Apollo Medical Holdings Inc
NASDAQ:ASTH
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Apollo Medical Holdings Inc
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Greetings and welcome to the Apollo Medical Holdings, Inc. Third Quarter 2022 Earnings Call. At this time all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions]. As a reminder, this conference is being recorded.
I would now like to turn the conference over to your host, Carolyne Sohn, Investor Relations for Apollo Medical Holdings, Inc. Thank you. You may begin.
Thank you, operator, and hello, everyone. Thank you for joining us.
The press release announcing Apollo Medical Holdings, Inc.'s results for the third quarter and nine months ended September 30, 2022, is available at the Investors section of the company's website at www.apollomed.net.
To provide some additional background on its results, the company has made a supplemental deck available on its website. A replay of this broadcast will also be made available at ApolloMed's website after the conclusion of this call.
Before we get started, I would like to remind everyone that this conference call and any accompanying information discussed herein contains certain forward-looking statements within the meaning of the Safe Harbor provision of the Private Securities Litigation Reform Act of 1995. These forward-looking statements can be identified by terms such as anticipate, believe, expect, future, plan, outlook and will and include, among other things, statements regarding the company's guidance for the year ending December 31, 2022, continued growth, acquisition strategy, ability to deliver sustainable long-term value, ability to respond to the changing environment, operational focus, strategic growth plans and merger integration efforts as well as the impact of the 2020 novel coronavirus or COVID-19 pandemic and other variants on the company's business, operations and financial results.
Although the company believes that the expectations reflected in its forward-looking statements are reasonable as of today, those statements are subject to risks and uncertainties that could cause the actual results to differ dramatically from those projected. There can be no assurance that those expectations will prove to be correct.
Information about the risks associated with investing in ApolloMed is included in its filings with the Securities and Exchange Commission, which we encourage you to review before making an investment decision.
The company does not assume any obligation to update any forward-looking statements as a result of new information, future events, changes in market conditions or otherwise, except as required by law.
Regarding the disclaimer language, I would also like to refer you to Slide 2 of the conference call presentation for further information.
For those of you following along with the accompanying supplement, there is an overview of the company on Slide 3.
On today's call, the company's Co-Chief Executive Officer, Brandon Sim will discuss third quarter 2022 highlights and the latest operational developments. Interim Chief Financial Officer, Chan Basho, will follow with a review of ApolloMed's results for the third quarter and the first nine months ended September 30, 2022. Brandon will conclude the remarks with an update on the company's outlook and long-term growth strategy before opening the floor for questions.
With that, I'll turn the call over to ApolloMed's Co-Chief Executive Officer, Brandon Sim. Please go ahead, Brandon.
Thank you, Carolyne.
We were pleased to deliver another strong quarter of profitability driving by 40% growth on the top-line in Q3 which was primarily due to increased contribution from capitated revenues. This was the result of strong organic membership growth in our core care delivery business, a more favorable membership mix, and our participation in a value-based care model for the Medicare fee-for-service population.
We reported a 53% year-over-year increase in capitated revenues to $227.6 million which accounted for nearly three quarters of total revenue, which was $317 million for the quarter.
Before we get into the quarter, I want to highlight a very important fact that sets ApolloMed apart from other providers. It's our desire to serve our entire communities across all peer types, that is original Medicare, Medicare Advantage, Medicaid, and commercial patients, and support them across their entire lives. Our willingness and dedication to serving all members of our communities and the unique care model in value-based care infrastructure that we have built in order to do so successfully makes us an extremely valuable partner to both payers and providers. That has also fueled our ability to consistently grow the business profitably, which drives a virtuous cycle as we continue to invest in the long-term health and wellness of the communities we serve and expand our care delivery model into new communities across the country.
We believe that the foundational tenant upon which successful healthcare delivery is built is the trusted relationship between a patient and her provider, and we will continue to invest in that sacred relationship in order to affect industry-leading clinical outcomes for our patients.
An example of our ability to provide exceptional care while lowering costs is evident through our accountable care organization stellar performance year-after-year. During the third quarter of 2022, we booked a $48.8 million shared savings settlement on the revenue line related to participation in an accountable care model for the 2021 performance year. Because of our successful track record and confidence on the care delivery model we had opted to take on a higher risk corridor in that program, resulting in the $27 million increase from last year's shared savings settlement on the top-line. We are pleased to have generated meaningful savings while delivering high quality care with our ACO once again.
