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

Okay. Good afternoon, everyone. My name is Bob Jones. I'm joined by my colleague, Jack Rogoff, and we cover the health care services and digital health space here at Goldman. Really excited for this next session with Evolent Health. Joining us from Evolent is Seth Blackley, Co-Founder and CEO, along with John Johnson, CFO. Welcome to you both for -- welcome to the conference. Thanks for being here today.

Thanks for having us.

Thanks, guys.

So a couple of questions to start things off, a little bit bigger picture. Obviously, there's been a lot of evolution over the last 2 years at the company. We thought maybe just for starters, it'd be helpful for the audience to maybe reorient themselves with the current strategic priorities. And then obviously, what progress you've been making around those priorities. And then I know you now really have delineated the business into 3 distinct areas. I was hoping maybe you could just take a couple of seconds, a couple of minutes to kind of talk about each one of those segments as you see them.

Great. Happy to do that, Bob. We're going to reference a couple of slides here on the screen that we recently 8-K that will make it a little easier for those following along to visualize. So in terms of Evolent, for those of you who don't know the business, we're 100% focused on the value-based care space and really addressing the $1 trillion of waste in U.S. health care. 3 primary solutions that we use against that mission. On the left, the specialty care management business within Evolent, which is -- goes to market under the New Century Health brand, really works with payers and risk-bearing providers and reducing the cost and increasing the quality of oncology and cardiology. And we'll talk a little bit about that in a second. The second solution in the middle is our total cost of care management space, we're doing the same thing, but with primary care physicians and we go to market there under the Evolent Care Partners brand. And then on the far right is our administrative simplification solution, which is the technology and services business called Evolent Health Services. And in terms of your question, Bob, what's changed over the last couple of years, I think it's a couple of things. One is that we have really shifted the end market for our solutions to include the payer community much more than we have in the past. And in fact, the 2 on the left, the specialty and total cost of care businesses primarily work with the Humana's and Centene's in Florida Blues of the world, and that's new for Evolent. And then secondly, I'd say that we also shifted and really learned over the first decade of the business that we sell some of our solutions like the far right through a technology services PMPM, but we've also begun to go-to-market with a model where we capitate or guarantee the results in many ways, which is what you see on the left 2, specialty and total cost of management. Those 2 ships, I mentioned, the end market towards the payers and kind of evolving the business model a little bit, has been a big part of the acceleration of the business that you've seen. And you can see some of the key metrics down here at the bottom of the page, over 10 million lives and $15 million of EBITDA in the last quarter. If you go to the next page, Bob, maybe just to your other question really quickly, what are we focused on? What are our priorities? We've really had 3 priorities over the last year, organic growth. Driving towards a mid-teens EBITDA profile and then really being thoughtful about allocation. We've included a couple of the highlights from the recent quarter here, which are new news to a number of folks, one of which on the top on the growth side, is this organic growth rate that was 29% year-over-year, from Q1 to Q1. And really on track or ahead in terms of the momentum in the pipeline. On the profitability front, we'll talk a lot more about this later, so I'll just touch on it briefly, but a 7% margin in the quarter and really a nice plan to get to that mid-teens EBITDA path that we talked about. And then on the capital front, we've divested a number of assets as part of really focusing on the 3 businesses that I talked about, which has left the company with a very strong cash position. And I think really reflects where we are as a company, which is a belief that we have 3 great products in 3 big markets and pretty limited market share, across each of those 3. And so our strategy is pretty linear in terms of growth of market share around those 3 big platforms. If you go to Page 5, you can just see a little bit more detail around that organic growth rate that I mentioned. The strong pipeline across those 3 segments and the success that we've had. And now on 6, which I'm not going to touch on now. But this is sort of the profile of the new segments that we mentioned and it tied to kind of a shift in the business that I mentioned at your initial question, Bob. So I'll pause there.

No. That's a great overview to set things up. I guess maybe one of the things you touched on towards the end there was just around the pipeline and opportunities. To the extent that you can, could you give a little bit more context on just kind of where you see the pipeline as it relates to those 3 distinct businesses, either from an interest level, deals, dollar amount, just kind of where you're seeing the most traction? I think, would be helpful.

