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

Everyone, and thanks for joining us for this session of the BoFA health care conference. I'm Michael Cherny, the health care tech distribution analyst. It's my pleasure to welcome Evolent. We have CEO, Seth Blackley, also a Co-founder; as well as John Johnson, who unfortunately couldn't be here in person but is on the phone with us, so will be participating as well; Seth Frank, who runs IR is also in the room as we go.

Maybe, Seth, I'll start with you. And I'm going to start a little big picture, but you've been coming to this conference for a number of years. And I just think back to the evolution of Evolent and how the business has morphed and changed. As you think about the journey that the company has been on, where do you think the -- has been the biggest change, the biggest dynamic in terms of what the business has become versus what it was when we were doing this 3, 4, 5 years ago?

Yes. No, that's a great question, one I get a lot as well. So if you think back to Evolent, we founded the company in 2011. We've been honing the capabilities around working with payers and providers for a long time. The big change really occurred a couple of years ago when we reappointed those capabilities instead of to the providers and really moved them to selling them to the payer community. So our biggest customers today are the insurance companies. They have the same incentives we do, and they appreciate our ability to engage the provider community directly. But that shift has really unlocked -- so we've had, I think, north of 30% growth rate the last 36 months CAGR. And I think it's all tied to the ability to go to the payer community and bring them this capability, has been the big shift.

Yes, it's been great. You see a technology platform that's tried and true and applying it to the new market. And along those lines, you've had a couple of really nice new partnership wins. You signed CountyCare, you had a Blue Cross win. Maybe give a sense of how those evolved and how those discussions and the proof points that they need to see from you in terms of this pivot led to these new partnerships.

Yes. No, it's a great question. And I think it's a similar answer for all of them, if it were Humana, Molina, Centene, Florida Blue, CountyCare, Blue North Carolina, I think a lot of it is we've been at this for a decade, right? So in some ways, the first pure-play value company doing this. And so I think a lot of it is the proof cases that we're able to bring to them from that long period of time. And even New Century, which we acquired, has been at it for 15 years. So it's not a new idea or a new product that we're asking them to take a leap on. It's something that's proven. And that's been a big part of it. I think the second thing is that our economic model, Michael, is often a guaranteed model, right? So we can go to a health plan and say, "Look, you spent $100 million on cancer care last year. We can guarantee it will be x next year." And our contracting model is not -- it's not like we're putting our fees at risk. We're actually guaranteeing that outcome. And again, that's based on the longevity and experience that we have in doing it. And so the ability to stand behind that guarantee is a huge part of why. And that would be the case on the primary care side as well, which is Evolent Care Partners or even on the services side, which is Evolent Health Services.

Yes. We're going to ask those in a little bit. I promise you.

All right.

But so thinking about that and that comfort factor you have on putting out guarantees, especially for complex conditions, I mean, big focus on oncology, obviously. How does the data that you've built up over the decade-plus, even before Evolent spun out from your previous parent company, but -- how does that all give you that comfort factor that you're going to be able to show up and say, "We can promise you x," without running that essentially reputational risk on -- if you do have any shortfalls?

Yes. It really is -- if you looked inside of New Century, for instance, or on our oncology side, the expertise we have, the team we have and the data that we have is, I think, unparalleled in terms of the depth. And so that's what gives our team confidence and the ability to do it. When you think about the data as a for instance, I think we have the largest longitudinal cancer database given our years of work in the area, and then the ability to apply that into a -- sort of blending together the ability to use that data with the actual people expertise to apply it. And we also have even outside of the company, the sort of 20-person scientific advisory board that advises us. And so we just have continuously invested in making sure our knowledge is leading in that area.

And along those lines, I mean, thinking about New Century, it's been a couple of years since the acquisition has come together. What surprised you to the upside about what those capabilities brought that you -- when you were doing the original deal analysis, you didn't foresee coming and how it's -- that's been resonating in terms of -- as you transition it into the market alongside the broader payer transition?