Going back to the financials, our operating expenses during the third quarter increased by $93 million or 53%, primarily due to return of pre-COVID medical expense run rates and a growth in membership, which is in line with the increase in capitated revenues.
As discussed in our last quarterly call, we continue to see an increase in MLR compared to that in 2021, primarily as a result of utilization returning to pre-COVID levels.
Despite the increased OpEx, we reported $26 million in net income attributable to ApolloMed shareholders and GAAP earnings per share on a diluted basis of $0.56 for the quarter.
Adjusted EBITDA was $57.1 million compared to $62.9 million in Q3 of last year.
I'm excited to announce that we are raising our revenue, net income, and EBITDA guidance for full-year 2022 as a result of our strong performance in the first three quarters of the year. We are reiterating guidance for adjusted EBITDA because we have revised our adjusted EBITDA calculation beginning this quarter to exclude addbacks for provider bonus payments and losses from recently acquired IPAs. We strive to ensure that our shareholders better understand the clinical and financial outcomes generated by our unique model, and removing these addbacks will bring adjusted EBITDA closer to free cash flow and highlight the unique level of profitability that our model generates as it grows 40% same quarter year-over-year.
In summary, our revenue forecast for the full-year is increasing from a range of $1.055 billion to $1.085 billion to a new range of $1.095 billion to $1.115 billion. Our net income forecast for the full-year is increasing from $38 million to $57 million to a new range of $50.5 million to $67 million, and our EBITDA forecast is increasing from a range of $81 million to $111 million to a new range of $107.5 million to $133.5 million. And despite the revised adjusted EBITDA calculation in which we're moving the addbacks related to one-time provider bonuses and losses due to recent growth, we are maintaining our adjusted EBITDA guidance of $136 million to $166 million.
Prior to this calculation adjustment, we had expected to beat this range. With the new calculation, we still anticipate being within this range, but on the lower end. For future years, we continue to anticipate to grow at a 30% revenue growth clip year-over-year with a target EBITDA margin of 10% to 15%.
Moving to recent operational developments, we made a couple of very exciting announcements a few weeks ago. We are pleased to have closed on the acquisition of nine primary care clinics in Las Vegas, Houston, and Fort Worth, operating as Valley Oaks Medical Group in mid-October. This marks our official expansion to Nevada and Texas markets, and we look forward to delivering positive clinical outcomes and improved care experiences to the underserved patients in these local communities through our unique care model. We've talked about making bigger moves into new geographies, and we are thrilled to begin building trusted relationships with patients and communities in Nevada and Texas.
In late September, we announced the signing of a definitive agreement to acquire 100% of the fully diluted capitalization of All American Medical Group or AAMG, and For Your Benefit or FYB, as well as certain related managed care assets. AAMG is a physician group in the San Francisco Bay Area and FYB is affiliated with AAMG and is licensed by the California Department of Managed Healthcare as a full service restricted Knox-Keene licensed health plan. We closed on the acquisition of AAMG on October 31 and expect to complete the remaining transactions by the end of the first quarter of 2023 pending regulatory approval. The restricted Knox-Keene license that is a part of the FYB transaction will allow us to assume full financial responsibility, including both professional and institutional risk for the medical costs of its members. This means that for the first time, ApolloMed will be able to recognize a much larger percentage of the premium dollar as revenue for its managed care risk bearing members in California. Instead of recognizing only $0.40 to $0.45 of each premium dollar for taking on professional risk, we will now be able to recognize closer to $0.85 illustratively of the premium dollar for taking on both professional and institutional risk or global risk in capitated revenues.
Today, we are currently take on -- taking on facility risk by partnering with hospitals or payers where we recognize shared savings and incentives revenue and we will translate the success we have achieved in doing so to better coordinate care for our members in the future via the restricted Knox-Keene license.
We view this as a significant opportunity for both revenue and EBITDA, but we do want to note that we anticipate the process of assuming this risk level across all of our members to be a gradual process. The AAMG, FYB investment and partnership will also add over 250 physicians to ApolloMed's network of providers and over 15,000 Medicare Advantage, commercial and Medicaid patients in the city and county of San Francisco and in San Mateo County.
We are thrilled to be expanding on our presence in Northern California following the acquisitions of Access Primary Care Medical Group and Jade Health Care Medical Group in the past year. With addition of AAMG and FYB to the ApolloMed family, we will now serve over 30,000 patients in the San Francisco Bay Area.
In the remainder of 2022, we look to continue strengthening our foothold in our core California markets while continuing to build rapidly in newer markets such as New York, Nevada, and Texas. As we continue to empower our physicians to deliver exceptional clinical outcomes, we believe there is a great deal of runway for our unique value-based care and value-based enablement offerings.
