Good deal. We'll go ahead and get started. Thank you for coming to the Canaccord Conference. We appreciate the support. I'm Richard Close. I cover digital and tech-enabled healthcare services here at Canaccord. I'm pleased to have Evolent kicking off my presentations at the conference. Co-Founder and CEO of Evolent, Seth Blackley. You know, really through its specialty management business, Evolent works with providers to choose the best treatment in areas like cardiology, oncology, to improve outcomes and lower costs. It's been one of the fastest growing companies in our coverage in achieving improved profitability. And based on these qualities, Evolent's been one of our focus stocks over the last couple of years. And Seth, welcome back, and spending the time with us and continuing to support the conference.
So, what I'd like to cover in today's fireside is really the last two acquisitions that you've had. It's really expanded the business and opportunity for growth going forward. I want to cover medical cost trends and the rate increases that you're getting, and then the TAM, addressable TAM, and then an update on the EBITDA trajectory towards the $300 million. So that's sort of the outline here. I gave a brief description. I'll turn it over to you to really sort of dive in a little bit deeper on that, and why this is a good company to invest in.
Okay, great. Good to be here. Thank you for having me. And, can you guys hear me okay? There we go.
Yeah.
All right, so let me give just a quick overview of the business, for folks who may be less familiar with it. So look, I think the best way to think about Evolent is take our personal lives and our understanding of how complex diseases work, and I'll translate that into how the business works. So, if a family member of mine, God forbid, is diagnosed with cancer, which I've had this happen a couple times over my life, I'm sure many of you are in the same place. You go to the doctor, and you get a diagnosis, and you get a treatment plan, right? I'm using cancer as an example. And amazingly, in the American system, even though we're the best in the world at cancer treatment, the right treatment plan is given about 65% of the time.
Meaning, about 35% of the time, there's a treatment plan that is not optimal for that patient. And part of the reason for that is, there's 300 journal articles getting published every month in cancer. The average oncologist is doing a great job, best they can, but reading three or four, five articles a month, really hard to keep up with the evidence, the complexity of the FDA pipeline, how drugs interact with genetic profiles, how tumor mutations affect which treatment plan is right. So what that translates to is, 35% of the time, patient not getting the best care. And we view our job at Evolent to intervene in that 35% of cases and help the physician.
We reach out to the physician directly if we see an opportunity, electronically, through their staff, or directly with one of our 300 physicians reaching out to the treating physician, and help expose them to the evidence, such that you might get that 65% adherence to best practice in a population up to 85% within a couple of years. That's our model. We would like to get it to 100, of course, but we're getting it as close to 100 as possible. What's interesting is, when you go from 65% adherence to evidence in oncology, or we do this in cardiology or other specialties, too, sometimes the cost goes up, sometimes the cost goes down. On average, the cost comes down.
It's sort of the Deming principle in manufacturing, where fewer defects get it right the first time, right treatment out of the gates avoids hospitalizations, retreatments, wasted drugs, wasted imaging. We've all experienced it, bouncing around the system, right? You go to this doctor, that doctor, this doctor, that doctor, and it's, you know. Let's get to the right answer first. And what we found is, when you get from 65% adherence to evidence to 85%+, the cost does come down. So we get hired by the health plans to manage cancer, cardiology, musculoskeletal disease, across these different categories. We get paid some of the time on a fee basis to do that work, some of our business is on a risk basis, meaning we'll say we're accountable for the cost of this population. So that's how Evolent works.
I won't go too much into the details beyond that, but hopefully that gives everybody a good basis for what it is.
That's a good launching point. So you reported your second quarter last week. Finally, we got a good bump in the stock. You know, we'll go into a deeper dive on some of the things later in the discussion, but if you were to just give us the brief highlights, what should we take away from the second quarter?
Yeah, look, I think obviously implied in the stock reaction was an expectation that there was gonna be some bad news, right? And I think in an environment where utilization is going up or is challenged for the industry in general, our ability to continue to perform, to continue to deliver profitability metrics, and to go back to customers where you've seen disease prevalence shift and make an adjustment to our relationship and our rates, I think is a positive signal to people that, gosh, Evolent must be creating some fundamental clinical value that's pretty differentiated if they can do that, and we, we believe we are. Ultimately, we are a clinical company. Everything we do is, is oriented around providing great clinical care to the patients that are getting treated, and I think that, that came through last week.
Okay, that's good. And we'll dive in.
Yeah.
On some of that in a minute. You're about a year and a half post a large acquisition. You levered up a little bit, since de-levered nicely. But can you talk a little bit about NIA and, you know, the success that you've had so far with that acquisition, and.
Yep.
And where we stand on full integration? Last time I think I had you on the road, you were talking about the tech being a very heavy lift, multi-year, so.
Yeah.
It'd be interesting.
Yeah.
To hear.
