EVOLENT HEALTH OVERVIEW. January 11, 2017 J.P. Morgan Healthcare Conference

Transcription

1 EVOLENT HEALTH OVERVIEW January 11, 2017 J.P. Morgan Healthcare Conference 0

2 Safe Harbor Statement All statements other than statements of historical fact included in this presentation are forwardlooking statements. You can identify forward-looking statements by the fact that they do not relate strictly to historical or current facts. These statements may include words such as may, might, will, should, expects, plans, anticipates, estimates, aims, predicts, potential, or continue, the negative of these terms and other comparable terminology. These forward-looking statements, which are subject to risks, uncertainties and assumptions, may include projections of our future financial performance, our anticipated growth strategies and anticipated trends in our business. There are important factors that could cause our actual results, level of activity, performance or achievements to differ materially from the results, level of activity, performance or achievements expressed or implied by the forward-looking statements. This presentation includes certain non- GAAP financial measures. Tables reconciling such non-gaap financial measures to the most directly comparable GAAP measures are set forth in the Appendix hereto. 1

3 Non-GAAP Financial Measures In addition to disclosing financial results that are determined in accordance with GAAP, we present and discuss Adjusted Revenue, Adjusted Transformation Revenue and Adjusted Platform, Operations Revenue, and Adjusted Cost of Revenue, which are all non-gaap financial measures, as supplemental measures to help investors evaluate our fundamental operational performance. Adjusted Revenue, Adjusted Transformation Revenue and Adjusted Platform and Operations Revenue are defined as revenue, transformation revenue, and platform and operations revenue, respectively, adjusted to include revenue, transformation revenue and platform and operations revenue, as applicable, of Evolent Health LLC for periods prior to the offering reorganization, and to exclude the impact of purchase accounting adjustments. Management uses Adjusted Revenue, Adjusted Transformation Revenue and Adjusted Platform and Operations Revenue as supplemental performance measures because they reflect a complete view of the operational results. The measures are also useful to investors because they reflect the full view of our operational performance in line with how we generate our long term forecasts. Adjusted Cost of Revenue is defined as cost of revenue adjusted to include cost of revenue of Evolent Health LLC for periods prior to the offering reorganization, and to exclude the impact of stock-based compensation expenses. Management uses Adjusted Cost of Revenue as a supplemental performance measure which is also useful to investors because it facilitates an understanding of our long term operational costs while removing the effect of costs that are non-cash in nature. These adjusted measures do not represent and should not be considered as alternatives to GAAP measurements, and our calculations thereof may not be comparable to similarly entitled measures reported by other companies. A reconciliation of these adjusted measures to the comparable GAAP financial measures is presented in the Appendix. 2

4 Presenters Frank Williams Chief Executive Officer and Co-founder Evolent Health Nicky McGrane Chief Financial Officer Evolent Health 3

5 Investment Thesis Strong position in large and growing market $45B+ Differentiated solution and integrated platform Proven results Attractive economic model 4

6 Evolent Health our vision Build a national network of providers transforming care under value-based payment initiatives what we do Provide integrated technology, intellectual capital and scalable services to enable business model transformation business model long-term contracts recurring revenue model embedded organic growth scalable margins market differentiation provider-driven broad integrated platform payer agnostic proven clinical/financial results by the numbers 2.5M lives supported $213M in adjusted LTM revenues through 30-Sep-2016* 2,300 + employees 30+ metro/micropolitan service areas supported *Non-GAAP measure. See Non-GAAP Financial Measures above for definition and Appendix A for reconciliation to GAAP. GAAP revenues for LTM 30-Sep-2016 were $212.2M. 5

7 WELL POSITIONED FOR LARGE AND GROWING MARKET 6

8 Health Care Spending Growth Unsustainable 30% 25% 20% 15% Projected Federal Spending and Revenues (% of Gross Domestic Product) Medicare and other health programs Revenues 10% Other 5% 0% Social Security Source: Congressional Budget Office Long Term Budget Outlook 7

9 Traditional Assumptions Underlying Provider Growth Strategy are Being Challenged by Purchasers Entrenched Payer Maintain broad provider networks Pass excess cost growth on to employers through brokers Established Provider Expect steady publicpayer, commercial price growth In-network for most plans Price-Insulated Patient Open access to broad provider network Seek care with little concern for out-of-pocket payment Open networks and consistent unit price increases meeting significant resistance Source: The Advisory Board Company 8

