Ontrak, Inc. (OTRKQ) Earnings Call Transcript & Summary

Hello, everyone. I'm Jailendra Singh, Healthcare Technology and Distribution Analyst at Crédit Suisse. Thanks, everyone, for joining us. Next up, we have Ontrak. From the company, we have Terren Peizer, Founder, Chairman and CEO; Curtis Medeiros, President and CEO; Brandon LaVerne, CFO. The company provides access to affordable and effective care, thereby improving health and reducing cost of care for people who suffer from the medical consequences of behavioral health conditions, helping these people and their families achieve and maintain better lives. Curt will begin with a quick 20, 25 minutes presentation. We will then open the line for Q&A. With that, Curt, over to you.

Thank you so much, and I'll try to make it quicker than that because we're really excited about getting to answer questions. I'm just trying to click here, make sure I can -- I'm not going to read the forward-looking statement, but I think most of this audience probably knows that by heart. I wanted to start by talking about, "We are in a crisis." And I know most folks on the phone are probably familiar with what's going on. And in the post-COVID world, we're seeing and McKinsey has projected that there will be an additional $100 billion to $140 billion in spending across the behavioral and physical health services in 2020 and beyond. And this is important because part of the group that we go after in terms of identifying and engaging with our health plan partners is a high cost group of individuals that have multiple chronic diseases and have unaddressed behavioral health conditions. And Milliman, in their report in August, has actually identified this group of being about 5.7% of the total population, but actually accounted for 44% of total health care costs, and so a significant opportunity to address the behavioral quotient of their overall health and drive down health care costs for the system. At Ontrak, we do this through identifying, engaging and then driving through treatment in collaboration with behavioral health care providers across 30 states in Washington, D.C., with some of the largest health plans in the United States. And we do this through a combination of leveraging proprietary technology and human touch to build trust and be able to engage people to take care of themselves, both in their physical conditions as well as their behavioral conditions in a lasting and proactive way. We've seen revenue and enrollment growth, far in excess of 100% in the coming years, and we expect that to continue as we move forward. How do we do this? We actually intake data from our payer clients broadly across the population and run a proprietary set of algorithms that allow us to not only identify individuals that have diagnosed behavioral health conditions but also use predictive algorithms to understand, who will have the behavioral health conditions and impute the presence of diagnosis, even if the diagnosis code is not present in a claim. And why is this important? It's really important for a couple of different reasons. Behavioral health data is not always broadly shared. And so even though someone might have a behavioral health condition, they might be unidentifiable by current algorithms within the payer community. But also when people are switching plans, even if they had interaction with the behavioral health system in the past, their current claim might not have access to that data. So being able to identify and predict individuals who have conditions that are not getting the appropriate treatment, allow us to engage a whole set of individuals that our health plan partners have not been able to engage. We then put them through a program, leveraging our proprietary approach and evidence-based treatment program that engages them in small objectives that build trust with the individual because we demonstrate success and then we drive them into the appropriate behavioral health care, whether it's therapy or psychiatry to make sure that they can get the help they need. And unlike other programs, we don't simply drop them off at the behavioral provider. We actually continue to support them up to 12 months along their journey to make sure that the behavior change and addressing their behavioral health challenges is sustainable as we move forward. And engagement is part of the key. So I talked about our proprietary algorithms, which are unique. But a big part of what we do is build trust in a way that allows the members to move into the care that they need. We can guide them through that opportunity. And this is important because about 90% of the eligible population that we are engaging in our program are not touched by other health plan programs at all. Even though they will have comorbid heart disease, diabetes, heart failure or COPD, these are all folks that are targeted because they are high cost on the medical side, but the health plan has been unable to engage them because they are care avoidant. And because we are very good, world-class at building that trust and being able to help guide them through their behavioral health journey, we're very proud of a Net Promoter Score in the mid-to-high 70s that we see across our entire book of business. And this is important because it's indicative of how happy the members are with our services and how they engage in the program. And as a comparison, you can see that most health plans across the United States are not performing particularly well on these type of measures. So what does this all result in? So I talked about lasting behavior change, achieving behavior change goals, engaging in their behavioral health care as well as in their medical health care in a more proactive and appropriate way, but at the end of the day, we also deliver a significant return on investment for our clients. So as you can see here, we're engaging folks that have, on average, around $30,000 in health care spend in the prior 12 months. We're achieving across our book of business an average about 52% savings year-over-year. And when we look at that over a couple of years because the savings are sustainable, we see a return on investment above 3%, which is quite remarkable given the focus in the industry on trying to reduce total cost of care. Recently, Dr. Chester Ho from Health Alliance spoke publicly about our results with his plan and the opportunity that we have to expand. We're very proud of our ability to serve the Health Alliance members and to have the opportunity to actually grow what we're doing with Health Alliance, because we have been able to deliver and verify repeatable cost savings across their book of business. And what has this turned into? When you look across how we've grown our customer base, we've been able to sustainably deliver revenue growth in excess of 100%, which we will achieve in 2020, and we expect to continue this pattern in 2021 and beyond as we see the need for these types of services growing rapidly in the wake of COVID but also the opportunity to expand the population that we serve through diversifying our portfolio of interventions. So a little bit about that growth strategy, and we think about it pretty simply. One, we're just getting started with our existing customers. And so we have a huge opportunity to expand what we're doing across geographies and across lines of business. And we have been doing this over the last couple of years. But again, we feel like we're just at the beginning of this journey, increase the addressable market through new solutions, both in behavioral health as well as in severe chronic disease. And we're very confident that we can do this because, as we talked about earlier, we already address folks that have multiple chronic diseases and multiple behavioral health conditions across substance use disorder, anxiety and depression. And the opportunity to serve other aspects of those markets are familiar in terms of how we already engage, build trust and then drive the treatment on these individuals. We have been and we will continue to make investments in technology, both directly as well as through acquisition to not only drive efficiency in how we're delivering our current service but also to be able to connect better across the behavioral health system as we grow our portfolio of solutions that we are bringing to market. And then lastly, we have a bias towards aggressively pursuing acquisitions so we can accelerate our growth even faster. Just wanted to end with -- we're very excited about the future of where we are. Again, we talked about on our earnings call last week, looking at in excess of 100% growth on the revenue line as we move towards 2021. The market opportunity is there, our ability to differentiate and drive value for our customers are there, and we see this opportunity continuing to expand as we move forward. So that's all I had. Ready for Q&A.

