P3 Health Partners Inc. Q4 FY2022 Earnings Call

Good day, and welcome to the P3 Health Partners Fourth Quarter 2022 Earnings Conference Call. All participants will be in listen-only mode. Please note, this event is being recorded. I'd now like to turn the conference over to Karen Blomquist, 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 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. Thank you. And I will now turn the call over to Dr. Abdou.

Thanks, Karen. Good morning, everyone, and thank you for joining our call today. I am delighted and excited to be here today to announce our new financing and to review the results of the year 2022. We are very excited about the progress that we've made in 2022 and the possibilities we see for our populations, our teams and our business, and for our shareholders as well. Today, I will discuss three points. Number one, the update on the liquidity and how the capital raise that we just announced early this morning will get us through to cash flow positive and profitability in 2024. Number two, I will share with you our insight and our determination to reach profitability in the year 2024 with a clear path to that end. And finally, we will discuss the possibility and impact and the questions that arose about the CMS advanced notice and any other changes in the risk adjustment factor calculations by CMS. So first, let me address the capital raise that we announced earlier today. Through a deal with our largest shareholder, Chicago Pacific Founders, and other shareholders including Leavitt 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 raised will provide us the financial resources to realize our strategic vision for P3. And we believe and we will address the details of the capital raise tool, our CFO Kavthekar will address those calculations that are sufficient to get us through to cash flow positive and profitability in 2024. As a matter of fact, we're confident that this will get us to early 2024 profitability and cash flow positive. Second, I want to share with you our clear path and insight into how we arrived at profitability in 2024. Our consistent and impressive membership growth is continuing in 2023, and for 2024 we already have in the pipeline very impressive and consistent growth in all the markets that we are in already. Second, let me address the funding per member. According to the files we received, the members that were with us in January 2022 have demonstrated an average increase of about 15% to 16% in their funding by January 2023. Overall, all the population in 2023, both newcomers and persistent members have shown a 7.7% increase in funding over January 2022. Our medical costs continue to improve by an average of 2.5% year-over-year. Our medical margin in 2022, calculated by capitated revenue minus medical claim expense as we reported in our filing, stood at $62 million in 2022. We project and believe that this will increase by 50% to 100% in the year 2023. As we continue with our leadership and our team performing consistently with the prior years, that will lead to a clear path to profitability with membership growth in the markets that we're in, consistent improvement in funding year-over-year, and improvement in the medical margin year-over-year. Finally, I want to address our operating expenses. We have significantly focused and improved our operating expenses year-over-year. If you clear all the operating expenses in 2022 from all the one-time events and costs related to the longer audit that we had to go through in 2022 and all the professional fees attached to it, we still have shown in 2023 a 23% to 25% improvement in our operating costs year-over-year. So consistent demand and membership growth in the markets that we're in allow us to grow with the existing providers, payers, and engaged patients, and the improvement in funding in a modest way demonstrated year-over-year leads to advances in the medical margin significantly in '23 and '24 while also reducing operating expenses. That is the clear path to our profitability. That is why we are very confident that we will reach profitability in early 2024. Finally, let me address the question about CMS, advanced notice, and other regulatory proposals related to the risk adjustment factor and funding in the Medicare Advantage program. Our risk adjustment factor is very modest, at 1.0 to 1.1 across the board for the populations we serve. We believe based on all calculations that any removal of diagnoses or codes in advance notices or adjustments to the coefficient factors of calculating the risk adjustment will have no material impact on the populations we serve. By checking the prevalence of diagnoses that have been removed and the impact factors and coding intensity, we see no material impact whatsoever on our funding in the coming years. We will wait to see the final ruling on Monday as well. So what I shared with you today is an excitement about the support from our current shareholders and the capital raise that allows us to have solid liquidity through profitability and cash flow positive in early 2024, with a clear path and insight into that journey. Finally, we answered questions regarding funding by CMS. With that, I'm going to turn it over to Atul for a review of our financial results and to give you more detail around our new financing and guidance, as well as a high-level look at our 2024 expectations.