Yes. Yes. It's a great question, Bob. So I'd say, interestingly, over the last 20 new partner announcements we've announced it's been 7,7,6 across the 3 segments. So pretty evenly distributed. I would say just in terms of dollars and weighting of those relationships and really the go-forward pipeline, Bob, the clinical segment as a whole, which is New Century plus Evolent Care Partners is growing slightly faster. It grew at about 40% organic, over that same time period that we referenced a moment ago. So it is growing a little north of the average, I'd say the pipeline reflects those 2 being slightly disproportionate in terms of total dollars. But really all 3 have been contributing, and all 3 have distinct pain points with distinct buyers. So they all feel pretty good right now.

Yes. I mean, I think that makes a ton of sense, and it's kind of interesting that you've seen the even traction across the board. Yes, I guess, maybe one area that they all generally touch on is the approach to enabling value-based care and taking on risk. Obviously, this is something that's been evolving for years. I think the public markets are getting even made more aware of this, given a lot of the recent IPO activity. Now, I guess as you thought about dividing up the business and where to really focus, I would imagine, obviously, this evolution obviously informed that. Could you maybe just talk about how you delineated in thinking about these 3 segments and why these in your mind made the most sense the way that you have them configured?

Yes. No, it's -- yes, happy to talk about that. I think the main thing in terms of the clinical segment, which is a Evolent Care Partners and New Century Health, Bob. Those 2 both, as I mentioned, are growing incredibly quickly. And they, I think, are meeting a pain point in the market that exists, which is, hey, the cost of care is growing faster than the payer community or risk-bearing providers would like it to grow. And so the ability to come in with either of those solutions and guarantee that result, is really the value proposition that we're able to put forth. And our Evolent Care Partners business for folks who are deeper in this market, very similar to something that agilon might do or Aledade. That's a good analogy, and it segments well because it is primary care, and that's why we've built that one out that way with that brand, with that segment and that go-to-market team. The New Century health side is really very similar to those business models, but it is for cardiology, oncology. And what we find is that, particularly in the payer community, oncology, as an example, it's trending at 12%, 14% given the drug pipeline that exists. And so that's a very discrete pain point, and cardiology, which shows up in much the same way. And so the buyers have really thought about the market as primary care and specialty care. And so those are the 2 logical pieces. And then there's our Evolent Health Services business is a great business. It's more of a tech services business. And a lot of what Evolent was pre-2015, 2016 is in that unit and there are just a number of buyers in the market again that need the infrastructure, Bob, and that's the kind of the right home for that. So it's actually fallen very neatly, and it really is based on what I call customer demand, customer needs.

Yes. No, that's really helpful. I guess maybe you mentioned some of the other recent market entrants and others that are gaining notoriety that take a more of a 50-50 split of full risk obviously, I know you do some of that within the MSSP program, but I think there's a lot of these players that are really focused primarily in MA today. Could you maybe just talk about how you could see the company evolving more towards that global cap basis? Is it something that your partners are really pushing you on to help them out more with? Just curious how you think about that world.

Yes. Let me answer that both for New Century and for Evolent Care Partners in order. So for New Century, in many ways, a lot of our business there is either in Medicare or Medicaid, Medicare Advantage or Medicaid and we are taking effectively a full risk relationship for a big chunk of that performance relationship. Again, just for cardio and on, but it would be very similar to some of those companies that you referenced in terms of business model, methodology, opportunity to scale quickly on the top and bottom line and the like. Within Evolent Care Partners, our primary care business. We are taking also there with through the MSSP program, pathways to success, sort of full up and downside. We then turn around share a decent slice of that back to our primary care partners. But we do that today in many ways, pull up and pull down around Evolent Care Partners with a lot of upside we see there. To your question, we will I think in the near-term be doing more around the Medicare Advantage space, in particular, through Evolent Care Partners, and that's a big opportunity across the 1,000 physicians that we support today with that Evolent Care Partners platform. So that's to your point, clearly, a place we're going to evolve.

Yes. No, no, very helpful. Appreciate it.

Sure.

