Oak Street Health, Inc.

At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. We note that today's call will be approximately 60 minutes in length. Please be advised that today's conference is being recorded. Hosting today's call are Mike Peikos, Chief Executive Officer, and Tim Cook, Chief Financial Officer. The Oak Street Press release webcast link and other related materials are available on the investor relations section of Oak Street's website. These statements are made as of May 11th, 2021 and reflect management's views and expectations at this time and are subject to various risks, uncertainties, and assumptions. This call contains forward-looking statements, that is statements related to future, not past events, In this context, forward-looking statements often address our expected future business and financial performance and financial conditions and often contain words such as anticipate, believe, contemplate, continue, could, estimate, expect, intend, may, plan, potential, predict, project, should, target, will or would, or similar expressions. Forward-looking statements by their nature address matters that are, to different degrees, uncertain. For us, particular uncertainties that could cause our actual results to be materially different than those expressed in our forward-looking statements include our ability to achieve or maintain profitability, our reliance on the limited number of customers for a substantial portion of our revenue, our expectations and management of future growth our market opportunity and our ability to estimate the size of our target market the effects of increased competition as well as innovations by new and existing competitors in our market and our ability to retain our existing customers and to increase our number of customers please refer to the annual report for the year ended december 31st 2020 filed on form 10k with the Securities and Exchange Commission where you will see a discussion of factors that could cause the company's actual results to differ materially from these statements. This call includes non-GAAP financial measures. These non-GAAP financial measures are in addition to and not as a substitute for 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 similar titled non-GAAP financial measures differently. Refer to the appendix of our earnings release for a reconsolidation of these non-GAAP financial measures to the most directly comparable GAAP measures. With that, I'll turn the call over to Mike Peikus, CEO of Oak Street. Please go ahead.

Thank you, Operator. And thank you to everyone that is joining us this morning. Joining me on today's call is Tim Cook, our Chief Financial Officer. I'd like to start my comments this morning by once again thanking our team members who continue to work tirelessly to support our patients and communities. Like most of the country, it is a time of transition and an exciting time at Oak Street. As vaccination numbers rise, COVID case counts drop, and society continues on a path back to normalcy. Oak Street has fully vaccinated over 105,000 people and administered over 150,000 vaccine doses. This vaccination effort was an all-hands-on-deck effort. In addition to vaccinating our patients during visits, we opened up our community rooms to older adults in the neighborhoods we serve, and in early spring, when the demand was peaking, we kept our facilities open on nights and weekends to improve access and positively impact the communities we serve. Given the majority of our centers serve lower-income communities with large minority populations, our vaccination efforts, just like our primary care model, help reduce inequities in the communities most impacted by COVID. Looking forward, we are transitioning back to normalcy on the operations front. We have moved most of our team members that were remote back into our centers and are beginning that process for our call centers. While obviously an adjustment for some team members after over a year of working remotely, we are excited for the relationship building and development opportunities being in person will enable for our teams. We believe being in person will create a positive talent from an efficiency and quality perspective across our teams for the remainder of the year. We are also beginning to cautiously resume community marketing events. While those are largely consisting of outdoor and socially distanced events at this time, we are hopeful that if we continue the current trends of vaccinations and declining cases, we will be able to execute a greater number and variety of events over the coming months. We are seeing progress on patient acquisition as our communities continue to reopen, and we are hopeful that it is a trend that will continue as the year progresses. As many of you heard me say, we believe our care model. which we develop internally and are continuously refining, is