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

Next session here. I'm Steven Valiquette, the healthcare services analyst here at Barclays. This session will be with Evolent Health. With us from the company, to my right is John Johnson, the company's CFO. This will be a fireside chat. I think with that, I guess we'll just -- we'll dive right in. And this is a company that I don't -- have ever officially covered. So not 100% plugged in out of some of the nuances, we'll dive into some of the things that are key within the company. I think first, there's been a lot of evolution within the company and also just within value-based care overall, obviously, within the industry and even for you guys as well. But -- so just start high level for others that might be less familiar with the company, just do kind of a quick walk-through of how that evolution has occurred over the past 5 or 10 years or so from more of a technology or solutions type offering to more of a greater services offering. Then we'll just kind of expand from there.

Great. Evolent was founded in 2011, pre Affordable Care Act, with 2 basic thesis, one is that what we now call value-based care was inevitable. It's the integration in some way of the financing and the delivery of health care. And the second thesis was that the best entities to drive that transformation would be the health systems across the country. They're the best capitalized and they had the most to lose in the shift to value. And for the first several years of Evolent's growth, we're focused on building tools that could create clinical value for providers managing risk, and we found 2 things. One is those tools really worked. They created a lot of value, and they improve the health of the patients that we work with. The second was that our second thesis was wrong, health systems were not well positioned to drive the transformation to value. And so we then circa 2017 embarked on an evolution to point the tools that we knew worked created real value for patients and for health plans, and we sold them to health plans. We now generate more than 95% of our revenue from health plans and our major customer, our major user of our technology is physicians. And our primary beneficiary is the patients themselves, deliver better quality outcomes for lower cost. We primarily now focus on specialty management in oncology and cardiology and musculoskeletal, the 3 most expensive, most complex conditions that insurance companies face. And we've been growing nicely -- the organic CAGR over 35% over the last 3 years and excited to continue to drive growth into the future.

Okay. Great. So yes, with that business mix now with a majority of revenue is now coming from the payer side, less from the selling solutions to providers, my guess is that mix will probably stay that way even move further up going forward. But I guess somewhat tied into that based on what you described. So there's been a wave of public companies describing themselves as technology-enabled providers. Some of them have come from it from the provider side first with physician clinics and tried to add technology later. Other ones did the technology first, then did more of the VBC contracting, et cetera, which you guys fall more into that camp. Maybe just talk about how that maybe gives you some extra competitive advantages as far as your evolution versus somebody maybe doing it the other way around.

Yes. I'd paint a couple of pictures on that. I think the first is we believe there's real value and our platform being independent. If you think of our core competitors, in particular, in the specialty management space, they are universally at scale owned by health plans. You have AIM, which is owned by Elevance, and you have eviCore, which is owned by Cigna, both great companies and not independent. And we find a lot of our customers prefer where possible to work with an independent entity. So I think that brings some real value. The second element that I think is of particular value in our model is it is highly scalable because we do not have to employ physicians. We can work directly with physicians and provide them tools, but we can contract with the payers and get live that way through our platform. And I believe that has really helped us to drive both the top line growth, of course, that you've seen, but also and more importantly, growth in earnings and growth in cash flow which we believe at this point in time also differentiates us as a value-based care public company that makes money.

Okay. Great. Yes. And somewhat tied into that, I'm going to dive into that next across a lot of the publicly traded VBC companies, there's some pretty big variation in how many of the physicians are directly employed versus how many are just contractually affiliated, you just touched on that. Maybe there's some pros and cons to both sides of that. But as your plan to mix over time and going forward, going to be still more on the affiliate side or...

It is. Yes. I think we have humility, those are different business models. And the actual owning and operating of a physician practice is a particular business and evidence-based value-oriented solutions that we provide, wherein technology are a different business. That's not to say that we wouldn't ever merge the 2, but that's our bread and butter, and that's where we're focused right now.

Okay. Great. And also maybe just help everybody in the audience room for a moment here just on the mix of the affiliated physicians, how much is really a primary care physician or PCP focused versus getting into various specialist categories? And where do you see more opportunity going forward from here?

Yes. So the vast majority of our revenue, which this year, we've guided to $1.9 billion to $1.96 billion of revenue. The vast majority of that is coming from the specialty space. So that's working with oncologists and cardiologists and orthopedists and on down the list on the specialties that we manage. We also have a small business that is focused on the primary care side of the house, it's very analogous to an agilon and Aledade, familiar with those business models, affiliating with physicians, helping them to stay independent and participate in value-based care. We manage about $1.3 billion in premium through that entity and drive cash flow and a nice little growth engine on the primary care side.