Perfect. Yes. This is really helpful. I have some prepared questions, which I plan to cover. But if any of the audience wants to ask any questions, please e-mail them to me at [email protected]. So this was a great presentation there. I want to follow up on your comment, and there was a comment on your slide deck as well, like, how you use AI and data analytics to identify, engage and treat health plan members with all these behavioral health conditions. Can you elaborate more on that? And maybe give some examples on how you leverage those technologies?

Absolutely. So I spent a lot of time in this space even before Ontrak. And there's kind of 4 different ways that people are looking at leveraging advanced data analytics through AI methodologies in the space. So one, in the predominant way is actually looking at improving administrative processes. And this is not the business that we're in, but that's the overwhelming focus of the majority of how AI is being deployed in health care today. Second, and what we do, do and is part of what makes us special and differentiated, is being able to identify patterns in diagnosis and utilization that allows us to compute the presence of disease even when we might not have a diagnosis code. And in the presentation, I talked about why this is important, both because health care data is not always connected across all stakeholders. So everyone might not have access and so that imputation actually fills in a gap that exists in the person's record. But also as people switch plans, the ability to see that data is not always consistent either. And so that's a big part of the focus of our historical development. And we look at and review and optimize those things every single quarter to improve how we're identifying and coming up with new associations. One of the other things that we spend a lot of time on is looking at our performance of our program versus individuals' needs. And we do this across unstructured data that we use natural language processing on, to structure and analyze, to understand how can we further customize our engagement approach and our care pathways to meet the individual needs, to minimize people leaving the program and maximize our opportunity to drive positive outcomes.