best in class in the market today. A key to the effectiveness and scalability of our model is Canopy, our proprietary data and technology system that powers our providers' workflows every day. Canopy enables us to aggregate massive amounts of disparate data to develop customized care plans. Since we only serve Medicare patients, we are able to execute the same care model across all of our patients. This, in turn, allows us to embed Canopy across all of our teams and use the system to help us care for every single patient in every center every day. We also hear from clinicians new to Oak Street who are working other value-based care models how refreshing it is to have the technology provide the necessary information in real time versus having to periodically review gap reports after patients have been seen. Our use of statistics are a great indicator of Canopy's importance to our team. In Q1, our providers activated Canopy on average four hours per day. I want to share two external data points from the past couple months on the impact of Canopy. First, the New England Journal of Medicine's Catalyst published a study showing the accuracy of our proprietary patient risk algorithms compared to just physician judgment. Our algorithms, which incorporate over 1,000 data fields, many unique to Oak Street, were developed using machine learning technology. Compared to provider judgment alone, Canopy's algorithms improve the accuracy of emissions and mortality prediction by 2x and 3.5x, respectively. Second, our Canopy application was recently awarded MedTech Breakthroughs EHR Innovation Award. In addition to our continued investment in Canopy, we also continued expanding our center base in the first quarter, opening seven new centers in four new markets across Louisiana and South Carolina, and we remain on track to open 38 to 42 centers this year. We've announced future centers in Georgia, Kentucky, and Alabama, and will likely also expand to several additional states over the remainder of 2021. We continue to feel confident in our ability to, at a minimum, maintain the effectiveness of our care model, as well as our ability to sustain the unit economics we have historically generated as we increase the pace of expansion. So long as we continue to maintain and improve our clinical results and patient experience and meet or exceed our historical unit economics, we will increase our new center opening pace each year as the white space in our market is vast. As a reminder, our market is comprised of over 27 million Medicare beneficiaries and can support nearly 10,000 Oak Street centers. Given the significant capital we raised during the quarter as part of our $920 million convertible note offering, we have ample capital to support our growth strategy. On April 1st, we officially began participating in the CMMI direct contracting model. As a reminder, the direct contracting program will enable Oak Street Health to assume financial risk for the cost of care for patients covered by traditional Medicare. Prior to direct contracting, we're only able to assume risk with patients covered by Medicare Advantage. We expect to serve approximately 6,500 patients in Q2 2021, and we would expect those patients to grow in Q3 and Q4 of 2021 and beyond as we grow our patient families. CMS recently announced a moratorium on new applicants. That moratorium does not prevent us from adding new markets to our current direct contracting footprint. Early data that we have received related to patient revenue and historical medical costs suggests that the per-patient economics will potentially be better than we initially estimated. This reinforced our confidence in our ability to benefit from the investment we make in our traditional Medicare patients' care by taking risks through the direct contracting program, similar to our demonstrated success taking risks working with Medicare Advantage plans. Finally, turning to Q1 results, we generated record revenue of $297 million in the quarter, exceeding the high end of the guidance we communicated to investors and representing 47% growth compared to Q1 2020. We cared for 75,500 at-risk patients as of March 31st. We'd like to point out that the 47% revenue growth is off a pre-COVID comparison quarter in Q1 2020 compared to a COVID-affected quarter in Q1 2021, and the growth in Q1 2021 is in spite of low growth for the spring and summer of 2020. We are confident that we will exceed 50% quarter-over-quarter growth for the foreseeable future. In summary, we continue to be very excited and encouraged by our clinical results, our center expansion opportunities, our patient acquisition momentum, and our patient economics for both MA patients and direct contracting patients. It's a very, very exciting time at Oak Street. I will now turn it over to Tim Cook, who will walk you through our financial results in more detail. Tim?