Yes. I mean, what was cool about -- New Century was really a diamond in the rough, and they had these deep, deep, deep clinical capabilities and expertise that were rock-solid. What they didn't have was the ability to sell the product that effectively in the marketplace. And then they had really only, Michael, focused on Medicare. And I think the biggest thing that surprised us is when you apply it to commercial and Medicaid, which obviously is are huge markets, too, it worked just as well. And so those -- the combination of those things from -- unlocked it.

And you mentioned oncology. Oncology, as you can imagine, is the most -- as we all know, is the most important impactful and costly disease cases. This is my third presentation this morning, and oncology is a big focus point of discussion in all 3 across very different disparate health care services. That being said, you're also in cardiology and a couple of others. How do you measure the opportunity set that you have to further penetrate what is the highest burden, highest-cost disease state versus branching out a tried and true model into other areas where payers are still looking for port services?

Yes. It's funny, Michael, I've been getting that question a lot the last couple of days. And it -- we think of ourselves as roughly 5% penetrated within cardio, oncology and then end of life, which are the 3 that we work on today. So we have tons of running room, obviously. And if you'd asked me that question 2 years ago, we would have said we're just going to focus on market share there, which is what we've done. I think the shift that's happened in the last 6, 12 months is we have a lot of happy customers on the cardiology, oncology and end-of-life side, these payer relationships, and they are asking us to do more in other specialties. And so I think if you ask this 2 years later, we're probably now more ready to add a next specialty than we were a couple of years ago based on that dynamic. It really is a pull from our customer base to say, "Hey, we don't really want to have 15 vendors doing different things. If you could do more, that would be great." And so that's sort of how we think about it. And there's some logical next areas beyond those 3 that we're in.

And just to give a sense, let's say, tomorrow you decide, here is the next -ology. We've had enough feedback from customers. What internally does Evolent have to do to turn on the lights, flip the switches, so that you can service a contract or risk population for that area?

Yes. Look, I mean there's 2 ways I'd say, Michael, to do it, right? One way would be to build it. And to build, you got to build clinical expertise and the data and then you have to have people who can be credible, know the space, whether it's immunology or neurology or orthopedics or whatever it is, right? The other way to do it is through M&A. And obviously, if you could find a company that has that expertise and developed in over a decade, we like that because it has such credibility. So could we find another diamond in the rough, I think, is another way to get at it. We are pretty disciplined, very disciplined on capital deployment, meaning we're not going to do something that's dilutive. We're going to be disciplined on capital, et cetera. But if we could find both of those things in one place, we would also think about M&A as a way to get into it.

Awesome. And I guess, John, hopefully, you can hear me. As Seth talks about the opportunity around M&A, how do you think about balancing the internal priorities on capital deployment and cash availability relative to M&A opportunities?

Yes. Great, Michael. As we think about capital allocation priority, they really go in this order. One is internal development, continuing to make sure that our existing product are really delivering at industry leading expectations. Last year, we deployed about $45 million of cash in the R&D across the capitalized software development operating expenses, and that number will be a little bit up this year. The second major area is M&A. And as we've said there, we're focused on deals for which we could pay an EBITDA multiple that's reasonable, that it would be accretive from an EBITDA per share basis for us and for our shareholders, so immediately accretive but strategically accelerates. And doing all of that in the context of a business here that now is generating cash flow last year, last year, converted at least about 40% of our EBITDA into cash flow, and that will grow as we continue to scale. And that will then support our continued expansion here.

Awesome. Thanks, John. It's like a voice from the sky, God's voice. We have...

That was very powerful, John. I hear it as well.

Yes, definitely used his expertise. Before we jump into some of the other areas, I want to just touch on New Century, and an anecdote or case study I find interesting is Molina. Molina, obviously, a very large Medicaid payer and really started with you as an entry partner on the tech and services platform and then it scaled. Is that the way that we should think about the average development, the average go-to-market strategy that you're pursuing with some of these relationships on -- you want customers that are going to start with Evolent to figure out what you can do for them and then potentially become more robust? Or is it you're going the big bang approach or both?

Yes, I think it is a good example. I would say they were kind of a very small customer right out of the gate in terms of just the technology piece of New Century. They were kind of sub-$10 million of revenue last year. They'll be $75 million this year. And they've been a great partner. They're very sophisticated in how they do this work. And so I think it is a good example. There are some cases, though, too, where it goes straight to the big bang. Florida Blue would be an example of that. And it just depends on what the dynamics are within each plan, but I think it's nice to have both methodologies in terms of how we partner.

