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spk06: Good day and welcome to the P3 Health Partners 4th Quarter 2022 Earnings Conference Call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then 1 on a touch-tone phone. To withdraw your question, please press star then 2. Please note, this event is being recorded. I would now like to turn the conference over to Karen Blomquist, Director of Investor Relations. Please go ahead.
spk01: Thank you, Rocco, and thank you for joining us today. Before we proceed with the call, I would like to remind everyone that certain statements made during this call are forward-looking statements under the U.S. federal securities laws, including statements regarding our financial outlook and long-term targets. These forward-looking statements are only predictions and are based largely on our current expectations and projections about future events and financial trends that we believe may affect our business, financial condition, and results of operation. These statements are subject to risks and uncertainties that could cause actual results to differ materially from historical experience or present expectations. Additional information concerning these factors could cause actual results to differ from statements made on this call as contained in our periodic reports filed with the FCC. The forward-looking statements made during this call speak only as of the date hereof, and the company undertakes no obligation to update or revise the forward-looking statements. We will refer to certain non-GAAP financial measures on this call. These non-GAAP financial measures are in addition to and not a substitute or superior to measures of financial performance prepared in accordance with GAAP. There are a number of limitations related to the use of these non-GAAP financial measures. For example, other companies may calculate similarly titled non-GAAP financial measures differently. Refer to the appendix of our earnings release for reconciliation of these non-GAAP financial measures to the most directly comparable GAAP measures. information presented on this call is contained in the press release we issued today and in our sec filings which may be accessed from the investor page of the p3 health partners website thank you and i will now turn the call over to dr abu thanks karen good morning everyone and thank you for joining our call today i am delighted and excited to to be here today to announce our new financing
spk00: and to review the results of the year 2022. We are very excited about the progress that we've made in 2022 and the possibilities we see for our populations, our teams, and our business, and for our shareholders as well. Today, I will discuss three points. Number one, the update on the liquidity and how the capital raise that we just announced early this morning will get us through to cash flow positive and profitability in 2024. Number two, I will share with you our insight and our determination to reach profitability in the year 2024 with a clear path to that end. And finally, we'll discuss the possibility and impact and the questions that arose about the CMS advanced notice and any other changes in the risk adjustment factor calculations by the CMS. So first, let me address the capital raise that we announced earlier today. Through a deal with our largest shareholders, Chicago Pacific, founders, and other shareholders, including Lovett Partners, we have secured approximately $90 million in funding through an equity agreement. We are grateful for the support and the confidence our shareholders, Chicago Pacific Founders, Levitt Partners, and other shareholders as well. The capital that we raised will provide us the financial resources to realize our strategic vision for P3 and We believe, and we will address the details of the capital raise tool, our CFO will address those calculations, that it's sufficient to get us through to cash flow positive and profitability in 2024. As a matter of fact, we're confident that that will get us in early 2021. 2024 profitability and cash flow positives. Second, I want to share with you our clear path and insight into how we arrived to profitability in 2024. Our consistent and impressive membership growth is continuing in 2023 and in 2024 class, we've already have in the pipeline very impressive and consistent growth in all the markets that we are in already. Second, let me address the funding per members. According to the files we received, The members that were with us in January 2022 have demonstrated an average of about 15 to 16 percent increase in their funding in January 2023. And overall, all the population in 2023, new and persistent, have shown 7.7% increase in funding over January 2022. Our medical costs continue to improve by an average of 2.5% year over year. And our medical margin in 2022 and as medical margin calculated by capitated revenue minus medical claim expense, as we reported in our filing, was $62 million in 2022. And we project and believe that that will be increased by 50 to 100% in year 2023. And as we continue, and our leadership and our team performing consistent with the prior years, that will lead to a clear path to profitability with membership growth in the markets that we're in, funding consistent improvement year over year, medical margin improvement year over year. And finally, I want to address our operating expenses. we have significantly focused and improved our operating expenses year over year. If you clear all the operating expense in 2022 from all the one-time events and one-time costs related to the long audit that we had to go through in 2022 and all the professional fees attached to it, We still have shown in 2023, a 23 to 25% improvement