Thanks for doing this session, really helpful context thus far. I wanted to ask a little bit about how your pipeline has reacted to the new federal administration. And I think it might shed them light about how your company has evolved. But we've seen some apparent shifts in priorities within CMMI, and I guess, has this created any uncertainty in terms of how your pipeline would progress versus what you normally expect, just how your pipeline is reacting to the messaging we're seeing coming out of the federal administration?

Yes. Sure, Jack. I'll take that one. The -- I think one interesting fact about our business is that 90% to 95% of the pipeline and similar amount of the revenues that you commit from the private payer market, meaning the Medicare Advantage plans, Medicaid plans. We just signed a very significant risk-bearing physician group who's taking risk. And so a lot of the -- almost all of our momentum and business and forward-looking pipeline's really coming out of those sort of private market programs that are not that tied to CMMI, they're certainly tied to CMS because of MA, but really it's more of an evergreen program. And then within the work that we do on the CMS side directly is through Pathways to Success, which is a 5-year program and is not part of CMMI. And very intentionally, we've done a little bit more with CMS and a little less of CMMI based on wanting to be able to hang our hat on and know where it's going to exist. The Next Gen program is a very small part of what we do. And we see those partners that we have transitioned, either Direct Contracting or Pathways to Success. So the core business feels really good on these fronts. And then I just see, in general, the market has been very receptive, and the pipeline feels good. And I think everybody feels like the Biden administration is likely overall going to accelerate things and the oncology program that they're in pilot mode with now is an example of that. It could be interesting for us. So pipeline is about as good as we've ever seen it in general. And I'd say the federal piece hasn't really distracted us and the things that they're going to do in the future are net positive.

It makes sense. You touched on this a little bit as far as Next Gen ACO, you saw some clients there. What's the go-forward plan for those clients? You mentioned Direct Contracting, is that something where you could actually be supporting those clients in that program? Just curious how material those clients are from a revenue perspective to your business given that the program is [ ending ] and any sort of transition to revenue next year, the potential air pocket?

Yes. Let me answer the second question and have John answer the materiality question. There's a straight pathway for any of those that either go into Direct Contracting or into Pathways to Success, and that's what we expect to happen. This wasn't a surprise to us that Next Gen was going to go away at some point. So we feel very good about that, and I'll let John comment on the materiality, but it's a very small part of the company today.

Yes. I would just underline. I wasn't surprised all of our partners have been planning for some sort of transition. Those partners are in the Medicare space in our Evolent Health Services segment, which for Q1 was $8 million of revenue. So it's a small fraction of our overall revenue.

Makes sense. That's very helpful. And just thinking about how it might look for you guys supporting these clients in Direct Contracting, given that it's -- they're Evolent Health Services clients, would you seek to continue to serve them under that piece of the business where you wouldn't necessarily be taking on some of that risk alongside them? Or would you be trying to push them maybe towards Evolent Care Partners where you could share those economics more wholesomely?

Yes. Yes. Look, it could go either way, depending on the partner of what they're interested in. If what we often find, Jack, is that the independent primary care physicians are the ones that are the best fit for the Evolent Care Partners model because they don't have the capital to underwrite the large risk profile and they -- and by capital, it's really just the ability to kind of take on that kind of program, not that you have to put any specific capital up. And so they're the right partners generally for that. Often, historically, our Next Gen partners have been health system partners, and they often want to kind of go directly into that space. I can see us doing some of both, depending on who the partner is, Jack. Independent physicians probably moving towards Evolent Care Partners and any health system relationship is likely more of a services model.

No. That makes a lot of sense and very helpful context. I guess, sticking with this theme around direct contracting, more information is coming out about the program. And it seems like there's some level of support for it over the next 6 years, at least. Just curious like what your conversations with clients are around that program? Are they interested in it? Will you be supporting anyone for the 2022 start? Just curious how big of a part it can play in your product pipeline?