Got it. Turning to Evolent Care Partners. I know you referenced before, clearly there's a whole host of different ways that in full ownership, partnership, MSA, all these dynamics, you're seeing a different approach towards the independent pharmacy market. How do you think about -- as you built out that business, what Evolent brought to the table that didn't already exist from some of these overarching partnerships, partnership models that existed?

Yes. So the way we -- it's a great question. There's kind of -- I'd break it into 3 categories for the physician world, right? One is the Oak Streets of the world or ChenMeds are doing work that is around de novo build, right? And that's a very effective model, but it has a different capital profile. Second is, I'd use Agilent as an example, these are larger groups, 20-year joint ventures. And that's good for a certain type of physician organization that's independent, that has certain goals. There's then, though, a big group of physicians left who are not interested in selling themselves to an Optum or a health system, and they are not, for whatever reason, interested in a long-term joint venture. And to us, that actually may be the majority of the independent physician market, right? And these are smaller physician groups, Michael, usually. I tell the story, sometimes, my dad was an independent primary care physician in rural North Carolina in a group of 1. And he's probably a little small as an example for what we would do. But a group of 5, a group of 10, a group of 20 who says, "I'm not ready to do a 20-year joint venture, although that's a great model. I actually just want to have a relationship that helps you make more money for the next handful of years." And that's -- we found a big open market there and I think we've also found it to be very sticky which is important, even though we'd say kind of a couple of year relationship versus a longer-term relationship. So that's where we're focused. It is both on the Medicare shared savings side, but it also -- we just entered our first capitation arrangement with a group of physicians like that in North Carolina with Blue Cross of North Carolina. So I think there are multiple ways for that business to grow. And it's, to be honest, not that competitive. We don't run into that many other companies doing the work we do.

And as you go into these physician groups, I mean, it's one thing if you're going into some of the largest independent groups that have major infrastructure. These still tend to be a bit smaller, but also probably have some infrastructure electronic health records, tax management, et cetera.

Yes.

How do you layer on to their infrastructure to make sure that the -- you're not causing -- as you ramp with them, as you help drive savings, you're not causing disruption upfront?

Look, it's a great question because our model is definitely lighter and thinner because of this dynamic. They don't have -- literally, the front office staff might be a relative, right? It's not -- we're not talking about a big infrastructure with lots of organization around it. So we have to, by definition, be lean and light. And that's what we've done. We don't require them to change their EMR. They do have EMRs, but we pull data out of them versus requiring a change. We have a very user-friendly tool called our Panel Insight tool, which allows the office staff and the physician to know kind of, it's the air traffic control system, like what do I need to do this week? And we provide that to them in a very user-friendly way, and it's light and easy. And so that is part and parcel to our model because they really don't have the infrastructure to do some big implementation.

And I know you've targeted and talked about the investment dynamic. And I think, and please correct me if I wrong, but $7 of savings for every dollar that gets invested.

Yes.

How do you measure those savings? And as we think about your evolution of the business, it seems to me like it's one where scale creates success. How do you think about the way that you're targeting where these savings can evolve over time as you get more and more customers?

Yes. Look, I mean, so we had I think it was around 3% savings that we documented. So we have -- let's say, we have $1 billion of premium that we manage through a population, 3%, $30 million. We can measure that. It comes in the form of the shared savings check or the report from the payer. Over time, we think that number will be 5%, 7% growing, right? And so if you think about your point, the scale that you get from it, hedge fund folks who get this, it's a percent on a growing number, right? It's like so if we can have $2 billion under management, if you have $1 billion today, we're going to have $2 billion over time as a for instance. And that percentage goes up. It does scale very well because our infrastructure costs are not that much higher. The only variable costs, let's say, you had a 5% savings on $2 billion, that $100 million of value generated, we do share some back with the physicians, right? And that's core, that the average physician in our first year with them made an extra $25,000 of income, right? So for my dad, as a for instance, in North Carolina, that would have been a huge deal. And $25,000 of income is a big deal for these physicians. That number will go up as well as the savings rate goes up and our profitability will go up as well. So that's kind of -- that's how we think about it.

