Privia Health Group, Inc. Q1 FY2021 Earnings Call

Good day ladies and gentlemen, and welcome to the Privia Health Quarterly Conference Call. At this time, all participants are in a listen-only mode. Later we will conduct a question-and-answer session and instructions will follow at that time. As a reminder, this call may be recorded. I would now like to introduce Robert Borchert, Privia's SVP of Investor and Corporate Communications.

Thank you, Jeff and good afternoon everyone. Joining me today on today's call are Shawn Morris, our Chief Executive Officer; Parth Mehrotra, President and Chief Operating Officer; and David Mountcastle, our Chief Financial Officer. This call is being webcast and can be accessed from the Investor Relations section of our company website at priviahealth.com. Today's press release highlighting our financial and operating performance as well as the slide presentation accompanying our formal remarks are posted on our IR website pages. Following Shawn and Parth's opening comments, we will open the line for questions. We ask that you please limit yourself to one question and one follow-up, so we can get through the full queue in a timely fashion. The financial results reported today and in the press release are preliminaries and are not final until our Form 10-Q for the first quarter ended March 31, 2021 is filed with the Securities and Exchange Commission. Some of the statements we will make today are forward-looking in nature, based on our current expectations and our view of our business as of May 27, 2021. Such statements, including those related to our future financial and operating performance and future business plans and objectives are subject to risks and uncertainties that may cause actual results to differ materially. As a result, these statements should be considered in conjunction with the cautionary statements in today's press release and the risk factors described in our company's most recent SEC filings. Finally, we may refer to certain non-GAAP financial measures on the call and reconciliations of these measures to comparable GAAP measures are included in our press release and the accompanying slide presentation posted on our website. With that, I'll now turn the call over to Shawn.

Thank you, Robert. Good afternoon, everyone. I'll provide a brief performance summary, including an overview of our investment thesis, growth strategy and our first quarter performance, as well as an update on where we are seeing momentum and continued success in our business. And Parth will cover a more detailed review of our financial and operating performance and outlook for the year, before we take your questions. Engagement with physicians is absolutely key as reimbursement models in the U.S. healthcare market shift to value-based care. Privia Health is purposely building a next generation physician organization that engages with and organizes physicians into large scale medical groups covering wide geographic areas in each state. Our model has proven to be more beneficial for providers in a thoughtful and successful manner to value-based care over time, generating over $430 million in savings since 2014. Our strategy is simple, but elegant and difficult for others to replicate as we work to achieve massive scale quickly. We have built a comprehensive technology solution directly for our providers to address key challenges and help them stay competitive each and every day. Our solution directly aligns with providers' financial success and facilitates physician autonomy while preserving their current ownership structures. Our value is reflected in our high retention rates and net promoter scores with both providers and patients. A key differentiation of the Privia platform is our ability to support all providers, all patients and all reimbursement models, from commercial to Medicare Shared Savings Program (MSSP), Medicare Advantage and Medicaid. This differentiation aligns with our provider health systems and payer partners as they look to serve all healthcare consumers. We enter and expand in new and existing markets with our capital-light financial model, which does not preclude us from the future potential of acquiring a minority or majority stake in an anchor medical practice or even opening a new clinic. We will continue to be good stewards of capital, taking a smart and thoughtful approach in making financially sound business decisions. These decisions will be grounded in solid market dynamics and demographics and predicated on market density targets and profitable growth. We are well positioned to monetize our platform and drive growth through five core strategies. Let me walk through each one. First, we organically grow our existing practices by increasing the number of providers, increasing their patient panels, and helping our providers to be more productive. Second, we look to move markets at scale to value-based care by participating in a variety of risk-based arrangements that evolve in each of our geographic markets. Third, we expect to capitalize on the white space opportunities in our existing markets by adding new providers and monetizing the Privia platform by adding and expanding ancillary services, such as labs, imaging, pharmacy, and clinical research when and where it makes sense. We also plan to enter new states and geographic markets and then repeat steps one through three. Finally, we will be opportunistic in acquiring or investing in other service models and expanding our platform. It's important to spend a couple of minutes reviewing our approach to taking risk across many different value-based reimbursement models. First and foremost, Privia Health already participates in multiple value-based care programs across commercial, Medicare, Medicare Advantage, as well as Medicaid. In fact, our medical practice has delivered care to more than 720,000 attributed value-based lives and over 70 risk-based payer contracts today. We are already at scale. We will continue to grow attributed lives and transition a more significant portion of those lives into full risk arrangements over time. A very important dynamic on our topline is that our practice collections and revenue only reflect fee-for-service collections, care management fees, and shared savings. Under our current partial risk contracts, we are not recognizing the full per member per month premium for our Medicare Advantage lives. We do expect this to change as we move more of these lives from partial to full risk arrangements. The Privia Health leadership team has decades of experience in managing and underwriting risk. We will remain focused on profitably transitioning practices to partial and full-risk models within both existing and new markets. Let's move on to performance; we started 2021 with strong first quarter results that were at or above the high end of the estimated ranges we provided in April during our IPO process. On a year-over-year basis, practice collections increased 5.1%, care margin was up 9.7%, and we continue to drive operating leverage through our Privia platform, which helped deliver platform contribution and adjusted EBITDA growth of 26% and 41% respectively. Our strong top-line performance in Q1 was generated through both our fee-for-service and value-based care models, of which we expect to see value-based care grow faster as more lives move to partial and full risk. As Parth will highlight, we are continuing to add attributed lives across a number of value-based programs while also continuing to grow organically and adding providers in our existing markets. As we achieved same-store growth, we are also executing a number of growth initiatives to enter new markets and leverage our operating structure to drive margin expansion. Now, I'll ask Parth to provide additional detail on our first quarter performance and outlook for the remainder of 2021.

