P3 Health Partners Inc. (NASDAQ:PIII) Q3 2023 Earnings Call Transcript

P3 Health Partners Inc. (NASDAQ:PIII) Q3 2023 Earnings Call Transcript November 11, 2023

Operator: Good afternoon, everyone, and welcome to the P3 Health Partners Third Quarter Results Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. I will now turn the conference over to Karen Blomquist, Vice President of Investor Relations of P3. Please go ahead.

Karen Blomquist: 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 these statements made on this call is contained in our periodic report 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, including adjusted operating expense, adjusted EBITDA, adjusted EBITDA per member per month, medical margin, medical margin per member per month for persistent lives and cash burn. These non-GAAP financial measures are in addition to and not a substitute or superior to the 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 that 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, CEO and Co-Founder of P3.

Sherif Abdou: Thanks, Karen, and thank you all for joining our third quarter 2023 conference call. I would like to update you all on our third quarter financial results, 2023 guidance as well as provide preliminary 2024 guidance. I will start off with some few big picture comments. We are pleased to be able to report that we are tracking towards our 2023 full year guidance as expected. Our overall momentum remains very strong. While our third quarter EBITDA is lower than anticipated by approximately $15 million, this is predominantly due to some timing elements impacting our EBITDA realization, which Atul will provide further details on shortly. The key point is that we expect about $15 million to $20 million of final payment for 2022 data services to be realized in the fourth quarter, and that will drop down to adjusted EBITDA.

I’m also pleased to be able to report that our cash burn, defined as cash flow from operations less CapEx for the third quarter was $8 million, and we are on track to be cash flow breakeven in 2024 as previously discussed. We are providing a preliminary 2024 adjusted EBITDA guidance of positive $20 million to positive $40 million. The guidance range assumes $60 million EBITDA from persistent lives that’s our baseline. We will provide more detailed guidance in January 2024. On to our third quarter and year-to-date highlights. Revenue for the quarter was $288 million, an increase of approximately 16% over the prior year’s quarter. And year-to-date, revenue of $920 million also grew 16% versus the prior year period. Medical margin for the quarter was $36 million, $126 million year-to-date, on track to meet our guidance of $155 million to $175 million for the year.

Medical margin per member per month for the quarter on all lives was $115 per member per month and $135 PMPM on a year-to-date basis. Medical margin PMPM for our persistent lives was $241 PMPM on a year-to-date basis. That is consistent with the mature market range of $150 to $200-plus PMPM reported by our peer, Agilon, which we consider a valuable benchmark. Persistent lives are defined as the lives were on our platform in December 2022 and are on our platform in January 2023. Medical claim expense PMPM for our Medicare Advantage lives were approximately negative 2% year-to-date. That is a reflection of the power of the P3 model and ability to build the cost curve with more persistent lives on our platform. Adjusted EBITDA for the quarter was negative $22.3 million compared to a negative $40.3 million in the prior year.

The $22.3 million includes the impact of noncash in the quarter, $3.8 million true-up of employee health care costs and does not take into account the accrual for the revenue recognition for data service 2022 that we expect will be captured in the fourth quarter. Year-to-date adjusted EBITDA was negative $41.2 million compared to the prior year of negative $87.9 million, which is 53% improvement. Said differently, we cut our losses in half. As we look forward to 2024, we would like to provide you with some insight as to how we see next year shaping up. As I just shared, our baseline for 2024 starts with the expectation that our persistent lives will contribute approximately $60 million of EBITDA in the year. Additionally, we expect to take on meaningful new lives and growth in 2024.

We are expecting to achieve this growth in a very capital efficient way by continuing to focus on existing and adjacent markets while leveraging our existing infrastructure in a meaningful way. We have various conversations ongoing with payers, providers and health systems, including potential JV and strategic partnership opportunities. Based on all this, I remain bullish on our opportunities to thrive in the years to come. Now I would like to turn the call over to Bill Bettermann, our Chief Operating Officer.

