LifeStance Health Group, Inc. (LFST) Earnings Call Transcript & Summary

All right. I guess we will get started here. I'm Jailendra Singh, Health Care Technology and Distribution Analyst at Credit Suisse. Thanks, everyone, for joining us for this session. Next up, we have Michael Lester, CEO; Mike Bruff, CFO; and Monica Prokocki, VP of IR of LifeStance Health. LifeStance is one of the nation's largest providers of virtual and in-person outpatient mental health care. We are doing this session as a fireside chat format. I have some prepared questions, which I plan to cover. But if anyone from the audience has a question, please e-mail them to me at [email protected]. Michael and Mike, thank you so much for doing this, really appreciate it. You guys reported last night. Maybe to begin, can you provide quick highlights from the quarter and your expectations for rest of 2021 and maybe next year?

Sure. Thank you for having us today. So in Q3, we saw strong execution. We added 400 net new clinicians for the quarter. We opened 29 de novo centers and completed 6 acquisitions. And that brought our footprint of clinicians to 4,375 across 500 centers in 31 states. And financially, we delivered ahead of our expectations, including revenue of $174 million, which was up 70% year-over-year and adjusted EBITDA of $11 million. For Q4, our guidance was consistent with prior expectations, except that we now expect clinicians to take a little bit more time off in the quarter. We've recently been intentional about engaging more with our clinicians. And across our forums for engagement, one clear theme emerged most of all from our clinician feedback. And many are now feeling this impact of COVID fatigue. It's a real thing. And we're seeing it across all of our clinicians. I think health care in general is seeing it across all of health care. And there's still a macro debate going on across the country about how we're going to be redefining work. So as a company focused on mental health, allowing for our employees, our clinicians to have a flexible schedule is really part of the strategy and very aligned with our mission. But to this end, many employees are planning to take more time off than usual during the holidays given the very difficult year that they've experienced, and we've adjusted our projections accordingly. So we expect our full year 2021 revenue within the $668 million to $678 million previous guidance but toward the lower end of that. Our previous full year guidance for Center Margin of $198 million to $208 million and adjusted EBITDA of $47 million to $53 million remain unchanged. So we remain very proud and confident in our ability to achieve growth in 2021 in excess of 75%. Taking a quick look ahead at 2022. We're in the midst of our planning process. We're considering strategic financial and operational factors as well as continuing to monitor the broader market dynamics as we finalize that plan. So we haven't provided formal 2022 guidance yet and will not be doing that today. However, we preliminarily expect 2022 growth rate in the low 30s and adjusted EBITDA dollar growth rate on pace with or slightly greater than revenue. So this assumes retention rates remain relatively consistent with where they are today. And given the uncertainty in the broader labor markets, we believe this is a pragmatic assumption for now. So we'll move forward making the infrastructure and talent investments necessary to execute on our long-term strategy and just continue to be very, very focused on our clinicians, our clinician retention and controlling what we can control today. We firmly believe that we have a very unique, hybrid, differentiated business model that works very well in the mental health space.

Great. Great. That makes sense. Maybe if I can follow up on a few things there, kind of digging a little bit into the lower clinician retention rate, which now you expect that to be kind of at a level similar to what you are seeing now for next year as well. Help us understand what is driving that, how your clinician retention rates have been trending recently and how do those trends compare with the broader industry? Just help us understand the trends there.

Sure. So in our IPO roadshow, our historical retention rate had been around 87%. And our retention rate was at 80% annualized in Q3, which was consistent with our expectations for the back half of the year and what we disclosed in Q2. So this labor market dynamic presents a more difficult operating environment. So we're focused on doing everything that's within our control to drive strong results and be the employer of choice for clinicians. So overall, we're very confident in our ability to grow. We continue to add to our clinician base. We had 400 net adds in the quarter, one of the best quarters in the history of the company despite the broader labor market dynamics. So we feel like we're doing better than our peers. I think we're doing better than health care in general. But the pandemic fatigue, you read about the era of exhaustion in The New York Times last week. You read about the great resignation. It's a real thing, and I think there is a large macro debate continuing to be ongoing in the country about what the workplace is going to look like long term. And we're participating in that. We don't know what the right answer is right now, but we are just laser-focused on clinician retention and making sure we are the destination of choice for mental health clinicians.

And is this like softness in the clinician retention, is that across the entire clinician base, across all provider types or geographies or is it tied to some specific groups or legacy sites?

