P3 Health Partners Inc. (NASDAQ:PIII) Q1 2023 Earnings Call Transcript May 12, 2023

Operator: Good afternoon, everyone, and welcome to the P3 Health Partners First Quarter Results Conference Call. Currently, 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 conference call is being recorded. I will now turn the call over to Karen Blomquist, Vice President, 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 US Federal Securities laws, including statements regarding our financial outlook and long-term targets. These forward-looking statements are only predictions and are based solely 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 our 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: Good afternoon, everyone. I would like to kick us off today by saying how proud I am of our team and its performance and achievement over the last period. As you have heard me saying before, we’ve committed to our investors that we would deliver on a number of very impressive profitability metrics to validate the model and we believe we have delivered. Our results will show that we have great momentum in our business model and we are feeling very confident and optimistic how we are tracking in the second quarter and toward our 2023 overall performance. Today, we’re updating our full-year 2023 adjusted EBITDA guidance to an improved range of loss of $55 million to $35 million. This updated guidance from the prior range of class of $60 million to $40 million reflects our confidence in the performance of the business and all profitability data that we are sharing today will validate that.

As I’ve shared with you in the past, 2023 is an inflexion year in P3 Health Partners’ lives. We have a significant number of persistent lives that we’ve never had before. For the first time, 83% of our lives that we are serving today are persistent. And we believe that metric is important as a first step to more clearly demonstrating the future profitability and trajectory of our model. The overall population funding had improved by 9.2%, up from $8.89 PMPM last year first quarter to $963 PMPM this quarter. Our medical margin for the quarter was $39 million. The medical margin percentage was 13.1%, which is consistent with our guidance and with other public peers and we view this as a validating data point for the P3 model. Our network contribution was $17 million.

It is important to note that once we tip that point where network contribution exceeds operating expense, the pendulum will swing to our profitability and we’re quickly approaching that key threshold. The distance to reach that point is about $62 per member per month. And just to give you a context of this, we improved our funding by over $70 PMPM. We do that again. That will help us cross that bridge. We improved our medical costs by over $30 PMPM. If we continue to do that again, we will cross into profitability. So, it’s important for us to see the levers that we’re pulling. It’s all improving about the health of our population, improving the funding and improving the medical cost ratio. Our adjusted EBITDA showed very strong improvement with a loss of $19.1 million compared to a loss of $4.1 million in the prior quarter.

biotech, laboratory

biotech, laboratory

Photo by CDC on Unsplash

Included in the Q1 2023 adjusted EBITDA is approximately $3 million in costs that we do not expect on a going-forward basis. Adjusted EBITDA PMPM was a loss of $62 PMPM, an improvement of $71 PMPM compared to a loss of $133 PMPM in the fourth quarter of 2022. In our newer markets, we have scaled up quickly. We are feeling optimistic and confident about what we’re seeing. Oregon for example, is quickly moving toward profitability and had a very insignificant loss in the first quarter. California has a positive adjusted EBITDA. Across all of the markets we serve, we noticed an extreme increase of the demand and a full robust pipeline of growth opportunities and we’re very confident about our growth the rest of this year and in 2024. In Arizona, our performance is strong.

Our focus is always — and quality had made us the leader in the market as we serve. That focus on quality is clear and I’ll give you, an example. We recently received full plus recognition from the CDC for our diabetic prevention and haemoglobin A1c program, which Dr. Bacchus, will provide some color on later. With these very solid results, we are well on our way to realizing the $200 million indebted EBITDA, in our material population and cohort and that we believe that is inherent in the P3 model. 2023 is a year where we have committed to deliver the data points to validate the P3 model and our first quarter results, are a reflection of that. When we think about where we are as an organization, I believe that we are with the right team, in the right space, in the right business model and we are on the right track to achieve profitability.

We have done extensive financial benchmarking analysis, comparing our results to our direct public peers, some of which that currently have $10 billion valuation. When they have similar revenue level, we are spot on. I will leave you with this. Our momentum is building, we’re executing our plan and I expect to share with you more positive news, in our second quarter results. I’d like now to turn the call over to Atul Kalaru, CFO.

Atul Kavthekar: Thank you, Sherif and good afternoon, everyone. I’ll start today by providing detail around what we achieved in the first quarter, and how we are progressing towards meeting our full-year guidance and anticipated profitability in 2024. Top line results for the first quarter were strong, with capitated revenue of $299 million and total revenue of $302 million. The capitated revenue includes a higher mix of persistent lives on our platform, which in turn improves profitability. In the first quarter of 2023, we had strong improvements in both medical margin and network contribution in the quarter. Our medical margin, which represents the amounts earned from capitation revenue after medical claims are deducted, improved over the prior year period to $39 million or $126, on a PMPM basis.

