Evolent Health, Inc.

Welcome to Evalent Health's earnings conference call for the quarter ended September 30th, 2021. As a reminder, this conference call is being recorded. Your host for the call today is Mr. Seth Blackley, Chief Executive Officer of Evalent Health. This call will be archived and available later this evening and for the next week via the webcast on the company's website in the section entitled Investor Relations. Here is some important introductory information. This call contains forward-looking statements under the U.S. federal securities laws. These statements are subject to risks and uncertainties that could cause actual results to differ materially from historical experience or present expectations. A description of some of the risks and uncertainties can be found in the company's reports that are filed with the Securities and Exchange Commission, including cautionary statements included in the current and periodic filings. For additional information on the company's results and outlook, please refer to its second quarter news press release issued earlier today. As a reminder, reconciliations of non-GAAP measures discussed during today's call to the most direct comparable GAAP measures are available in the company's press release issued today and posted on the investor relations section of the company's website, ir.evalinthealth.com, and the 8K filed by the company with the SEC earlier today. At this time, I will turn the call over to the company's Chief Executive Officer, Mr. Seth Blackley. Please go ahead.

Thank you, and good evening. I'm Seth Blackley, Chief Executive Officer of Evelyn Health, and I'm joined by John Johnson, our Chief Financial Officer. I'll open the call this evening with a summary of our recent results, including an update on our key investment themes, which are, one, strong organic growth. two, expanding EBITDA margins, and three, efficient capital allocation. Next, I'll share highlights on innovations across the business. I'll then hand it to John to take us through a more detailed financial review of the third quarter results, as well as provide fourth quarter guidance. I'll close with a summary of our key focus areas. As always, we'll be happy to take questions at the end of the call. We have shared a summary of our quarterly financials and highlights for your reference and a presentation available on the events section of our IR website, ir.evalenthealth.com. In terms of the financial overview and results for the quarter, total revenue for the quarter ended September 30, 2021 was $222.5 million. Adjusted EBITDA for the quarter ended September 30, 2021 was $13.8 million. As of September 30, 2021, we had a total of 14.7 million lives on the platform, including approximately 3 million lives on the performance suite, plus an additional 11.7 million lives on our new century health technology and services suite platform. Overall, we're pleased with our continued momentum on organic growth and earnings power, and we are raising our guidance across both revenue and adjusted EBITDA for the year. Turning to an update on our three investment themes. Our revenue result represents year-over-year growth of 36.3%, which excludes divested assets, as we continue to deliver on our first investment theme of strong organic growth. Today, I'm happy to announce three new partnerships, bringing our total this year to 10 new partners and exceeding our target of six to eight new partners. We're pleased to announce Evelyn Care Partners continues to grow its ACO network and has entered into two new agreements with Sunflower Medical Group, a medical group based in Kansas City, and Northern Medical Group, a medical group in the state of New York. Together with the two provider groups announced in August, Our Evelyn Care Partners network on January 1st, 2022 will already be expanded by over 200 providers, a 20% growth from current levels with the opportunity to add additional partners before 2022. This strong growth is driven by Evelyn Care Partners' demonstrated ability to increase physician compensation and help providers deliver better care, not more care. These drivers will continue as we expand into new markets and with new practices in 2022. Additionally, we're excited to announce we entered into an agreement with Health New England, a leading not-for-profit provider-owned health plan to utilize our New Century Health Vital Decisions Platform. New Century, through our Vital Decisions Platform, will be offering its telehealth and digital solutions to Health New England's Medicare, Medicaid, and commercial members in Massachusetts and select neighboring states. The partnership went live on October 1st, and over 180,000 Health New England members will have access to the Living Well program to work with our advanced care planning specialists who ensure care preferences and goals of care are communicated to families and medical teams and are reflected in individuals' care plans. This signing, along with the future possibility of further integrated new century health in this geography, has been validation for the transaction rationale we laid out last quarter. Second, we continue to deliver on our theme of adjusted margin expansion. Our adjusted EBITDA margin performance was on track, and our adjusted EBITDA results for the quarter met expectations. And third, we remain focused on disciplined capital allocation. As John will