Yes. It's surprisingly very consistent across every way we cut it, whether you look at acquisitions that we've made versus de novos, whether you look at different age groups, whether you look at psychiatrists versus nurse practitioners versus psychologists or therapists, it's very consistent across all of those metrics.

Okay. So at this point, it's really hard to say like whether or how much of that is like just a kind of structural change in the business model versus like a temporary headwind?

Yes. So I don't think we know the answer to that yet. I don't think anybody really knows the answer to that. That's part of the macro debate that's going to be ongoing. We just don't know whether it's temporary or not. But I can tell you that we're using a lot of different tools to engage and be very, very high touch with our clinicians to understand what the stressors are in their life, what they want to be a happily employed LifeStance clinician.

Yes. That's what I was going to get to my next question. I mean, what tools and technologies, what other things you can do to really offset this macro headwind, which clearly beyond your control? So what else you can do here so that maybe doing some kind of partnerships or doing some kind of vendor partnerships or just help us understand what you can do there.

Yes. So some of the simple things that we've done. So we've implemented a very systematic way of identifying at-risk clinicians and working to assess and address what their needs are. Our management team reviews those metrics on a very routine basis. Second, in the case where it's compassion fatigue or burnout are identified, we have a peer-to-peer support group offered through a national clinical team. The third is 100% of our clinicians have been assigned a champion within the company who have initiated routine one-on-one communications schedules to ensure that we're giving them the opportunity to be heard. And finally, we're actually trying to live our mission. I mean, clinicians are asking to take additional time off at the holidays. We're supporting this and promoting self-care and well-being. While the other, I think, unique things that we've done is, as planned pre-IPO, in 2022, we're rolling out our employee equity program. What's a little bit unique about this is the vast majority of our employees are clinicians, so all clinicians are eligible to participate in our equity program, assuming they're a W-2 full-time employed clinician. And we've rolled that out. We'll be starting to do grants that have 4-year vesting to them in early January. And it has been extraordinarily well received. Clinicians feel like they have a chance to be an owner in LifeStance, and they have a chance to build a significant amount of wealth over a long period of time. So we will be doing annual grants as planned pre-IPO.

Okay. And one last thing on the quarter before we go into high-level discussion on the business model and background. Another thing which came up last night was investments in business kind of expected to continue next year. Maybe I think you touched upon some of those investments, but just how you think about ROI on those investment, the key focus areas we should be aware of?

Sure. Mike, can you address that?

Sure, Mike. Thanks. And again, thanks for having us today. It's a pleasure to be here. Yes, we had a fairly significant set of investments in 2020 and 2021 through 2023 to, a, build our company as a public company. We had a lot of infrastructure that we needed to build out there. Number two, build out a corporate structure and divisional structure that can handle the growth trajectory that we're on because it is significant. Growing 75%-plus this year is significant. So we need to build out that type of infrastructure. So those are things that we had already contemplated on a certain trajectory. And those investments are ongoing. One of the key areas that differentiates LifeStance from other peers perhaps in our group is the fact that we have very innovative, digital and tech-enabled services that really speak to our ability to have a hybrid model, both in-person and virtual. And it offers clinicians and patients the opportunity to move back and forth seamlessly between the 2 and engage really across multiple channels. It really makes things incredibly flexible. So those investments were stepped up here in 2021 from 2020, and we're going to continue to invest in that area. I think the inflection in investments came coming out of our second quarter earnings call when we said that we were going to add $10 million of investments in the back half of 2021 related really to 2 things. First, it's just the inflection in clinician growth is greater than we thought, which is a good problem to have, but we needed to catch up to that support. And then the other was deploying resources around business operations, operational excellence and looking for opportunities to drive leverage, quite frankly. And those investments, the $10 million in the back half of the year, they're ongoing. They're going to remain as part of our structure going forward into 2022 as well. But these are all initiatives to support public company and really drive the growth initiatives as we remain pretty young in our journey.

Okay. Yes. Let's switch gears to kind of taking a step back and understand the key differentiation in your business model. Maybe talk about at a high level overview of how you guys create a customized care plan for people struggling with mental health, clearly, one of the biggest crises right now out of the country, the whole world is going through just to help us understand your strategy and business plan there.

