Q4 2022 P3 Health Partners Inc Earnings Call
Good day and welcome to the P. Three health partners fourth quarter 2022 earnings Conference call.
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I would now let's turn the conference over to Karen Bloomquist Director of Investor Relations. Please go ahead.
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.
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.
Okay.
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.
Could cause actual results to differ from statements made on this call.
As contained in our periodic reports filed with the SEC.
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 earnings release for a reconciliation of these non-GAAP financial measures because of the 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 P. Three health partners website.
Thank you and I will now turn the call over to Dr. <unk>.
Okay.
Thanks, Karen.
Good morning, everyone and thank you for joining our call today.
Hi, I'm delighted and excited to be here today to announce our new financing and to review the results of.
The year.
2022.
Okay.
We are very excited about the progress that we've made in 2022 and the possibilities we see.
For our population our teams.
Our business and for our shareholders as well.
Today.
I'll discuss three point number one.
The update on the liquidity and have the.
The capital raise that we just announced earlier this morning, we will get us through too.
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 'twenty 'twenty four with a clear path to do that and and finally, we'll discuss.
Possibility and impact in the questions that arose about the CMS advance notice and any other changes in the risk adjustment factor calculations.
Right.
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 <unk> partners, we have secured approximately $90 million in funding through an equity agreement.
We are grateful.
For the support and the confidence of our.
Shareholders.
Chicago Pacific founders Leavitt partners.
And other shareholders as well.
The capital that we raise will provide the financial resources to realize our strategic vision for B three.
And.
We believe and we will address that.
The details.
Of the of the capital raise.
Total GAAP, Scott, our CFO will address dose.
Calculation that is sufficient.
To get us through.
Two.
Cash flow positive and profitability in 2024 as a matter of fact, we're confident that that will get us in early <unk>.
2020 for profitability and cash flow positive.
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.
It is continuing in 2023.
In 2020 report that we've already have in our pilot Brian very impressive.
And consistent growth in all the markets that we are in already.
Second let me address the funding for members.
According to the filings we received.
The members that were with us in January 2022.
Have.
Demonstrated.
And average about 15% to 16% increase in their funding in January 'twenty two 'twenty three.
And overall them.
Older population in 2023, new and persistence have shown seven 7% increase in funding over January 2022.
Our medical costs continue to improve.
By an average of two 5% year over year.
And our medical margin in 'twenty, 'twenty, two and as Medicare margin calculated by CAD potato 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%.
And in year 2023, and as we continue.
Our leadership and our team performing consistent with the prior years.
That will lead to a clear path to profitability with the 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.
<unk> focus and improved our operating expenses year over year if you.
Clear all the operating expense in 2022 from all the one time.
Events in one time cost related to the <unk>.
Longer audit that we had to go through in 2022, and all of the professional fees attached to it.
We still have shown in 2023, a 23% to 25% improvement in our operating cost year over year.
So <unk>.
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 in patients.
Improvement in funding in a modest way that we've shown year over year.
Consistent improvement in the medical costs.
Two 5% year over year.
And that leads to advance of the medical margin.
Significantly in 'twenty, three and 'twenty four and.
Reduced operating expense that is the clear path to our profitability that is why we sit here today, we're very confident that we'll reach profitability in <unk>.
Early 'twenty 'twenty four.
Finally, let me address the question about CMS advance notice and other regulatory proposals to.
Address the risk adjustment factor and the funding and they in Medicare advantage program.
Our risk adjustment factor is very modest at one point to one point and one across the board for the all the populations that we our privilege and honor to serve with today.
We believe from all calculation that any removal diagnosis codes in advance notice or adjustment to the coefficient factors of calculating the risk adjustment factor.
I wouldn't have no material impact in the population that we serve.
And.
By checking the prevalence of the diagnoses that has been removed in our populations and the other impact factored in a coding intensity.
We see no material impact whatsoever.
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 and excitement about the support of our current shareholders and.
Capital raised that allow us to have a solid liquidity through our profitability and cash flow positive in early 2024.
And a clear path and insight into our path to profitability.
Early 2024, and finally, we address the question about funding by CMS with that I'm going to turn it over to a tool for a review of our financial results and give you more detail around our new financing and guidance as well as high level look at our 20 <unk>.
24 expectations.
Thank you Sheri.