Bill Bettermann: Thank you, Sherif. I plan to cover 3 topics today; first, how we judge our own operating performance and the effectiveness of the P3 model; second, ACO REACH; and third, highlights from our California market. We, as a management team, judge our own operating performance on a PMPM basis as well as versus publicly available benchmarking data. On the last point, we have a publicly traded peer, Agilon health, with a similar affiliate business model, so the data is readily available and relevant. We have the utmost respect and admiration for what Agilon has achieved and use it as a natural benchmark for the P3 business, knowing there are some differences in the model and mix in membership. The first relevant data point is revenue per member per month growth for the quarter.

This is a relevant data point to answer the question, is the P3 model effective at engaging patients and assessing the disease burden appropriately. P3’s revenue PMPM growth for the quarter was 11% and Agilon’s was the same. P3’s revenue PMPM year-to-date was $985; Agilon’s was $945. We are pleased about that. The second data point is medical margin PMPM, which is directly tied to the effectiveness of P3’s model in absolute terms and relative to a JV model. It answers the question, does the P3 model bend the cost curve as effectively as the JV model? It is the fundamental value prop in value-based care, premiums less medical claims. P3’s medical margin PMPM is $135 year-to-date. Agilon’s was $119 PMPM year-to-date and $134 PMPM for 2-year plus markets.

P3’s persistent lives medical margin PMPM is $241 year-to-date. We’re already operating at mature margins of a JV model. The third data point is gross profit PMPM. P3’s year-to-date gross profit PMPM was $56 PMPM versus Agilon’s at $45 PMPM. We feel really good about that. There are some differences in the 2 models. We are not fully scaled yet and expect to leverage our infrastructure in a similar fashion as we grow over the coming years. P3 owns up roughly 100% of its adjusted EBITDA, and so we don’t expect significant minority interest expense going forward as we become adjusted EBITDA profitable. We don’t have significant geographic entry costs. We generally grow adjacent to our existing markets given the significant wide space available to pursue this strategy.

P3’s cash burn year-to-date was $61 million versus Agilon’s at $107 million. We also enjoyed lower cost of membership acquisition than our peers. The majority of our provider adds are driven by inbound inquiries by those attracted to our operating model, and this really allows us to avoid long sales cycles. Additionally, 20% of P3’s revenue is delegated, which has positive cash flow dynamics attributed to it. We expect to grow that over time so our cash flow dynamics will mirror that of a health plan, premiums upfront, pay claims later. The delegated model also enables important operating benefits related to better data clarity, accuracy and timing versus non-delegated, which is helpful to drive physician adoption of our P3 model in better managed medical cost trend.

Finally, we have a lower mix of ACO REACH lives today. Regarding ACO REACH, we have roughly 7,000 lives today and plan to increase that substantially over the coming years. With our current 2,700 and growing PCPs that we have, the ACO REACH program allows us to create greater depth into each of our practices by offering the benefits of this program to patients being seen by those PCPs who are not currently in a risk-based arrangement. Migrating those patients to an ACO REACH program further entrenches the value-based care concept with our clinicians and allows us to better serve those patients. We continue to see an increase in engagement level of our clinicians as they deepen their understanding of the value-based care program due to proper incentive alignment, increased use of our data tools and education, as well as working with our care management teams for very sick, high-utilizing patients.

This increased adoption and engagement is very encouraging and bodes very well for our clinical, financial and operational performance going forward. Lastly, I want to take a minute to focus on one of our newer markets, California, which we entered in December of 2021. We have approximately 8,500 Medicare Advantage members in this market. Much of this market is based solely on affiliate providers as we don’t have a medical group presence here. If we compare the California market from September of 2023 year-to-date versus prior year-to-date, you will see some significant improvements we’ve made in this market’s performance. If you start with revenue PMPM, third quarter 2023 year-to-date, it was $1,134 PMPM versus year-to-date prior, it was $976 PMPM.

That’s an increase of 16%. Medical margin PMPM, third quarter year-to-date 2023, it was positive $244 PMPM versus year-to-date prior, it was negative $45 PMPM, a nearly $300 positive swing. One key element driving this performance is our commitment to building very strong relationships with our affiliate providers. We’ve partnered with them to see many of their patients in our senior center where we believe we have done a tremendous job of closing care gaps and identifying their chronic conditions to help aid their PCPs in providing the best care. We believe we have also optimized our health plan contracts to assure full alignment with our payer partners and will expand upon the coordination of care with the stronger performing plans. I want to thank you for your time today.