Thank you, Sherif. Good morning, everyone. Since this is my first quarter speaking with you, I just want to take a minute to tell you how excited I am to be part of the P3 team. I was drawn to P3 for a number of reasons. First and most importantly is the mission of the company, which is defined as solving the healthcare problems facing our nation, including high healthcare costs and poor outcomes. Second is its history of delivering value-based healthcare quickly and effectively to its members through an asset-light affiliate model. The third is the incredible team of professionals at P3 that I get to work with. Now let me walk you through the fourth quarter and the full year 2022 numbers. Top-line results for 2022 were strong as the team executed and delivered with revenue of $1.049 billion, a tremendous growth of 65% versus 2021, and squarely in the middle of our guidance. More specifically, on a PMPM basis, revenues grew 10% over 2021. In the fourth quarter, we had revenue of $258 million, a 40% increase over the fourth quarter of 2021. In this reporting cycle and to help our investors and analysts understand our business better, we've broken out what we previously referred to as medical expenses into two separate components: medical claims expense, which are the specific expenses related to Part C and D services, and network expenses, which include partner physician expenses related to surplus sharing and other direct medical expenses incurred to improve care for our members. You can see some more detail around that in our 10-K, and our hope is that it provides a deeper level of clarity around our model. As Sherif mentioned, we had strong improvements in both medical margin and network contribution in 2022. In 2022, our medical margin, which represents the amount earned from capitation revenue after medical claims expenses are deducted, improved by 429% over the prior year to $62 million, or $52 on a PMPM basis. Network contribution, which we define as medical margin less network expenses, improved by 65% over the year, reaching a loss of $7.7 million. We believe that the trends in these two critical data points are proof that our model is working. Another new data point we will begin to provide investors is our platform support costs. These costs include amounts related to providing support services to our various markets, including support personnel and other associated operating costs. We do exclude costs related to the operations of our owned medical clinics and wellness centers from this amount. Going forward, we are laser-focused on driving efficiencies in our operations and managing our cash expenditures, and as a result, expect our platform support costs to decrease as a percentage of revenues going forward. In fact, we decreased our platform costs as a percentage of revenues from around 15% in 2021 to 11% in 2022. Going forward, we're aiming to bring that percentage down into the high single digits in 2023 and continue to make progress. Our net loss in 2022 was $1.6 billion compared to a net loss of approximately $204 million in the prior year. The increased loss was primarily due to a goodwill impairment charge of $1.3 billion, which was taken due to the decrease in our market cap relative to the book value of the goodwill. Excluding this impairment charge, our net loss increased by $90 million, reflecting the ramp-up costs associated with onboarding roughly 35,000 new members to our platform, other non-recurring transaction costs, and additional expenses related to completing the extended 2021 audit. For the three months ended December 31, 2022, we reported a net loss of $532 million compared to a net loss of $118 million in the three months ended December 31, 2021. The increase in the loss was primarily driven by a goodwill impairment charge in the quarter of $463 million. Excluding the goodwill impairment, the loss increased by $69 million due to the increased number of members and costs associated with the audit - the ongoing audit. Adjusted EBITDA loss was $128 million in 2022 compared to an adjusted EBITDA loss of $95.5 million in the prior year. As a result of our extended 2021 audit period, completed in October 2022, our full-year EBITDA was impacted by $12 million related to 2021 financial final year settlements, which were shifted back into 2021 and recognized in that year, but in normal course would have been recognized in 2022. Also related to the 2021 audit, we incurred approximately $6 million in costs for services provided by audit