advantages when you're going into market and pushing forward on some of these value-based incentives and ideas?

Yes. That's a good -- both good questions. I mean I think on the on Evolent Care Partners side, Mike, the -- first of all, the market is pretty big. I mean that's the nicest part. There are hundreds of potential physician group partners that we can work with. And yes, there's only a handful of companies that are approaching it like we are, which to say we're not trying to build new clinics and we're not trying to employ the physician community. What we think is there's a pretty big segment, hundreds of clinics that want to stay independent, but want to migrate their model from pure fee-for-service towards value. And when you think about -- you can work with an Aledade or an agilon or [indiscernible] Care Partners, there's a handful of options out there, but there are not that many organizations that do what we do. And frankly, we don't run into those couple of entities that I mentioned very much because it's just a big market. So I think that's an exciting space for us. It's small, as I mentioned today. But it has, I think, a really interesting growth path ahead. And it does build off of a decade to your point of experience. The data is huge for us. I mean, across all 3 solutions, to be honest, every time we add another year of data, our interventions get more targeted, our ability to take a cancer case and know, based on the data, who is the best oncologist. And this is a question that, unfortunately, I've had an answer in my family, many of your family is probably the same thing. Where do you go for cancer care? Who's the best oncologists to treat this type of cancer, question one? Question two, what course of treatment out of 14 different options of cancer treatment therapeutic choices, different drugs, different mix of radiation oncology. It depends on your genetics. It depends on your weight, your age, all these things. How do you best choose the treatment after you chose an oncologist? So you choose the treatment if the oncologist is not using the proper treatment. How do you influence that oncologist to pick the right treatment? And as you can imagine, that is a huge source of how we use our data, right, to both convince the physician, but also to make the right choices on behalf of the family that we're representing and supporting with that oncologist. So that's just one example, Mike, but it is a huge part of what we do. What we've not done is actually monetize our data as data. We use it as part of our product. But we have not turned it around and actually have built a data business that's an opportunity for the future, but one that we're -- is in the offing right now.

I guess along those lines in that pivot to New Century, when you talk about cardiology and oncology, clearly, those are areas of unfortunate focus, as you mentioned across the country, just given the prevalence. It's also an area where there's been a litany of tech and tech-enabled services companies that have tried to penetrate in the past. And so whether it's convincing the providers or convincing the individuals, what do you put as your best foot forward in the value proposition to make sure that you're wedging yourself into -- what is a market that I would never say is necessarily underserved, but maybe there's opportunities for companies to come along and serve it better?

Yes. Great question. So look, I think the biggest thing for us -- the primary audience that we have to convince first is the payer or the risk-bearing physician group. Meaning they hold the risk, they're trying to manage the cost of oncology. In a world where this is a data point that people can't believe, but it's true that only 6% of all cancer drugs approved between 2005 and 2017 actually create meaningful quality of life improvements for patients, right? So in a world where you have really high-cost drugs coming out, only some of which work. But when they work, they can be life-changing. It's really complicated and so being able to go into that payer and say, look, I can help you make the right choices, make sure that patient that needs treatment XYZ gets it immediately, no delay. And the patients that can also have the same efficacy or better on a different course of treatment. It's lower. You have to do that, otherwise, the drug spending is going to gobble up all of the budget we have for health care over time. And so I think that, that value proposition, the ability to go into the payer and really guarantee the savings while they have tremendous confidence they're going to be doing things that are better for patients, is the value proposition. I gave an example on the earnings call last week about a CAR T therapy that had been prescribed to a given patient that turned out would have been potentially fatal for that patient or really dangerous for that patient because it was contraindicated. It was an improper diagnosis and that saved $1 million to the plan, but it also what was the right thing for the patient. So we -- that is the value proposition. We go in and we can drive the real savings and we guarantee the savings. In terms of convincing the treating oncologists, who's the primary audience that we influence, the credibility that we have with our Scientific Advisory Board and the evidence of the pathways that we bring to bear builds that credibility. We have a physician satisfaction score of 4.2 out of 5. So it's not like we're coming in and really annoying them. We're coming in and actually providing value because it's -- there's 300 new journal articles that are coming out every month. And yet the average oncologist only has time to read 3 or 4. So we're actually providing some value in terms of enhanced information to that oncologist. So that's really how it works, Mike. I'll just say, lastly, that we enter a new market. Often, the adherence to best evidence is in the 60% to 65% range. At year-end, we can get that number closer to 80%, and that shows you the ability to lift -- that's what creates the value for patients and for the payer. And over time, we think we can get that number to [ 90% ]. Did I answer the question?