Sure. So every new patient has a full evaluation with one of our licensed clinicians. Again, we W-2 employ psychiatrists, psychiatric nurse practitioners, psychologists and licensed therapists. That evaluation is composed of obtaining a full history, an evaluation of current symptoms, past psychiatric history, current and past medical history, family history and psychosocial history, including any trauma or abuse. So after the initial evaluation, which can take up to 2 to 3 sessions. And for children, meeting with parents and guardian or their guardian as part of the evaluation process, the licensed clinician will then discuss with the patient, treat with the patient a very specific treatment plan based on their individual diagnosis and needs. So the diagnosis is based on DSM-5, and the treatment plan is based on evidence-based practices. At times, this may necessitate medication and therapy in combination. And that's where our model is also differentiated in that we provide a continuum of care, again, from psychiatry all the way through psychotherapy. So patients may initially see a license psychiatric clinician who may recommend a referral to one of our in-house psychotherapists for psychotherapy or vice versa. So patients can come in through seeking medication management or they can come in through seeking psychotherapy and be referred to either if the need necessitates that. So that's really the way the care plan is initially developed.

It makes sense. So as we think about, I mean, clearly, I think most of us can agree that just because COVID is over soon, hopefully, fingers crossed, mental health crises is not going away. It's just unfortunate. So how do you think about the TAM in your business model? How do you size it? What are the growth drivers in the market for you in a post-COVID environment?

Sure. Yes. COVID, it's really interesting. COVID, there was a mental health crisis pre-COVID. COVID just sort of help shine a light on it. We estimate the outpatient mental health care market is $116 billion and growing double digits, should be $215 billion in 2025. And this is an estimate, but this estimate is an output of a detailed bottoms-up consulting work that we did based on market spend, patient population by mental health condition type and patient demographics. So we've sort of segmented the TAM of the outpatient mental health space to be $88 billion of currently served, diagnosed and patients receiving mental health services. $22 billion of TAM is currently underserved, diagnosed and receiving partial or no mental health services. And then $7 billion of the TAM is currently unaware, so patients undiagnosed with no mental health services. And we use sources. We have proven claims of 105 million-plus patient claims and the SAMHSA's National Expenditures of Mental Health and Substance Use Disorders report. So the real growth drivers in the TAM are treatment and utilization rates. So as awareness improves and mental health conditions are destigmatized, that's going to increase utilization rates. We also expect reimbursement to improve over time given the tremendous need and the growing attention around the impact of the mental health crisis as well as the fact that this space has been woefully under-reimbursed in the past due to fragmented nature of the market and lack of provider leverage. We're also seeing payers recognize that good mental health care actually lowers overall medical care costs. So cardiovascular care costs go down, diabetic care costs go down. So while mental health utilization might go up, overall patient care costs are going to go down.

Okay. And maybe spend some time on how does your revenue model work? Do you generate like per visit fees from both telehealth and in-person visits from mostly in-network payers?

Yes. That's right. Our revenue is primarily driven from commercial in-network fee-for-service reimbursement rates. And the same is true whether the visits take place virtually or in-person. With our hybrid model, we can offer both and transition seamlessly between the 2. And in the vast majority of our contracts, we have rate parity. So we're agnostic as to the point-of-care location.

Okay. So as you think about various stakeholders you deal with like patients, clinicians, payers, PCPs, are you seeing, like which stakeholders you're seeing like more support for this kind of hybrid in-person virtual mental health service and where you see most pushback.

Yes. We see broad support for the model, and that's part of what really differentiates us. Our model really positively transforms mental health for all the stakeholders. So for patients, we offer convenient, affordable, high-quality care, both in-person or virtually. We delivered over 2 million visits last year alone. For the clinicians, we're able to provide a best-in-class work environment with the infrastructure and technology that allow them to focus on patient care and not running a practice. And for the payers, we not only reduce, as I just mentioned, the overall medical cost for their members, we're able to demonstrate data-driven outcomes for them. And for primary care physicians, we offer a national network for referrals. And in some cases, we actually co-locate our clinicians inside large primary care group practices. So we find that all of our stakeholders are supported by the hybrid model as it helps increase access to high quality affordable mental health care. And we believe in this hybrid model. We don't believe in a 100% virtual model. It's important to understand that mental health patients and mental health clinicians both want a combination of in-person and virtual visits. So we think that the hybrid model is really the future of health care delivery. Everybody was sort of forced to get a taste of how it worked because of COVID and everybody woke up and said, this is really convenient. I like this. I just don't want to do it all of the time. I want the combination of both. So we think we're creating a gold standard patient care and clinician experience, both in-person and virtually.

