P3 Health Partners Inc. Q3 FY2022 Earnings Call

Greetings, and welcome to P3 Health Partners Third Quarter 2022 Earnings Conference Call. At this time, all participants are in a listen-only mode. A brief question and answer session will follow the formal presentation. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Karen Blomquist. Please go ahead.

Thank you, operator, 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 operations. 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 factors that could cause actual results to differ from statements made on this call is 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 our earnings release for a 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 Investors page of the P3 Health Partners’ website. I will now turn the call over to Dr. Abdou.

Thanks, Karen. Good afternoon, everyone, and thank you for joining us in our call today. I know it has only been a few weeks since our last update and as promised, we are now back on a normal cadence of earning releases. I would like to start by providing a snapshot of the results and the strong demand we see for our value-based care. I will then turn the call over to Erin Darakjian, our Interim CFO for the financial review. And finally, we will turn it over to Dr. Amir Bacchus, our Chief Medical Officer and Co-Founder who will provide some insight into P3 through the lens of the position. I will just start by saying we had a strong third quarter with a robust underlying performance. Our membership is up 67% from the third quarter last year. In the third quarter, we achieved nearly a 60% increase in revenue compared to the prior year. We had roughly a 180 basis point improvement in gross margin in the first nine months of 2022 compared to the same period in the prior year. Our EBITDA per member per month improved approximately 6.5% in Q3 of 2022 compared to the prior year. Our base cohort on our platform for over 36 months continues to improve and achieve an average of 11% annual improvement in medical cost. We are seeing consistent improvement in our medical margin, which is capitated revenue minus medical expense. We are also anticipating a robust pipeline for 2023. We believe that our growth in 2022 continues to demonstrate that our vision to be a leader in transforming healthcare with our patient-centered, outcome-oriented care model is succeeding. In more and more markets across the country, growth in the value-based care model has not only gained traction, but is proving its relevance with nearly 50% of the Medicare population now on Medicare Advantage. At P3, we are succeeding by engaging patients, providers, and payers in the singular goal of achieving better clinical outcomes while simultaneously lowering the cost of care. Let me highlight a few examples of how we are leveraging the value-based care model to make significant strides in this important journey to transform healthcare. The P3 service model historically has incentivized the excess utilization of high-acuity services. P3 and our physician-led leadership understand the disconnect that ultimately leads to poorer, more costly care for patients and physician burnout. That is why it is critical that we shift that paradigm to the benefit of our patients, providers, and lower the overall cost of care. We know that we must rewrite the social and moral contract between physicians and patients. The value-based model removes the pressure on primary care physicians to operate in a high-volume environment, which is frequently characterized by over-packed schedules, with limited opportunity to fully engage with patients to assess their overall health, life circumstances, and social determinants of health that may affect their care and clinical outcomes. Value-based care replaces volume-based care with teams, tools, and technologies to align the social, moral, and economic incentives between providers, patients, and payers. Our integrated clinical review technology solution enables providers to have a 360-degree view of the patients so that they have the right insights around the patient's potential medical condition at the point of care. During the patient visit, in our model, the physician, the patient, and the payer all benefit from the patient's better clinical outcomes. As you may have seen in our Q3 earnings press release today, we are changing our adjusted EBITDA guidance. As always, I want to provide transparency and clarity for you as our shareholders. First, as a result of the length of the 2021 audit, we had to shift some revenue that would typically have been reflected in the current year back into the prior year. Second, the cost of the 2021 audit and restate process were sizable and impacted 2022 EBITDA. Third, we have been assessing the impact of the 2021 audit on 2022, and Erin will provide more clarity around this. And as I said, Erin will provide more clarity on those drivers and the change in guidance. I wanted to stress this change is not the result of the underlying performance of the company. I’m very excited about the future of P3 and you should be as well. Our expectations for 2023 as we roll out of this transformative year, will be balanced with purposeful and disciplined growth. We are taking measured steps to grow at the right pace to support the health of the business to ensure we succeed in our mission to lead the transformation of healthcare. With that, I will now turn over to Erin Darakjian for a review of our financial results and other business developments.