And how do you see this business evolving from -- and morphing from a market perspective? And I think about some of the businesses that service BPCI, so it's more instance-driven or specific encounter-driven versus take on a total population. Is that the way that you see the business evolving? Or is there just so much runway in your approach now that let's just stick with this and see where it goes?

Yes, it's more of the latter. I mean, we have -- let's say, we have 1,000 physicians. There's 250,000 primary care in that general category in the country. We have a very small base of the physicians that exist today. That number can grow for a long time, we think, without having to do anything different in terms of getting into episodic care. The episodic stuff, they should do on the New Century side with the specialists directly, but I think this primary care work is going to just be more of the same.

Got it. We might come back, so hold on a little bit. I want to make sure I'm always cognizant. But turning to Evolent Health Services. Just give us a sense of how that business evolved, especially within your overall organization. Again, a lot of this is -- I've always found the pivot interesting. But this is one where it seems like there's -- a little different than some of the other technology evolutions, but still providing a very core service capability and core cost savings for health plans.

Yes. No, it's a great question, I mean, so for people who are new to the story. Our clinical segment is the specialty and primary care. That's the majority of the business. It's growing, has been growing at 40% to 50% very rapidly. What we're talking about now is the minority of the company. It's been growing nicely, 20-plus percent in Q1, et cetera. So it's a nice grower, but it's more of the administrative services. And that's claims payment, care management technology, things like that, sold to HealthLine, Bright Health or CountyCare, other large customers. And I think it's a solid business. It's doing very well. I think it has a nice growth run ahead. it's probably a bad analogy, but the analogy I like to use is in the way that Amazon Web Services serve Amazon internally and then they vended it out externally. There's an element of that with this business, right, because it -- we do use some of the components internally, but they make a lot of sense for a payer to also use it on a direct basis, and that's a great -- it's a great business unit for us and has a nice future ahead.

I love bad analogies. So that works for me. I use them all the time.

We probably should not compare ourselves to Amazon, but anyway.

Throw yourself in the ring and you're good. We're talking about the disparate dynamics of these new services. They're all underpinned by one tech stack. How do you think about the prioritization that you have? And maybe this is a question for the voice from above, but the prioritization you have on operational spend on capital spend to fuel growth among the 3 different major segments that you focus on?

John, do you want to take that one?

Yes, I'll start, and Seth, you can comment as well. I think when you're, first, customer-informed; and second, ROI-driven on this. And so the first question is where are we getting and seeing the most customer demand for incremental services or particular feature functionality, et cetera? And that will be the first layer of how we think about the capital deployment on say the software sales side. The second layer is very ROI-driven. And so I'll give you 2 examples. On the Evolent Health Services side of the house, they're a people-intensive business. And so a number of the ROI-driven projects are around robotics projects, information, automation, machine learning and so on to over time lower the reliance on manual interventions. Within New Century, on the specialty management side of the house, the ROI view tends to focus more on the longer-term innovation. They talk a little bit, for example, about lowering patient application, a huge need in oncology, as an example. And so those are the sorts of ways that we tend to think about prioritizing our capital.

Got it. This might be a question for both of you. But I'm think of some of the second derivative factors of what's been a choppy utilization dynamic. And obviously, with the focus on signing the health plans, your -- some account stream from health systems, from physician groups and what they're seeing on a utilization perspective, but they're also seeing hosts of wage inflation, other inflationary pressures. How does that build into the visibility that comes into your business? And I guess, is there almost this -- to me, I can see this interesting dynamic where it gives you more visibility because health systems are turning to payers for cost opportunities, payers are then turning to you to make sure that whatever comes about around renegotiation, repricing, that you're helping them offset it. I know it's a long-winded question, but...