Yes. Yes. Look, over the 5-year horizon, 3-year horizon, I think it's very interesting, and we like the general direction that CMMI and CMS have gone with this, Jack, and it is going to be a program. I think it's around for a long time and it's going to be productive. Our view right out of the gates is that particularly for physician groups that already have a big panel of Medicare patients that the Pathways to Success model for the first year is actually more attractive. And so more of our partners have gone in that direction. I think if you're a group that doesn't traditionally have a lot of traditional Medicare. The rules are slightly different for Direct Contracting and make it more attractive. So some of the -- a lot of the names you see coming out for '22 look more like that than like a traditional panel practice. And so for us, in the first year, it didn't make sense to be as involved in it. We're not involved for '22. In the future as the rules change a little bit, which we're spending a lot of time with CMMI on right now. I think we will be involved in that program. Also, we just continue to come back to the oncology program. That's been incubated into CMMI, which I think also is -- probably represents a very significant opportunity for us. Those are kind of the 2 biggest newest programs.

No, that makes sense. I guess, how do you think about the ability to cross-sell when you decide what sorts of products to push? I know like there's some where there's a prior off in utilization management lever where that would lend itself well to Century Health cross-selling versus some of the others under original Medicare, where you don't have those levers. And so maybe not as good a fit. I guess when you think about the ability to better leverage the entire organization, does that play into your priorities? Or are you just focused on getting to that fixed partners a year, call it, and the organic growth targets you talked about?

Yes. John, you want to take that one?

Yes, happy to. So what I would say there, Jack, is it absolutely factors into our long-term strategic plan. As we look at our current year goals, we're relentlessly focused on driving that mid-teens growth for next year. Which we're currently feeling pretty good about. The -- as we look long term, the more our portfolio looks like things like Medicare Advantage. Maybe that's Direct Contracting 2.0. Maybe it's things like the oncology care model that Seth was reflecting that has those sorts of PA tools, then the more value we will be able to create. And therefore, the faster we think we'll be able to grow. So in aggregate, I think those programs are more interesting to us. In the near term, we're focused on those partners that we can take with us into 2022.

Yes. I guess just to stick with New Century, obviously, you currently have oncology and cardiology. I wanted to see if there was any thought behind or what the latest thought was behind additional investment dollars, whether going towards developing the platform further, expanding the customer base or maybe even thinking about getting deeper into new therapeutic areas. Just wanted to get your latest thoughts on kind of how you think about striking that balance?

Yes. I think right now, that business has been on a bit of a tear, Bob. It's done very well. And we have been focused on continuing to invest in it because it's growing so quickly and growing profitably. And it's got a great [ formula ] set up, and that's just looking back a little bit, the reason we launched the light tech product and the SaaS version to kind of cover different pieces of the market that we weren't covering with the original products. So we've done some of that, and rolled out a few additional modules like the genomics module. I think in terms of the go forward, there's 2 basic things that we're going to look at. One is, are there ways that we can go deeper in the solutions that we already have. We have a 4.5%, 5% market share, call it, with New Century today, maybe even less, depending on how you count it. And so question one is what investments can we make, whether it's in sales force, but also in product to win over more of that market more quickly. And I think our preference, Bob, will be to start there. If it'd be a different matter, maybe if we had 30% share. But given the fact that we have modest share, let's make investments in and around New Century, around cardiology and oncology and where we can find those, whether it's tech, sales force, even accretive M&A that's an obvious choice to move on. After that -- particularly, after we get a little bit more on the market share front, there's a clear synergy on sales force, on product, on tech, to add the next sort of complicated specialty. And I think we thrive around complicated specialties, Bob, where drugs and complicated decisions and science is sort of all changing frequently. And when it is, that's a ripe opportunity to kind of optimize on quality and cost. So yes, we're going to keep investing. We have been, and I think we're going to do it in probably the order I mentioned, which is deeper first then broader.

I mean, I think that makes a ton of sense. I mean, are there areas already that maybe it's not the right time right now, but that you are getting that feedback from payers like, well, geez, if I look at the success we've had in oncology or cardiology where it just seems like a natural push that you'll end up kind of having the support to go into other therapeutic areas?

Yes. Yes, we are certainly hearing some of that, and it's the kind of usual candidates that you'd expect where there's high trend and high complexity. That said, I think we're getting more feedback, Bob, that like, hey, as a payer, I'm scared to death, they say of the trend that's coming and drugs are 50% of cancer today. They're going to be 80% of cancer. The pipeline is really full on the drug side. And so help us think about the best ways to manage that. The end-of-life process that's tied to that, the process that you have to go through to sort of really engage a patient around decision-making around those drugs, but also so many different pieces that we can take on around cardiology and oncology. I think we're getting more feedback there. But yes, within the broader, kidney is a good example, right, where it's just complicated and big and a lot of interest there as well.