With that, I'll turn it over to Chan to review our financial results.
Thank you, Brandon.
We continue to deliver strong results, reporting total revenue of $317 million in the third quarter of 2022, a 40% increase from $227.1 million in the prior year quarter. This was primarily driven by increased capitation revenue resulting from organic membership growth in our core IPAs, and participation in a value-based Medicare fee-for-service model.
Capitation revenue increased 53% to $227.6 million during the period, accounting for 72% of total revenue for the quarter ending September 30, 2022.
Risk pool settlements and incentives revenue increased 8% to $64.8 million during the period from $59.9 million in the prior year period, primarily driven by a $27 million increase in shared savings settlements earned from Apollo's participation in an ACO related to the 2021 performance year. This was partially offset by reduced risk pool payments due to an increase in utilization post the COVID-19 public health emergency period.
Fee-for-service revenue increased 77% to $12.9 million from $7.3 million in the prior year quarter. The increase was primarily due to a $4 million increase from the consolidation of Sun Labs beginning August 2021 and DMG beginning October 2021 as well as increased visits to our surgery center.
Our membership remained at approximately 1.2 million managed lives at the end of the third quarter ending September 30, 2022. Approximately 600,000 or half of our members were under capitated risk-bearing arrangements through our consolidated IPAs.
Total operating expenses increased about 53% to $266.9 million in the third quarter of 2022 from $174 million in the prior year period. This was primarily a result of increased cost of services due to a return to pre-COVID-19 medical expense run rates and growth in membership, which was commensurate with our increase in capitation revenue.
Net income attributable to ApolloMed was $26 million compared to $34.3 million in the third quarter of 2021.
Earnings per share on a diluted basis were $0.56 compared to $0.74 in the prior year period, mainly due to an increase in operating expenses mentioned earlier.
We reported EBITDA of $48.2 million in the third quarter of 2022, which compares to negative EBITDA of $0.3 million in a prior year period. Adjusted EBITDA was $57.1 million compared to $62.9 million in the prior year period. We place great emphasis on adjusted EBITDA figures as these numbers back out the impact of excluded assets, stock-based compensation, other income, income from equity method investments. The adjusted EBITDA figure for Q3 2022 takes into account a significantly lower non-cash unrealized loss of $3.9 million as a result of a decrease in fair value associated to the passive investment in a payer partner's shares held as marketable securities, and other investments, which compares to $69.2 million in unrealized losses as a result of a 1-to-3 conversion of a payer partner's preferred shares to common stock in the prior year period. As a reminder, these payer partner’s shares are in the excluded asset bucket that we've described in the past, as they solely benefit our affiliate APC and its shareholders.
With that, I'll go over a few financial highlights for the nine months ending September 30 [sic] 2022. Total revenue was $850 million, up 47% from $578.8 million in the prior year period, primarily attributable to organic growth of membership and participation in a value-based fee-for-service model. Total operating expenses increased to $758.3 million from $482.9 million in the prior year period, primarily due to an expected return to pre-COVID-19 medical expense run rates and growth in membership, which was commensurate to our increase in revenue. Net income attributable to ApolloMed was $51.6 million for the nine months ending September 30, 2022, compared to $60.1 million for the nine months ending September 30, 2021. Diluted EPS was $1.12 for the nine months ended September 30, 2022, compared to $1.33 in the prior year period.
Turning over to the balance sheet. We remain well capitalized and well-positioned to execute on our growth initiatives. We ended the third quarter with $184 million in cash and cash equivalents compared to $233.1 million at the end of 2021. Our working capital was $287.4 million compared to $283.4 million at the end of 2021.
Total stockholders' equity increased to $513.5 million at September 30, 2022, from $460.5 million at December 31, 2021. Total debt at the end of the third quarter was $205.9 million.
I'd now like to turn it back to Brandon for a discussion of our growth strategy and outlook for the remainder of 2022. Brandon?
Thanks, Chan.
We expect to close out 2022 on a strong note. The Valley Oaks and AAMG-FYB transactions represent several of the growth levers we have discussed in the past, geographic expansion of our care delivery model and increasing the amount of risk we can take via the restricted Knox-Keene license.
We are working closely with the FYB team to complete this transaction and believe these investments will continue to drive strong growth in revenue and EBITDA. We also continue to be in active discussions with provider groups and healthcare organizations all over the country, and we continue to be energized by the amount of enthusiasm we are seeing from physicians about our unique physician enablement model and technology platform.