That's helpful. A little -- want to follow up on the -- your business model. Looks like you have a pretty flexible business model. Maybe talk about the revenue mix and pricing structure? Are all your model like PMPM or PEPM kind of model? Maybe just case rates, shared savings. Just give us some flavor about the revenue mix and how your contracts are structured with the health plans?

Sure. And of course, this is evolving because as we continue to grow the mix of how this looks, but at a high level, in today's world, we have one contract that is in the shared savings, so I'll cover that first. And we actually prefer to do these type of contracts, because we're confident in our results. Part of the challenges, it requires our clients to question whether we can actually deliver those results or not. And so we're at the point where even the current contract we have is most likely not going to be a shared savings contract as we move into 2021, because the client is now -- fully believes that we have consistently delivered on the savings and doesn't want to share it with us anymore. So as we move forward, that part of it will be 0. The majority of our contracts today are in the per enrolled member per month structure. And so as you know, what that means is, based on our enrollment, we are charging and submitting on a monthly basis for who we're serving and that sort of continues as long as they persist in the program. And part of what we're very proud of is, even though our program is up to 12 months long, on average, we will have people in the program for around 8 months, just shy of 8 months, which is actually quite remarkable when you think about how difficult it is to engage this group. And then the fact that they are care avoidant, we get to keep them in the program. That's probably, again, in the ballpark of about 75% of our overall mix right now. 25% and growing is a case rate. And that's when we get paid upfront. We still recognize the revenue over the life of the 12-month program. So it's not accelerating revenue recognition. But what it does is it gives us cash upfront. If someone drops out, between the enrollment period in the first 6 months, there is a sort of pro-rated schedule by which we will reimburse some of that upfront case rate. But if we keep person -- the individual for 6 months and beyond, that's now 100% earned. And so this is also a structure that we really like, because it gives us flexibility to bring in more cash upfront, but also the ability to align the potential of the individual getting past the effective 6-month period and being able to keep more of the overall money.

Okay. So I was looking at your number, I mean, your guidance for this $82 million to $85 million versus $35 million last year. Do you think that -- I mean, clearly, COVID has been a tailwind for this business, unfortunately, even, but still -- I mean, pandemic, but still positive for you guys. But how should we think about the run rate going forward? Do you think majority of benefit you're seeing this year is sustainable and you grow from here? Or you think that once we have vaccine and things get back to normal environment, there could be some potential headwind? How do you think about the core run rate for the business?

Yes. So interestingly, although early in the year, when COVID first hit and people were more at home, there was a slight tailwind in terms of our ability to contact people and get them engaged in the program. But as the pandemic progressed, it actually became a significant headwind for us. So part of what we talked about last week, is because we are identifying high-cost individuals, and there is a bar that people have to be over, what we've seen, starting in the second quarter and persisting through the beginning of the third quarter, is actually lower utilization in health care, and this has been reported by many of the large payers in the United States, which has driven down the overall cost and so we've actually seen less people remaining above our hurdle rate for total cost of care to be included in our program. So despite that headwind, we've actually been able to do very well because we've continued to improve our overall enrollment rates, which at 20% across our book of business are actually pretty impressive compared to alternative programs in this space. But we see that headwind turning into a significant tailwind as utilization and spend returned back to normal, which, again, in the last couple of weeks, we've seen like UnitedHealthcare, say, they are starting to see things return back to normal. And we expect that in the first quarter and beyond, we will see more people qualifying at rates similar to what we've seen pre-pandemic in our outreach pool, which is the people that we can engage and get into the program will actually grow back to normal levels.

Okay. That's a fair point. So when we think about the repeat users on your platform, maybe any -- can you put any numbers around those? And what is your like member retention rate? I mean, any data you can provide around those things?