Okay. Great. So another thing across some of the publicly traded VBC companies. Some are pretty willing to talk about some of the payer relationships and which ones are the biggest and most important other ones to keep that very close to the best. You guys have given some clarity around that. You mentioned 1 or 2 of the bigger ones, I think, earlier in this discussion. I think you've disclosed that previously as well. But I think you've also talked about some newer relationships that are driving a lot of the growth with like Humana and Molina in particular. So maybe you can just spend a couple of minutes if you are able to talk about some of the biggest relationships, but also the biggest drivers of growth from here, maybe from some of those newer ones as well.

Yes, totally. I think strategically, we are pretty oriented towards diversification here. And that goes both for our payer customers and also for things like line of business and revenue and economic business model in other areas. So on line of business, about 40% of our revenue is in Medicaid, 35% in Medicare. The rest is in commercial. On payers, post the acquisition of NIA, the -- our biggest customers will be, for the most part, the biggest health plans in the country other than United. So we've got Humana and Molina and Centene and on down the list, all very important customers. And importantly, we have lots of running room to continue to grow with them. We've estimated that if we were to roll out our performance suite, which is the capitation risk-bearing product from our specialty unit across all of the lives that are currently managed by our current customers that's a $50 billion revenue opportunity for Evolent as a whole. So a lot of running room within our existing customers.

Okay. Tying some of this together, another way you can slice and dice it. I mean you talked about more of the specialty focus and less on primary care. Within that, you talked about some of these payer relationships, but is it just serendipitous and ultimately for the company, whether the payer mix is geared more towards commercial versus Medicare or Medicaid? Or do you have an intentional focus to increase that mix one way or the other?

We have no particular intention to inflect that mix. The products work equally well across all of those lines of business. I'd say we've had historically a specific focus on the government-sponsored programs, Medicare and Medicaid because generally speaking, that's where you see the most clinical complexity where we can drive the most value in our model. But products work, and we expect to continue to grow across all of those lines of business.

Okay. Great. Another way to kind of think about these business models from covering all the managed care companies, they talk nowadays about within their provider arrangements that may be 65% to 70% of all of their cost of care is tied into value-based arrangements. But then within that, you find that maybe only -- maybe 5% or high single digits on average is sort of true full global risk versus -- and the majority is still going to be shared risk arrangements. So I think from your perspective, just curious how you think about that from year-end. Are you more open to doing global risk, shared risk preferable. I mean [Indiscernible] depends on the terms and everything else. Just talk about your thoughts around both those opportunities.

Yes, totally. So a couple of thoughts. Our most value-creating products, both in terms of dollar margins to Evolent and dollar savings to our partners is our fully capitated products, we call it our performance suite, and it's where we're taking the risk for a particular scope and a particular specialty. That's a great product and it's been growing quite quickly. As from where I sit, managing the finances of the business, we also really like to have a deep portfolio or fee-based business, it's not subject to underwriting cycles, and it's a highly reliable margin. In fact, right now, about 75% of our profits in this year, we expect to come from the fee side of the business and 25% will come, we expect from the capitation side of the business. And that may evolve a little over time, but I wouldn't expect those ratios to flip flop. Generally speaking, our orientation in all of these models is towards sustainable margins, both at the outset and over time. We articulated a general margin curve for our capitation contracts starting in the mid-single digits, call it, 4% to 6% for the first year and growing into the mid-teens by year 3. And Importantly, you did not hear me say that we lose a bunch of money in the first year. That's not our model. And it is the model in some global cap arrangements. And that's why we have been judicious in our expansion into global cap through Evolent Care Partners.

Okay. Got it. All right. Just jumping around on a few other topics here. You guys closed your NIA acquisition, Magellan Specialty business, not too long ago. Maybe just give us an update on the integration efforts and what's going on in that part of your business?

Yes. Integration is going very well. We're 2 months in. We are very explicitly investing in the integration to ensure both we mitigate any risks that come up operationally during the integration and that it goes well. We've articulated 2 sources, important synergies for this acquisition. The first and more near term is on the cost side. We've articulated a $15 million cost synergy goal and the second and larger opportunity is this cross-sell opportunity, I mentioned earlier, where with the addition of both the specialties that NIA can manage and their customers, there's not a big customer overlap between them and us. We now have, we believe, the $50 billion addressable market to cross-sell with our existing customers. So that is very high on our priority list as we think about integration and executing on that over the next several years.

Okay. Great. So with the potential for that to be a successful acquisition. Maybe just talk about the appetite for M&A overall and also balancing that within your capital structure, I think on the 1 hand, maybe some investors want to see you pay down debt, but also you still want to be able to grow. So maybe just tackle that whole thought on just capital deployment, managing the balance sheet. So I guess that's going to be our CFO question for sure.