in our operating costs year over year. So consistent demand and membership growth in the markets that we're in that allow us to grow with the existing providers and existing payer and existing engaged environment and patients. Improvement in funding in a modest way that we've shown year-over-year. Consistent improvement in the medical cost of 2 to 2.5% year-over-year. And that leads to advance of the medical margin significantly in 23 and 24. reduce operating expense. That is the clear path to our profitability. That is why where we sit here today, we're very confident that we'll reach profitability in early 2024. Finally, let me address the question about CMS advanced notice and other regulatory proposals to address the risk adjustment factor and the funding in the Medicaid Advantage Program. Our risk adjustment factor is very modest. It's 1.0 to 1.1 across the board for all populations that we are privileged and honored to serve today. We believe from all calculations that any removal of diagnoses or codes in advance notice or adjustment to the coefficient factors of calculating the risk adjustment factor will have no material impact in the population that we serve. And by checking the prevalence of the diagnoses that have been removed in our populations and the other impact factors and coding intensity, we see no material impact whatsoever on our funding in the coming years. And we will wait and see the final ruling on Monday as well. So what I shared with you today in excitement about the support of our current shareholders and the capital raise that allow us to have a solid liquidity through profitability and cash flow positive in early 2024. a clear path and insight into our path to profitability in early 2024. And finally, we addressed the question about funding by CMS. With that, I'm going to turn it over to Atul for review of our financial results and give you more detail around our new financing and guidance, as well as high-level look at our 2024 expectations.
spk04: Thank you, Sharif. Good morning, everyone. Since this is my first quarter speaking with you, I just want to take a minute to tell you how excited I am to be part of the P3 team. I was drawn to P3 for a number of reasons. First and most important is the mission of the company, which is to find a solution to the healthcare problems facing our nation, including high healthcare costs and poor outcomes. Second is its history of bringing value-based health care quickly and effectively to its members through an asset-light affiliate model. The third is the incredible team of professionals at P3 that I get to work with. Now, let me walk you through the fourth quarter and the full year 2022 numbers. Top-line results for 2022 were strong, as the team executed and delivered with revenue of $1 billion, $49 million. That is tremendous growth at 65% versus 2021 and squarely in the middle of our guidance. And even more indicative, on a PMPM basis, revenues grew 10% over 21. In the fourth quarter, we had revenue of $258 million, a 40% increase over the fourth quarter of 2021. In this reporting cycle, and to help our investors and analysts to understand our business better, We've broken out what we previously referred to as medical expense into two separate components. These include medical claims expense, which are the specific expenses related to Part C and D services, and network expenses, which include partner physician expenses related to surplus sharing and other direct medical expenses incurred to improve care for our members. You can see some more detail around that in our 10-K. and our hope is that it lends a deeper level of clarity around our model. As Sharif mentioned, we had strong improvements in both medical margin and network contribution in 2022. In 2022, our medical margin, which represents the amount earned from capitation revenue after medical claims expenses are deducted, improved 429% over the prior year to stick $62 million, or $52, on a PMPM basis. Network contribution, which we define as medical margin less network expenses, improved by 65% over the year to a loss of $7.7 million. We believe that the trends in these two critical data points are proof that our model is working. Another new data point we will begin to provide investors is our platform support costs. These costs include amounts related to providing support services to our various markets, including support personnel and other associated operating costs. We do exclude costs related to the operations of our owned medical clinics and wellness centers from this amount. Going forward, we are laser-focused in driving efficiencies in our operations and managing our cash expenditures, and as a result, expect our platform support costs to decrease as a percentage of revenues going forward. In fact, we decreased our platform costs as a percentage of revenues from around 15 percent in 2021 down to 11 percent in 2022. Going forward, we're aiming to bring that percentage down into the high single digits in 2023 and make continuous progress as we move forward. Our net loss in 22 was $1.6 billion compared to a net loss of approximately $204 million in the prior year. The increased loss was primarily due to a goodwill impairment charge of $1.3 billion, which was taken due to the decrease in our market cap relative to the book value of the goodwill. Excluding this impairment charge, our net loss increased by $90 million, reflecting the ramp-up costs associated with onboarding roughly 35,000 new members to our platform, other non-recurring transaction costs, plus additional expenses related to completing the extended 2021 audit. For the three months ended December 13, 22, we reported a net loss of $532 million compared to a net