10 Providers Under Pressure from All Segments to Slow Health Care Cost Growth and Improve Quality of Care Medicare Continued reimbursement cuts for FFS as patient mix increases to more Medicarei, ii MA enrollment projected to double by 2025 more stringent utilization controls iii Medicaid States under budget pressure, seeking managed solutions Repeal of Medicaid expansion would leave ~15M people uninsured major revenue loss for providers Complex chronic population driving majority of spend Provider Commercial Aggressive employers investing to slow premium growth and control utilization (narrow networks, proven pop health management solutions) iv Pushing accountability to the individual Consumer High deductible plans for consumers making savvier price shoppers pressure providers to be lower cost and higher quality Repeal threatens hospital margins with potential loss of ~11M+ insured via exchanges v Low cost leader through cost reduction OR Capture higher portion of premium leverage clinical assets in value-based arrangements Sources: See Appendix. 9

11 In the New Administration, Increasing Costs / Budget Pressure Will Continue to Drive Shift to Value WHAT WE RE PREDICTING MEDICARE MA to expand significantly due to demographics/policy emphasis* CMMI survives to pilot Premium Support MACRA stays as a bi-partisan supported effort, and docs demand for APMs continue, but mandatory models (e.g., CJR) may shift to be voluntary MEDICAID Indiana s solution a possible model for path forward on Medicaid Expansion All replace options likely to mean fewer dollars and more risk/responsibility shifted to states, managed care plans and beneficiaries COMMERCIAL Tax credits for HSA / HDHPs replace Obamacare subsidies and mandates Reforming employer-based market too much to swallow politically, but cost pressures remain and narrow networks continue as growth engines BOTTOM LINE FOR PROVIDERS: Fewer $, shift in mix, declining FFS rates New revenue growth largely through value Delegated risk or health plan ownership *Source: KFF, Medicare Advantage Fact Sheet, June 29, 2015, available at: 10

12 Recent Discussions in the Field and Industry Surveys Indicate Future Provider Strategy Oriented Toward Value Acknowledge continued revenue pressure with ongoing mix shift, Medicare FFS cuts Larger hospitals leaning into value strategies to drive growth and margin preservation. Value-based care revenue anticipated to increase 2x+ within 3 years 1 Early innovators moving from delegated risk to health plan ownership to access full premium and control key performance levers Mix of government and commercial value business dependent on local market dynamics The national economy cannot sustain health care being as big a share of the gross domestic product as it is said Dennis M. Murphy, president and chief executive of IU Health... We ve got to create more value in health care That principle, I think, survives. -- The New York Times article on our partner Indiana University Health 2 1 Source: Muken, Ross, Vijay Kumar, Michael Newshel, and Elizabeth Anderson. "EVR ISI 6th Hospital CapEx Survey." Evercore ISI. Evercore ISI Healthcare Services & Technology, 4 Jan Source: Goodnough, Abby, and Robert Pear. "After Obama, Some Health Reforms May Prove Lasting." The New York Times. The New York Times, 02 Jan Web. 04 Jan < Photo credit: Ilana Panich-Linsman for The New York Times. 11

13 Evolent Well Positioned for Near-Term Market Opportunity SEGMENT MEDICARE OPPORTUNITY MA enrollment growth accelerating 1 Payers delegating risk to high performing networks Providers launching majority of new MA plans 1 MEDICAID / CHIP COMMERCIAL Medicaid / CHIP enrollment currently at 73M members ~$300B of Medicaid spend (~60%) still in FFS today Several states actively seeking managed solutions to address budget pressure Direct to employer opportunity emerging in several markets Payers delegating risk to high performing provider networks 100+ active potential buyers across next months LEGACY PROVIDER- OWNED PLANS Need for more efficient and sophisticated infrastructure to meet growth ambition Note: Remaining ~14% market comes from other government expenditures 1 Source: The Advisory Board Company advisory.com 32577A; Jacobson, et al., What s In and What s Out? Medicare Advantage Market Entries and Exits for 2016, October , Avalere, Nearly 60 Percent of New Medicare Advantage Plans Are Sponsored By Healthcare Providers, January 26, 2016, Health Care Advisory Board interviews and analysis. 2 Source: CMS 2014 Health Insurance Enrollment and Enrollment Growth Rates Report 12

14 Evolent Has Achieved Significant Scale Partnering with Providers Nationwide to Manage Populations MEDICARE 2.5M Lives Supported MEDICAID COMMERCIAL 25+ Operating Partners 13

