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

Good afternoon, everyone, and welcome to the JPMorgan Healthcare Conference. My name is Anne Samuel, and I cover health care technology and distribution here at JPMorgan. We're thrilled to have Evolent here with us this afternoon. With us are CEO, Seth Blackley; and CFO, John Johnson. They'll do a brief presentation, and then we'll open it up for Q&A. So with that, let me turn it over to Seth.

Okay. Thank you, Anne. See some [ dull ] faces here at the end of the second day, people are looking pretty tired, [ few ] hung over Michigan fans. Good to be here. I'm honored to be representing our 5,000 mission-oriented employees at Evolent. As Anne said, I'm Seth Blackley, CEO and Co-Founder of Evolent. And I want to start today just with a second on what Evolent does. So we are a value-based specialty care company. Many of you probably know about value-based primary care. We do our work around 3 main specialties: oncology, cardiology and musculoskeletal care. Our customers, our health plans and risk-bearing providers we get hired by them, as I'll describe in a second, to help them manage the cost and quality of those complex cases. Our users, our main interface point is actually with the physician community, so oncologists, orthopods, cardiologists, et cetera. And at the end of the day, our motivation is around the patient. We don't touch the patient directly through our services for the most part. But our end goal is to make the care better and safer for the patient. It is our motivation. You can see a few of our selected customers here listed in the bottom. In terms of the investment case for Evolent, we have a framework of 3 main objectives for shareholder value creation for the company, the same ones since John, the team and I have been running the company, the same 3. They're going to remain the same 3. The first one is organic growth. Our 3-year acquisition-adjusted growth rate is over 30% a year. So we've been growing very rapidly. We have $150 billion total addressable market, and we're coming up on $2 billion of revenue in the company. So obviously, we have low penetration in a pretty big market. And we'll talk about this in a second, but our existing customers represent a $50 billion cross-sell. So 1/3 of the total market is addressable through cross-selling to our existing customers, which we think is a big deal. Second, we are focused on profitability that was less popular a couple of years ago, but we've been focused on it for many years, and we're coming up on $200 million of EBITDA, and we continue to remain focused and disciplined around driving profitability in the company, and we'll talk about how we do that in a minute. And our third priority is around capital allocation, so part of that is around cash flow. We had committed to $120 million of unlevered cash flow after all CapEx this year, which we're on track to deliver. If you think about that ratio relative to around $200 million of EBITDA, it's a 60% conversion. That number is attractive, and I think will go up over time. Related also to capital allocation is a commitment to remain disciplined about how we deploy that free cash flow. We'll talk about it a little bit later in John's section, but we're going to be highly disciplined about how we think about that. In terms of the opportunity that we're addressing, I talked about the $150 billion market and the $50 billion cross-sell. On the right-hand side of the page, what is the root cause problem that we're solving, there's 3 areas. One, cost are growing a lot in these complicated areas, right? Just with oncology, cardiology and MSK, $50 billion of spending increase in the country between 2015 and 2020. So these are growing costs that are significant for our customers, the payers. If you think about the bottom 2 categories around quality and patient experience, raise your hand if you're in the room, you or somebody in your extended family has been diagnosed with cancer. How many hands in the room, a bunch of hands. Think about that experience for a second and what it was like. I know speaking for my family, many times, the care is not optimal, and the experience is not optimal. In fact, about 35% of the time, we find that the care plan for a given specialty, let's use cancer as an example, is not best practice. 65% of the time it is, 35% of the time is not best practice, meaning the cost or quality of the way the care is being delivered is not optimal, and you probably have seen that in some of your own personal experiences. Evolent exists to try to take that 35% of time and reduce that number, right? So increase the percent of time that the best care is delivered. Let's think about, okay, within that 35%, why does that happen? Why 35% of the time, [ 1/3 ] of the hands of the room represented by that number. Why is the care not optimal? Four reasons. One is it is incredibly complicated. There are about 300 using the oncology example, 300 journal articles in oncology that are published every month. Typical oncologist is reading 3 or 4, 5 of those if they have time. That's hard to keep up with. We'll talk about Evolent solution. But on the right, we have invested a lot, including a staff of 1,400 clinicians to help aggregate that information for the treating physician. Second, there's sort of a challenged model within the health plan world historically around utilization management. If you know what utilization management is, I may have heard a few purse words under people's breath out there. It's not popular historically. It has really driven historically a lot of friction for providers, and it does not typically increase the quality in a way that we think is possible. And we think what we do, we'll describe in a second, we've invested a lot to make the process of reviewing care and figure out what the right plan is much easier for physicians, more integrated with the EMR and more around value-based care, meaning incentives rather than sticks. Third is provider misalignment. You probably know this, but in all those specialties I talked about, the way the physician gets paid often is disconnected from the quality or cost of care, right? So we do a lot, and we've invested a lot over many years around developing payment models that help align that practice with the payment that the physician receives. And then fourth and finally, the patient voice is often not included in this. Evolent is increasingly doing more touching the patient directly to get the member engaged in the journey. Turning to the next page, just bringing this together, okay, what is Evolent's product. This is our product architecture here across the specialties I mentioned, oncology, cardiology, musculoskeletal, but also complex care, where we do this kind of work with patients, who have multiple comorbid conditions. And the way we do the work and including radiology and genetic testing and even supporting end of life is kind of lined up against those 4 issues I told you about on the last page, right? So it's deep and broad. We cover multiple specialties, and it goes deep into each condition. We do a lot of work to make sure that the way the decision support is delivered to the physician at the point of care is done seamlessly. I mentioned number 3, the incentives and number 4, the member journey. Let me bring this to life for a second with a case example, which I think if you don't know the business well this will sort of help you get your hands around it a little bit. So let's start with the idea that up to 35% of the time the care is not optimal. And if you think about that and you say, okay, how do you address those 35% of cases, where the care is not optimal. We do that through a 3-step process. The first on the left is we do aggregate all the data and all the information from all those journal articles that are published. But we also have a bunch of proprietary sources of data, including our own scientific advisory board, our 1,400 clinicians on staff, and we make sure that we have what we believe to be the gold standard for clinical evidence that any oncologists in the country, any expert around the world would look