loss of $118 million in the three months ended December 31, 2021. The increase in the loss was primarily driven by a goodwill impairment charge in the quarter of $463 million. Excluding the goodwill impairment, the loss increased by 69 million due to the increased number of members and costs associated with the open audit. Adjusted EBITDA loss was 128 million in 22 compared to an adjusted EBITDA loss of 95.5 million in the prior year. As a result of our extended 21 audit period, completed in October of 22, Our full year EBITDA was impacted by $12 million related to 21 financial final year settlements, which was shifted back into 21 and recognized in that rear, but in normal course would have been recognized in 2022. Also related to the 21 audit, we incurred approximately $6 million in costs for services provided by audit firms, financial consultants, and other service providers. And finally, we incurred approximately $14 million of costs related to transactions including the business combinations and the Medcor acquisitions. We have excluded these costs from our calculation of adjusted EBITDA because we do not expect them to recur in the future. Now, looking forward, I'm very pleased with the continued support and the vote of confidence from our investors that participated in the $90 million pipe offering. Their conviction in the P3 story and the P3 team is great to see. and provides a level of support that lets us keep our focus on executing against our vision every day. This is a strong endorsement from the investors in our differentiated model, and we appreciate the support from our largest existing investor, Chicago Pacific Founders, which led this financing with over $70 million. Our external advisors, the management team, board, and the special committee of the board worked hard to source and negotiate the best deal for P3. As part of the offering, and as more fully disclosed in the press release of the transaction, the company raised approximately $90 million in gross proceeds by issuing units priced at $1.11, with each unit consisting of a share of P3 common and .75 warrants and an exercise price of $1.13, which represents a 10% premium to the trailing five-day moving average. We were quite intentional about the size of this offering, which does not contemplate the repayment of any debt or redemption of any shareholder's position and delivers capital directly to the company. Given the yearly revenue and medical expense PMPM results so far this year, which are right on track with our plans, we have confidence that this raise will give us ample resources, not just to end the year with a cash cushion, but to bridge the company to a point of positive EBITDA and cash flow positivity in 2024. To give you a better sense of what this means to P3, we ended 22 with approximately 18 million of cash on our balance sheet. Between the new capital from the pipe and the draws we made this year on our unsecured note that totaled just over 100, and with the continued cash inflows generated from our operations, we expect the end of the year with resources to bridge the company, not just till profitability, but until it's cash flow positive. Again, with this new capital, The entire management team is excited to get back to focusing on those key elements that service our MA patients and drive our economics. Number one, engaging with our patients. Number two, actively managing their health conditions. And number three, keeping a watchful eye in managing our operating expenses and eliminating waste. I want to remind you of our guidance for 2023, which has not changed. We expect 2023 revenue to be between $1.2 billion and 1.25 billion, and adjusted EBITDA between 40 million and 60 million, loss of 40 million to 60 million. In addition to that, we are expecting our medical margin in 2023 to be in the range of 155 to 175 million. While we aren't providing quarterly guidance, I think it would be helpful to point out a few unique factors about P3 that may help investors better understand the broad contours of our various quarters and of our earnings progressions a bit better. E3 recognizes revenue on a very conservative basis. Unlike more established companies in this space, we do not estimate and accrue for revenues for our year-end true-ups, but rather recognize that revenue based on cash and or certainty around that revenue. As these true-up amounts generally become known to us in the June or July timeframe, We will typically record those revenues in the appropriate quarter. This tends to make the second and third quarter relatively strong on the top line compared to the first and the fourth. Medical expenses can sometimes also have some seasonality, particularly in winter months as the cold and flu season impacts utilization. The third important factor this year will be our overall platform expenses. We have focused intensely on these expenses as a company and have significant goals in the year. To that end, we expect much of those cost reductions to reveal themselves in the second quarter and beyond compared to the first quarter. In all, we expect the first quarter to be a bit softer from an overall EBITDA perspective compared to the second and the third quarters, with Q4 falling somewhere likely in between. So in closing, let me say we are extremely focused on the prudent growth and conservative management of our resources to meet these goals. We are taking measured steps to control costs and improve the SG&A burden while ensuring that we have the talent necessary to execute on our strategy and achieve our goals. Thank you all once again for your interest in the P3 story. And with that, I'm going to turn it back to the operator, Rocco, to open the floor to questions. Rocco?