Thank you, Mike, and good morning, everyone. We were pleased with our first quarter as we delivered results above the high end of the guidance we had provided in March. In terms of membership, our at-risk patient base, which drives our financial performance, grew by 37% to 75,500 patients. At the end of the first quarter, we operated 86 centers, an increase of seven centers compared to December 31, 2020, and representing 32 more centers than the 54 we operated at the end of the first quarter of 2020. Capitated revenue of $291.2 million grew 48% year-over-year, driven by growth in our at-risk patient base. Total revenue grew 47% year-over-year to $296.6 million. Our strong revenue growth was primarily driven by the increase in our at-risk patient base. I will note that $6.9 million of capitated revenue in the first quarter of 2021 was related to 2020 patient retroactivity, where payers paid Oak Street a catch-up for patients managed in 2020 but not previously included on our rosters. Our medical claims expense for the first quarter of 2021 of $199.7 million represented growth of 51% compared to first quarter of 2020. $6.6 million of our first quarter medical claims expense was related to 2020, primarily related to the previously mentioned patient retroactivity. Our cost of care, excluding depreciation and amortization, was $60.3 million for the first quarter, an increase of 38% versus the prior year, driven by growth in the number of centers we operate and our more team members to support our larger patient base. Sales and marketing expense was $24.1 million during the first quarter, representing an increase of approximately 103% year-over-year as we continue to invest in this area to support patient growth and a much larger footprint of centers. Corporate general and administrative expense was $72.9 million in the first quarter, an increase of 200% year over year. The majority of this year over year increase is related to an increase in stock-based compensation expense, which represented $41.2 million of G&A expense in the first quarter of 2021 compared to $1.7 million in the first quarter of 2020. As a reminder, the increase in stock-based compensation is primarily related to an accounting change related to awards issued prior to our IPO in August 2020 and is not a function of stock awards issued since our IPO. Excluding stock-based compensation, corporate general and administrative expense was $31.7 million in the first quarter of 2021, an increase of 40% compared to the first quarter of 2020, driven by costs necessary to support the continued growth of our business. I will now discuss three non-GAAP financial metrics that we find useful in evaluating our financial performance. Patient contribution, which we define as capitated revenue less than medical claims expense, grew 42% year-over-year to $91.5 million during the first quarter. We expect at-risk per patient economics to improve the longer that our patients are part of the Oak Street platform. Platform contribution, which we define as total revenue less the sum of medical claims expense and cost of care excluding depreciation and amortization, was $36.7 million, an increase of 43% year-over-year. As an individual center matures, we would expect both platform contribution dollars and margins to expand as we leverage the fixed costs associated with our centers, as well as improving our appropriation economics over time. Adjusted EBITDA, which we calculate by adding depreciation and amortization, transaction offering-related costs, and stock-based compensation but excluding other income to net loss, was a loss of $17.4 million in the first quarter of 2021 compared to a loss of $8.7 million in the first quarter of 2020. We finished the first quarter with a strong balance sheet and liquidity position. During the quarter, we completed a successful convertible debt offering, issuing $920 million in aggregate principal notes due in 2026 at a 0% interest rate with an initial conversion price of $79.16 per share. Our net proceeds after issuance costs were $898 million. We used a portion of these proceeds to purchase a cap call, which increased the effective conversion price to $138.88 per share. As of March 31st, we held approximately $1.15 billion in unrestricted cash. Our liquidity position will support our continued growth initiatives, primarily our de novo center expansion. Cash used by operating activities was $8.8 million in the first quarter of 2021, while our capital expenditures were $7.8 million for the quarter. Now I'll provide an update to our 2021 financial outlook. For fiscal 2021, we are increasing our guidance for total at-risk patients to a range of 107,000 to 112,000 patients, including our direct contracting patients. We are increasing our full-year revenue guidance to a range of $1.3 billion to $1.34 billion from our prior outlook of $1.275 to $1.325 billion. while our adjusted EBITDA guidance has been tightened to a loss of $205 million to a loss of $165 million. We continue to expect to have 117 to 121 centers open by December 31, 2021. For the second quarter of 2021, we are forecasting revenue in a range of $315 to $320 million and an adjusted EBITDA loss of $40 million to $35 million. We anticipate having 93 to 94 centers in an at-risk patient count of 86,000 to 87,500 patients, including direct contracting patients, at June 30, 2021. We'd like to make one final comment regarding stock-based compensation expense, as we have received a number of questions on this topic. As I mentioned earlier, the vast majority of the increase in stock-based compensation was driven by the accounting treatment for pre-IPO awards dating as far back as 2016 that converted from an uncertain vesting timeline to a defined vesting timeline at IPO. These awards vest between August of 2022 and August 2023. Q4 2020 was our first quarter that reflected the full quarterly cost of this accounting treatment. We expect our stock-based compensation expense to remain at elevated levels until August of 2022, when the expense will begin to taper significantly as some of these awards are fully expensed. By August 2023, we would expect stock-based compensation expense to reflect market equity compensation. And with that, I'll turn the call back over to the operator, and we'll now take questions. Operator?