Thank you, Sherif. Our Q3 2022 top-line growth remains strong with total revenue of $248 million, a $92 million or a 59% increase over the same period in the prior year. For the three months ended September 30, 2022, we reported a net loss of $65 million compared to a net loss of $32 million in the three months ended September 30, 2021. The increase in the loss was primarily driven by onboarding roughly 35,000 new patients to our platform during 2022, which included adding new employees to support that growth as well as non-recurring costs related to consulting fees. Adjusted EBITDA loss on a non-GAAP measure was $40 million in Q3 2022 compared to an adjusted EBITDA loss of $26 million in the same period of the prior year. On a per-member, per-month basis, adjusted EBITDA loss in Q3 was $133, an improvement over a loss of $142 PMPM in the prior year. Our Q3 2022 year-to-date top-line growth also remains strong with total revenue of $791 million, a $339 million or 75% increase over the same period in the prior year. 99% of that revenue was derived from capitated agreements related to our at-risk Medicare Advantage members. For the first nine months of 2022, we reported a net loss of $1 billion compared to a net loss of $86 million in the nine months of the prior year. The increase in the loss was primarily driven by a goodwill impairment charge, which increased the net loss by $852 million. This was a non-cash charge shown on our income statement during the period. Excluding the impairment charge, our net loss reflects the ramp-up costs associated with onboarding roughly 35,000 new patients to our platform during 2022, including the addition of staff to support that growth as well as consulting fees. Adjusted EBITDA, a non-GAAP measure, was $88 million in Q3 2022 year-to-date compared to an adjusted EBITDA loss of $60 million in the same period of the prior year. On a per-member, per-month basis, adjusted EBITDA loss year-to-date in 2022 was $97, an improvement over a loss of $110 PMPM in the prior year, which reflects the power of our model to drive down costs. We ended the third quarter of 2022 with unrestricted cash and cash equivalents of approximately $34 million. As we said previously on our last call, we expect 2023 cash burn to be more modest than in 2022 given the maturation of our members and lower growth more consistent with our long-term projections. We are actively working with outside advisors to raise sufficient capital in the debt and/or equity markets to reach profitability and self-sustaining cash flow in 2024. The use of cash reflects the investment required to support our strong growth and investments in building the infrastructure and professional staff needed to meet our obligations as a public company. Our receivables have increased by $36 million in the third quarter of 2022 over the same period in the prior year reflecting the strong growth in our business. We are very focused on near-term expense control while onboarding our new patients to our care model so that we can realize adjusted EBITDA profitability by 2024, as referenced in our previous guidance. For the full year 2022, we are reiterating the revenue guidance we gave on our second-quarter call and expect revenue to range between $1.025 billion to $1.075 billion, representing a 61% to 69% increase over 2021. We expect at-risk Medicare Advantage members to exceed 100,000 by December 31, 2022, representing a roughly 35% increase over the prior year. As Sherif mentioned, we are updating our full-year guidance for adjusted EBITDA to a loss between $118 million and $128 million compared to the prior guidance loss between $55 million and $90 million. I would like to provide you with some detail around the change. First, due to the 2021 audit being open until October 21, we recognized $12 million related to the final sweeps or settlement in 2021, which otherwise would have been recognized in 2022. Second, due to the length of the 2021 audit and the resources necessary to complete the audit, including audit firms, financial consultants, and legal firms, we incurred non-recurring costs of approximately $7 to $10 million. Third, in assessing the 2021 audit impact on 2022, we considered applying the same treatment to the final 2022 sweeps to be consistent with the treatment of the final 2021 sweeps. However, after discussions with our auditors and consultants, we decided against changing our revenue recognition policy. Therefore, we will recognize the revenue of the final 2022 sweeps when received in 2023. This results in $15 million to $20 million in revenues and adjusted EBITDA from 2022 being recognized in 2023. So in summary, our full-year adjusted EBITDA guidance of negative $118 million to $128 million excludes approximately $12 million in profits moved to 2021 and does not include an incremental $15 million to $20 million in revenue, which would be captured by the 2022 final sweeps that are attributed to the 2020 dues and prior years. The updated guidance also reflects $7 million to $10 million in non-recurring costs related to our extended financial code and the restatement process. As we think about our adjusted EBITDA guidance, if not for these adjustments, our 2022 adjusted EBITDA guidance loss would be an improvement of between $34 million and $42 million. On a per-member, per-month basis, we are updating our full-year 2022 adjusted EBITDA loss outlook to reflect the changes I just mentioned. As a result, we are now predicting a loss between $97 and $107 per-member, per-month. This compares to our prior guidance of a loss of $45 to $75 per-member, per-month, an improvement of 11% to 22% over a loss of $119 at the end of 2021. With that, I will turn the call over to Dr. Bacchus to give you an example of P3 in action.