Yes. No, look, I think it's helpful to us when the payer community are trying more aggressively to manage their costs, whether that's because the hospitals are pushing them on price and inflation and things like that, post-COVID, et cetera. That creates a good selling environment for us, and that's probably the main dynamic we see out of it. One thing we've not seen a lot of is our own inflationary issues are outside of normal. I think on our talent side, close to 4,000 employees, like they like what we do. I think they like our work, and it's not -- we're finding people who are leaving the hospitals and want to come work with us because it's usually a virtual job. And in the new world order, people have tended to pick those types of jobs. So we've not had inflationary pressures on staff. And then the same thing on the clinical side of what we do, we've just not seen those sorts of post-COVID bounce back issues. We've kind of, as John will say often, kind of guided and modeled that we might see some of those across the later part of this year, but we have not seen much. So that's kind of -- it's a net positive for us, I would say, based on all those factors.

Turning back a bit to New Century and some of the dynamics of your fee structure. How do you think about, over time, the evolution that you have in this business? Because I think, it could be overarching vision too about performance-based fees. We talked about -- the beginning about putting out guarantees. But over time, do you think that there's an opportunity? Do you want there to be an opportunity to take on more incentive-based fee structures, revenue structures, which may change some of the recurring revenue dynamic but also may provide potential source of upside?

Yes. You know what's interesting on that one is, today, the majority -- strong majority of our revenue in New Century is through our performance suite, which is a capitation-like model, right? And so that is recurring. It is paid monthly. It's not contingent upon some payment later, which we like. So it's not -- there's seasonality, things like that. But it already is the strong majority of the business. So I think we would see that continuing with no change into the future. One thing we did do is we added this SaaS version, tech services version, which in some ways goes the other way. It's a lower P&P and lighter high-margin product, which is like a SaaS model, our tech and services suite. We added that just as sort of some clients want that as a starting point, and then they -- we see this big opportunity for moving them over from that into our performance suite product. But I don't think you'll see a third piece, which is more of a gain share model or something like that. I think we've got the 2 that we're going to have.

Got it. I know we're running low on time, trying to just make sure I hit on everything. Your recent partnership with Vital Decisions. I know you talked about M&A and also partnerships, as what stands out. Maybe give us a sense on how that evolved. And if you think about your goals 2, 3 years out, where do you think you'll have generated success if it works out the way you want?

Yes. So with Vital, obviously, we closed that acquisition last year. It's been a great acquisition for us. Vital, for those who don't know it, works in the end-of-life space, if you've ever had a personal experience of this, unfortunately, I have in my family, and you see people, families and oncologists or cardiologists trying to make decisions about when do you keep trying more chemo? And when do you say, "Let's focus on the quality of life that we have remaining," right? It's a very hard societal issue. 80% of people, 85% of people want to have those conversations about what is the right way to die. It's hard to just to say that word, but what is the right way to die? Because we're all getting there eventually. And unfortunately, only 19% of people have those conversations in advance, and what you want -- there's a documentary on Netflix that highlights the difficulty of this setting. If you hadn't had these conversations in advance, what ends up happening is sort of hero-based care at the very end, and patients spend their last 30, 60 days in the ICU getting bombarded with what are poisons, right. Chemotherapy is a poison. And it often reduces the length of their life. It certainly reduces the quality of their life and it massively increases the cost. And again, I've had this happen in my family. It's an awful thing. And I wish we had, had the service that Vital offers, which is sit down with the family, the oncologist and the patient and document what does that person want at the end of their life. And again, amazingly, it ends -- certainly a higher quality of life at the end, but it sometimes often extends life, ironically. And that's what Vital does. We do not direct when and if care should happen. We do motivational interviewing with 130 Masters-trained therapists, that elicit the preferences of that patient for the end of life and have the oncologists and the family hear those. It's non-directive. We don't get involved other than the therapy. And it's odd to say we have a therapy product, but we have a virtual teletherapy product for end of life. And it is a beautiful thing when it works well. It's in a sad situation, but it is a very positive thing. And we have implemented it and integrated it into New Century Health, such that our New Century Health oncologists and cardiologists where 70% of the end-of-life conversations happen. And so it makes all the sense in the world for us. And I hope we help a lot of families, and I hope we save the system a lot of money, to answer your question, when this plays out.

I think we're just about out of time. But Seth, thanks for being here, John, thank you for being here in spirit. I appreciate it and appreciate everyone joining us.

Thanks, Michael. Appreciate it.