at and agree with. From there, we take that and apply it to an individual case. So let's imagine that a patient, 48-year-old patient diagnosed with lung cancer presents to their oncologists. The way the process works is their oncologist submits to us Evolent through their EMR and the data that they have, their proposed care plan. We receive the care plan. [ If it's ] 1 of the 65% of cases that meet standard, it is automatically approved. If it's one of the 35% we look at it. If it's worthy of an intervention, meaning, gosh, there's a big opportunity to improve the quality for the patient, reduce the cost, we will go through this process in the middle of looking at the alternatives. In this case, there's 9 different alternatives. Average tumor has 100 mutations. It's very complicated, genetic profile, age, tumor mutation, et cetera, to figure out what is the right pathway. We look at first, of course, efficacy. We also look at toxicity. And after those things, we look at cost. And if in this example, the physician is not recommending [ path B or E ]. In this example, we will reach out to the physician in some way. We do -- we are delegated the utilization management capability, but only about 3% of the time do we actually deny a case and say that's not the right path. The vast majority of the time, we're using our influence model to partner with the physician, reach out to the physician peer-to-peer. And if it's a lung cancer issue, we will have a lung cancer specialist reach out to that physician, have a conversation. This evidence was published in the last 90 days. You may not have seen it, and we've had really good success at changing the practice pattern through that model. And you can see on the far right, what happens in health care, interestingly is when you improve quality, which we believe we do through focusing on pathways, the cost also comes down. Not 100% of the time, but on average. Sometimes it's more expensive. But it does on average, is lower cost when the pathway, Level 1 pathway is followed. So in this example, from one patient, engaging the physician, convincing the physician is an alternative model, maybe different therapeutic in this example, and they adopt that different therapeutic model. The cost is significantly lower to the plan. It's lower to the patient and the quality is also higher. So that's really at the heart of what we do. We do that across cardiology and musculoskeletal. Tell you a little bit about how our customers have grown with this. I'm obviously biased. It will take my word for it. But if you look at our customers and how they've grown with us, I think it's a good indicator that they have trust in what we're doing and that we're delivering value to them. Here are 3 good examples. Those of you who know Evolent have seen the first 2 examples. We added Humana here. About a year ago, we announced a significant expansion of our relationship with Humana, which rolled in across 2023. You can see that represented here. And I think all 3 of these case studies, in my view, communicate the same thing, which is if we can begin working with a plan, we can demonstrate that we're improving quality for the patient and we're reducing costs for the health plan. And there are not that many win-wins in health care, as we know. And we believe the model we have is doing that. The other message that we like to share today is that if you look at the penetration rate amongst our top 10 customers, the 3 that you saw on the last page, plus our other 7 largest customers is reasonably small. It's about 3% penetration on a revenue basis or about 14% penetration on a product life basis. This data is from a couple of months ago and has not materially changed despite the new announcements we've made across the last year. And so, I think this just gives you a sense for the kind of running room we have within our existing customer base. A couple more slides here. Just in terms of our growth model, we have, I think, a proven algorithm for how we're growing the business. And one way we grow the business is add unique logos. We announced today a new logo, [ as in ] for instance, or yesterday through the -- this presentation, a new partner. We have 72 of those today. There are a couple of hundred, I think, target customers in the market. Second way we can grow is by adding members within a plan. So let's use Florida Blue, as an example, who's a great partner of ours. We work with their Medicare Advantage members. We don't do any work with their commercial members. So if we added a product or a contract around their commercial line of business, that number would go up. And the third category is around products, so products per customer. When we started reporting on this metric last year, I think the number was at 1.6 or something like that. It's moved up across the year to 1.9. If you multiply the unique members times the number of products, that gives you product numbers. So 41.7x1.9 is 78. And that is another metric that if you track us, you'll see, which is our unique product members. We also track the number of cases that we have in -- around some of our musculoskeletal work in our end-of-life work. And the fourth and final way we can grow is to add what we call the Performance Suite. We have 2 revenue models, a tech and services model, which is what it sounds like, technology and services and has 50% type gross margins. The other model is a risk-bearing model, cap intended model. and that's called the Performance Suite. We have about 5% of our product members covered in the Performance Suite today. So if we have a customer that's using us for tech and services and upgrades, if you will, to Performance Suite, that's a fourth leg of growth. We have a bunch of examples across 2023, this type of growth, and we'll talk about a couple of those in a second. Finally, here before I pass it to John. Just a couple of business updates, kind of the only new information here in the presentation. As part of the 8-K last night, we did announce 2 new announcements, 2 new contracts, a partnership with a new logo or a regional Medicaid plan of 300,000 lives. It's the first time we have bundled together multiple of our products into a large-scale integrated offering post the NIA acquisition about a year ago. And so that's a big moment, I think, for the company. And then the second new contract is adding NIA to an existing Evolent relationship that we had in the Northeast. In addition to those new announcements, we did also roll out our MSK services to Centene, which was something we announced -- planned to do when we announced that deal that has happened. We had previously announced Florida Blue. Cardiology was a deal that we had signed that went live on January 1st, and then we're on track for our cardiology go live with Molina. In terms of profitability, I'll let John go into a little bit more detail here. But as you can see on the slide, we feel like everything we're seeing is within expectations is a little bit different than perhaps some of the plans or others have shared, but we have largely seen consistent utilization with our expectations. And similarly, our redetermination number has been right in line with our expectations. And then related, we get a lot of questions about our Performance Suite. For those of you, who don't know us, our Performance Suite has a 3-year margin maturation path. We continue to release information every quarter or 2 about how that's trending, and it continues to trend well is the short answer. We're on target there, and we're on target for our $300 million EBITDA number. And then finally, just in terms of capital, I'd say, we're slightly ahead of plan on deleveraging. But given the strong cash flow in the year, we did convert -- completed a convert in December, which I think brings down our cash interest significantly. And I mentioned that we are on track for our $120 million of cash flow for the year. So I would say just in general, we feel really good about the business going into the year. We've obviously reiterated guidance for this year and also the $300 million target towards the end of '24. And with that, I'll pass it to John.