Seth, going back to Evolent Care Partners, I think everyone is aware that primary care physicians are under a lot of pressure just with changes to reimbursement models. And obviously, with COVID, a lot of their patients moved to telemedicine. So that was a big focus for a lot of primary care physicians. I guess can you talk about some of the struggles that primary care physicians have today and some of the ways that you can address some of those struggles?

Yes. Look, it's interesting. My dad was a primary care physician for 35 years and like just seeing his experience, but seeing a lot of primary care physician, knowing a lot of them. The biggest struggle is that they don't get paid very much money relative to the level of education. And they have, unfortunately, to try to make at the upper bound of what they can make relative to other physicians, is they have to see a lot of patients. And that drives dissatisfaction for the patient and the physician. I can't sit down with my patient, have a 45-minute conversation about a really substantive issue because I can't get paid that way, right? So I think you end up with a lot of burnout in the physician -- primary care physician space based on what feels like a churn and burn life, right? You just have to see as many patients as you can. And yet you're pulled based on your -- the training that you had to really take care of patients holistically. So being able to solve that, some of it's about telemedicine and COVID. But a lot of it is just, hey, how would you like to make a little bit more money, while also slowing down and taking care of patients more holistically. And because you're 3% of spend to health care but can influence 70%, 80%, 90% of the spend of health care, you have enough leverage in the economic model for our model to pay you more. And we are paying our primary care physicians more based on outcomes, but also slow down and do it in a way that feels good to the patient, feels good to the physician. It is -- it's a beautiful thing to see as it works. And I can just tell you that the primary care physicians that are doing it strongly prefer that model. The real question for our business and our care partners is we're doing a lot of this with the CMS programs, which may represent, let's say, 30% -- 20%, 30% of that physician's panel. They still have the churn and burn on the rest and how do we expand into Medicare Advantage, Medicaid commercial, which is certainly where we're headed with that business.

When you think about your conversations with your payer and provider partners, has COVID fundamentally changed the way they think about their business? Or do you think that as we -- the economy reopens, things are going to more or less go back to the way they were pre-COVID? Or are there any sort of longer-lasting changes?

Yes. I mean, John, jump in here, too. I'd say yes, it has made permanent change. For primary care physicians, I think it has shifted the mindset and the interest in value-based care. I see what it's like when I got paid only for what I did. And I see how odd it is that telemedicine and remote intervention, all the other things that I might want to do reimburse differently. I'd rather just not think about that and take care of the patient. I think the mindset shifted for the primes, and that's great for us and big tailwind for our business. I'd say on cancer and on cardiology, I think the longer-lasting impact that we're going to see in addition to maybe some more home infusions and telemedicine there too, the bigger issue is that there's a lot of patients out there that may have long-lasting cardiology impacts from COVID. There are a lot of patients that may have delayed screenings for cancer or may have a diagnosis that has migrated in its seriousness relative to what they were. So it's become a big sales point for us and, say, Allen, with the payer community that you need to get ahead of this stuff. And you also need to be able to do the proactive things in the home that you could have been doing. So its -- both are tailwinds for us with respect to kind of the pipeline and the desire to do this kind of work. Are they 50% shifts? No. I mean, I'd say it's a 20%, 30% adjustment in terms of mindset. But it's -- we think it's permanent.