Okay. But looking at your patient volume, how much is referred by your primary care partners versus like reached directly by your customers' locations?

Sure. So it's about a 50-50 mix. So we get about 50% of our patients directly referred from primary care physicians. You have to recognize 40% to 50% of our primary care physician's patient population today has a mental health diagnosis. So we've built relationships with over 2,100 primary care physicians across the country that refer patients to us. And our relationships, we think that's a win-win because we're able to provide high-quality mental health care for their patients, lower their overall cost and track outcomes. And we get great feedback from primary care physicians that we're constantly giving them outcomes and data on their patients. We keep them informed of the status of their patient. So our established relationships within our national network of primary care physicians remains healthy. It's an important source. And our overall patient acquisition cost is virtually nothing due to these sticky relationships. It's also important to realize that there's no economic relationship with any referral source that we have. The other 50% of the patients, mental health patients tend to go online to find their therapist or psychologist more so than somebody going online looking for a cardiologist or a dermatologist as an example. So the other 50% is basically self-referred or they're going to their payer looking at the list of providers from their payers and then contacting us online that way.

Got it. Okay. I might not have the latest figure here, but I think in one of the filing you mentioned like some more than 50 acquisitions of existing practices. Were those all related to mental health clinicians? And what is your strategy on the telehealth component of your business? Is it more focused on organic development or is it like, how does that, do you partner with somebody?

Sure. So as of Q3, we've actually done 70 acquisitions to date since we started the company. All of these are related to mental health clinicians. And once we do an acquisition, during the integration, we convert all acquired clinicians onto our technology platform. So we have all 4,400 clinicians on the same EMR. And our strategy to date for virtual services has been all organic growth, deploying our telehealth platform within our existing clinician base.

Okay. And just going back to the clinicians, I mean, remind us like how are they compensated? Are they like salaried, hourly paid, per visit? And are majority of your clinicians like full-time employees or you have some part-time employees as well?

Yes. The majority of our clinicians are W-2 employed full-time clinicians and they're paid a fixed fee per visit. So they're not salaried.

And does every clinician perform both telehealth and in-person service or you have kind of certain clinician dedicated for doing only telehealth versus in-person?

No. Everybody does both.

Okay. I think you guys have also called out having a partner with about 2,100 primary care physicians who act as referral base to your mental health service. Maybe help us understand that model in terms of reimbursement and how much data exchange you guys have with those PCPs when you do partnerships?

Yes. So we partner with them, though, it's not a contractual relationship. Again, with 40% to 50% of a primary care's patient population having a mental health diagnosis, they're desperate to find somebody to refer their patients to. Typically, it's a 6-month wait to see a psychiatrist today. So particularly in the large primary care group practices where we are physically co-located there, they view that as a huge benefit. They can walk their patient down the hall, get them seen that day versus referring them out and not really knowing whether their patient was ever seen by a mental health clinician. So again, we get about half of our referrals from there. There's no economic relationship between any of our referral sources.

Okay. Just want to get your thoughts on the, high-level thoughts on the competitive landscape. Clearly, mental health has seen a lot of new entrants in the marketplace. Every company has a different approach. Like some are going directly to employers, some to payers, some direct to consumers. And we have companies like Teladoc and Ginger, Lyra, TalkSpace. And then we have companies like Calm, Headspace. What do you think about the evolving landscape? Do you think we have, every company probably can be a winner here or you think there'll be winners and losers 3 to 5 years down the road? Just curious how you think about the mental health landscape evolving over the next 3 to 5 years.

Sure. So we think our differentiated platform is very different than what a lot of the competitors do. And I think they say imitation is the sincerest form of flattery. There's a lot of companies out there trying to become LifeStance today. We believe that we've built a unique model that's highly differentiated versus other alternative models. Our hybrid care delivery model of in-person or virtual visits is uniquely built to meet the care needs of a higher acuity patient versus what we would call the worried well, which there's definitely a need to take care of those patients in a way. But this higher acuity, the hybrid model with a higher acuity patient just doesn't work in virtual-only models. So that's why we think that model is highly differentiated. One of the key competitors when we operate on a national scale, none can really pair the consistently high level of care with the convenience of in-person visits that we can. Also the fact that we have a multidisciplinary team offering a comprehensive suite of services differentiates us. So again, we have psychiatrists and therapists that can cross-refer and take care of a good continuum of care of that patient population. And our breadth of in-network commercial insurance coverage is unparalleled. We've said we have over 250 in-network contracts today. And that goes along with a deep relationship with these 2,100 primary care physicians.