Okay. All right. Seth talked a bit about the market that we're in, how we're creating value and how we're growing the business. We'll spend the next couple of minutes talking about how we translate that growth into EBITDA and cash flow and then what we do with that cash. We think of the products that we take to market in 2 categories. And we like having this balanced business, where about 75% of our earnings we estimate during 2023 were derived from admin fee style relationships we call technology and services. Average PMPM there is $0.37, with an average gross margin of around [ $0.50 sorry 50% ]. The rest of our business is the capitation style deal in the Performance Suite, where you have a significantly higher revenue PMPM and target flow-through margins of between 12% and 18%. Now of course, that 12% and 18% on a much higher dollar revenue figure means that the Performance Suite profit pool for us in terms of the profit opportunity is much larger, as you see on this page, with close to $2.5 per member per month in the Performance Suite versus maybe $0.18 per member per month in the technology and services suite. Within the Performance Suite, this capitation model, we see a year-to-year progression, as we launch new contracts, where we see profitability between 4% and 6% in the first year between 8% and 12% in the second year and at maturity in the third year and beyond, profitability of between 12% and 18%. And this is supported now by 5 years of data from launches since we acquired this business in 2019. The launches that we've done over the last couple of years have been on track with this general profit maturation curve. It's an important contribution towards our $300 million ending this year target for adjusted EBITDA. We articulated in May of last year, the key steps to -- from where we were at the time to our target of exiting this year at $300 million. The first is fully incorporating the acquired EBITDA from acquisitions that we made in 2022 and the very beginning of '23. The second is approximately $40 million to $50 million from the maturation of over $300 million of newly launched Performance Suite business. And the third is net new growth between the beginning of last year and the end of this year, so that's 24 months of growth, contributing about $50 million of EBITDA towards that $300 million target. And then, where we stand today, you see a lot of green on the page. We are on track on each of these metrics and feel good about our performance against each of them. On the capital allocation side, we've had 3 clear priorities for the last several years and reiterating them again today. The first is we use our cash to continue to invest in the core business. We believe that we have a significant moat in value-based specialty care based on our clinical depth and the breadth of relationships that we have. And we believe it is important to continue to invest in making those products leading edge in the market. We spent about $50 million in R&D last year, some was OpEx, some was capitalized, and that will grow over time, although not as fast as our revenue growth. Second, capital allocation priority is disciplined and accretive M&A. The NIA transaction that closed last January is a good example of this. We paid a very attractive EBITDA multiple for it, and it brought a breadth of specialties that accelerated our pipeline and lead to an incrementally differentiated platform for our health plan partners. Finally, we seek to achieve those first 2 priorities with a disciplined balance sheet. We typically talk about a soft cap on leverage of around 4x on a net basis. For example, when we closed into the NIA transaction, we had a 3.9x net leverage number with a clear path down to being under 2x by the end of this year. And as Seth noted, we're a little bit ahead of schedule on that metric. Finally, I'll close here, and then we'll leave some Q&A just by reiterating both our guidance for last year. You see on the page here, our $300 million target exiting this year and then a longer-term target beyond this year of continuing to grow adjusted EBITDA at 20% plus for several years to come here. So with that, I will...

