Alignment Healthcare, Inc.

And welcome to Alignment Healthcare First Quarter 2021 Earnings Conference Call and Webcast. All participants will be in a listen-only mode. After today's presentation, there will be an opportunity to ask questions. To ask a question on the phone line, you will need to press the Start and the 1 key on your touchtone telephone. Please note, this event is being recorded. Leading today's call are Mr. John Cahill, Founder and CEO of and Thomas Freeman, Chief Financial Officer. Before we begin, we would like to remind you that certain statements made during this call will be forward-looking statements as defined by the Private Security Litigation Reform Act. These forward-looking statements are subject to various truths and authenticity and reflect our current expectations based on our beliefs, assumptions, and information currently available to us Although we believe these expectations are reasonable, we undertake no obligation to revise any statements to reflect changes that occur after this call. Descriptions of some of the factors that could cause actual results to differ materially from these forward-looking statements are discussed in more detail in our filings with the SEC, including the risk factors section of the prospectus for our initial public offerings filed with the SEC on March 29, 2021, in our Form 10-Q for the quarter ended March 31, 2021. In addition, please note that the company will be discussing certain non-GAAP financial measures that they believe are important in evaluating performance. Details on the relationship between these non-GAAP measures to the most comparable GAAP measures and reconsultation of historical non-GAAP financial measures can be found in the press release that is posted on the company's website and in our Form 10-Q for the quarter ended March 31st, 2021. I would now like to hand the conference over to your speaker, Mr. John Carroll. Please go ahead, sir.

Thank you, operator, and thank you all for joining our first earnings call as a public company. I'm proud to report that we exceeded our expectations across all of our key performance metrics for the quarter, including our health plan membership, revenue, adjusted gross profit, and adjusted EBITDA. We increased health plan membership by 32% year-over-year from 62,900 members to over 83,000 members at the end of the first quarter. Our strong growth over the last year reflects how seniors recognize the unique value of our rich offerings. Our revenue of $267 million increased 19% year-over-year on a consolidated basis. More importantly, we described to you in the roadshow, our health plan premium revenue saw very strong growth at 30% year-over-year. Our adjusted gross profit came in at $23 million, and our adjusted EBITDA came in at a loss of $14 million. Taking a step back, Thomas and I had a chance to meet with many of you on our recent IPO Roadshow. But for those of you who are new to our story, I'd like to spend a couple of minutes sharing what I believe are key differentiators and what truly makes Alignment Healthcare unlike any other company out there today. We founded Alignment Healthcare in 2013 with a singular mission, improving healthcare one senior at a time. We are a next generation, consumer-centric platform revolutionizing the healthcare experience for seniors. The foundation of this company is based on the simple belief that we should treat all of our members like we would want our parents to be treated. With decades of experience and lessons learned through my work in health plan, provider, and healthcare IT businesses, I got firsthand experience with how the traditional healthcare system consistently falls short. I realized there has got to be a better way. We purpose-built this company to create a better overall experience for our seniors and in doing so have established ourselves as the leader in this space combining high touch and high tech. Alignment's business model is different than traditional legacy health insurance companies and unique compared to anything else in the market today. Our model combines best-in-class health plan capabilities with the culture, competencies, and compassion of a provider organization, all built around a unified data and technology platform we call AVA. We like to think of ourselves as a tech-enabled payvider. All of this results in a distinct ability to consistently deliver a high-quality, better care experience for members at a low cost. In turn, we take the sustainable competitive advantage and create higher value next generation coverage and benefits for our members. In order to show you how we do this, I need to first talk about our care model. It is based on three key principles that we have developed over 30 years of serving seniors. First, 20% of the population accounts for 80% of the spend in the MA space. We therefore need to know who is in the 20% of the high-risk population. We use AI and ML in our AVA platform to help us stratify the member data by acuity to personalize a care plan for each member. The type and level of care is based on each member's personal needs. The delivery of this personalized care leads to the next two lessons learned principles. Second, we strongly believe in aligning with community doctors and nurses and give them the data, the tools, expertise, and aligned incentives to enable them to thrive in value-based care. The alignment we have with the doctors has been foundational to the company's success. We don't want to compete with them. We want to enable them and support them. And third, to further support our provider partners, our Care Anywhere program utilizes our own dedicated clinical teams and a combination of high-tech and high-touch care for our highest-risk, most complex members. These cross-disciplinary care