Thanks, Shawn. Over the past seven years, Privia Health has proven its operating model and has delivered strong organic growth with double-digit historical top-line expansion. We expect that level of growth to continue in 2021, given the high visibility of our model. As you can see in the chart on the top row of the slide, growth in implemented providers and value-based attributed lives led to a 5.1% increase in practice collections in the first quarter from the same period a year ago. Of note in mid-2020, a large medical practice in our Mid-Atlantic market decided to leave our platform and align with the local health system. In this case, we decided not to utilize our capital resources to retain that practice. Despite this departure, we experienced growth in implemented providers in Q1 2021 over Q1 2020 and that drove continued sequential growth from year-end 2020 to the first quarter of 2021. Our care margin increased 9.7% from Q1 of last year. This is essentially the gross profit generated by Privia Health after the cost of care delivery, which in our model includes patient care, physician and provider costs, medical claims, cost to build and operate care center locations, and our providers' share of any shared savings in value-based contracts. We showed significant operating leverage, with platform contribution increasing 25.9% year-over-year as we continue to scale our operations and leverage our technology platform. This operating leverage further translated into adjusted EBITDA growth, which was up 41% in the first quarter compared to a year ago as we scale our sales and marketing, platform development, and corporate G&A costs. Adjusted EBITDA margin as a percentage of care margin expanded 420 basis points year-over-year in the first quarter of 2021 to reach 18.9%. Our performance this quarter is a great reflection of the inherent operating leverage of our platform, as we move down the P&L. Turning to our full-year 2021 guidance, we are confident in our business momentum and outlook for the remainder of the year. We expect to increase the number of implemented providers by 11.8% to 13.7% over 2020 and value-based attributed lives by 7% to 10% as we continue to move providers and their patients to risk-based reimbursement programs. Practice collections are expected to grow 11.1% to 12.6% year-over-year, reaching $1.445 billion to $1.465 billion for 2021. As we stated in our IPO prospectus, in our model, practice collections include collections in both states with corporate practice of medicine laws and states with no corporate practice of medicine laws. So as our business grows in states where we don't own the medical groups due to corporate practice laws, our practice collections will grow faster than GAAP revenue. Our care margin is expected to expand by 14.6% to 17.8% over full-year 2020, reaching $215 million to $221 million, and we expect the operating leverage in our model to drive adjusted EBITDA growth in 2021 of approximately 22.4% at the midpoint of our guidance range. There are a few other assumptions I wanted to highlight regarding our 2021 guidance. There were some modifications to our pre-IPO stock option program as well as some additional equity grants as part of our IPO, as we previously disclosed in our IPO prospectus. We expect the fully diluted weighted average number of common shares outstanding to be $110 million to $120 million for full year 2021, which includes the pre-IPO period of about four months. Related to that, we expect our non-cash stock compensation expense to be in the range of $195 million to $205 million in Q2 and $245 million to $255 million for full year 2021, primarily related to our pre-IPO stock option program. Net cash proceeds from the IPO and from private placement were approximately $212 million. So our quarter-end pro forma cash balance was approximately $294 million, and with about $34 million in debt outstanding at the end of Q1, our net cash position of about $216 million gives us sufficient capital and liquidity to pursue our various growth drivers. Given our highly efficient growth and expansion model, we expect CapEx to be less than $1 million for all of 2021 and we continue to expect high free cash flow conversion. Lastly, we expect our effective tax rate to be in the range of 25% to 27% for the full year. We do have a deferred tax asset that will offset much of our cash tax payments this year. In closing, since this is our first earnings call as a public company, all of us at Privia are really excited to embark on this new chapter in the company's history post-IPO. We continue to transform the healthcare delivery experience with our purpose-built platform and believe Privia is on the right side of history. We look forward to continuing to serve all our stakeholders—our physicians, providers and health system partners, our patients who entrust their care to our medical groups, our various private and public payer partners, all Privia employees and care center staff, and our investors who have entrusted us with their capital. We take our responsibility to serve all of you very seriously. With that, operator, we're now ready for the first question.