Great. So maybe I'll start with the first couple of questions. If anybody has a question, please raise your hand, and we'll be sure to get you a mic. But you've added so many new specialties in recent years, and you've outlined a really substantial addressable market. So I was hoping you could start with talking about the cross-sell opportunity. And how do you plan to move your customers from 1 to 2 products today to 6 over time?

Yes. I think -- look, I think the biggest piece, Anne, there is that health plans and patients would like to be treated kind of as a holistic human experience and a condition versus somebody that is getting reviewed around silos. And historically, whether the companies we've acquired or the way that the markets work, there might be a radiology benefit management over here and a genetic benefit management over there. And the way we're moving is to actually integrate those things such that when a patient and a family is dealing with a diagnosis of -- a cardiovascular diagnosis that the imaging and the genetics and the entire condition are treated holistically, reduces friction for the physician, for the patient, I think it's just the right way to do health care. And I think our customers see that. And so, I think clinically, it's the right thing to do, Anne. And I think that's going to be part of the answer. I think the other part of the answer just at a practical level is our customers prefer to work with fewer vendors. They don't want to have 5 different partners. So to the extent we can do more with them. If we can have all 6 products with them, that's easier than having 3 vendors doing 2 each or 3 partners doing 2 each. And so, I think there's a couple of different tailwinds clinically and kind of from a contracting perspective that should help us. And we've got the account management team set up to run at that.

How quickly can you scale towards those 6 because I feel like that probably takes a bit of time.

It does take time. I mean, I think the pace we've been at going from 1.6 to 1.9 across the last 12 months is a good trajectory. And if we continue to move in that direction, that will -- that will get us in a much better place over time. I don't think it will [ ever be 6 ] because there's certain dynamics in certain markets, but I think we're kind of going to continue trending at that rate.