As I noted earlier, I'm excited that we are able to raise our previously disclosed guidance projections for revenue, net income, and EBITDA for the full-year of 2022. We are maintaining our guidance for adjusted EBITDA for the year given the aforementioned revisions to our adjusted EBITDA calculation. We have shared these details on Slide 11 of our earnings supplement.
Please keep in mind that the net income and EBITDA guidance do take into account the potential impact of APC's passive investment in a payer partner, which Chan also mentioned in his comments earlier. For this reason, we place greater emphasis on the net income attributable to ApolloMed shareholders and adjusted EBITDA metrics. As any material developments arise, we will be sure to update the markets and reevaluate guidance as appropriate.
In closing, we have made investments thus far in 2022 in our people, technology and communities in order to give us strong visibility into an exciting 2023 and beyond. We continue to prioritize the foundational trust that patients have in us and our providers, and we will continue to invest in the long-term health of our communities.
Together, I am confident that we will transform the way healthcare is delivered across the country, accelerating our healthcare system towards the future in which all Americans, regardless of age, race, circumstance or socioeconomic status, has access to a high-quality healthcare experience.
With that, operator, let's open it up for Q&A.
Thank you. At this time, we'll be conducting a question-and-answer session. [Operator Instructions].
Our first question comes from the line of Ryan Daniels with William Blair. Please proceed with your question.
Yes. Thanks for taking the question and congrats on the strong quarter. Brandon, can you talk a little bit more about the RKK process and how quickly you'll be able to transition to more of a full risk model in the $0.85 on the dollar. That's something that you'll go through kind of over a three, four-year period as you contract renew with the managed care plans? Thanks.
Hey, good morning, Ryan. Thank you for joining. Great to hear from you. Yes, you're absolutely correct. It's not going to be an instant process, we anticipate having regulatory approval from the Department of Managed Healthcare in California sometime in Q1 of next year, and we'll certainly update the investor base when that happens. But afterwards, there is a fairly lengthy process of re-contracting across all of our 20-plus payers, hospital partners, so on and so forth in order to make sure that all of our patients are covered under the restricted Knox-Keene license. So I would probably guide for a fairly large range of two to four years for everyone to be in that high risk track across the board.
That makes sense. And then, ahead of and during that process, are there incremental technology investments that you need to make to the platform as you take on more institutional risk or -- are you already kind of deploying those models to ensure that the shared savings in the risk pool line such that you don't have to make a ton of investments to move to that risk level?
Yes. Thanks, Ryan. So I think there are going to be a few investments on the technology as well as on the clinical side to ensure that we have all the risk controls in place to take on global risk in all of the new geographic regions that we've entered. We're very used to doing that, and you can see the results of that in the shared risk pool and settlement line item historically. But especially as we move into new geographies, there will be a little bit of investment required on the clinical side to make sure everything continues to run as smoothly as we have run it in the past. But we don't anticipate it to be a very large investment that we'll have to make, given our historic ability to take on global risks and so forth.
Okay. Great. And then, a couple of questions on kind of the core California Medicaid business. Obviously, some new awards there in counties in which you participate. I assume you already have relationships with all or some of the winners of those contracts. So number one, is that the case? And number, two, if not, do you envision any turnover in your membership base of capitated risk with managed Medicaid plans? Or do you think you can kind of re-contract with new winners and keep that intact over time?
Yes, absolutely. That's one of the beauty of the model that we have, which is that we're payer-agnostic. And so we have contracts with all of the large winners of the rebid process in Medicaid in California. We already have members with them. And so if members were to move from one of the losers, for example, to a payer who had won a new contract in a county, we wouldn't anticipate any disruptions in care for those patients.
Okay. Perfect. And then my final question, any thoughts on Medicaid redetermination? It sounds like all else equal, that will probably start to begin end of January, early February. I know states have effectively a year to go through that. But do you envision that having a big impact on the book of business? I know California Medicaid is an extremely low payer, so maybe even if you lose lives there; you can just absorb that with growth with a much smaller amount of Medicare Advantage lives. But any thoughts there would be helpful. Thank you.
Absolutely. We're still want to look out for when the public health emergency will end and the redetermination will happen. We anticipate the impact to be somewhere between 5% to 15% of our Medicaid book of business potentially. Of course, we're working very hard to make sure that everyone is reenrolling as necessary so that they don't experience any disruptions in their care.