Yes. No, that makes sense.

I guess on that topic, we heard this morning, Anthem talking about how they have aimed and they're combining that with their at-home resources with myNEXUS and they're trying to do more with their behavioral assets. I guess, do those sorts of areas make sense in supporting this ecosystem around oncology and cardiology? Like I'd imagine, especially you described like those end-of-life situations and decision-making and guidance could tie into some of those course of pieces. So could that very well be what the product development pipeline looks like longer term?

Yes. I think -- I mean, I think you hit on it. There's sort of a whole array of things, unfortunately, that are -- that pop up when cancer pops up. Some of the things you mentioned, depression is highly correlated, behavioral health issues and mental health issues are highly correlated with cancer. So those are big things. There's also a huge piece around genomics, and the lab, right, and the companion diagnostics that go with the diagnosis and the treatment choice. And what we found is that, that percentage of cases where you need a genomic test to sort of specifically identify which patient deserves and needs which kind of drug. That's the -- you have to have that companion diagnostic or else you can't get there. So again, I think part of what we maybe communicated in the earnings call is, there's a decade of big ideas around cancer that have very significant market size. And so yes, Jack, I think the ones you mentioned, and there's a bunch of other ones. And we're excited about running at that from a mission perspective and market size perspective.

No, that makes a lot of sense. And these tangible examples are really helpful in getting to know the company better. I guess, shifting to a little bit of a different portion of the business. You disclosed that Evolent Care Partners is serving health plans like Blue Cross Blue Shield of Texas. I guess can you walk through what that looks like when you're supporting a health plan with Evolent Care Partners? And where the opportunities lie for Evolent Care Partners in the commercial end market? That would be very helpful.

Yes. Yes. I mean, just generally, I'll just answer the general question first, Jack, and then we can get into commercial. But generally speaking, it's the coordination of care to reduce cost and improve quality. It's usually about keeping patients at home and out of the hospital, and it's about -- that has been in turn about kind of adherence to a care plan for a certain type of patient. It's about coordination across primes and specialists, medication adherence, risk adjustments, part of this, too, right? Getting the proper documentation. It's all those levers that kind of contributed to the ability to take [ wood ] for us is $900 million of total spend and target a very significant improvement on that $900 million, while the quality goes up. The commercial space is really the same idea. So if you looked at that relationship that you mentioned or any of the others that are in development, it's the same thing. It happens to be slightly different clinical interventions for commercial than Medicare. There's more, what I would call, catastrophic and acute care in commercial and a little bit less of the chronic. And so the clinical interventions tweak a little bit, but the primary deal of going to a payer and saying, "Hey, next year, you're going to spend less and the patients are going to have higher quality and then Evolent's going to share a chunk of that back with the independent primary care physicians." That's the value proposition.

I wanted to switch gears a little bit and talk about margin expansion. Obviously, it's been the bigger part of the story. As of late. I mean, maybe, could you maybe just walk us through what's been taken out from a cost structure perspective to date? And as we think about the go forward, it's clearly still a few hundred basis points a year, a fixed cost leverage versus mix and efficiencies. Just trying to understand the balance and how we should think about what kind of has gotten us here as far as margin expansion and what should we be thinking about it as far as further margin expansion as we go forward?