discuss in more detail, we generated significant cash flow from operations in the third quarter, are expecting continued cash generation for the balance of the year, and we end the quarter with a total available cash balance of $191 million. Overall, we continue to execute on our key investment themes and are encouraged by our strong performance and momentum as we head into 2022. This momentum is driven by our execution, a diverse new business pipeline, expansion with existing relationships, and a favorable macro environment. To close out this section, I do want to share a little more detail on the macro environment. Value-based care continues to gather significant momentum. As an example, CMS recently released a new strategic plan indicating the administration will be doubling down on the path to transforming value-based care. One objective of the strategic plan is ensuring all Medicare and vast majority of Medicaid beneficiaries are in value-based relationships by 2030. As of today, we already have approximately 730,000 Medicare Advantage lives on our performance suite, and our opportunity in this market continues to expand as Medicare Advantage enrollment is forecasted to grow by approximately 8% a year through 2025. Another focus of CMS's plan is to potentially increase mandatory value models within the fee-for-service Medicare program, which would likely present opportunities for Evelyn Care Partners and New Century Health. Equally, if not more importantly, we believe private payers will continue to turn to value-based models in primary and specialty care to solve longstanding cost and quality issues. For example, oncology cost trends for payers exceed 10% annually, and the FDA pipeline is filled with high-cost oncology therapeutics, creating an ideal macro environment for the expansion of new century health. These trends are strong tailwinds for Evelyn, and we feel well-positioned to play an ongoing role in this important transformation in healthcare. Turning to the next section, I'll provide updates on our three solutions. Our growth and profits are a direct result of the value we create in the form of higher quality care, better outcomes, and lower costs in these three solutions. A core part of our capital allocation strategy is to continually innovate in these three focused areas, making sure we're delivering on our mission. Let me give you a few examples of this focused innovation. First, in our specialty solution area, New Century Health, it's not an exaggeration to say that billions of dollars are poured down the drain each year in the form of drug vials that are opened, but that are eventually discarded. This money could have been spent treating other patients. For example, in 2018, close to $80 million was spent just on discarded units of Herceptin, a breast cancer drug, that could have covered the Medicare spending to treat close to 2,000 additional women with Herceptin. To address this issue, New Century developed a new program that automatically rounds therapeutic doses to the optimal amount within clinical guidelines and based on detailed review of literature. often creating opportunities to optimally treat a patient while opening one fewer vial of the therapeutic. This dose-rounding module has the effect of reducing waste, lowering clinical toxicity, and lowering costs for our partners and their patients. We recently went live with this product module with both Centene and Humana. We're also happy to report that the acquisition of Vital Decisions closed on October 1st and is now part of the New Century Health Organization. We believe the combination of Vital Decisions member engagement ability with New Century Health physician engagement ability will increase the breadth and quality of service we deliver to our partners and their members. Again, the partnership with Health New England is a great early indicator of Vital's growth momentum. And while it's still early, we are excited to welcome the talented Vital team to the Evelyn family. Next, I'd like to share a bit more about the innovation going on in the total cost of care section of our clinical solution segment, Evalent Care Partners. As a reminder, we launched this solution in 2019 with the simple idea to use the capabilities and expertise we developed over the last decade and which are made available on a fee basis through Evalent Health Services to enable independent primary care physicians to succeed through our primary care risk model. Through this evolution to Evolunt Care Partners, we have the opportunity to serve a much larger market at higher margins by directly managing the premium dollar in Evolunt Care Partners, as well as position ourselves as an ideal partner for independent primary care physicians looking for a risk arrangement. Two years in, we're very pleased with our early progress. In September, CMS announced the results for our first year of operation, results that place Evelyn Care Partners among the top 10% for first-year scaled ACOs in the history of the ACO program. The business is built on three principles. First, the opportunity in primary care is large. There are approximately 500,000 primary care providers, and just under half are members of smaller independent practices. Second, based on our experience in value-based care, we know what works and we focus only on what works. Our Proprietary Panel Insight Solution, a module of IDENTIFY, prioritize