Jumping back into some of where you sit in the various different platforms. Seth, you talked about 5-or-so percent market penetration across Tier 3 newly constituted or, I guess, adjusted segments. As you think about that and maybe use New Century as an example and the focus on 2 ologies and primary care, does it make sense to go deeper on those areas? Or do you want to be more ubiquitous broader? And part of achieving those growth rates is moving on to additional ology, additional other targeted physician groups where there still is that element in a different fashion, but on a chronic or repeatable care?

Yes. It's a great question, Mike. I'd just say briefly, the 10 million lives on roughly rounding on New Century and you think about that life count relative to the several hundred million lives we address, the most logical thing for us to do is continue to do more there. And the same thing on cardiology versus add new ologies. And as we get up a higher market share and that kind of thing, we will certainly look at other specialties. And there are places where specialties really benefit from depth and science and complexity. That would be the logical place for us to go next. But I think in the short term, likely more focused on the ones that we have.

John, we're not going to let you get away too easy here. There's a number of levers that the organization as a whole, especially as you re-amalgamate yourself with the assets coming out there are really pulling to optimize operational performance. That being said, 29% organic growth doesn't happen without some level of spend. And so as you think about targeting those multiyear 2024 margins, how are you leading the organization? How is the organization focused on that balance between operational enhancements, driving better profitable growth, while at the same time, making sure that as opportunities come up, maybe there is another ology, or maybe some areas start to come up in greater focus that you're not starving those areas to prevent levels of growth that can better position the company long term.

Yes. It's a really important question, Mike. I would say that our answer boils down to focus. And that's really what we have tried to instill across the company over the last, call it, 2 years. And part of that was divesting the health plan. Part of it is really doubling down in these core areas like oncology and cardiology, like the Evolent Care Partners model for primary care, where we know we can drive real differential value. Then it is a process of driving to the maximum efficiency on repeatable unit costs right? There are parts of our business, for example, that really do win on being a highly efficient product. And so driving cost savings where it makes sense to drive cost savings, and then preserving that margin or continuing to invest in the business. Across software development, some of which we capitalized in operational expenses, we spent about $40 million a year in R&D across the business to make sure that we're continuing to drive forward that sort of product excellence across all 3 major solutions here.

I guess along those lines, maybe taking Slide 7 as an example of your 3 check boxes on what's driving margin expansion. If we come back here in 3 years, why would your margins be higher than the target? And why would they be lower among those areas? What's gone potentially right or outperformed? And what could -- potentially, what's the most concerning for you to go wrong? Is it wage inflation on the service side, other areas? I'm curious how you think about the variability in achieving what are -- would likely be very robust margin targets.

Yes. It's a good question. I think there are 2 major areas of potential variability. The first is around product mix. So the faster, for example, our tech and services suite, very high margin. Grows relative to the rest of the business. It's going to bring up our overall percentage EBITDA margin, so just an example. On the flip side, the faster the performance suite in New Century grows, which has some of the lower percentage margin flow-throughs, then that will have a lower effect on our percentage EBITDA margin. Now the dollars, EBITDA dollars per member are different, right? So that would actually be higher dollar growth. That's part number one. Part number 2 actually has to do with our growth rate, where because of this dynamic that I went through around how our customers grow in profitability over time. The faster that we're growing, actually, the slower our EBITDA margin will expand, a very good problem to have, right? We'll be driving significant value in a bigger top line. That could drag a little bit of the EBITDA margin down.

Perfect. Well, look, I know we can keep going, but I see a whole bunch of red zeros on my screen. So we're going to cap it there. Although, John, I would love to impart that more pleasant melodious bird sounds to my home office if possible. But Seth, John, really appreciate the time today. I really appreciate you updating us on the story. Congratulations on what has been clearly a lot of hard work and the progress to kind of reposition the business and look forward to seeing more success in the future.

Thanks, Mike. Appreciate it.

Thanks, everyone, for joining us.

You all take care.