spk06: Yes, sir. Thank you. We will now begin the question and answer session. To ask a question, you may press star then 1 on your touch-tone phone. If you are using the speakerphone, we ask that you please pick up your handset before pressing the keys. To withdraw your question, please press star then 2. Today's first question comes from Brooks O'Neill with Lake Street Capital Markets. Please go ahead.
spk03: Good morning, everyone, and thanks for taking my questions. I have a couple. I'd like to first start off by just asking you if you could summarize your perception of the demand environment in the marketplace today. Specifically, I'm thinking about interest from provider partners, you know, primary care groups in your existing markets and from payers. But I'm also curious if you could just comment a little bit about the demand environment from the patients as well.
spk00: Thanks, Brooks, for your question. Really appreciate your interest here. So we've seen high level of demand across all the three constituencies that you just described, Brooks. So number one is the physician or provider groups. Usually the sales cycles or the engagement cycle used to run anywhere between one to two years with the provider groups. Today we are receiving incoming calls asking to engage And as the pricing pressure on the fee-for-service compensation from CMS and other payers continue, we see that the providers are very engaged and excited and looking forward to move into value-based contracting and full risk, and also excited about using our tools. and from technology to the team surrounding them. Secondly is the payers as they made commitment to their constituencies and as the evidence increased that people and patients and value-based contracting and value-based relationship had have seen an improved clinical outcome and an improved quality, the payers are excited to move more and more into the value-based contracting. So we're getting demands and engagement from all kind of payers in the marketplace. And finally, the patience. The patients have really seen the benefits and experienced a different experience from value-based provider than the fee-for-service where the availability, the accessibility, and the transparency of information and communication with them by the provider themselves or the surrounding team from P3 We see that demand intensify and increase continuously year over year.
spk03: Great. Thank you, Sharif. Let me ask you two more quick questions. First, I'm curious. Well, let me just make a comment. I thought the information you provided at the J.P. Morgan Conference earlier this year was terrific as it relates to the progress you're making within markets and and with calendar year cohorts of patients. Can you give us any update at all as it relates to continuing progress in markets like Arizona and as your cohorts continue to mature?
spk00: Absolutely. Thank you very much for that question, Brooks, because it really highlights the impact and the effectiveness of our medical management team led by Dr. Amir Bakas, our co-founder, and chief medical officers, and the rest of the medical leadership. We see that in Arizona, the progress continue. We're independently, the market of Arizona will reach break-even and profitability this year. And the medical margin continued to march positively, where over $160 to $180 PMPM medical margin for the population that continued with us. And finally, if you look at the medical costs in Arizona, which average about $713 per member per month for the medical claims expenses, almost about $100 to $200 per member per month and Part C medical claims expenses ahead of a lot of our peers in the space and continue to improve as well.