And our first question comes from Lisa Gill of JP Morgan. Your line is open.

Thanks very much. Good afternoon, Shawn and Parth, congratulations on your first quarter as a publicly traded company. I really just wanted to start with your comments around shifting to full risk. I know during the IPO process, you talked about several hundred thousand Medicare lives. So if we think about shifting under Medicare to full risk, can you maybe just walk us through a timeline of when your expectations are that you will have some full risk arrangements within Privia?

Yes, thanks for the question, and thank you for your congratulatory message. We're excited, as Parth said. This is Shawn; I'll touch on that and later Parth can weigh in as well. We've structured our contracts in a way, as we talked about during the IPO process on the Medicare Advantage side, where we initially build attribution, get to some form of partial risk, and then move into full risk over time. We think it's critically important to do that because we actually share upside and downside with our providers, and at the same time, it's a disciplined approach. We're looking forward to that happening over the next few quarters. But we will execute this transition when it's disciplined and appropriate for our providers. Parth, do you want to comment on that?

Yes. Hey, Lisa. Just two other things to add. One is, I want to make clear that we do take downside risk in many of our contracts, both Medicare Advantage and MSSP with CMS. While it's not full risk, we have downside risk over 100,000 lives with CMS already. They could potentially move over to direct contracting as we said during the IPO process, once we figure out the equivalency of the benchmarks and so forth. And then even in MA, we are already taking some downside risk. The second comment I want to make is regarding timing; as you know, we are highly incentivized given our fee structure, as we earn 3x or 4x on our value-based book versus the fee-for-service book to profitably move and ensure there are savings in those contracts. So make no mistake, we are incentivizing the Company and often our providers are looking to do the same.

Okay. And just to confirm that, there is no full risk at all in the 2021 guidance. So I believe this is kind of maybe 2022-2023 opportunities, just want to make sure that I have that correct?

That's correct. Yes, nothing in 2021, and we’ll obviously let you know when we get the 2022 guidance.

Okay, great. Thank you.

Thank you, Lisa.

The next question is from the line of Jailendra Singh of Credit Suisse. Your line is open.

Yes, it's Jailendra speaking from Credit Suisse. I just had a question, hello everyone, congratulations on your first quarter as a public company. This is your first call as a public company, so I think it's very important for you to spend some time educating the investor community about how your model is differentiated. I mean, over the past few months, several tech-enabled primary care companies have gone public, some opening new clinics and centers, some following a partnership approach, some are payer-agnostic, and some focus on Medicare. I understand the overall market opportunity is big enough for all of them to succeed, but could you spend some time discussing your unique differentiation and your model versus others, and how that impacts physicians’ willingness to work with Privia over others?