Thank you, Erin. At P3, our model is focused on engagement, whether with our payers, through delegation, our patients through care management and thoughtful communication, or our providers through direct interaction via both our clinical and administrative team. Today, I would like to shed some light on how we work with providers by describing a recent interview from a large provider practice in our Oregon network. Dr. Tim Powell, CEO of Evergreen Family Medicine, highlighted some of the benefits of P3 in his recent YouTube interview. Dr. Powell shared his view on the benefits of having P3 for his patients, and he described P3 through a couple of short stories that show how P3 supports provider groups. This first example described an elderly patient in his care who had suffered from a disabling stroke many years earlier that left one side of his body paralyzed. The patient’s wife had been caring for him for about 10 years and now that they were much older, it was becoming too much for her to manage. When this need was identified, we stepped in, utilizing our social workers and administrative team to ensure that her husband could get the right care in the right place. Dr. Powell knew he didn’t want the patient to necessarily have to go to the hospital and then be transferred to a rehab facility, which is the typical route for admission into a rehab hospital. Instead, we at P3 were able to find an assisted living facility that could manage the patient’s rehab needs while also providing peace of mind for his wife regarding her husband’s ongoing care. At P3, we understand that focusing on what care really means is paramount. It’s not just about doing a procedure or administering medications. Sometimes the most important and impactful care involves engaging with patients and ensuring the appropriate navigation of a complex system to address one's needs. Doing the right thing leads to a win-win for both provider and patient and usually results in significant cost reductions as shown in this case. In Dr. Powell’s interview, he also explained how P3 aligns incentives for providers to encourage them to take the time to complete a thorough comprehensive exam to understand the entirety of a patient’s condition, something that traditional Medicare does not pay for today. P3 insists on completing this for each patient annually to ensure that we best manage those with chronic conditions as their needs change and potentially worsen over time. This allows P3 to identify which patients require more services and specialty care so that we can support them most effectively. Our core value is to keep patients as happy and healthy as possible, which in turn improves overall health, increases satisfaction, and decreases costs so that everyone wins, including you, our shareholders. I would encourage you to listen to Dr. Tim Powell directly on YouTube for his insights. We have made it available on our IR webpage. Thank you. And now I will turn it back over to Sherif.

Thanks, Amir. Before we begin our Q&A, I will leave you with this. As I started with, we are reporting a very strong third quarter along with strong underlying performance from our medical management team. The near-rate and membership increase year-over-year stands at 67%, a significant revenue improvement of approximately 60%, and roughly 180 basis point improvement in our gross profit. Our base cohort, which includes about 9,000 lives, continue to show a consistent 11% average annual improvement in medical costs. If you compare year-to-date EBITDA with the first three months in 2021, there’s a 6.5% improvement approximately. Comparing end of 2021 EBITDA to the new guidance still reflects about an 11% to 22% improvement as discussed by Erin. We continue to see robust demand and a robust pipeline for growth in 2023 and beyond. So we are executing our disciplined, purposeful growth strategy, focusing not only on growth but also the prudent management of our balance sheet. Thank you. And now, Victoria, we will be happy to take any questions.