15 Proven Results for Evolent Operating Partners EVOLENT NEXT GEN OPERATING PARTNER 1 30,000 lives Projected 2016 Shared Savings: $11.3M Implemented 3 clinical programs and Identifi EVOLENT STATEWIDE MA PROVIDER PARTNER 2 16% total MedEx reduction for Complex Care 12% reduction in readmission via Transition Care 10% increase in PCP visits for patients enrolled in Complex Care Validation by the Care Innovations Validation Institute confirms that Evolent s highly coordinated delivery system has delivered outcomes that so far are unmatched by any other vendor in this segment. Al Lewis, independent reviewer 3 1 Data provided by Deaconess Health System 2 Evolent Identifi Data Warehouse; Complex Care cases created 4/1/14 9/30/14; Cost and utilization indicators based on claims incurred through Jun 2015, paid through Oct Cases and controls were matched 1:1 on demographics, health risk (i.e., CCI), chronic conditions, member months, and 12 month prior healthcare use and spend using a propensity score model. Transition Care cases created 5/1/14 1/31/15. Acute IP discharges based on claims incurred through Mar 2015, paid through Jun Exclusions applied for discharges for death, those with a principle diagnosis of pregnancy, or those with a condition originating in the perinatal period. Cases and controls were matched 1:1 on demographics, socioeconomic status, health risk (i.e., CCI), inpatient case mix, and 12 month prior healthcare use and spend using a propensity score model.) 3 Evolent Press Release, March 17, 2016: 14

16 Momentum in 2016 Expected to Continue in 2017 Strong Financial Performance Continued Growth in Lives New Long-Term Operating Partners Adding Capabilities and Services Sustained Q-o-Q and Y-o-Y adjusted revenue growth since IPO CAGR: 48% $118M $213M CAGR: 248% 718K 2.5M 6new partners Launched Medicaid Center of Excellence with Passport 4 major releases of Identifi, now live with significant enhancements on v10.12 Operationalized Next Generation ACO offering with 2016 year partners and 2017 year applicants At IPO LTM 31-Mar-15* Current LTM 30-Sep-16** 31-Dec-15 1-Jan M+ lives contracted across new partners Acquired Valence Health, adding 11 operating partners, 600K lives, strong back-office and TPA capabilities, expertise in pediatrics and Medicaid Strong breadth and depth in current pipeline *Represents revenue of Evolent Health LLC **Non-GAAP measure, see Non-GAAP Financial Measures above for definition and Appendix A for reconciliation to GAAP. GAAP revenue for LTM 30-Sep-16 was $212.2M *2.5M lives expected to be supported as of 1-Jan M lives supported currently. Approximately 400K lives expected with the addition of MDwise as of 1-Jan

17 Health Systems Face a Myriad of Value Contracting Choices, All With Distinct Operational Requirements Progressive Employers Employer-centered medical homes, high performance networks, private exchanges Payer-Delegated Risk to Providers Payer risk deals with key performance metrics in quality, clinical savings; care management and utilization management delegation Managed Medicaid Opportunities to experiment with Medicaid risk with emerging focus on high-cost, complex populations Medicare Payment Reform to Value Bi-partisan movement away from fee-forservice continues to drive interest in Medicare Advantage, MSSP, etc. Provider-Sponsored Health Plan Full risk, local provider brand competing with national payers across multitude of lines of business Evolent Value- Based Care Platform Provider 16

18 Evolent Provides A Fully Integrated Value-Based Care Platform BLUEPRINT set a value strategy MARKET FACING SOLUTIONS Employer Value Advantage Health system employees Local employer strategies Private exchanges Value-based plan index Benefit consulting Payer Value Alliance Aligned value contract templates National and regional payer and provider relationships Specialized managed care negotiators and actuaries Health Plan Value Edge Accelerated health plan launch Provider-centric product designs Nationally scaled infrastructure Consumer / broker marketing toolkits capture value Pop Health Performance Clinical Programs Patient Engagement Specialized Care Team Quality and Risk Coding CLINICAL AND ADMINISTRATIVE INFRASTRUCTURE Delivery Network Alignment High Performance Network Value Compensation Models Integrated Specialty Partnerships Financial and Administrative Leadership Management and Management Health Plan Payer Risk Analytics and Reporting PBM create value Organizational Design & Alignment System Transformation Physician-Led Practice Transformation Communication & Change Management Data and Integration Services IDENTIFI TECHNOLOGY SOLUTION Clinical and Business Content EMR Optimization Applications deploy integrated technology platform 17