Jailendra, thanks for the question, and thank you for all the work we've done throughout this process to build a long-term relationship with us. Yes, I would say it's a great question. We talked a lot about it during the IPO process. If you think about the physicians out there, we have upwards of 2,700 signed, over 2,500 on the platform itself, and we think it's really critical for those physicians and those 650 care centers to note that their desire is not to practice value-based care on just one cohort. They want to provide high-value, cost-effective, high-quality care to everyone that walks through the door, and that includes a diverse patient mix. We attract those physicians who want to do just that. They self-select to join us. Our model—landing and expanding, as we enter markets—means that we aim to build comprehensive medical groups across states. We leverage the entirety of the patient load, as that is the way physicians want to practice to maximize efficiency in value-based care. We think that's a key differentiation from other models. Our doctors share both upside and downside risk with us. They know they need our tools, talent, and technology to succeed. They come to us wanting to move into this model, and we are very thoughtful and disciplined in our approach. Parth, anything to add?

Yes. Thanks, Shawn. I would highlight four quick points. Number one, we are agnostic to the geographic markets we enter, given our diversity of how we partner with providers and payers. So if the market is not heavily focused on Medicare Advantage, that is perfectly fine for us. The second point is that we are also focused on other specialists—OB/GYN, pediatricians, etc.—in building out these large medical groups, all of whom play a role in value-based care. Third, our unique platform allows us to partner with health systems, which is a differentiator and opens up a significant total addressable market for us, given that a substantial percentage of providers are employed or affiliated with health systems. Lastly, we have the capability to provide solutions across all lines of business, from commercial to MA, which is a key differentiation as well.

Yes, thank you.

Thanks, Parth. The only thing I'd add is that all our providers expect a high differentiation when they partner with us. When a provider joins us, they leave their existing technology and contracts behind and we form a singular technological and medical group. We believe that this capability is a significant advantage in disseminating information with both payers and patients.

Okay. My follow-up question is around your decision to not participate in the direct contracting program, especially given the company's exposure in fee-for-service and its ability to generate savings on the platform. Would you consider participating in the future if the program is opened up again?

Thanks, Jailendra. Direct contracting is an interesting option. If you look at Privia and our management team's background, we are big supporters of government programs. We've got 90,000 Medicare Advantage lives, as Parth mentioned. We're taking risk on 100,000 MSSP lives. We have a strong appreciation of government programs, but we are very methodical about transitioning to any new program. As we share upside and downside risk with our providers, it's essential that we understand any new program and transition thoughtfully when it's appropriate. I anticipate continuing to explore various government programs once their guidelines are more clearly defined. Parth, anything to add?

No, I think you covered it, Shawn. One thing to highlight is that we have a significant MSSP book of business. So as we engage with CMS regarding new programs like direct contracting, we consider how such programs would affect our existing markets and their current performance. When opportunities arise in the future, we'll certainly consider moving into them.

Great, thanks again.

Thank you, Jailendra.

Taking the next question from the line of Sandy Draper of Truist Securities. Your line is open.

Thanks so much and good afternoon. I'll add my congratulations. I have a question, but I also want to incorporate how I think about something to make sure I'm thinking about the business correctly. In line with Jailendra's point, there are lots of different models out there. When I think of Care Margin and Platform Contribution, I consider Care Margin as a measure of how efficient practices are in delivering care and generating savings, while Platform Contribution reflects how efficiently Privia operates at the corporate level to deliver profitability. One, am I thinking about that correctly? And two, because you're guiding to those, how do you differentiate in visibility between guiding on Care Margin, which includes variables outside your control, versus guiding on Platform Contribution, which may be more under your control since it deals with spending rather than the doctors' care?

Thanks, Sandy; you've got a couple of questions there. Parth, do you want to address that?