Great. And then you announced 2 new partnerships this week. Can you just help us understand maybe some of the math around PMPM and lives just that we can understand for our models?

Yes. So the first, we mentioned 300,000 Medicaid members, multiple specialties there. And then the second is adding a specialty to an existing partner, about 200,000 lives with that partner. Between the 2, you're looking at revenues of $5 million to $7 million once they're fully rolled out, and we expect that to be completed probably in the middle of this year.

Great. Thanks. You've taken a little bit of a different approach to value-based care versus other players that a lot of us look at, you've really narrowly focused on high-cost specialties. So can you talk about why focusing on specialty care management is so attractive? And how can it meaningfully bend the cost curve?

Yes. I think that if you talk to most of our customers right now, Anne, the biggest thing I hear is, hey, one, risk adjustment pressure is real, right? And 2, we've done a lot on the primary care side already. And 3, utilization is going up. And so, I think that leaves you with not many options on how to manage cost. But one of the ones that's left is the utilization of these really complicated cases, right? And a lot of the cost sits around oncology, cardiology, et cetera. So I think when you put it in that frame, there's a lot of interest in using the service that we have to help reduce the cost of care in those areas, and again, it's sort of one of the last bastions of opportunity left. Last thing I'd say is one of the things we do that others don't do in the specialty side is take a capitation model through our Performance Suite. And I think particularly in this era, where plans are under pressure, that's attractive to be able to guarantee a savings.

And then just maybe to that point, can you talk about the competitive landscape? I mean, there's kind of very few kind of public players that we look at they are kind of or structured the way that you are around specialty. So who are you up against? Who are you kind of winning against or losing against in the market? And does stacking all of these different specialties together, you talked about kind of wanting to deal with one vendor, does that give you a competitive advantage?

Yes. It's a great question. I mean, I would put the competitive landscape, Anne, into 2 big buckets. One are kind of broad scaled organizations. And there are a couple -- there are 2 others of those and us really. And then there are a number of smaller companies that may be just doing one specialty. And I think the dynamic I would describe is that on average, the plans would prefer to work with a more scaled entity. So to your point, they don't have to deal with lots of different partners and you can holistically deal with patients and fewer handoffs. So I think that trend is to our advantage. And then, I think the other thing, I would note, Anne, is that the capital required that we've had to deploy, and our other 2 larger scale competitors have had to deploy to get to a place of scale, I think does create a bit of a moat as well for the kind of work we do. And it also creates a scale -- a level of scale, where we need to do something like AI, which we're investing heavily in right now. We have a big base upon which to deploy that AI versus just one small. So I think the sort of broad and deep model is the right model. And then as to the competitive landscape between the other 2 scale partner -- competitors and us, we tend to be very different actually. We're much more clinically oriented in nature. We're much more focused on the government program segment, very focused on alternative payment models and provider engagement given our heritage.

And maybe to that point, one thing I thought that was really helpful at your recent Analyst Day was you outlined how you get provider by kind of by leveraging your clinicians. So can you talk about how you balance using technology to drive cost savings with maybe some of that provider intuition?

Yes, absolutely. So the goal, right, is to be fast when we can be fast. Seth mentioned that when something comes through for an authorization request, for example, and it's on pathway, we want to get that automatically approved. We want to make that as streamlined as possible for the practice. And so, meeting them where they are in that way is really important. And that's the sort of area, where we're first interested in deploying AI, for example, right? What can we take out of the equation from an administrative perspective that's just friction right now. But then you got -- also got to be slow [ to slow things ]. So if something is a high-value intervention, where we believe the data indicates that is a better path than what the physician is currently suggesting to prescribe, then we'll seek to do a specialist matched peer-to-peer, right? And so, if it's a lung cancer case, we'll have a specialist in lung cancer, make that phone call and do a real -- seem to be collegial, right? Here's what I see in the data. And so, taking as much of the adversarial relationship that so often exists between providers and payers out of the equation and making it provider led in that way.

That's really helpful. And you touched on AI, and that's something that everybody has been having kind of top of mind recently, especially [indiscernible] health care tech companies. Can you just talk quickly about how you use AI, both maybe internally for your own efficiencies and then also within your product suite?