Yes. I thought you might ask about margins. So I have a page on it. The -- as you think about what we've taken out to date, this chart on the left is just the trailing 12-month EBITDA over the last 5 quarters. And a lot of this work was cost related. So between Q2 of '19 and Q1 of '21, it's about more than $100 million of cost that's really just transformed the business. As we look forward, there are 3 main sources remaining of margin expansion to get us to that mid-teens target in 2024. The first is some remaining cost reductions that are identified that are happening over the course of this year. Some of those are incorporated in our guidance for this year, some will be feathered in for next year so to take place at the end of the year. And the last -- I'll do the third one here, the fixed cost scale as we grow at 15% or more the way that our fixed costs are structured, we expect to drop about a point of margin, 100 basis points to the bottom line each year. The last component is an important one for our clinical segment, where our -- the profitability of our new partnerships increases over time. This is something that you see in a lot of clinical models that are risk-bearing like our. And we have some examples here on this page, where -- on the chart on the right, a New Century performance relationship. Might start at a flow-through margin down to EBITDA of 4% to 6% in the first year. As we penetrate the network with our pathways, to sort of the fulsome work that we do around the network and alignments, we can often triple that by year 2 or 3. Given the pace of the growth here, this segment growing at over 40% CAGR over the last couple of years, this has been -- it's sort of a headwind on our actual margin expansion in the near term. And the faster that we can grow this, the more of a headwind it will be, the more substantial the longer-term economics and flow through economics will be. So right now, we've pegged this as worth about 200, 300 basis points over the next couple of years in that waterfall that gets us to the mid-teens by 2024.

Yes. No, that's really helpful, John. I think one of the questions, obviously, off of this is as you see greater traction in the offerings and accelerated revenue growth and potential for even faster revenue growth. What's the company's comfort with maybe reprioritizing margin expansion in the favor of faster growth. I mean, I know a lot of companies that you guys have really done a nice job reaccelerating the top line. In growth modes, typically, we don't necessarily get specific margin targets for obvious reasons. So just curious if you wouldn't mind opining on kind of how you strike that balance between, if you're on to some traction and clearly you are, how fast do you go at the expense of maybe sacrificing some of those margin targets? Or can you have both?

Yes. I'll say 2 things that Seth [ said ], and if we have a better report. The first answer, Bob, is, while the percent margin obviously matters to us. Ultimately, we believe we're in the business of generating dollars, dollar profits. And so if we have a meaningful opportunity to accelerate some of the lower percentage margin that high dollar margin parts of the business, and we're absolutely grabbing that opportunity. And that's piece one. And we have a point of view that, that will result in meaningful dollar profit expansion over time. The second piece that I think is slightly on the other side of that coin is -- due to our product innovation over the last couple of years, we have identified a couple of areas that are very high-margin, that we've slammed the gas on. An example of that is the New Century Tech & Services Suite, which we've been able to grow very quickly. It had 6.2 million members at the end of 2020. And by the end of March, it had 8.2 million, and it will continue to grow. It's a smaller revenue number. So back to my point about dollars versus percentages, but it's very high percentage margin. And it's a high ROI for the client as well. So as we continue to grow that, that will also help us drive margin expansion, even as we're growing the larger performance side of the business as quickly as we can.

That's helpful. I appreciate that, John. Well, look, just in the handful of minutes, we have left. Seth I wanted to come back to you on one. I think it was at the last Analyst Day, you shared a slide that highlighted the valuation disparity between other value-based companies and Evolent. If we think out over the next couple of years, what do you think the company needs to do? And what do you think investors would need to come to appreciate more to really see Evolent achieve that valuation that some of your -- I want to call them peers, but others that are kind of in and around the value-based evolution, if you will. What would need to have to play out in your mind for that gap to close?

Yes. Maybe to answer this, and Bob, I'll, in some ways, just reflect back what we're hearing from our shareholders, which is you look at the conversation we've had today and the strategy we've laid out, we've been executed on it for 3 quarters in a row. And the idea of continuing to exceed expectations and deliver on what we committed and stick true to the story. What we're hearing is a couple more quarters of that, and there should be a very significant opportunity to unlock there. And so that's probably the biggest thing. And I think continuing to be to grow at the rate we're growing and deliver the margin, that's going to be the key. And so we're, John and I, are pretty focused to the execution story really at this point, and we feel very good about the path. And doesn't feel to us like we have to contort ourselves in any way or do things far off in the distance, really about a handful of additional quarters of delivering.

That makes sense to us. I think we'll wrap there. I really appreciate both Seth and John, your time today. I appreciate you guys making time for the conference. And thanks to everybody who is on the webcast. I hope everybody enjoys the rest of the conference. Thanks so much.

Thank you, guys.

Appreciate the time. See you later.

Thanks, Seth. Bye.