Yes. Hey, Sandy, thanks for the question. Yes, I would step back a little. Our practice collections have two components: a fee-for-service book and a value-based care book. One key differentiation to note, as outlined, is in a partial risk value-based book, we are recognizing shared savings. That can be compared to the medical margins in a full-risk contract, as some companies state. So it's important to understand that we don't have an apples-to-apples comparison there. Our Care Margin effectively represents all the dollars that come to Privia after we've made all payments to physicians, including their portion of shared savings and other payments whether fee-for-service or value-based. Therefore, we have strong visibility in both Practice Collections and Care Margin since we understand what our fees are for each book of business. Below that, we monitor our operating costs, which are also under our control. Hence, we feel confident in providing guidance across the board.

Okay, great. That was my question. I appreciate it.

Thank you. Next question from the line of Ryan Daniels of William Blair. Your line is open.

Yes, thanks for taking the questions, and I'll add my congratulations on the quarter and the recent IPO. I want to talk a little about the provider pipeline. Obviously, a big part of your growth is additions to the platform, and you've been very successful there. So, I have a two-part question: One, can you give an update on the outlook for the remainder of the year and then into 2022? And also, could you share thoughts on your ability to work more closely with health systems to help them with provider alignment?

Yes, Ryan, thank you for the congratulations. I'll start and then let Parth jump in. We're feeling really good about our pipeline going into this year. The strong quarter reinforces that outlook. On the health systems front, we initiated discussions a few years ago with a Florida health system to enhance their performance, particularly in value-based care. Given what we learned from COVID, many health systems reached out to us wanting to collaborate. A lot of these health systems are seeking alternatives to employing physicians and are attracted to the Privia model, where they can partner with us without having to buy out practices. The relationships with health systems can be complex and longer-term due to their internal dynamics, but we're optimistic about the opportunities ahead.

The only thing I would add is that our model is flexible enough to adapt depending on the needs of a particular health system. We can work with larger integrated delivery networks that are satisfied with their employed physicians, while also assisting smaller regional health systems that do not want to employ primary care physicians. We can help them retain independence while still promoting alignment with our services. Most importantly, we are uniquely positioned to assist them in making the transition to value-based care successfully.

Absolutely. Great, thank you so much, guys.

Thank you, Ryan.

Thank you. Your next question is from the line of Josh Raskin of Nephron Research. Your line is open.

Hi, thanks. Good evening, guys. This is Josh Percher as well. I have two questions; the first one is an easy one. In the S1, I think you alluded to this in your prepared remarks, having estimates around GAAP revenues, Care Margin, Platform Contribution, EBITDA, etc. It seems all areas came in at or above the high end of those ranges. Were there specific areas of unexpected upside, or were there trends that performed better than expected, or was it just appropriate levels of conservatism in light of the IPO?

Hey, Josh. We don't think there were any material changes. Parth, do you have any insights to add?

Yes, Josh. Thanks for the question. Two quick things: One, we saw strength in both fee-for-service and value-based books. Obviously, in the initial part of the quarter, we were still dealing with the impacts of COVID in many states, which creates uncertainty. We also experienced challenges, such as the Texas freeze that impacted patient access. Despite all those challenges, we demonstrated better than expected performance. Regarding the value-based book, what we recognize in practice collections is the shared savings, so any outperformance in value-based savings translates directly into EBITDA, which can further impact our results. This operating leverage is essential given our structure.

That makes sense. I guess with potentially lower utilization impacting fee-for-service, but value-based care revenues potentially driving EBITDA; is that a fair way to think about it?

Yes.

Yes, that's correct.

Okay. Can you also speak to the timing around entering new markets? January 1 is critical for Medicare Advantage and commercial contracts; however, is it more about finding providers and signing contracts? Can you provide specifics on how to think about new market entry as we approach 2022?

Yes, Josh. I'll start off, and then Parth can provide additional detail if necessary. Our business does hinge on putting an anchor out there; this can take time, particularly depending on the size of the practice and alignment of our vision. Larger health systems do move slower typically. Once we establish a presence in an area, however, our growth process—what we refer to as our machinery—kicks in, and it becomes more predictable. Our existing physicians are often part of this growth in their same-store numbers. It's important to note that while securing the correct partnerships is essential, it ultimately results in a scaling process that is mostly under our control. We’re not merely selling Medicare Advantage contracts; we’re offering a full technology platform tailored for value-based care, which includes comprehensive support for ancillary services and patient engagement. That said, Parth, do you want to elaborate?