Thank you. Our first question comes from Josh Raskin with Nephron Research. Please go ahead. Josh, the floor is yours.

Okay, great. Thanks. Sorry about that. So I wanted to ask about the EBITDA guidance down about $51 million or so. But I’m only counting I think $39 million of items that were called out that Erin went through. So was there some operational change, or am I doing the math wrong? I just want to make sure because I think Dr. Abdou, you talked about no change to the operations. But I just want to make sure that I’m not missing something there.

Yes. Josh, thank you very much for the question and clarification. It is the cost of care that is not related to the claim that has increased with the membership. For example, we pay an extra amount for a comprehensive visit examination. Last year we paid for 60,000 lives. This year we are paying for over 100,000 lives. So that would increase. Even though it is not a medical cost, your medical management does not include it; it is a cost related to operations, often referred to as cost of sales or cost of goods, which is standard language. So I appreciate you pointing that out. It is all related to the cost increase in membership.

Okay. So it is the $12 million for the final settlement suite. It is the $7 million to $12 million, let’s call it $10 million additional resources for the audit, and then the $15 million to $20 million that gets kicked into 2023. And then the increment is from your previous guidance is the incremental cost of these types of visits for 40,000 more lives. That is the idea.

That is correct. Thank you.

Okay. And then starting, I guess, sort of an outlook for 2023, I understand you are not going to give guidance, but I just have a couple of moving parts. So did I hear Erin say that the EBITDA loss would be $34 million to $42 million in 2022? Is that a reasonable baseline to start? Is that the starting point?

So you are, I’m sorry, Josh, you are saying for full-year 2022, the full-year EBITDA loss?

Yes, well, for 2022, right. Excluding these kind of what you would describe as one-time items, what is like the right baseline?

Yes. So we are saying that if we consider the three items you just mentioned, if you added those back, we would be somewhere around an improvement of $34 million to $42 million, in line with prior guidance of around $90 million.

Alright so is it really the, so it was sort of $55 to $90. So I’m sorry to be so specific on this, but the $118 million to $128 million add back $34 million to $42 million, that is the baseline. So that is the starting point.

So we are saying that if we - the three that you just mentioned, if you added those back, we would be somewhere - it would be an improvement of around $34 million to $42 million. So in line with prior guidance of around $90.

Alright so it is really the, so it was sort of $55 to $90. So I’m sorry to be so specific on this, but the $118 million to $128 million add back $34 million to $42 million, that is the baseline. So that is the first, that is the starting point. And then second, I know at the time of the SPAC, that is a long time ago, but you guys were looking for 2023 revenues of about $1.25 billion or $1.255 billion in light of the outperformance, significant outperformance for 2022. Maybe you could just give us some directional feedback on revenues for next year. If there is any kind of like one-time big contract wins or if it is just sort of the expected continuation of your sort of what I will call normal growth. And then again, if you could just give us some color on, I know EBITDA break-even in 2024, but does 2023 look more like 2022 or does it get you halfway there? Just some sense of where you are heading so that we can sort of figure out sort of cash needs?

Josh, I really appreciate that question. Our lawyer will be on my case if I start getting into 2023 specifics. So, I will defer on that and let everyone kind of reread what you just said, but I have no comments to give on 2023 guidance at this point. I’m excited, but I can't provide specifics.

Okay, I will get back in queue.

Next question comes from Brooks O’Neil with Lakes Treat. Please go ahead.

Thank you, good afternoon everyone. I have a couple of questions too. I'm going to try not to be quite as mathematical as Josh was, but let me just start off by saying, when I look at your balance sheet for September 30, I see roughly $35 million in cash and obviously you have got $80 million of debt. So in light of the report today and kind of the outlook for the fourth quarter and into 2023, how should we think about the kind of capital you believe you need to get through 2023 and get to 2024 to the adjusted EBITDA breakeven level you are talking about?