And now I will turn the call over to Atul Kavthekar, our CFO.

Atul Kavthekar: Thanks, Bill, and good afternoon, everyone. I’ll start by discussing our recent quarter and how we are progressing towards meeting our full year guidance. Then I’ll provide updates on our liquidity position and our significantly lower cash burn in the quarter and finish up with some thoughts around our preliminary 2024 adjusted EBITDA guidance. I’ll begin with our results for the quarter and year-to-date. Top-line results for the third quarter were strong, with capitated revenue of $285 million and total revenue of $288 million representing growth of 17% and 16%, respectively, compared to the prior year. Year-to-date, capitated revenue was $910 million, and total revenue was $920 million, representing an improvement of approximately 16% on each metric compared to the same period in the prior year.

On a PMPM basis, this roughly equates to a 16% improvement, reflective of improved funding on the nearly 75% of persistent members on our platform, which we define as members who have been with P3 since the start of the calendar year. In the third quarter, our medical margin improved to $36 million or $115 on a PMPM basis, which is roughly 6x improvement compared to the prior year. Year-to-date, medical margin improved nearly 25x to $126 million. Gross profit in the quarter improved significantly over the prior year to $9 million or $29 PMPM compared to a slight loss in the prior year. Year-to-date, gross profit increased to $52 million or $56 PMPM compared to a loss in the prior year. This is yet another quarter in which we have demonstrated significant progress on these measures and that provides a clearer picture on our ability to manage and improve our members’ health.

Going forward, we have targeted several new initiatives that we will be laser focused on that are designed to be even more impactful in managing our medical costs. We will be sharing much more about them and the delivered results in subsequent calls. As it relates to operating expense trends, we saw a significant drop in our platform support costs, going from 12% of revenue in the third quarter of ’22 down to 9% in the current quarter. I continue to be very pleased with the team’s commitment to continuous improvement and operational innovation. And as I’ve said in the past, we will continue to monitor our spending carefully and incorporate this mindset into our everyday cash management. Adjusted EBITDA for the quarter was a loss of $22 million, a significant improvement compared to a loss of $40 million in the prior year.

Year-to-date, 2023 adjusted EBITDA loss was $41 million compared to a loss of $88 million in the same period of ’22, another significant area of improvement. Let me provide some additional color on this quarter’s adjusted EBITDA. Our adjusted EBITDA for this quarter reflects several notable elements, including favorable IBNR adjustment recommended by our actuaries of roughly $3.8 million non-cash charge related to employee insurance costs, and finally, no recognition of any revenues in connection with our estimated 2023 final payment related to the 2022 dates of service. All in all, we are pleased with the quarter’s results and plan to drive the company to higher performance over the next several quarters. To that end, we are reaffirming our full year 2023 guidance.

We still expect 2023 revenue to be between $1.2 billion and $1.25 billion, adjusted EBITDA of between negative $30 million to negative $50 million, and our medical margin to be between $155 million and $175 million. With regards to our liquidity, our position is solid. We ended the quarter with approximately $58 million in cash. And consistent with our messaging last quarter, our cash burn was substantially lower than in prior quarters at approximately $8 million of burn in Q3. While this is reflective of a more normalized burn rate in the near term, we continue to march down a path that leads us to profitability next year and positive cash flow soon thereafter. Looking forward, and as Sherif mentioned earlier, we are expecting to continue the positive trends we’ve seen in terms of member growth, revenue, medical margin and operating expenses.

Specifically, we have high visibility into some of the key drivers of our business including our persistent member economics, our new membership growth pipeline, our funding in 2024 adjusted for the V28 model, our growing ACO REACH penetration along with its better unit economics, and specific areas of opportunity in our medical cost management. We will provide further details at a future investor conference in early 2024, but we’re expecting to generate adjusted EBITDA between positive $20 million and positive $40 million. We are pleased to share our continued optimism and excitement at the near-term and long-term prospects of P3 and look forward to sharing more specific details with you in the coming weeks.