Good morning, everyone. Since this is my first quarter speaking with you I just wanted to take a minute to tell you how excited I am to be part of the <unk>.
It is drawn to page three for a number of reasons first and most important is the mission of the company, which is defined as solution to the health care problems facing our nation, including high health care 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 P. Three that I get to work with.
Now, let me walk you through the fourth quarter and the full year 2022 numbers.
Topline results for 2022 were strong as the team executed and delivered with revenue of $1 $49 million.
There's tremendous growth of 65% versus 2021 and squarely in the middle of our guidance and even more indicative on a <unk> 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.
And this reporting cycle and to help our investors and analysts to understand our business better we have 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 parts <unk> services and network expenses, which include partner position expenses related to surplus sharing and other direct medical expenses incurred to improve care for our members.
Can see some more detail around that in our 10-K and our hope is that Atlanta, a deeper level of clarity around our model.
As <unk> mentioned, we had strong improvements in both medical margin in network contribution in 2022, and 2022, our medical margin, which represents the amount earned from capitation revenue. After medical claims expenses are deducted.
<unk>, 429% over the prior year to $662 million for $52 on a P. M. P M basis.
Network contribution, which we define as medical margin less network expenses.
Proved 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 as 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 and medical clinics and wellness centers from this amount.
Going forward, we are laser focused on driving efficiencies in our operations and managing our cash expenditures and as a result, we expect our platform cost support cost to decrease as a percentage of revenues going forward.
In fact, we decreased our platform costs as a percentage of revenues for around 15% in 2021 down to 11% 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 35000, new members to our platform.
Other nonrecurring transaction costs, plus additional expenses related to completing the extended 2021 audit.
For the three months ended December $30 22, we reported a net loss of $532 million compared to a net loss of $118 million in the three months ended September .
At December 31, 2021.
The increase in the loss was primarily driven by a goodwill impairment charge in the quarter of $463 million <unk>.
Excluding the goodwill impairment the loss increased by $69 million due to the increased number of members and costs associated with the audit the open on it.
Adjusted EBITDA loss was $128 million and 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 'twenty two.
Our full year EBITDA was impacted by $12 million related to 'twenty, one financial final Youre settlement, which was shifted back into 'twenty, one and recognized in that rear.
But in normal course would have been recognized in 2022.
Also related to the 'twenty, one audit, we incurred approximately $6 million in cost for services provided by audit firms financial consultants and other service providers and.
And finally, we incurred approximately $14 million of costs related to transactions, including the business combination and the <unk> 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 am very pleased with the continued support and the vote of confidence from our investors that participated in the $90 million pipe offering.
Our conviction in the <unk> story and the <unk> 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 <unk>.
As part of the offering and as more fully disclosed in the press release of the transaction. The company raised approximately $90 million of gross proceeds by issuing units priced at $1 11, with each unit consisting of a share of P. Three comment and 70 575 warrants and an extra price.
Exercise price of $1 13, which represents a 10% premium to the trailing five day moving average.
We're quite intentional about the size of this offering which does not contemplate the repayment of any debt redemption of any shareholders position and delivers capital directly to the company.
Given the early revenue in medical expense P. M. P. M results. So far this year, which are right on track with our plans with 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 <unk> III. We ended 22 with approximately $18 million of cash on our balance sheet.
Between the new capital from the pipe and the draws will be made on this year on our unsecured note that totaled just over 100 and with the continued cash inflows generated from our operations. We expect to end the year with resources to bridge the company not just fill profitability, but to kill 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 and 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 5 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 million to $175 million.
While we are while we arent providing quarterly guidance.
I think it would be helpful to point out a few unique factors about P. Three that may help investors better understand the broad contours of our various quarters end of our earnings progression a bit better.
<unk> recognizes revenue on a very conservative basis. Unlike more established companies in the space, we do not estimate and accrue for revenues for our year end true ups, but rather recognized that revenue based on cash and our certainty around that rabbit.
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 impacted utilization.
The third important factor this year will be our overall platform expenses. We are 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 third quarters with Q4 forest 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.
You all once again for your interest in the <unk> story, and with that I'm going to turn it back to the operator Rocco to open the floor to questions.
Rocco thank.
Thank you we will now begin the question and answer session.
To ask a question you May Press Star then one on your Touchtone phone.