firms, financial consultants, and other service providers. Finally, we incurred approximately $14 million of costs related to transactions, including business combinations and the Medcore acquisitions. We have excluded these costs from our calculation of adjusted EBITDA because we do not expect them to recur in the future. Looking forward, I'm very pleased with the continued support and the vote of confidence from our investors who participated in the $90 million PIPE offering. Their conviction in the P3 story and the P3 team is great to see and provides a level of support that lets us keep our focus on executing against our vision every day. This is a strong endorsement from the investors in our differentiated model, and we appreciate the support from our largest existing investor, Chicago Pacific Founders, which led this financing with over $70 million. Our external advisors, the management team, Board, and the Special Committee of the Board worked hard to source and negotiate the best deal for P3. As part of the offering, and as more fully disclosed in the press release and the transaction, the company raised approximately $90 million in gross proceeds by issuing units priced at $1.11 with each unit consisting of a share of P3 common stock and 0.75 of warrants at an exercise price of $1.13, which represents a 10% premium to the trailing five-day moving average. We were quite intentional about the size of this offering, which does not contemplate the repayment of any debt or redemption of any shareholder positions and delivers capital directly to the company. Given the early revenue and medical expense PMPM results so far this year, which are right on track with our plans, we have confidence that this raise will provide 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 for P3, we ended 2022 with approximately $18 million of cash on our balance sheet. Between the new capital from the PIPE and the draws that we made this year on our unsecured note that total just over $100 million, with the continued cash inflows generated from our operations, we expect to end the year with resources to bridge the company not just to profitability, but also 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 serve our Medicare Advantage patients and drive economics. Number one, engaging with our patients, number two, actively managing their health conditions, and number three, keeping a watchful eye on managing our operating expenses and eliminating waste. I want to remind you of our guidance for 2023, which has not changed. We expect 2023 revenue to be between $1.2 billion and $1.25 billion and adjusted EBITDA between a loss of $40 million and $60 million. In addition to that, we expect our medical margin in 2023 to be in the range of $155 million to $175 million. While we aren't providing quarterly guidance, I think it would be helpful to point out a few unique factors about P3 that may help investors better understand the broad contours of our various quarters and our earnings progressions a bit better. P3 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 recognize that revenue based on cash and uncertainty around that revenue. As these true-up amounts generally become known to us in the June or July timeframe, we will typically record those revenues in the appropriate quarter. This tends to make the second and third quarters relatively strong on the top line compared to the first and the fourth. Medical expenses can sometimes also have some seasonality, particularly in winter months as the cold and flu season impacts utilization. The third important factor this year will be our overall platform expenses. We have focused intensely on these expenses as a company, and we have significant goals for the year. To that end, we expect much of the cost reductions to reveal themselves in the second quarter and beyond compared to the first quarter. In all, we expect the first quarter to be a bit softer from an overall EBITDA perspective compared to the second and the third quarters, with Q4 likely falling somewhere in between. In closing, let me say we are extremely focused on prudent growth and the conservative management of our resources to meet these goals. We are taking measured steps to control costs and improve the SG&A burden while ensuring that we have the talent necessary to execute on our strategy and achieve our goals. Thank you all once again for your interest in the P3 story. And with that, I'm going to turn it back to the operator, Rocco, to open the floor to questions.