Hi Brooks, it’s Erin. I will just reiterate, our strong growth has contributed to the cash burn that you are seeing. We are very focused on being prudent regarding cash and we are in active discussions to ensure liquidity, but we have highly supportive shareholders of the company that are very big believers in the P3 model. We are also actively looking at options and in discussions with our Board and active market players on potentially refinancing or enlarging that debt facility.

Okay. I understand all that. Let me ask a somewhat different question. It feels to me in the current environment as I talk to healthcare players around the country that you have virtually unlimited opportunity to add membership that the marketplace needs you and the model you bring to the party. So my question is, how do you guys think about balancing growth, membership growth let’s say with the obvious reality that the more members you take, the more money you lose?

Brooks, thank you very much for the question, but more importantly, thank you for the observation that we have always reported excitement about being in the right space and leveraging the Medicare Advantage model with our affiliated delegated approach, supported by a strong leadership team, including Dr. Bacchus, Laurie, Sarah, and Erin. As I mentioned, we continue to focus on disciplined, purposeful growth. We are able to refine our strategy and pipeline through the counties we are in. So we will go deeper in the county by increasing providers and payers in the same county, thus leveraging our platform. Additionally, we are exploring strategic relationships with other providers in the marketplace where we can improve unit costs while growing our membership. Thus, as we mature into the model and demand increases, we are more disciplined, purposeful, but also more powerful in our ability to manage unit costs as well as the overall cost.

Great. Let me just ask one more. I appreciate that, Sherif. That was very helpful. Recognizing that 2021 and 2022 have been characterized by not only the disruption of the audit and all of that but also COVID and staffing. I would love to get your perspective as you sit today and as you think about, let’s say the next year. I’m not asking for guidance, but what do you evaluate as the biggest challenges you face in the environment you see out there now and what you anticipate as we move into the new year?

Great question. Let me divide that into two parts. First, how do I view 2023 in comparison to 2022 and 2021? We have been talking about a cohort of lives that have been with us for over 36 months. That cohort is going to double in 2023. Therefore, we anticipate improvements in the overall population of this cohort along with their health outcomes and costs. The labor market continues to pose a challenge, notably in 2021 and 2022, but we believe we may have reached a peak and plateau or might see some easing soon. The demand will be significant, and we must maintain discipline by focusing on two key areas: going deep into counties where we already operate and choosing the right partners to help manage transitions rather than taking on full risk immediately. We will continue to refine our growth model, which will shape our strategy in 2023.

Perfect. Thank you very much. I’m excited for the New Year.

Thanks, Sir.

Next question comes from Gary Taylor with Cowen. Please go ahead.

Hi. Good afternoon. I guess I wanted to look at the quarter's medical loss ratio, excluding the PDR benefit that is at 104%. I know you are describing that as a strong quarter, even though it is well above some initial expectations. I guess there is so much focus on the revenue line as being strong and less on the medical expense line. Can you give us some insight or data to help us understand how those cohorts are developing and whether or not all your new contracts are running above 100% MLR?

Great question, Gary. I appreciate that, as always. As far as the details, let me gather them and I promise that I will share them with you in detail. I don’t want to provide you with an answer that is not completely accurate. However, let me explain that when we discuss the medical cost ratio, we internally manage the way that we define it to be consistent with our peers’ reporting. The reported medical costs include many non-claims related third-party providers. Many activities included in the cost of care are not traditionally in claims. For example, any surplus that we registered with providers would show up there; any extra incentive for quality or access paid to the medical groups could also be included. It is not related to the cost of care but the cost of operation. I promise to get the details on the cohort and the medical costs to you so you can better understand the improvements in the performance of our medical management team.

Okay. And then just moving to Erin, I want to make sure I understand that the $15 million to $20 million of revenue that was in the guidance for 2022 is now moving into 2023. Is that risk coding revenue? You saw the patient in 2021, you coded them in 2021. You are receiving that revenue from the plan in 2022, but you are not going to capture this last piece of that revenue until the sweeps are done in 2023. Am I understanding that correctly or can you clarify that for me?