spk03: Great. Let me just ask one last one and appreciate the color. I don't think you talk much about this. Obviously the last couple of years severely impacted by COVID in positive and negative ways. It seems like COVID is in retreat right now, but can you just talk a little bit about what you expect in terms of medical cost trends? Do you expect a big rebound and people coming to the hospital and seeing their doctors, or do you think it's going to be a more normal year this year, uh, In that regard, thank you very much.
spk00: Thanks, Brooks. So thanks for reminding us. So the COVID is a story of almost three stages. So the second quarter of 2020 saw a significant retreat in the medical utilization and the medical costs. that was artificially developed by the lockdown and the preventive measure from going in public and going into the hospital and emergency room as well. Second, the following, when the COVID infection and pandemic intensified and increased utilization through emergency room, And the two major variants that hit the population, Omicron and the Delta variant, that showed increase in utilization. We recorded, over the last 18 months, over $90 million of COVID-related expense. In 2023, We see that retreated back and receding to normal utilization. I think right now it's standard operating procedures. The only adjustment that you will see is is our success into managing the population, but I believe the COVID impact is behind us, positive or negative, and we're back into pre-pandemic standard utilization adjusted by our effective medical management and improvement in the medical costs as well. Anyway, thank you very much for the question, Brooks, and happy to hear you're making very strong recovery and back to normal.
spk06: Thank you. And our next question today comes from Josh Raskin at Nefron Research. Please go ahead.
spk02: Hi. Thanks. Good morning. I want to talk about the implied EBITDA margin for 2023. I think it implies a negative adjusted EBITDA margin of, you know, 4.1%. That's an improvement of about 800, 810 basis points. So I'm trying to figure out how much of that is coming from medical management. I'm assuming a large majority versus the administrative cost improvements that you were talking about. And if you could give some specifics on what's driving those medical cost ratio improvements, that'd be helpful. And then I have a second question.
spk04: Yeah, Josh, this is Atul speaking. Thanks for the question. Yeah, look, I think you can look at it as a combination of a lot of things. Principally, you know, we're feeling strong about the way that our revenue PMPMs are progressing. You saw a pretty big jump just looking at 21 to 22. That was almost 10% as we were talking about. So we've got some, you know, some assumptions in our forecast and our guidance that I would call non-heroic. I think they are very reasonable and achievable. But it's a combination of that along with some very modest reductions that we're thinking of in medical claims expense. And again, as Sharif was talking about earlier, we've seen good traction in that regard as well. As far as the SG&A reductions, I mean, we are considering some of that as well, but On balance, we think that this guidance is really driven by all of those components working together. It's not especially dependent on any one factor. We've got a number of different levers moving around.
spk02: Okay. Well, that's helpful, which ties into my second question, which is it sounds like a lot of the medical cost improvement is predicated on you know, what you're calling funding improvements or reimbursement improvements. So I'm trying to figure out, you know, how are you seeing a 15 to 16% improvement in funding, you know, in the first year of the 2022 members, and yet your risk scores are still one to one, you know, I think you said 1.0 or 1.1. And, you know, and again, going back to that medical expense is a large majority of that, you know, improvement in risk coding, or is some of that medical cost management too?
spk00: Thanks, Josh. It's a combination. So, number one, those percentage for the population that were there in 22 and now still with us in 23, it's a combination of the benchmark improvement in the counties that we are in, in addition to the increase of a percentage of the dual eligible populations that comes with the higher funding and also our engagement with the chronic special needs program which also comes with the higher funding. And the average of the risk scoring that I shared is across all population and an annual average because At the end, as you very well know, that there is a degradation over a period of time for population. The severely ill population kind of depart, and the new patients come in with the 0.8 average of risk, so that modified the risk score across all populations throughout an average year. So, like I said, the overall population has shown an increase of 7.7%, and the specific persistent population has shown an increase of 16%. And that's a combination between the risk scoring, the benchmark adjustment, and an increase of the dual risk population percentage in our population.
spk02: Okay. And I want to make sure I get this clear because I think it's important. That 16% that you're quoting in terms of increased PMPMs, that's not risk coding, right? Or there's some component of that.