You are using a speaker phone we ask that you. Please pickup your handset before pressing the keys.
Your question. Please press Star then two.
Today's first question comes from Brooks O'neil with Lake Street Capital markets. Please go ahead.
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.
The 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.
Yeah.
Thanks for your question really appreciate it.
Your interest here, so we've seen high level of demand across all of the three constituencies that you. Just described Brooks. So number one is that position or provider groups.
Usually the sales cycles are the engagement cycle use 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 as the pricing pressure on the fee for service.
Compensation from CMS and other payers continue we see the provider are very engaged and excited and looking forward to move into.
<unk> based contracting and full risk and also excited about using our our tools.
And from technology to the team surrounding them.
As the payers as they made commitment to their constituencies and as the <unk>.
The.
Evidence increase that people and patients in value base.
Contracting and value based relationship.
<unk>.
Have seen an improved clinical outcome.
Improved quality.
The payers are excited to move more and more into the value based contracting. So we are getting demand and engagement from all kinds of payers.
And in the marketplace and finally the patients.
The patients have really seen the benefits and experience.
A different experience from value based provider than the fee for service, where the added ability the accessibility and.
Transparency.
Information in.
In communication with them by the provider themselves or the surrounding team from <unk> III, we see that demand intends to apply an increase.
Continuously your year over year.
Great. Thank you. So 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 Jpmorgan Conference earlier this year was terrific and as it relates to the progress you're making with what the end markets and win.
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.
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 buckets, our cofounder and chief medical officers and the risks of the medical leadership.
Okay.
We see that in Arizona.
The progress continue.
Independently the market, Arizona will reach.
Breakeven and profitability this year and the medical margin continued to March.
Positively.
A.
Over 160 to $180 <unk> 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. Mitigate medical claims expenses ahead of a lot of our peers in this space and.
Continue to improve as well.
Great. Let me just ask one last one then I appreciate the color.
I don't think you've talked much about this obviously the last couple of years severely impacted by Covid in positive and negative ways.
Seems like cold, but it's into 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 come into the hospital and seeing their doctors or do you think it's gonna be a more normal year this year.
In that regard thank you very much.
Thanks Brooks.
So thanks for reminding us so.
The Covid as is.
Story.
Almost three stages.
The second quarter up 2020.
A significant retreat in the medical utilization and the medical cost that was artificially developed by the lockdown and the preventative measure from Goldman public and go into the hospital and emergency room as well.
Second the following.
When the Covid infection, and pandemic intensified and increase utilization through emergency room.
And and.
Day, two major variance that that head.
The population.
I'm crying and <unk>.
Variant that showed increase in utilization we recorded.
The last 18 months over $90 million of Covid related expense.
And 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 us is our success into managing the population, but I believe the COVID-19 impact is behind us positive or negative and we're back into.
Pre pandemic.
Standard utilization.
Adjusted by our our effective medical management and improvement in our medical costs as well so.
Thank you very much for the question Brooks.
Brooks and happy to hear you.
Youre, making very strong recovery and back to normal.
Thank you and our next question today comes from Josh Raskin of Nephron Research. Please go ahead.
Hi, Thanks, good morning.
I wanted to ask what the implied EBITDA margin for 2023, I think it implies a negative adjusted EBITDA margin of four 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 it if you could give some specifics on whats driving those medical cost ratio improvements that'd be helpful. And then I have a second question.
Yes, Josh this is a tool speaking thanks for the question. Yes look I think you can you can look at it a combination of a lot of things to principally we're feeling strong about the way that our revenue <unk> are are progressing you saw a pretty big.
Just looking into 'twenty, one to 'twenty two that was almost 10% as we were talking about so where we've got some.
Some assumptions in our in our forecast in 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 its sharif was talking about earlier.
We've seen good traction in that regard as well as far as the the SG&A reductions I mean, there were considering some of that as well but.
On balance we think that this is this guidance is really driven by all of those components working together it is not especially dependent on any one.
Factor, we've got a number of different differ.
The different levers moving around.
Okay. That's helpful Languishes, 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 are calling funding improvements or reimbursement improvements. So I'm trying to figure out how are you seeing a 15% to 16% improvement in funding you know in.
In the first year of the 2022 members and yet your risk scores are still one to one I think you said one point or 1.1.