Sure. So let's start with the last point first. So in the last couple of quarters, we've seen sustainable levels of retention -- well, actually disenrollment rates just slightly shy of 9%. And again, we're very proud of those numbers, because anywhere from 30% to 50% of that number is related to people that lost health plan coverage. So when you think about having a pretty low disenrollment rate to begin with and then up to half of those people are disenrolling because of their health plan coverage has gone, it's a pretty low rate. You're talking about 4% to 6% of the people are actually choosing to leave the program, which is actually quite remarkable. So said a different way, like I said earlier, for a 12-month program, on average, we're seeing people stay just shy of 8 months. And some of the other approaches in the behavioral space and the anxiety and depression side of the coin, have 12-week programs where they are excited if they get 25% of the people to get halfway. So significantly longer program, significantly better retention, which to us is quite exciting. In terms of repeat users, I think what you're meaning and just to clarify is repeat engagement of the same user. Is that what you meant?

Guys will keep coming back to your platform? Yes. It's not like they use once and then they forget which happens in telemedicine very often, right? I mean, people use it once and then they just forget.

Yes -- no, and that's one of the things that we are very different than, I would say, the typical telemedicine provider because like I said before, we're not getting people into the program to the behavioral provider and dropping them off and leaving. We continue to support them throughout the entire length of the program even after they engage the appropriate behavioral provider, whether that's a therapist or a psychiatrist or both in certain circumstances. So when we think about repeat use, our care coaches, which are sort of the quarterback of the overall program are in constant communication, and we could see in that 8-month period, on average, between 30 to 40 different interactions with our health coaches. Now that doesn't count the e-mail communications or the text messaging. So in 2019 -- at the end of 2019, part of what we did was implement secure text messaging as a convenience feature, to make sure that we could maintain contact, we could schedule visits and we could deal with any issues that came up with a member where they might need our help. And now we see north of 70% of our membership using that on a regular basis. Those are things that we haven't even counted because the numbers at this point are so big. So between the asynchronous communication of the SMS and the e-mail and then the 20 to 40 care coach visits, in that, again, on average, 8-month period, we're seeing significant usage of the platform across the board.

Okay. And when you drive these engagement and retention, I mean, you talked about, I think on the website I saw, like, telephonic, video, e-mail, text, various ways, you use to drive engagement. Where do you see most success for this population in terms of driving more consumers in your platform?

In terms of having a meaningful experience where we're getting people to follow up on the things that they need to do, with this particular population, the main way to achieve that is still telephonically, and so it's convenient. But they also want to talk to someone. They want to discuss things with someone that has the expertise to guide them and reinforce what they are hearing from their behavioral provider. What we found with the texting and the e-mail, that's more of a convenience feature, right, to touch base, to schedule, to make sure people understand what's going on and what has or has not happened in follow-up. But in terms of the meaningful conversations to actually drive people forward to achieve their goals, it's still very telephonically dominated.

That's fair. So we were looking at your investor presentation. I mean, you talked about TAM of like $33 billion, $34 billion. And you said that like 20% of that enrollment is achievable. I mean maybe talk about that and where the majority would come from? And just why 20% is the right number? Just curious, like, how did you come up with that number?

Yes. So the 20% is based on our historical experience. So when we have looked at how our business is ramping, usually, what happens with a lot of new customers. We see engagement and enrollment rates that are slightly below 20% and then would ramp up to a steady state of 20%. As we've expanded into other areas, like Medicare Advantage, for example, with Cigna, we actually see rates that are significantly above that 20%. And so over the last handful of quarters, when we look across our entire book of business, despite ramps, despite the fact that we have a different mix between Medicaid, commercial and Medicare, we're actually achieving that 20%. So it's not based on an assumption. It's based on our actual performance across our book of business.