And we do anticipate that some of them will unfortunately not be reenrolled profitably. So we probably anticipate kind of mid-single-digit percentage attrition in Medicaid -- in the Medicaid book of business, which, as you mentioned, is not quite as high in terms of PM/PM and probably would be absorbed. We don't anticipate there to be a material impact to overall financials due to the redetermination. But we are focused on making sure people continue to have access to care.
Okay. Great. Thank you for that. And I also applaud the new EBITDA calculation. I think it's a lot more consistent with how people look at the model and your cash flow. So I appreciate that. Thanks, guys. Have a good day.
Absolutely. Thank you. Take care.
Thank you. [Operator Instructions].
Our next question comes from the line of Sarah James with Barclays. Please proceed with your question.
Thank you. Congrats on a great quarter, and I echo the sentiment. I think the switch in accounting policy is going to make it a lot easier to compare you to your peer group. So I just wanted to unpack a little bit what's happening in the risk pool and incentive line. If we look at kind of the core of that with your settlements from hospital partners, how did that trend this year versus 3Q 2021? Because I know last year, you had that benefit from low COVID utilization. So how is that looking for you guys? Are you back to a normal run rate level? Or are you still getting some benefit from low utilization on that line?
Hey, good morning, Sarah. It's good to hear from you. Thanks for the question. Yes, so we are seeing MLRs this quarter that are back to normal. We don't anticipate any future increases in MLR in our core business, and that has stable -- stabilized as to kind of in the low to mid-80s. And MLR across all of our businesses, both the core and the new, which were now kind of lumped together given the new accounting policies.
As for kind of how that impacted the shared risk pool and settlements incentive line item. As we had disclosed, the ACO payment was $29 million higher than it was same quarter last year. The shared savings from our hospital partners was down around $25 million relative to same quarter last year. And so it has been essentially a wash, $4 million increase relative to last quarter -- sorry, last year same quarter. We don't anticipate -- there are no more COVID tailwinds kind of baked into that hospital payer partner so far, and we don't anticipate there to be any kind of in our guidance for the future either.
Great. Can you help us understand what the benchmarks or thresholds are for those hospital bonuses? What type of metrics are being evaluated on? And how are you falling in the range versus fee escalation there?
Right. So for our hospital payer partners, it's a pretty simple arrangement, actually. They receive capitated dollars as a percentage of premium for each member that they have on a PM/PM basis. And we essentially charge all facility costs against that capitated pool. Whatever is left, we will split some percentage to the hospital and some percentage to us. And so those arrangements range from us keeping 50% of the excess surplus in that pool to perhaps 80% in some of our contracts. And so that's essentially the only metric that is measured. It's just however much is left in there in the risk pool. We are splitting that amount in a predetermined fashion.
Of course, those are correlated to clinical measures that we are monitoring very carefully all the time in terms of our inpatient bed days and readmissions and so on and so forth. And we've seen those numbers stabilize as well in a post-COVID world, in as much as that can happen.
Great. And last question is, if you could just refresh us on how you view organic growth. You guys have branched out geographically, I think since you last guided on that. So how are you thinking about organic growth these days?
Yes, absolutely. So we -- as you know, we've raised guidance of revenue this year. We continue to see strong growth even throughout the year. Of course, it is AEP now, so we will anticipate to see kind of more chunky growth in Q1 of next year. But that being said, we're still guiding towards mid kind of teens organic growth and kind of look forward to make sure -- making sure that our new investments in new geographies are contributing kind of much more rapidly to that overall book of business.
That being said, I would temper expectations slightly by saying that, in other states that we've entered, such as Nevada and Texas, we are not yet in fully capitated global risk arrangements the way that we are used to doing in California, some of that book of business is still fee-for-service, for example. And so over the next two years, 18 months, we would work to ensure that the model aligns, kind of from a reimbursement perspective, more similarly with what we've had historically in California. But we view those as kind of opportunities and tailwinds to increase revenue in some of these other states that we've entered.
Thank you. Ladies and gentlemen, that concludes our question-and-answer session. I'll turn the floor back to management for any final comments.
Well, thank you all for attending the earnings call today and thank you for your time. We're always open to a dialogue with investors, and I would welcome any of you to our offices in Alhambra any of you be in the Los Angeles area. Please feel free to reach out to us or our Investor Relations firm, The Equity Group, with any additional questions. We look forward to speaking to you all again on our next quarterly call. Thank you so much. Have a great day.
Thank you. This concludes today's conference call. You may disconnect your lines at this time. Thank you for your participation.