The revenue that is the $15 million to $20 million is actually related to services provided in 2022 that will be recognized in 2023. So it is not revenue from 2021; it pertains to 2022's services that we will recognize once we receive them in 2023.

So you are treating the patient this year, you are coding them this year, but that revenue will show up in their risk-adjusted revenue next year?

That is correct.

And why is that moving if you are not changing your revenue recognition practice? Because I think industry convention has been, you recognize the revenue in the year that you expect the plan to pass that risk coding revenue onto you.

We recognize the midyear adjustment in the current year, but we recognize the final settlement in the next year when we receive it. That is based on cash basis.

Alright. And that has been your policy. Why is that moving? I thought you said the revenue recognition didn’t change, so I’m not sure I understood why the revenue moves from 2022 to 2023.

Due to the length of our 2021 audit, we had to push back those final settlements into 2021 that we would have otherwise recognized in 2022. We considered moving 2022 into this year as well, but after consulting with our auditors and external consultants, we decided to retain our existing policy on revenue recognition and recognized it into next year.

Okay. Last one for me. You talked about your largest payer being 19% of revenue but 35% of receivables. Is there any easy, quick explanation as to why that cycle is running longer with that largest payer?

That is a great question. I will have to look into it and get back to you on it, but I will take a note and make sure Karen reaches out to you with that answer.

Next question comes from Ryan Daniels with William Blair. Please go ahead.

Hey everyone. This is Jackson standing in for Ryan Daniels. I appreciate you taking my questions. To start, could you provide more details about the $15 million to $20 million in sweeps? Additionally, following up on Josh’s earlier questions regarding the guidance numbers, has there been any change since the last release? Is there anything else that we should be aware of, apart from the sweeps, that could affect the fourth quarter?

Linked to that question, Jackson. We consulted with our auditors and consultants. We were exploring the possibility of having our 2022 sweeps reflected in this year, but we ultimately decided against it to maintain our existing revenue recognition policy and recognized that revenue in 2023. In addition, we pushed back $12 million into 2021 and incurred another $7 to $10 million in non-recurring costs related to the length of the audit and the restatement process we just completed recently.

Thanks. And then just looking at the corporate G&A line item, it still seems slightly elevated compared to the previous year. Even though it was down on a sequential basis. Can you provide any additional color on how we should think about this into the fourth quarter and then possibly into next year as well? Thanks.

As I said before, we incurred some one-time items through the $7 million to $10 million in that category. Now that we are through that restatement process, we consider these to be non-recurring.

Awesome. Thanks. And then just the last thing that I have, are there any investments or anything on the M&A side that you might look into or even have identified to help supplement your growth into 2023?

Jackson, this is Sherif. It is a great question. Here in Henderson and in the market that we are in, we are focusing our management team on improving operational excellence, enhancing our balance sheet, and improving our medical cost as we work on our patients' health day-in and day-out. We have many consultants and the Board looking at all these opportunities, and I’m sure they will let us know as soon as any meaningful discussions arise.

There are no further questions at this time. I would like to turn the floor back over to Dr. Sherif Abdou for closing comments.

Thank you very much, Victoria, and thanks everyone. I really appreciate the questions from Josh, Brooks, Jackson, and Gary. I owe you a return with the details on the cohort and other questions you had. I want to close by reminding you that even though we are lowering our EBITDA guidance today, it is still an improvement of 11% to 22% per-member, per-month, which is how any population health management should measure itself year-over-year. I also want to remind you of our 60% plus increase in revenue, a 67% increase in membership, and nearly 180 basis point improvement in gross profit. We continue to be excited about the pipeline and the demand we are witnessing for 2023 and beyond. With that, I want to thank you all for your interest and participation today, and I look forward to our upcoming call, which will be on schedule and compliant with our routine cadence. Thank you very much. Have a great evening everyone.

This concludes today’s teleconference. You may disconnect your line at this time. Thank you for your participation.