Today's first question comes from Brooks O'Neil with Lake Street Capital Markets. Please go ahead.

Good morning, everyone. Thanks for taking my questions. I have a couple. I'd like to first start off by just asking you if you could summarize your perception of the demand environment in the marketplace today. Specifically, I'm thinking about interest from provider partners, 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.

Thanks, Brooks, for your question. Really appreciate your interest here. So we've seen a high level of demand across all three constituencies that you just described. So number one is that of provider groups. Usually, the sales or engagement cycles used to run anywhere between one to two years with the provider groups. Today, we are receiving incoming calls asking to engage, and as pricing pressure on the fee-for-service compensation from CMS and other payers continues, we see providers are very engaged and excited and looking forward to move into value-based contracting and full risk, as well as being excited about using our tools and technology. Secondly, with payers, as they made commitments to their constituencies and as evidence increases that patients and value-based contracting lead to improved clinical outcomes and quality, the payers are excited to move more into value-based contracting. So we're getting demands and engagement from all types of payers in the marketplace. Finally, from the patients, they have really seen the benefits and experienced a different experience from value-based providers than from fee-for-service providers, where the availability, accessibility, and transparency of information and communication from the providers or surrounding teams at P3 has intensified the demand continuously year-over-year.

Great. Thank you, Sherif. 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 as it relates to the progress you're making in your markets and with calendar year cohorts of patients. Can you give us any update at all regarding continuing progress in markets like Arizona, as your cohorts continue to mature?

Absolutely. Thank you very much for that question, Brooks, as it really highlights the impact and effectiveness of our medical management team led by Dr. Amir Bacchus, our Co-Founder and Chief Medical Officer. We see that in Arizona, the progress continues, where independently the market of Arizona will reach breakeven and profitability this year. The medical margin continues to improve positively, achieving over $160 million to $180 PMPM medical margin for the populations that continue with us. Finally, if you look at the medical costs in Arizona, which average about $713 per member per month for medical claims expenses, are almost about $100 to $200 per member per month ahead of a lot of our peers in the space and continue to improve as well.

Great. Let me just ask one last one and I appreciate the color. I don't think you talked much about this obviously, the last couple of years were severely impacted by COVID in both positive and negative ways. It seems like COVID is in retreat right now, but can you just talk a little about what you expect in terms of medical cost trends? Do you expect any rebounds in people coming to the hospital and seeing their doctors? Or do you think it's going to be a more standard year this year in that regard? Thank you very much.

Thanks, Brooks. So thanks for your reminder. The COVID story can be seen in three stages. The second quarter of 2020 saw a significant retreat in medical utilization and costs, artificially developed by lockdowns and preventive measures that restricted public movement and hospital visits. The subsequent period, when COVID infections intensified, showed increased utilization through emergency rooms due to the major variants hitting the population, primarily Omicron and Delta. We recorded the last 18 months with over $9 million of COVID-related expenses. In 2023, we are seeing the return to standard utilization. Right now, it's a return to standard operating procedures. Any adjustments will be adjustments in managing our populations. However, I believe the COVID impact is behind us, both positive and negative, and we're back into pre-pandemic utilization, adjusted by our effective medical management and improvements in medical costs as well. So anyway, thank you very much for the question, Brooks, and I'm glad to hear you're making a strong recovery and back to normal.

Thank you. Our next question today comes from Joshua Raskin at Nephron Research. Please go ahead.

Hi. Thanks. Good morning. I want to talk about the implied EBITDA margin for 2023. I think it implies a negative adjusted EBITDA margin of 4.1%. That's an improvement of about 800 basis points. So I'm trying to figure out how much of that is coming from medical management, assuming a large majority, versus the administrative cost improvements that you were talking about? If you could give some specifics on what's driving those medical cost ratio improvements, that would be helpful. Then I have a second question.

Yes, Josh, this is Atul speaking. Thanks for the question. Yes, look, I think you can look at it as a combination of a lot of factors. Principally, we are feeling strong about the way that our revenue PMPMs are progressing. You saw a pretty big jump just looking at 2021 to 2022, which was almost 10%. So we've built some assumptions into our forecast that I would call non-heroic—very reasonable and achievable. However, it's a combination of that along with some very modest reductions we are projecting in medical claims expense, as Sherif discussed earlier, and we have seen good traction in that area as well. Regarding SG&A reductions, we are also considering some of that. But overall, we believe that this guidance is driven by all these components working together; it's not especially dependent on any one factor. We've got several different levers moving around.

Okay - that's helpful. This ties into my second question, which is about your medical cost improvement being predicated on what you're calling funding improvements or reimbursement improvements. So I'm trying to figure out how you’re seeing a 15% to 16% improvement in funding in the first year of the 2022 members, yet your risk scores are still 1 to 1, which you mentioned as 1.0 or 1.1. Again going back to that medical expense, is a large majority of that improvement in risk coding or is some of that due to medical cost management too?