teams, which include employed physicians, advanced practice clinicians, case managers, social workers, and behavioral health coaches, work closely together to establish customized care plans and to engage our high-risk seniors. Our high-risk chronic and complex care management capabilities allow us to effectively manage risk, provide better clinical outcomes, and improve our seniors' experience across the board. This combination of working with both community-based doctors and our own Care Anywhere team in an aligned model represent lessons learned from over 30-plus years of experience. If the heart of the company is rooted in our clinical model, the brain relies on our AVA platform. AVA is our modular, componentized tech platform that everything is built upon. AVA was designed specifically for senior care and provides end-to-end coordination of the healthcare ecosystem. AVA is unique, proprietary, and the key to our successful growth in new markets. Even more so, AVA is critical to why our model works and how we intend to replicate and scale alignment across the country. Ultimately, our model is based on a flywheel concept, which we refer to as our virtuous cycle. We use AVA to identify the 20% high-risk members. We partner with providers and use the Care Anywhere program to improve healthcare outcomes. For example, by reducing unnecessary hospital admissions and in turn bring down overall costs. Our unique ability to manage healthcare expenditures allows us to reinvest our savings into richer coverage and benefits for all of our members, such as our black card or grandkids on demand. This, in turn, propels our growth in revenue and membership due to the enhanced consumer value proposition. Bottom line, it's high-quality, low-cost healthcare with a better senior experience. We believe that by bringing together our experienced, mission-driven team with our purpose-built technology, we have found a way to address the unmet needs of our senior consumers and ultimately do well by doing good. What's really important is how this all translates into results. During our IPO Roadshow, we told many of you that we saw three key avenues for growth in the short term. I want to provide you an update on how each of these has progressed in the quarter. While there are numerous other growth avenues over the medium term, our most immediate priorities are, number one, grow our membership in our existing markets. Number two, grow into new contiguous markets in our existing states. And number three, establish a new beachhead markets in new states, either organically or through M&A. In terms of our existing markets, our health plan business was in 16 counties in 2020. As of the end of the first quarter, our 16 same-store health plan markets grew from approximately 63,000 to 78,000 health plan members, which represents a 25% year-over-year growth rate. All of our markets grew year over year and 15 out of 16 same store markets increased their market share year over year as a result of our expanding provider relationships and our strong positioning of our diverse array of products. For example, we introduced an ethnically diverse product for the Asian community. We introduced several provider sponsored products that deepened our relationships with these provider partners and further differentiated ourselves from our competitors. We launched products that helped the socially and economically vulnerable. This product innovation combined with our expansion of provider partnerships was instrumental to our same store growth. In terms of expanding into new markets in our existing states, we added two new contiguous counties in central California for 2021. We added approximately 2,300 new members in our first three months in these two counties. Additionally, these two new counties expanded our total addressable market by approximately 200,000 eligible members. Also, in the first quarter of 2021, we launched health plans in four new markets across two new states, North Carolina and Nevada. While early, these markets are progressing well, and we expect them to expand our total addressable market from approximately $4.9 million to 5.5 million eligibles. I think these can be really significant markets for us over the next five years. As we've discussed, finding like-minded provider partners is a key component of our expansion strategy. An example of how we continue to grow and develop more integrated and empowered provider relationships can be seen in our North Carolina market. In that state, we partnered with a group of local provider organizations to participate in Medicare's direct contracting program, launching our joint venture on April 1st under the name Acceleron. Combined, our two DCEs have contracted with 16 primary care practices consisting of 56 clinicians. The initial population of approximately 5,800 members exceeded our expectations and was meaningfully higher than the 1,500 to 2,000 members we had indicated in our S-1. While still early, we believe the DCE partnership in North Carolina is indicative of the value alignment can potentially deliver to a broader set of seniors in traditional Medicare over time. Leveraging historical investments in our data-driven AVA technology platform and our comprehensive care anywhere clinical model will result in a distinct ability to deliver better care at a lower cost for chronically ill seniors. We remain mindful with respect to the long-term unit economics of the program, given that we are only a couple of weeks in, but we feel the program's intent is consistent with our model and in line with our area of expertise. As we think about new markets in the future, I can only tell you now that we are making very good progress engaging with like-minded providers in our targeted expansion markets. While we've