19 FINANCIAL DISCUSSION 18

20 Multiple Sources of Growth Drive Strong Topline Results $ in Millions Transformation Platform and Operations adjusted revenue CAGR* 138% $163.5 $213.0 $100.9 $8.3 $40.3 lives on 2012** LTM 30-Sep platform 28K 174K 433K 718K 1.5M *Non-GAAP measure, see Non-GAAP Financial Measures above for definition and Appendix A for reconciliation to GAAP. GAAP revenues in 2013, 2014, 2015 and for LTM 30-Sep-2016 were $25.7M, zero, $96.9M and $212.2M, respectively **2012 refers to GAAP revenue of Evolent Health LLC 19

21 Evolent has Recurring Revenue With Scalability as Mix Transitions to Platform and Operations (P&O) Revenue Model Business Model Drivers % of LTM 30-Sep-2016 Revenue Transformation (Business Plan Development and Implementation) Fixed fee Recognized over life of engagement Project-based Attractive entry point to new client Good visibility to forward revenue 17% Platform & Operations (Population and Health Plan Management) Variable fee based on lives (PMPM) and percent of premium Recognized as services delivered Long-term contracts Aligned with customers High visibility due to recurring revenue model Embedded growth in clients Creates network effect High margin on incremental lives 83% 20

22 Recent Financial Results Demonstrate Continued Growth and Strong Performance lives on platform (thousands) % CAGR 1,466 total adj. revenue* ($ millions) $ % CAGR $60.2 Q Q Q Q adj. P&O revenue* ($ millions) 47% $52.5 adj. gross margin* (%) 1% 43.7% 44.0% $35.7 CAGR CAGR Q Q Q Q *Non-GAAP measure; see Non-GAAP Financial Measures above for definition and Appendix A for reconciliation to GAAP 21

23 Evolent Has Successfully Completed Two Compelling Strategic Acquisitions Description Key terms Valence Health, based in Chicago, IL, provides valuebased administration, population health, and advisory services for providers, with particular expertise in the Medicaid and pediatric markets Closing consideration of ~$219.4 million, plus an earn-out of up to $12.4 million Closing consideration consisted of ~7.0 million shares of Evolent Class A common stock and ~$50.3 million of cash Aldera, based in Lisle, IL, provides back-end benefit administration and claims management processing for several health care companies, including Valence Health Consideration of ~$34.4 million, consisting of ~0.5 million shares of Evolent Class A common stock and ~$24.5 million in cash Rationale Enhances important value-based care administration and technology capabilities with deep Medicaid and pediatric expertise Strong cross-sell opportunity as evidenced by early success with Passport Adds scale to platform with >600,000 lives across 10 operating partners, with an additional 400,000 lives added early 2017 from MDwise Synergistic operating cost structure and technology roadmap Diversifies Evolent revenue base while maintaining existing growth profile Ability to integrate financial data with existing clinical infrastructure enables insights into clinical quality, care design, results and payments enabling partners to better succeed in delivering clinical and financial outcomes Strategic value in insourcing a core component of the consumer experience with existing provider oriented solution enables a unique provider-led, patient focused solution Insourcing TPA software integrates a core requirement of providers and enables Evolent to control a key piece of the product roadmap with a best-in-class, highly scalable solution 22

24 Capitalization The following table sets forth our cash and cash equivalents and capitalization as of September 30, 2016 on: an actual basis; and as adjusted to give effect to the sale of the notes in the convertible debt offering of November 2016 and the application of the net proceeds therefrom. As of September 30, 2016 In thousands, except share data Historical As adjusted Cash and cash equivalents $ 109,777 $ 231,027 Senior convertible notes due ,000 Total Debt $ - $ 125,000 (1)(2) Class A - common stock $ (3) Class B - common stock Additional paid-in capital 397, ,603 Retained earnings 164, ,024 Non-controlling interests 197, ,629 Total Shareholders' Equity $ 759,857 $ 759,857 Total Capitalization $ 759,857 $ 884,857 (1) Proceeds received by the Company from the offering has been reduced by the initial purchasers discount. The proceeds will be further reduced by fees and expenses incurred by the Company as a result of the offering. (2) As adjusted cash and cash equivalents does not give effect to (i) $50.3 million in cash consideration paid in connection with the acquisition of Valence Health subsequent to September 30, 2016 and (ii) $22.0 of the $24.5 million in cash consideration paid in connection with the acquisition of Aldera subsequent to September 30, 2016 ($2.5 million of such $24.5 million was paid prior to September 30, 2016). (3) As-adjusted Class A common stock does not give effect to the 7.5 million shares of Class A common stock issued in connection with the acquisitions of Valence and Aldera subsequent to September 30,