Sherif Abdou: Operator, let me make some closing comments and then we’ll go to Q&A. So today in the call, we shared with you reaffirmed our EBITDA and medical margin guidance for 2023. We shared with you that our revenue was up 16%. Our capitated revenue was up 17%. We also shared with you that our Medicare Advantage medical expense year-to-date per member per month. When you compare it with the Medicare Advantage year-to-date 2022, the trend is down, negative 2% improvement in the medical cost and that reflects the power of P3 model and the success that we’re seeing. The medical margin had improved 306% year-over-year, $36 million for the quarter over $9 million last year quarter. Gross profit was $9 million positive versus $6 million negative last year, same quarter.

OpEx is down 18% to 20% year-over-year. Our cash burn, as we shared with you, is $8 million for the entire quarter. Our EBITDA has improved from last quarter and year-to-date, ’23 over ’22 by 53%, as we mentioned and shared with you that basically, we cut our losses in half over this year. And we’ve shared with you our preliminary projection for EBITDA positive 2024, between $20 million and $40 million. So with that, operator, we’re ready for Q&A.

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Q&A Session

Operator: [Operator Instructions] Our first question comes from Brooks O’Neil with Lake Street Capital Markets. Please go ahead.

Brooks O’Neil: Congratulations on the significant progress you’ve made. I have a couple of questions. I guess I’d like to first, just to ask you, I think, Sherif, you mentioned that you expect a meaningful drop down in Q4 related to the claims experience in the prior year. When you’re thinking about the $20 million to $40 million of positive EBITDA you commented about expecting in 2024, is that dependent on any kind of similar drop down from prior year?

Sherif Abdou: Well, I think Brooks, first, thank you very much, and I appreciate the question. That’s exactly why I put those summary caps at the end. We’re going to continue to improve that. The revenue will continue to go up, 16% to 17%. The medical cost will continue to trickle down. And as a result, our actuarial, as I said, recommended that we start releasing some of the reserves that we put in IBNR. Our medical margin has improved 300% year-over-year. I don’t even have to do that. But if we continue to improve and the contribution from the persistent life is $241 PMPM. So you can extrapolate that continuation of revenue, medical costs go down, medical margin go up, gross profit go up, OpEx, we’re all focused on continuing to be more efficient and leverage the infrastructure. The cash burn continues to go down then that’s our path for $20 million to $40 million EBITDA.

Brooks O’Neil: That’s great. I think it’s going to be important for you to get there. And it sounds like you’re on track to do so. So that’s fantastic. Let me just ask you about the growth you commented about in new lives for 2024. Obviously, historically, when you’ve had new lives come in, they tend to be depressing to some of the profit and performance you’ve had. How confident are you that you can bring in new lives next year and still continue the improvement you’re seeing now?

Sherif Abdou: We’re very confident, Brooks, because we’ve added some lives this year. We’ve added on the same network. We’ve added on the same geography and markets. We went to the market in the county next door so that we can leverage the infrastructure, and we’re going to continue to do so. And we’re seeing more and more as not only the patient maturation take place, but the physician engagement maturation takes place, the time from landing in our platform and soaring into a successful medical margin is getting shorter and shorter. So we’re very confident that we will be able to grow and maintain the trajectory that we shared with you today.

Brooks O’Neil: Great. Let me ask one last question. I think it was Atul mentioned the funding improvement that you’ve achieved this year. My sense is that our friends at CMS have made some changes to the risk adjustment mechanisms in Medicare Advantage. Again, how confident are you that you can continue to drive improved funding next year in the environment we all anticipate for 2024?

Sherif Abdou: I’ll turn the answer to Dr. Bacchus. He’s here with us in the room. He is our Co-founder and Chief Medical Officer. Dr. Bacchus?

Amir Bacchus: Brooks, good to hear your voice again. Yes, I mean for us, as we’ve heard me describe before, a few different factors are real important in making sure that we can continue to perform in driving not only proper documentation for each and every one of our patients through our education modules and things that we do today. But also, it comes from, as Sherif is describing, the maturity of those practices that understand it. So those things all bode well for us upfront. In addition to that, as we’ve talked about, we have a better opportunity in regards to when we’re looking at where we currently reside in our current RAF with the opportunity that still exists. So in analyzing our populations, we still know we have significant opportunity, even with the revenues that Sherif described. So we are quite excited as we even move to version 24 to 28 to continue to perform in the risk adjustment coding standpoint.