spk00: Correct.
spk02: But that's more mixed. Okay. How much is the risk coding component of that 16? Is there an estimate there?
spk00: Yeah. So it's about 3% to 5%. across all populations. Of course, it varies from one population to another, but about 3% to 5% of that is in risk adjustment. Okay, that's super helpful.
spk02: Thanks again.
spk06: Thank you. And, ladies and gentlemen, as a reminder, if you'd like to ask a question, please press star, then 1. Our next question today comes from Ryan Daniels at William Blair. Please go ahead.
spk05: Hey, guys, this is Jackson on for Ryan Daniel. Thanks for taking my question. So just first, when looking at the cash burn, the fourth quarter looks to be slightly elevated. And I understand the fourth quarter is historically higher. But I'm curious, how should we think about cash burn going forward in 2023? And I believe in your prepared remarks, you said you expect to be cash flow positive in early 2024. So does 2023 get you mostly there where the cash burn tapers quite a bit? Or I guess, you know, just kind of how should we think about this going forward? Thanks.
spk04: Yeah, Jack, that's a great question. So the way I would suggest you think about it, and I gave a little bit of an indication of sort of, again, the seasonality of EBITDA, and I think that that may be a reasonable proxy for you to think about the burn as we progress through the year. But again, you can think of it as high level. We gave you EBITDA guidance, 40 to 60 loss over the course of the year. You should probably tack onto that when you think about burn. You should probably tack onto it roughly $20 million, say, between cash interest, working capital changes as we go through the year. So you can think of that as sort of the entirety of the burn. And, you know, again, you can kind of map that out, I think, you know, over in the quarters as you, you know, proportionate to your EBITDA, if that makes sense. I think the first quarter, especially, as we went through and managed our expenses, we were very careful. We were very aggressive in how we managed our cash and our research, and we'll continue to do that, of course. But I think you'd probably see a little bit of a less burn in the first quarter as compared to the next three. Perfect.
spk05: That's great, Collar. Thank you. Another quick question, too. Are you guys seeing anything in terms of the pipeline for 2024? I know that for 2023, you saw pretty robust growth in that cohort class. And I know it's really early and you're not guiding beyond 2023, but I'm curious if you have any comments on the 2024 progression or, you know, if it's on track at this point.
spk00: We're very confident, thanks for the question, Jay. And The pipeline is we have a clear line of sight for 2024 growth, especially in the counties and the states and the geographies that we are in today and the providers. that we're engaged with today where they want to expand the relationship to all Medicare Advantage and all Medicare ACO patients that will be included in our platform coming 2024. So we have a clean line of sight for 2024 growth, and we'll continue to be very confident about it as well.
spk05: Okay, understood. Thanks. And then one really just quick last question, and this is going off Brooke's question on demand. I'm curious if you guys have seen any uptick in conversations with health systems, and if this is a segment you're looking to pursue, and maybe if you can just touch on the opportunity there. Thanks.
spk00: Thanks. Absolutely, we do. The health system, they are seeing the – The value in converting from fee-for-service to value-based contracting and engagement with the organization like ours into improving not only the health outcome but also the economics of their own medical group or engaged network. So we're seeing multiple health systems that have engaged with us to create that path to value-based contracting in 23 and 24.
spk06: Thank you. And, ladies and gentlemen, this concludes our question-and-answer session. I'd like to turn the conference back over to Sharif Abdul for any closing remarks.
spk00: Thank you very much, Rocco. Thanks again for all of you that joined us today and for your interest in P3. I want to finally make a comment about our excitement and commitment to our shareholders and our appreciation for the support of our shareholders in the capital raise that we successfully included late last night, early this morning. And we continue to look very optimistically into 2024 of reaching profitability and positive cash flow. and we look forward to engaging in our next quarter call. Thank you very much, everyone.
spk06: Thank you, sir. This concludes today's conference call. We thank you all for attending today's presentation. You may now disconnect your lines and have a wonderful day.
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