made significant progress on our growth avenues in the first quarter, our top priority has been the continued safety and well-being of our members through the ongoing COVID-19 pandemic. We did see higher COVID-related utilization from Q4 continue into January. But as the quarter progressed, we saw that trend towards a more normalized level. Outside of the financial impact, we have sought to keep our members engaged and informed. In the first quarter, we hosted seven virtual town halls with roughly 18,000 members participating, sent an additional 5,000 masks to our seniors, the continuation of an effort we started last spring, and we've seen our members use their black cards in Q1 to purchase over-the-counter necessities like Tylenol, toothpaste, and miscellaneous grocery items. Additionally, telehealth and virtual care still represent 73% of our Care Anywhere visits in the first quarter. We've embarked on a number of other efforts to put our seniors first during these challenging times, including waiving home delivery fees for prescriptions from retail pharmacies and establishing an expedited process to ensure a smooth customer experience if a member choose to move their prescriptions from retail pickup to home delivery. offering zero cost sharing for telemedicine visits to all members for any reason, while strongly encouraging the utilization of these telehealth solutions, and partnering with a third-party vendor to increase access to telepsychiatry behavioral health support, given the impact that ongoing isolation can have on our seniors' well-being. I hope it's apparent to you all that Alignment Healthcare is truly a unique company with a differentiated position in the markets. We built this company on an incredibly solid clinical and technological foundation, and we made it even more powerful by bringing together a deep experience team. We're really well positioned for growth, and I look forward to updating you as we capitalize on the opportunities ahead of us. Finally, I want to recognize each and every one of our team members who work diligently every day to provide extraordinary care to our seniors. Achieving our mission wouldn't be possible without you. With that, I'll turn the call over to Thomas to review our financial results and our outlook for the rest of the year in more detail. Thomas?

Great. Thanks, John. I'd also like to thank everyone for joining today's call and for their interest in Lyman Healthcare. From a financial perspective, we were pleased with our first quarter results and the momentum we are seeing across the business. In my prepared remarks today, I'll briefly cover our recent IPO, review our first quarter results, and conclude by providing our initial outlook for the second quarter and full year 2021. I'll start with our IPO, which was successfully completed on March 26th. Including the green shoe, we sold approximately 30.5 million shares at $18 per share, resulting in gross proceeds of approximately $550 million. On a pro forma basis, we have approximately 187.3 million shares outstanding, including approximately 10.5 million restricted shares that are subject to ongoing vesting restrictions. Turning to our first quarter results. In spite of the broad COVID-related challenges to engage with the senior community during our primary selling season, we were able to generate strong net new enrollment year-over-year and ended the quarter with 83,000 health plan members. Our 32% health plan membership year-over-year growth rate continues to demonstrate our broad value proposition to our senior consumers in addition to the significant growth opportunity embedded in our 22 markets. Our health plan membership growth further translated to strong top-line performance. Total revenue in the first quarter of $267.1 million increased 19% year-over-year. Normalizing for the termination of one of our third-party payer capitation contracts in North Carolina, our health plan premium revenue growth was quite strong at 30% year-over-year, exceeding our initial expectations. Our revenue per member per month was consistent with our internal expectations for the first quarter. For our returning members, which we define as a member who was with Alignment in 2020, our efforts to engage our seniors and document their underlying acuity in the second half of 2020 have made a positive impact on our full-year visibility to the Revenue PMPM of those members in 2021. However, our new members to alignment have come in at lower Revenue PMPMs in 2021 than our prior experience would suggest is typical, which we believe is due to the COVID-19 pandemic. Given the fact that close to 25% to 30% of our health plan members will be new to alignment in 2021, we don't expect to have full visibility on our overall revenue PMPM until we receive the mid-year sweep from CMS. Accordingly, while we remain cautiously optimistic about the consolidated revenue PMPM for 2021, we have taken a conservative approach in our projections for the rest of the year. Moving on to non-GAAP measures. In order to provide a more representative view of our operations, when discussing the following QM metrics, we are adding back equity-based compensation expense of $31.8 million to of which $25.2 million was charged to SG&A and $6.6 million was charged to medical expense. Note that the vast majority of the equity-based compensation expense in the quarter was related to our IPO. Adjusted gross profit was $22.6 million for the quarter, as we continued to put our seniors first during the COVID-19 pandemic. Consistent with the broader state of California, we first began to experience a material increase in COVID-related hospitalizations in the fourth quarter of 2020, which carried over through the first half of Q1 2021. However, as we continued to deploy our