interventions for care managers and physician practices. Prioritize interventions are one instance of how we drive efficiency for our partners. For example, Evelyn Care Partners recently completed a campaign to support our primary care providers in conducting more annual wellness visits for patients. These wellness visits came at no cost to patients and have been shown to have positive effects on quality, preventative care, and chronic condition management. In the first three months, the campaign led to a 22% increase in annual wellness visits. Based on our experience, these visits are critical to maximizing quality of care and building the foundation for trusted long-term relationships between patients and primary care physicians. This relentless focus on efficiency and maximizing quality of care means that for each dollar invested in directly operating Evelyn Care Partners, we delivered $7 of savings in year one in the form of savings to Medicare, increased compensation to physicians, and Evelyn profits. We believe this efficiency is highly differentiated at national scale. Based on our experience over many years of operating ACOs, the savings rate should increase meaningfully over time. For example, our third year of operations with our partner ACOs served by the Avalon Health Services fee model resulted in an average savings of 6.9% as compared to 3.8% in the first year for Avalon Care Partners. This expected evolution could create tailwinds in both physician compensation and Avalon profits. Third, We grow by affiliating with providers. This affiliate model means providers can partner with us without giving up their practice, changing their system with other unique undue burdens. And it means we can grow without significant capital investment. Overall, this model produced $21 million of gross savings for performance year 2020 for approximately 55,000 members. Today, we have 90,000 members. with continued growth already contracted for next year. This growth, combined with expected year-over-year expansions in the savings rates, gives Evelyn Care Partners strong momentum headed into 2022. Finally, Evelyn Health Services continues to provide unique value to health plans and risk-bearing providers by coupling our clinical solutions with our end-to-end administrative solution. This clinical platform is the same that is deployed in Evelyn Care Partners with powerful results. ACOs supported by Evelyn Health Services in 2020 saved a total of $106 million in Medicare programs. We believe this technology, when integrated with our administrative solutions, makes Evelyn Health Services a leading platform for health plan operators and risk-bearing physicians. We've been busy in this segment this year, driving strong results for our existing partners and implementing our previously announced health plan partnership going live next year. We expect this important partnership to support 200,000 lives across multiple geographies as we provide our proprietary technology platform, Identify, as well as a broad array of other services. This partnership will have PMPN's consistent with other broad Evelyn Health Services relationships, and importantly, as upside as the plan expands nationally. Further, Evelyn Health Services continues to provide important integration value across Evelyn, supporting both Evelyn Care Partners and New Century Health through technology, services, and cross-selling opportunities. Overall, our decade of experience leading the market in value-based care coupled with our clinical and technical innovations, are major differentiators for Evelyn. We believe our unique solutions deliver improved health outcomes while lowering the cost of care, which continues to be a growing focus of the market. As we head into 2022, we're seeing strong momentum as our solutions are delivering differentiated performance for our partners, and we have very good traction with new partners. I'll now turn it over to John to give you more details about our financial performance in the quarter. as well as to provide guidance.

Thanks, Seth, and good evening, everyone. Our financial results for the quarter delivered on all three of our strategic goals with strong organic growth, profitability, and attractive cash flow. Let me say a bit about each before walking through results by segment and ending with guidance. Our revenue year to date is now 35.6% higher than it was for the same period last year, excluding divested assets, demonstrating a consistent track record of growth since 2019, with a CAGR of about 34%. At the end of the quarter, we had 14.7 million members on our platforms, and with the addition of Vital Decisions on 10-1, that number now exceeds 17 million. Our profitability in the quarter was strong, particularly in our clinical segment, and driven by shared savings for our Evelyn Care Partners solution. Let me comment briefly on how these shared savings translate to profits to Evelyn, and I'll reference page seven in the presentation. In 2020, we created $21 million of savings, or about $32 per member per month, across 55,000 lives. As Seth mentioned earlier, Those 55,000 lives have grown substantially, and we would expect the $32 per member per month savings to also grow over time, creating the opportunity for revenue and earnings expansion each year. Of those savings, Medicare keeps the first 25%, and we recognize the other 75% as revenue for Evelyn's