And again going back to that medical expense is as a large majority of that improvement in risk coding or is some of that medical cost management too.
Thanks, Josh it's a combination.
Number one the percentage for the population that were there in 'twenty, two and that was still with us in 'twenty three it's a combination of the benchmark improvement in the counties that we are in in addition to the.
Increase of a percentage.
<unk> dual.
Eligible populations that comes with a higher funding and also the.
Our engagement with the.
Chronic.
Special needs program, which also comes with a higher funding so the and the average of.
The risk scoring that a share is across all population and.
An annual average because at the end as you are.
Very well know that there is a degradation over a period of time for population.
The <unk>.
Severely ill population kind of depart and and the new patients come in with <unk>.
Eight average.
<unk>.
Risks, so that modified the risk score across all populations throughout an average year.
Like I said the.
Overall population churn increased seven 7%.
And.
Specific resistant population have shown an increase of.
16% and that's a combination between the risk scoring.
Benchmark adjustment and an increase of.
Dual risk population percentage in our population.
Okay. So I want to make sure I get this correctly I think it's important that 16% that you quoted in terms of increased P. M. P. M. That's not risk coding right or were there some component of correct.
That's more mixed okay, how much does the risk coding component of about 16 is there an estimate there.
Yeah, So it's about 3% to 5%.
Across all population of course, the bank from one population to other but about 3% to 5% of that is.
And risk adjustment.
Okay. That's super helpful. Thanks again.
Thank you and ladies and gentlemen, as a reminder, if you'd like to ask a question. Please press Star then one on.
Our next question today comes from Ryan Daniels William Blair. Please go ahead.
Hey, guys. This is Jackson on for Ryan Daniel Thanks for taking my question. So.
So just first when looking at the cash burn in the fourth quarter it looks to be slightly elevated in and I understand 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 just 2023 get you, mostly there where the cash burn tapers quite a bit or.
I guess, just kind of how should we think about this going forward. Thanks.
Yes, Jack Thats Great question. 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.
Reasonable proxy do you think for you to think about the <unk>.
The burn as we progress through the year.
But again, you can think of it as a 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 a roughly $20 million say of 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.
Again, you can kind of map that out I think.
Over in the quarters as is.
Proportionate to your EBITDA does that make sense I think in the first quarter, especially as we went through and manage our expenses. We were very careful we were very.
Aggressive in how we manage our cash and our resources and we will continue to do that of course, but I think you'd probably see a little bit on the last burn in the first quarter as compared to the next three.
Perfect. That's great color. Thank you. Another quick question. Two are you guys seeing anything in terms of the pipeline for 2024, I know that for 2023 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 2020 for progression or if it's on track.
This point.
We were very confident thanks for the question Jay.
And the pipeline is we have a clear line of sight for 2024 growth in especially in the counties and states and geographies that we're in today and the providers that we're engaged with today, where they want to expand the relationship.
To all.
All Medicare advantage and all Medicare.
ACO patients that are in.
It will be included in our platform will come in 2024. So we have a clean line of sight for 2020 for growth and we'll continue.
Continue to be very confident about it as well.
Okay understood. Thanks, and then one one really just quick last question. This is going up for a question on demand I'm curious you guys have seen any uptick in conversations with in conversations with health systems and if this is the segment you're looking to pursue and maybe if you could just touch on the opportunity there. Thanks.
Thanks, absolutely we do.
The health system they are seeing.
The value and converting from a fee for service to value based contracting and the engagement with the.
Organization like ours into.
Proving not only their health outcomes, but also the economics of their.
Owned medical groups are engaged network. So we're seeing multiple.
Health system that are engaged with us to.
To create that path to value based contracting in 'twenty, three and 'twenty four.
Thank you and ladies and gentlemen. This concludes our question and answer session I would like to turn the conference back over to Teresa Madden for any closing remarks.
Thank you very much Rocco.
Thanks again.
For all of you that joined US today and for your interest in <unk> III.
And.
Just wanted to finally make a comment about our excitement and commitment to our shareholders and our appreciation for the support of our shareholders and the capital raise that we successfully concluded late last night early this morning.
We continue to.
Look very optimistically into 2024 of reaching profitability and positive.
Positive cash flow.
We look forward to engaging in our next quarter call. Thank you very much everyone.
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.