Yes. So look, we've been really explicit this year that our priority on capital allocation is delevering. We've set up targets to exit this year under 3x net levered and exiting 2024 under 2x net levered and we'll be deploying excess cash to pay down the debt and driving towards those targets. On broader capital allocation priorities, we tend to think of it in these 3 categories. First, we invest into the development of the organic products. We spent about $50 million last year in R&D and capitalized software development. We will spend a little bit more than that this year, ensuring that our products remain very strong and competitive in the marketplace. Second, on M&A, we bring two key criteria to evaluating potential M&A. And again, this would be after we delever the balance sheet under 2. The first is we would seek M&A that accelerates our strategy. We don't want to just buy other things to get bigger. One of the things that we love about, for example, the NIA acquisition is that we believe it's able to accelerate our path forward by expanding our addressable market in a meaningful way. The second is, we're only going to buy things that are accretive for us. And since we trade on our EBITDA multiple and generate cash flow that lowers our potential universe of companies to buy somewhat significantly. And so that means we tend to be asset led from an M&A perspective and identifying those assets that may come to market that may fit those 2 criteria and be good cultural fits with Evolent.

All right. Great. So just jumping around here a little bit more. So from our lunch session today with our keynote speaker, the majority of that discussion was tied into value-based care, and part of that was some discussions around bundling as well. Some of those government-sponsored opportunities have proven to be maybe not quite as profitable as some of the participants hope they would be, maybe clearly it could be different as far as contracting directly with payers. So really, I guess the question is, can you just give us an update on, first, maybe just some cross-sell discussions that you might be seeing across the various specialty therapeutic categories you're focused on? And also the potential for bundling within that and again, whether that's more on the payer side or government or both, maybe just tackle that coming off of the back of the discussion around that from the keynote earlier today.

Yes. On the cross-sell opportunity, what I would say there is a great example of this is some of the announcements of our expansions with Molina that we announced last year where we believe we've been able to drive real value for Molina in a couple of key states for them, starting in cardiology. They were able to see that value and chose to both expand with us geographically into other states and also add oncology as an additional service. It's an important part of our growth story here, both in the past and our target growth in the future. So lots of focus on that from a go-to-market perspective right now. On bundling, we have a perspective that many of our customers prefer to have fewer vendors. If they had their druthers, they'd rather have one highly aligned performance partner for a number of different specialties rather than buying several different high-performing point solutions. And we believe that with the NIA acquisition, we now have enough specialty to take together as a product to be highly meaningful in that conversation and we've got to prove that out, and execute on the cross-sell, but we're excited about that opportunity.

Okay. Great. So building on that and this question, maybe you already have answered this, but just got to throw it out there anyway. So as far as the sales pipeline, I mean a lot of the payer relationships, you'll take on a certain portion of their membership -- might be smaller, if you do that successfully, then you'll get more over time. That's kind of how it works. And you talked about how the -- some of the payers just want to work with fewer vendors. But how do you balance getting more share within each payer versus also building up the physician affiliations and everything else doing that methodically over time and just proving that you can do it more and more on a larger scale and just gain more share within each payer.

Yes. So importantly, in the specialty side, the health plan conversations comes first, and the provider engagement is just that. We do not affiliate with oncologists. We are working with them, and we're their partner when they need prior authorization in our specialties. So we're really focused in on the payer as our key the customer. And the way that you tend to be able to grow within a payer is geographically the way most payers are organized is with local plan leadership that is empowered to make those key decisions, inclusive of their risk partner on a specialty deal. And so what we tend to see is you have a really strong national relationship that is supportive of local expansion, but the sale is at the local level to that local plan leader, whether it be a state market president or a county MA plan in the state before.

All right. Great. So running low on time here. Maybe a final question. Let's just kind of piggyback off one of the comments you made earlier. I think you said that you have payer relationships now with most of the major payers maybe with the exception of UNH, I heard you right? I wasn't sure what the backdrop there, if there was something that would prevent that? Or is that still an opportunity that you have going forward from here [indiscernible] within that.

Yes. We do have a couple of services with United. I would say, in an honest moment, they're not a big target customer because they have a lot of internal stuff, okay? Our core customers are those health plans that need external support. The good news from our perspective is there's like 250 million lives in the country who are covered by those payers.

Yes. Makes sense. Okay. Great. Well, with that, I think we're out of time. So I want to thank you for your time today, and enjoy the rest of the conference, and everyone, thanks for being in the audience here today as well. Thanks.

Thanks.