Thanks, Josh. It’s a combination. The percentages for the population that were with us in 2022 and are still with us in 2023 are based on a combination of the benchmark improvements in the counties that we serve, in addition to the increasing percentage of dual eligible populations coming with higher funding, plus our engagement with the chronic special needs program, which also comes with higher funding. The average risk scores I shared are across all populations, presenting an annual average because, as you know, there’s usually a degradation over time for populations; the severely young population may depart while new patients come in with an average of 0.8. So that modifies the risk score across all populations throughout an average year. The overall population saw a 7.7% increase, with specific cohorts showing an increase of 16%. This stems from a combination of risk scoring, benchmark adjustment, and the increase of dual risk population percentage in our population.

Okay. I want to make sure I get this clear, because I think it’s important. The 16% in terms of increased PMPMs you’re quoting—that’s not solely risk coding, right? Or is there some component of that?

Correct.

But that's more mixed, okay. How much is the risk coding component of that 16%? Is there an estimate?

Yes, about 3% to 5% across all populations can be attributed specifically to risk adjustment.

Thank you. Our next question today comes from Ryan Daniels at William Blair. Please go ahead.

Hi, guys. This is Jack on for Ryan Daniels. Thanks for taking my question. So just first, when looking at the cash burn, the fourth quarter looks to be slightly elevated, and I understand fourth quarter is historically higher? But I'm curious how should we think about cash burn going forward in 2023? I believe your prepared remarks indicated you expect to be cash flow positive in early 2024. So does 2023 get you mostly there, where the cash burn tapers quite a bit? Or how should we think about this going forward? Thanks.

Yes, Jack, great question. The way I would suggest you think about it—and I gave a little indication of the seasonality of EBITDA—it could be a reasonable proxy for you to think about the burn as we progress through the year. But I would say that, like our EBITDA guidance, which is between a loss of $40 million to $60 million over the year, you should add approximately $20 million for cash interest and working capital changes as we proceed through the year. You can think of that as the entirety of the burn. In the first quarter, we were very careful and aggressive in managing our expenses. We expect cash burn to be somewhat less in the first quarter compared to the subsequent three.

Perfect. That's great color. Thank you. Another quick question too. Are you guys seeing anything regarding the pipeline for 2024? I know for 2023, there's pretty robust growth in that cohort class. And I know it's early and you're not guiding beyond 2023, but I'm curious if you have any comments on the 2024 progression or if it's on track at this point?

Yes. We are very confident. Thanks for the question, Jack. We have a clear line of sight for 2024 growth, especially in the counties, states, and geographies that we are currently in, along with the providers we are engaged with today, who want to expand their relationship to all Medicare Advantage and Medicare SEO patients that will be included in our platform in 2024. We are committed to pursuing this opportunity and our confidence remains strong.

Okay, understood. Thanks. And then one really just quick last question, and this goes off Brooks's question on demand. I'm curious if you folks have seen any uptick in conversations with health systems and if this is a segment you're looking to pursue; maybe you can just touch on the opportunity there? Thanks.

Thanks. Absolutely, we do. The health systems are recognizing the value of converting from fee-for-service to value-based contracting. They are engaging with organizations like ours to improve not only the health outcomes but also the economics of their medical groups or engaged network. We are seeing multiple health systems engaging with us to create pathways to value-based contracting in 2023 and 2024.

Thank you. And ladies and gentlemen, this concludes our question-and-answer session. I'd like to turn the conference back over to Sherif Abdou for any closing remarks.

Thank you very much, Rocco. Thanks again to everyone who joined us today and for your interest in P3. I just want to make a final comment about our excitement and commitment to our shareholders, and our appreciation for their support during our recent capital raise. We continue to look very optimistically into 2024, aiming for profitability and positive cash flow. We look forward to engaging during our next quarterly 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.