Network contribution, which we define as medical margin-less network expenses, improved by 114% over the year to $16.5 million. We believe that the trends in these two critical data points, give a clear view of the progress we are making as we work towards reaching profitability in early 2024. Adjusted EBITDA loss was $19.1 million in the first quarter of 2023, a big improvement compared to the loss of $40 million, in the prior quarter. Included in the Q1 2023 adjusted EBITDA, is approximately $3 million in costs that we don’t expect on a go-forward basis. The Q1 2023 adjusted EBITDA, is in line with our expectations for the quarter. And as I mentioned on the last call, we anticipate the second and third quarter to show significant improvement, as we begin to see the benefits from operational efficiencies and receive midyear true-ups that will create a contour rather than a straight line spread of results.

We expect the fourth quarter will be slightly softer than the second and third, as we expect to see some seasonality as we move into the colder months and into cold and flu season. That said, Q4 should still see a meaningful improvement over Q1. Our net loss in the first quarter of 2023 improved by 14% compared to the same period in the prior year in part due to the 300 basis point improvement in SG&A, as a percentage of revenue. For the remainder of the year, we expect platform expenses to continue to taper as we exit the second quarter and get to a more normalized go-forward run rate unencumbered by these costs present in Q1. We started the second quarter of 2023, with a cash balance of $95 million. Although this is not reflected in the Q1 financials due to the timing of the transfer of funds from the capital raise, we announced on March 31, which were received in the first week of April.

For the remainder of the year, we expect our cash burn to be significantly lower than the prior year and we will end the year with more than adequate cash to operate until we reach positive cash flow. We are feeling really great about where we are from a liquidity perspective, even better now than we did on the last call. The capital raise put to rest our liquidity concerns and we are now myopically focused on operational excellence. As I sit here today in mid-May, I’m feeling really good about Q2 and 2023 guidance. I want to remind you of our guidance for 2023. We still expect 2023 revenue to be between $1.2 billion and $1.25 billion and we are increasing the adjusted EBITDA guidance to now be a loss of $55 million to $35 million compared to the prior guidance of a loss of $60 million to $40 million.

In addition to that we are expecting our medical margin in 2023 to be in the range of $155 million to $175 million. Thank you all once again for your interest in the P3 story. And with that I’ll turn the call over to Dr. Bacchus who will give you an example of how we are able to bend the cost curve at Q3.

Amir Bacchus: Thanks Atul. Good afternoon. As Sherif mentioned, we are winning in the markets that we serve from both the provider and patient perspective. From last year through the first quarter of this year, we have been better able to align stronger incentives for our providers to improve access to both their EMRs and patient visits, delivering better outcomes in quality of care, documentation, and utilization. As we discussed in previous calls, it takes positions approximately 24 to 36 months to fully encompass the care model on their persistent patients and become converts to the value that value-based care brings. This is precisely why we’re seeing the significant medical margin improvement company-wide. The provider engagement is paramount and I’m happy to report that we have more providers engaged with our teams in each market than anytime previously.

But not only is the provider engagement important, patient engagement is equally important to engage patients to improve their care. By utilizing our care managers, care navigators, and others on the team, we have been able to significantly improve results on our high-risk, high-cost population, or cohort from 2021 through 2022, reducing both hospital admissions and emergency department utilization by 19%. For our diabetic population, we have seen a 10% improvement in control of this condition, which is why we were recognized by the CDC as Sherif described earlier. Key technologies like our risk stratification tool, our Care Connect tool allow us to understand who is at risk and how to monitor them through their care journey. To push the point further, this high-risk, high-cost population saw a 71.5% improvement in their medical cost ratio, leading to a savings of almost $13 million.

Success as we see it is striving for meaningful relationships with both our providers and patients and enabling both of them via improved data team support or better care options. With that, I will turn the call back over to Sherif before we begin Q&A.

Sherif Abdou: Thanks Amir. Before we go into Q&A, I just wanted to remind you all that our kit promises to our shareholders and investors that we will work hard on improving the funding and we have improved that from $899 PMPM last year first quarter to $963 per member per month first quarter 2023. That’s about 9.3% improvement. We have promised and committed to improve our medical margin. First quarter 2022 was $82 PMPM. And as we promised we increased the medical margin to $127 per member per month. That is constituted about 13.1% margin from our revenue. And medical cost ratio had improved from 91% 92% first quarter 2022 to 87% first quarter of 2023. We promised we said it we did it. And network contribution was $7.7 million first quarter last year or $26 PMPM or 2.8%.

This year first quarter, as we promised, it’s more than doubled $17 million network contribution positive $53 per member per month, that’s 5.5% of the revenue. That is why that confidence that we have and all the performance and the fundamentals of our operation and improvement in the health of our population we increased our EBITDA guidance for this year as I mentioned earlier. With that, we’re going to open for question and answer. Operator?

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