25 Investment Thesis Strong position in large and growing market $45B+ Differentiated solution and integrated platform Proven results Attractive economic model 24

26 APPENDIX 25

27 Appendix A: Non-GAAP Reconciliation Evolent Health, Inc. Adjusted Results For the quarters ended September 30, 2016 and 2015, the last twelve months ended September 30, 2016, and the years ended December 31, 2015, 2014, and 2013: (in millions) Add: Evolent Evolent Evolent Health, Inc. Health LLC Health, Inc. as Reported Operations Adjustments as Adjusted Q Transformation $ 7.8 $ - $ - $ 7.8 Platform and operations Total revenue Cost of revenue (0.2) (1) 33.7 Gross margin Gross margin % 43.7% 44.0% Q Transformation $ 6.8 $ - $ 0.8 (2) $ 7.6 Platform and operations (2) 35.7 Total revenue Cost of revenue (0.4) (1) 24.4 Gross margin Gross margin % 38.7% 43.7% LTM Sep Transformation $ 36.7 $ - $ 0.5 (2) $ 37.1 Platform and operations (2) Total revenue $ $ - $ 0.8 $ Transformation $ 19.9 $ 15.8 (3) $ 1.5 (2) $ 37.2 Platform and operations (3) 3.3 (2) Total revenue $ 96.9 $ 61.8 $ 4.8 $ (1) Adjustments to cost of revenue include $0.4 million in stock-based compensation expense for the three months ended September 30, 2016 and 2015, respectively. Stock-based compensation expense includes the value of equity awards granted to employees and non-employee directors of the Company or Evolent Health LLC. (2) As part of the offering reorganization and as a result of gaining control of Evolent Health LLC, we recorded the fair value of deferred revenue resulting in a $4.9 million reduction to the book value. Adjustments to transformation revenue and platform and operations revenue relate to purchase accounting adjustments which reflect the portion of the adjustment that would have been recognized in the respective period. (3) Represents the results of operations of Evolent Health LLC for the period January 1, 2015, through June 3, Transformation $ - $ 36.3 (4) $ - $ 36.3 Platform and operations (4) Total revenue $ - $ $ - $ Transformation $ 22.1 $ 12.5 (5) $ - $ 34.6 Platform and operations (5) Total revenue $ 25.7 $ 14.6 $ - $ 40.3 (4) Represents the results of operations of Evolent Health LLC for the period January 1, 2014, through December 31, (5) Represents the results of operations of Evolent Health LLC for the period September 23, 2013, through December 31,

28 Sources (i) CBO, Letter to the Honorable John Boehner Providing an Estimate for H.R. 6079, The Repeal of Obamacare Act, July 24, 2012; CBO, Cost Estimate and Supplemental Analyses for H.R. 2, the Medicare Access and CHIP Reauthorization Act of 2015; Budget of the United States Government (Proposed) FY 2016; Health Care Advisory Board interviews and analysis. (ii) CMS, 2013 Annual Report of the Boards of Trustees of the Federal Hospital Insurance and Federal Supplementary Medical Insurance Trust Funds, May 31, 2013, available at: Health Care Advisory Board interviews and analysis (iii) KFF, Medicare Advantage Fact Sheet, June 29, 2015, available at: McKinsey & Co., Provider-Led Health Plans: The Next Frontier Or the 1990s All Over Again?, January 2015, available at: healthcare.mckinsey.com; MedPac, Do new Medicare beneficiaries choose Medicare Advantage right away? Sept. 15, 2014; Health Care Advisory Board interviews and analysis. (iv) The Advisory Board Company, Health Care Industry Trends 2016, 2016, The Advisory Board Company Market Innovation Center, Health Care Advisory Board interviews and analysis. (v) Young, Jeffrey. "Obamacare Had Its Biggest Day Ever This Week, President Says." The Huffington Post. The Huffington Post, 16 Dec Web. 26 Dec

29 800 N Glebe Rd, Suite 500 Arlington, VA evolenthealth.com 28