Yeah, so we're about 18 months, Richard, to comment there, about 18 months post-closing NIA. NIA, we acquired from a large payer, and the ongoing work that we have there is really around finishing the tech integration. Everything else is complete. I think the success of the acquisition has really been about taking NIA customers who were working with NIA and not Evolent, and bringing the Evolent products into those opportunities. We actually just announced one of those on the call, where a big Blue Cross plan, who is an NIA customer, just announced that we're adding the full oncology suite. And so those, I think is, that's a classic example of why it's been a good acquisition for us.
I think in general, if you think about radiology, which is one of the big products that NIA has, radiology is a piece, right? Radiology is not a condition. Cancer is a condition, cardiovascular disease is a condition, and we, we believe in managing the patient holistically. Imaging, you know, that, that is a way to understand, is a tumor growing? How is your heart reacting to the treatment, et cetera. And so, plugging that radiology platform into our conditions is how we've oriented the product, and that's, I think, what customers want. Customers don't wanna buy imaging anymore on a standalone basis as much, they wanna buy the condition and serve the patient. So it's been a great acquisition, on that front, and, and, you know, the integration's gone well. I think we're 90% through it, I'll call.
The 10% left is the long tail of the tech work that we still have to do.
Great. What I'm really excited about is the acquisition you just announced.
Yep.
So, if we can talk a little bit about that, announced in June, you completed it. Well, said you completed it on this most recent call.
Yep.
But, you know, there's, i t's really twofold, is my understanding. Internally, you get some benefits. You know, so cover that.
Yeah.
And then let's dive into what's the external opportunity with that.
Yep. So for those who are unfamiliar with it, Machinify is a Silicon Valley-based company backed by Google Ventures. It's the team that originally invented the Netflix recommendation algorithm. So if you, if you like what Netflix tees up for you, that, that's the team, the data science team, that started Machinify. And Machinify is an AI-first company, deep, deep tech investment, and we acquired out of that one of their three products, which is the product that's relevant for managing complex specialty care. And as Richard was saying, it's sort of two ways we're gonna be using it, right? One is for our staff. We have 5,000 employees. We've got, a couple, up close to 2,000 clinicians who spend every day helping to try to move that adherence to evidence from 65% to 85%.
And in doing that, they're spending 30, 40, 50 minutes per case aggregating the information so that they can make a clinical recommendation. We think the Machinify platform can help those clinicians make the same or better recommendation in half the time, eventually. That's down the road, half the time, but we think it can really make their jobs more efficient and free up time to sort of do more higher value add work. So that's sort of point one. Point two is, there's a bunch of customers that we have, who use Evolent for a couple specialties, but they have other in sort of inside staff, what I would call in-source basis, for less complicated specialties. And so the second use case is to allow them to access that same technology, so that they can get those efficiencies for their.
So if I'm a big payer, I can work with Evolent for my really complicated specialties on an outsource basis, and then I can use that same platform to do my own internal work. And it's a cheesy analogy maybe, but the way that Amazon had Web Services and then made it an external product too, is certainly a decent analogy for how we'd wanna use this product. And we use it inside, and then we'll make it available to customers.
So on the external, you know, I mean, payers have been getting crushed a little bit on inpatient.
Yep.
Stays, and.
Yep.
And the Two-Midnight Rule is playing some impact in that, in terms of the change in the, or interpretation of the Two-Midnight Rule. But, you know, is the idea that they use this technology to more efficiently, you know, prepare for, like, inpatient stays, or is it lower acuity? You know, maybe some details there.
Yeah. The way the Machinify platform is designed, it can do inpatient, it can do outpatient, so it could cover the really, the full waterfront of any clinical review that they wanna do. So the same way I described earlier, we look at a cancer patient and evaluate it against medical policy. The payer can load in all their medical policies into the Machinify platform for inpatient, for outpatient, for all other long, the long tail of other specialties. S omebody's going in to get a sleep study. Does that sleep study meet clinical criteria? Like, that's not something Evolent's gonna do, but they can use our platform to do that. So yeah, and yes, inpatient would be part of that.
That's like tech and services margin?
That would even be. It's really a SaaS-based.
Yeah.
Yeah, exactly. Correct.
So, you gave some, I don't wanna say guardrails, but some financial metrics in terms of, like, the internal opportunity with Machinify.
Uh-huh.
It was pretty dramatic.
Mm-hmm.
I mean, to be frank. Can you go over that a little bit more in more detail?
Yeah, so Machinify today, on this product, has one big payer customer. That payer customer's seen about 55% reduction in clinical time. And so, you know, that's over multiple years, five, six years of developing that product. So I think, though, that that does give you an indication that, is it possible that if we apply this capability to Evolent and our internal work, and give it to our customers to use, that you could see 25% efficiencies on staff over the next several years? I think the answer is yes. Could it be approached to 50% over time? Potentially. I think that's the kind of opportunity we see.