care partners. We then share a portion of the savings after operating expenses with the physicians in the network. and the rest becomes evident profit. The revenue in these shared savings models is recognized on a delay as we receive and analyze data on our performance. The bulk of the revenue recognized for that solution in Q3 was for performance year 2020. We expect this seasonality to persist into next year, leading to elevated clinical solutions revenue in Q3 versus other quarters. Cash flow in the quarter was strong, driven by our EBITDA results and cash from timing of working capital, and we ended the period with $191 million in available cash, excluding cash held for passport. Cash deployed for software development and purchases of PP&E was $7 million. Net debt, which we define as the face value of our convertible notes less available cash, was $125.4 million at quarter end, resulting in a net debt leverage of 2x versus LTM-adjusted EBITDA. As we look at our balance sheet over the next two quarters, I would note three main items outside of normal operations. First, we deployed $42.5 million in cash in our purchase of vital decisions on 10-1. Second, the $27 million in remaining 2021 convertible notes will mature this December. and the holders of those notes may choose either equity conversion or a cash retirement. And third, we expect a payment to us of $23 million in the first quarter of 2022 for the second half of our earn-out payment for Passports membership. Now, let me take you through consolidated and segment-specific results before ending with an update on guidance. Total revenue of $222.5 million in the quarter represents a decrease of 7.1% year over year. More importantly, revenue less divested assets, that's $218.9 million, increased 36.3% from $160.5 million in the prior year due to growth from new partner additions as well as same-store sales growth. Adjusted EBITDA of $13.8 million was consistent with the same period of the prior year on a lower revenue base. the result of our margin expansion trajectory. Turning to our segment results, within our clinical solutions segment, revenue in the second quarter increased 13.9% to $159.6 million, up from $140.1 million in the same period of the prior year. Excluding revenue from divested assets, clinical solutions revenue grew 51.3%. Q3 adjusted EBITDA from clinical solutions was 23.9 million compared to minus 1 million in the prior year. This strong EBITDA performance was largely driven by shared savings timing at avalanche care partners, with performance at New Century Health remaining consistent relative to performance during the first half of the year. Looking at the year-over-year comparison, Clinical Solutions EBITDA in the same quarter of 2020 was impacted by elevated New Century Health costs related to COVID. Membership in our Performance Suite for Clinical Solutions was $1.5 million relative to $1.6 million in Q3 of the prior year, with a PMPM of $34.16 versus $29.92. Membership in our New Century Health Technology and Services Suites for Clinical Solutions was 11.7 million relative to 4.9 million in Q3 of the prior year, and with a PMPM of 36 cents versus 41 cents in the Q3 of the prior year. The PMPM decline was in line with expectations consistent with strong growth in Medicaid and commercial membership, which have slightly lower PMPMs than Medicare Advantage. Within our Evaluant Health Services segment, Third quarter revenue decreased 36.8% to $63.3 million. Excluding revenue from divested assets, Evelyn Health Services revenue grew 7.8%. Membership in our performance suite for Evelyn Health Services was $1.6 million relative to $1.8 million in Q3 of the prior year, with a PMPM of $13.19 versus $17.64. adjusted EBITDA from our Evalent Health Services segment for the quarter was minus 3.4 million compared to 24.6 million in the prior year. This segment EBITDA was driven by two factors. First, core Evalent Health Services EBITDA was consistent with the first two quarters of the year with continued strong execution. Second, as a part of our sale of Passports assets last year, we are eligible for an additional performance payment for 2020 based on plan operating results. Our original estimate of this amount was $13 million to the positive. Based on updated run-out of claims, we are moving that estimated accrual to positive $5 million, which had an overall negative $8 million impact on the quarter. With well over $100 million of capital returned to date, we remain pleased with performance at Passport and are on track to meet or exceed the high end of our estimates on capital return. Finally, corporate costs decreased 31.6% to $6.8 million, down from $9.9 million in the same period of the prior year. This decrease was the result of continuing to execute on our commitment to reduce overhead while still delivering strong operational and clinical performance for our partner organizations. Turning to guidance, we are pleased with our progress against our financial objectives for the year. We now expect total revenue for the year to be in the range of $884 to $900 million. We are forecasting full-year adjusted EBITDA to be in the range of $56 to $60 million. For the fourth quarter specifically, we are forecasting total adjusted revenue of $225 million to $240 million. and we are forecasting total adjusted EBITDA of 14 to 18 million. With that, I will turn it back over to Seth.