Okay. That's fair. I know before we started the live session, we were talking about the competitive landscape, like, you are the only pure-play in the space for this thing. But how do you -- what do you think about any views on competitive landscape, clearly, when I think about other players who are focused on behavioral health business or the telemedicine companies doing behavior health? Livongo had behavioral health offering. Even insurance companies are expanding into more mental health, behavior health. Optum bought this company AbleTo. Just curious, how -- where do you see your company fitting in the landscape? And who do you think are your real competitors, both public and private?

Sure. So in the longer term, I think you named some of the people that are trying to evolve to look at the space that we are in today. In terms of right now, there is not someone that our clients are hiring to do and solve the problems that we solve. Again, and that's that high-cost individual that has multiple chronic conditions and unaddressed behavioral health conditions. And part of what we see is our clients coming with feedback around digital applications alone are not moving the needle. There needs to be some combination of digital and human touch, even at the lower end to make sure that people are driving to sustainable outcomes. There are folks, and you mentioned, AbleTo, that focus on anxiety and depression. Whereas when we look at our book of business, we're looking at substance use disorder, anxiety and depression. And anytime we can have a broader reach that tends to be a successful approach with clients, because now they have to contract with less people to be able to cover the same population. So our biggest competitor right now is continuing to get the word out on what we can do and how we deliver results rather than an individual company that we're losing business to.

Fair point. Then on -- I want to talk about the -- your physician network -- provider network. Maybe spend some time on that? Are they full-time employees or independent contractors? And given behavioral health is still very sensitive part of health care, how do you manage the medical liability and those kind of things?

Sure. So we, as an organization, in terms of what we perform, we are not directly delivering clinical services. So we focus on the coaching. And one piece that we didn't talk about yet is, we have a group called care community coordinators, who are actively working with individuals to address barriers in their social determinants of health. So things like access to healthy food, safe housing, transportation. And our job is to actually connect them to services either in their community or that their health plan provides that allows them to address the social determinants of health. So those are the folks, whether it's the care coaches or the care community coordinators that are our employees. Consistent with your question, when we refer into the behavioral health network, those are therapists, physicians, licensed social workers that are generally part of our health plan customers' network. We do operate in a generally narrower network than what they have, because we want to be able to control the quality and the payment of those individuals in the behavioral health provider side. And so we work really hard to educate them on our program, how they need to engage with us and what we will provide them. And then how we're there to help them -- help the individual member get better on their care journey. So those are not employed individuals, who are not practicing clinical services. And therefore, we're not looking at things like medical liability like you asked.

That's fair. And the last question I want to ask about. You recently closed on a preferred stock offering, around $45 million net proceeds. Will you need more capital going forward to fund your growth? Maybe also talk about when do you see the company being EBITDA or EBIT profitable?

Sure. So as we've talked about consistently with our current model, we can persist and grow the model that we have without raising any new funds. We've also talked about how we're aggressively looking at strategic acquisitions. And so depending on the nature and size of those things, that might change that equation. But in today's world, there's nothing that we need to do to get to cash flow and EBITDA positive on a consistent basis. In terms of timing, we're still looking at Q1 into Q2 early next year where we will hit that mark and sustain it. On an EBITDA adjusted basis, we did achieve that in the last couple of months of Q3, but with investments that we see coming to ramp for the beginning of the year, we'll probably dip below that a little bit and then emerge again in Q1 in a sustainable fashion.

What is the long-term EBITDA margin you believe you can generate on this business?

Oh, goodness. There's -- we have so many irons in the fire in terms of how we're going to expand our portfolio. What I would say is, in today's world, in terms of the mix of digital and technology-enabled versus human touch, we're probably at the lower end in terms of that, meaning we are more human touch today than we will be in the future. So as we progress towards that more digital biased view of the world, we expect that we can be somewhere in the 50% to 70% range as we change the mix over time.

All right. That makes sense. Great. This was a great conversation, but I guess we are out of time here. So we will leave it there. Thanks a lot for participating in our conference. Have a nice rest of the evening. Thanks, guys. Take care.