Yes, Josh. To clarify regarding timing, nothing in the model anticipates new markets for 2021. We are currently in discussions and are exploring potential anchors to help us open those markets. We can set up operations at any time during the year, not strictly tied to the beginning of the year. Although we launched Tennessee in Q4 amidst COVID last year, we are continually evaluating options. Should we proceed with new markets, we will provide updates accordingly. For value-based contracts in particular, they may reset in new or existing markets but follow similar timelines as other players.

Perfect. Thanks, guys. Congrats again.

Thank you, Josh.

Thank you. Last question from Richard Close of Canaccord Genuity. Your line is open.

Thank you. Congratulations. I appreciate the comments on the pipeline. Can you talk a little about the competitive landscape? Are you the only player in town? Are practices considering you against other companies, or are there other competitors in the mix?

Richard, I'll start. Thanks for the congratulations. Doctors always have choices in this area. When physicians graduate, they have several factors influencing their future, including location, debt, and their vision for practice. Those who mature into their careers often seek models that allow them ample independence and control rather than being employed by health systems. Therefore, our clientele primarily consists of physicians who are entrepreneurial and want to establish a significant practice in a partnership model. Our solution sale approach and our willingness to work with them is key, and that ensures we attract the right candidates. Parth, do you wish to add?

Yes, Richard. I won't go into specific competitors, but what's noteworthy is our total addressable market (TAM) is the broadest, thanks to our extensive lack of specialization. While we face competition from diverse sources that might cater to particular practices, our value proposition remains relevant across many. As we mentioned, we have the most adaptive model which supports independent practices looking for efficient ways to implement value-based care without being limited to single specialization.

Okay, and as a follow-up, can you provide any additional details on your arrangement with Anthem? Any collaboration agreements you can discuss moving forward?

Yes, the Anthem agreement involves their investment of $92 million at IPO. It’s a collaboration agreement, without exclusivity; we can work with any provider, and they can engage with other providers as well. Our partnership symbolizes our successful collaboration, and they're enthusiastic about accelerating our growth while performing effectively together. We are exploring similar engagements with other payers based on that success. Parth, anything you want to add?

No, thank you.

Thank you.

Thank you, Richard.

And your last question is from Jessica Tassan of Piper Sandler. Your line is open.

Hi, congrats on the first quarter, and thank you for taking the question. Your 2021 guidance suggests that practice collections are expected to grow at roughly two times the rate of revenue. Could you walk through in terms of market mix and reimbursement mix what might drive that divergence in growth rates? What could lead them to converge given in a year or in 2021?

Yes, Jessica. The divergence has two major drivers: first is the growth in states with Corporate Practice Laws (which impacts GAAP revenue); second is the practice that left us in the Mid-Atlantic, which does not affect GAAP revenue. So as our business grows in states with corporate practice laws, their practice collections typically grow faster than reported GAAP revenue. This can manifest depending on the mix—in that sense, we hope to maintain good growth rates with ongoing contributions from existing practices as they improve utilization rates compared to new market entry.

Got it. As utilization picks up, can you talk about the potential advantages Privia has compared to models concentrating solely on primary care in terms of both fee-for-service and value-based revenue?

Certainly. On the fee-for-service side, we are directly influenced as utilization increases across our patient population. Moreover, our mix of specialists also benefits from this increased utilization. While pediatricians and similar roles faced challenges during COVID, we expect them to ramp back up significantly. This consistency in our diversified book of business differentiates us from primary care-only models, providing potential for revenue growth in both landscapes.

Got it. Thank you.

Thank you, Jess.

Thank you, and I’m not showing any further questions. I would now like to turn the call back to Mr. Morris for any closing remarks.

Thank you, operator. Thank you for joining us on our inaugural earnings call. We look forward to building long-term relationships with each of you, and we hope to speak with you again soon. Thanks a lot, and have a good evening.

Ladies and gentlemen, thank you for participating in today's conference. This concludes today's event. You may all disconnect. Have a great day.