clinical resources, we saw a reduction in COVID-related hospitalizations in the second half of the first quarter of 2021. This resulted in a net favorable mix of COVID versus non-COVID admissions for the quarter versus our internal expectations, which has a favorable impact on our overall claims per member per month. We also experienced some temporary favorability in some of our internal clinical model as well as our Part D gross profit relative to our internal expectations, both of which we would anticipate to reverse over the course of the year. While we exceeded our internal expectations, and in spite of some of the favorable utilization trends in the second half of the quarter, our overall medical benefits ratio was 91.5% in the first quarter. Seasonality in a normal year would typically reflect Q1 as a higher MBR quarter, given the impact that flu season can have on our results. Q4 is similarly often a higher MBR quarter. However, our 2021 Q1 MBR was higher than we would typically anticipate in a normal calendar year, given the impact of COVID on our consolidated revenue PMPM, as well as our overall claims trends. We believe that there will likely continue to be some abnormal seasonality in our MBR for 2021. However, we project that we will ultimately land in a high 80s for the full year. Our SG&A in the first quarter was $64.9 million. However, excluding equity-based compensation expense of $25.2 million in SG&A, our SG&A in the first quarter was $39.7 million, which increased 21% year over year. The increase was a combination of higher expenses to support our growth and incremental expenses related to being a public company. This quarter's SG&A was slightly lower than we initially anticipated due to the timing of certain expenses and investments contemplated in 2021. We expect these expenses will be incurred in future quarters. All of these factors resulted in an adjusted EBITDA loss of $14 million. We also finished the first quarter with a strong balance sheet and liquidity position. Following our successful IPO, we ended the quarter with approximately $377 million of net cash on the balance sheet. I'll wrap up my comments today by discussing our initial financial outlook for the second quarter and full year. We continue to see improved visibility to full year 2021 performance as we have concluded our primary selling season, which lends itself to our predictable recurring revenue model. For the second quarter of 2021, we expect health plan membership to be between 83,300 and 83,700 members, revenue to be in the range of $265 million to $270 million, adjusted gross profit to be between $32 and $34 million, and adjusted EBITDA to be in the range of a loss of $9 million to a loss of $10 million. For the full year 2021 outlook, we expect health plan membership to be between 83,500 and 84,500 members, revenue to be in the range of $1 billion, $40 million to $1 billion and $55 million, adjusted gross profit to be between $116 and $122 million, and adjusted EBITDA to be in the range of a loss of $56 million to a loss of $51 million. I'd like to provide a little more color on some of our underlying assumptions that were used to frame our guidance. For membership, we expect continued sales and disenrollment throughout the remainder of the year based on our prior experience. As a reminder, a majority of our net membership growth occurs by 4-1 of a given calendar year due to the timing of the annual enrollment period, or AEP, and open enrollment period, or OEP. We therefore expect more modest membership growth from March of 2021 to December of 2021, and would then expect a step-up in membership effective January 2022 after our upcoming AEP this fall. In terms of revenue per member per month, we anticipate seeing continued improvement in our visibility to our revenue PMPM for 2021, returning members over the next several months. For new members, however, we will not have complete visibility until the mid-year sweep, which generally occurs sometime in the second quarter of a typical calendar year. Until we receive that information, we believe it is prudent to remain appropriately conservative in our consolidated revenue PMPM outlook. As I noted earlier, our medical benefits ratio in the first quarter benefited from some reduced COVID-related utilization relative to expectations, which led to some outperformance. That said, we remain cautious on full-year trends for 2 to 4Q. Our full-year outlook reflects a natural rebound in system-wide utilization as our members continue to ramp up their vaccination rates and seek deferred care. It also reflects a reversal of some of the temporary favorability we experienced in Q1 related to our internal clinical model spend as well as our Part D benefits. Finally, for adjusted EBITDA, we expect to see a reversal of a few million of early in the year SG&A favorability. In particular, we have continued to gain visibility to several expenses related to being a public company, such as our director and officer liability insurance, which we anticipate will cost approximately $4 million more in 2021 than we previously anticipated. We otherwise believe we are on track with our internal expectations for SG&A. that we will continue to look for ways to reinvest our outperformance towards further growth initiatives for 2022 and 2023. In summary, we were very pleased with our first quarter results and think it's a solid start to the year. Our team is executing on our strategic initiatives in all markets, and I want to thank each of them for all of their hard work. I believe we are well positioned to capitalize on the meaningful growth opportunity ahead of us, and I look forward to keeping you all updated on our progress throughout the year. At this point, I'd like to open the call to questions. Operator?