Okay. Thinking about the growth strategy going forward as you scale the business, clearly, very important there. I believe you are in more than 30 states right now. Anything you can share in terms of plans and time line for future expansion in new states and how you want to go about there?

Sure. So as you said, we currently operate in 31 states. We have a near-term plan to be fully operational in 6 more with a long-term growth plan to deliver services in all 50 states through either in-person or virtual care.

Okay. Then any, like when you go about kind of picking the markets or geographies, I mean, anything in particular you do, guys, to evaluate like priority area to focus on when you think about the markets you want to expand into?

Yes. So we don't disclose our specific expansion targets or locations for competitive reasons, but we have a strong pipeline with a proprietary database of clinician practices that represent over 4,000 group practices, which are we view as acquisition opportunities. And the impact of our continued acquisitions is to bring on more clinicians, expand our reach, enabling us to deliver on our mission of increasing access to high-quality, affordable, personalized mental health care services. We're basically going to the population centers. I'm not anxious to run off to South Dakota or Montana, although ultimately, we'll probably be there one way or another virtually or in-person.

Right. The other thing, like we have seen a lot of focus on risk-based model, like risk-sharing arrangements, like value-based care. You guys have talked about a long-term goal of finding this integrated care model where mental health clinicians are embedded into primary care centers. Help us understand that kind of long-term vision and like any initial tractions you have with payers where you think you have more interest in those kind of risk-sharing arrangements?

Sure. So it's early days in the behavioral health space and value-based compensation, but we do believe in a fully integrated care model. Nobody is really doing that in the for-profit environment. It's only been done in academia. And the reason being, it's very difficult to measure. So we have 2 large pilots going on with a large payer. And if you think about it, really the only way you can do this and measure it is with a payer because the payer is the only one that gets to see all claims paid. So we're excited about these pilots. We think they'll run about 12 months. And we think at the end of the 12 months, we'll have really good data demonstrating that good mental health care does, in fact, lower overall medical care costs.

Okay. Just quickly on the generally mental health population, I mean, the population you're dealing with is very kind of sensitive population. You have to be careful in terms of various, I mean, not only clinical but also like from patient disclosures, HIPAA and all. Just curious like about your, how you gather and use data for analytics and AI and any other kind of extra things you do to better take care of this patient beyond just clinical focus?

Yes. So we're in the early stages. We track outcomes. By the end of 2022, we'll have more outcomes data than anybody in the country because we have so many clinicians on the same electronic health platform. And we think that, that's going to be very valuable. We've shared some data with some payers along the way. And the bar is pretty low in the mental health care space because it's such a highly fragmented business. So when we show data to payers, their eyes sort of roll back in their head and say, this is fantastic. How can we work together and start building this into some type of value-based concept. So we're very focused on outcomes. And again, by having so many clinicians on the same electronic health record versus this very, very, very fragmented industry, we think, is another advantage and differentiates our model.

Okay. And then one last thing I want to ask about is your balance sheet. Clearly, you rely on acquisitions to expand your mental health clinician network. How would you describe your financial flexibility to engage in those transactions?

Mike, do you want to talk about that?

Yes, sure. I think the opening statement to this would be that we use multiple levers to grow both organic and inorganic. And in fact, our clinicians, our net clinician growth this year has been predominantly through organic measures. But we do use multiple levers, organic and inorganic. We're in a very strong position to continue to deploy capital across those levers. We've got $212 million in cash and $157 million in long-term net debt, so very good position. We've been very disciplined in how we deploy capital. Our organic model with the de novos generate a very attractive return in a fairly short period of time. And our inorganic as we go the acquisition route, we see still a return well above the cost of capital of that deployment of capital. So we're getting good returns, but we are still of the, not but, and we remain very focused on a growth mindset because we're kind of less than 1% of the total market here. And we're able to kind of walk and chew gum at the same time, which is be able to generate growth and return. And that leads to adjusted EBITDA dollars as being positive. But because of the attractive end market, we're reinvesting those dollars in future growth.

Okay. All right. Before we wrap up, anything else Michael, Mike, you guys want to touch upon before we kind of close the session.

No. We appreciate your time and the opportunity.

Thank you so much. Thanks, guys, for your participation and thanks everybody for joining here. Thank you.

Thank you.

Bye.

Bye.