And again, it's the way that plays out, Richard, is like, hey, it was taking this nurse and this physician 28 minutes, you know, to go through this case and help get that patient on the best evidence. We can now do it in 18 minutes, you know? And it, a nd so it's not like AI is taking over and just giving the answer, it's just shortening the amount of.
Yeah.
And it's always gonna be clinician in the.
But I thought you gave the example that you spend, like, $150 million in terms of.
Correct.
On the clinical review, and essentially, you could double your business, essentially. Am I going too far there or?
No, the way we thought about it, so the way we think about it, we're spending about $150 million a year on clinical staff today. That number, in the future, will obviously be, at current course and speed, let's make it up, $300 million. Off of that $300 million base, we're gonna find efficiencies, and we're gonna share some of that with our customers.
Yeah.
In form of lower fees and lower rates, and we feel like some of that will fall to Evolent. So that's kind of where we came up with the $50 million impact over time.
Okay. You know, I, you've had success in growing the value-based book, the at-risk book Performance Suite. But really, over the last, you know, as you've expanded that business, over the last couple of years, and we sat here last year talking about this, and, you know, you've really been tied to managed care.
Yeah.
Commentary.
Yep.
The stock, every time United or Humana says something with respect to medical cost trends.
Yeah.
Or Medicaid redeterminations.
Yep.
You know, your stock.
Yeah.
Gets whipsawed.
Yeah.
You know, I'm curious your thoughts in terms of how closely we should listen to that commentary, how much it affects your business?
Yeah.
Is that, you know, the correlation accurate or is it not?
Yeah, look, I'd say so like most things in life, which is it's somewhere in between. You know, if somebody says one thing and somebody else says another thing, usually the answer is in between somewhere, and I think that's the case here, which is when payers see increased utilization, that probably means that utilization is up for, you know, more broadly, whether it's oncology or cardiology or MSK. And, you know, based on our results and how we adjusted the guide this year, that's true for us, too. I think the place it departs a little bit is our ability to make some adjustments around how the rate works, because we actually are not controlling prevalence, things that how many patients are getting cancer, that's not in our control. What we can control is the cost of the care once the patient has the cancer.
So I think it's somewhere in between, which is, it is a decent read-through, but I'd say it's gonna be muted for us, where it's not gonna be as impactful as it is for the plan. That's sort of the short answer.
Okay. And then, like, on the increased disease prevalence that you experienced early this year, it sounds like the last couple months, you know, you've shown some improvement. Couple months doesn't make a trend, obviously.
Agree.
But, like, in your guidance, it assumes what happened in the first half, if I'm not mistaken, so.
Yep.
I guess, leaving some upside potential. Can you talk a little bit about the, I guess, what caused the disease prevalence? I think it was more population-based and maybe not necessarily higher utilization.
Yeah.
Maybe a little bit into that, and then, you know, the process of getting the rate increases.
Right.
And just where you stand.
Yeah, look, I mean, I think, I'll give you an example. We had one payer with one market that went live, you know, over the last couple years, that the population shifted a lot from when we first evaluated it to when it went live. Because there was growth in the population, it changed, there were sicker people in the group, and so the total cost of cancer care, jumping off point, I'll call it, was different than how we looked at it, and it continued to increase as utilization increased.
And so, you know, that, in that market, it's in one state, you know, you go back to the payer and share the data on, "Hey, here's the actual prevalence rate in the population, is much higher than we're getting paid for, so the adjustment has to get made." Again, we're happy to take risk on and manage the cost of how that goes once you have the right starting point, but you gotta get the right starting point. And so, you know, that's a good example, I think, of how it works, and go back to the payer. And they sort of know that if the way the contracts work is there's either a mechanical adjustment for those things, Richard, or if the parties can't agree on what the rate should be, then both parties can walk away.
And then we have good confidence that we can do the clinical management at a level that's better than the alternative, in which case, it gives us the ability to kind of get aligned on, "Hey, here's the right starting point, at least." That's all we're asking for, is a fair starting point, and we've had good success being able to do that, and I think it speaks to, you know, our ability to accurately and robustly manage the care in a way that nobody else can. So we're really confident in that, really hang our hat on that clinical differentiation.
Okay. We got a couple minutes. My clock, back there, didn't necessarily start on time.
Right.
So I don't want to go over. Are there any questions for Seth here from the audience? I want to make sure I open it up a little bit if. All right, I got a couple more.
All right.
In my back pocket.
What you got up there?
So, you know, we didn't cover the TAM.
Yep.
You know, you're just scratching the surface. You know, given the medical cost trends, and the pain that payers have, somewhat been feeling over the last couple years, you know, I mean, that should prove to be a extremely fruitful selling environment for you.
Yep.
So talk about the TAM, the opportunity, and how is the current environment?
Yeah. So the TAM is $150 billion. We're coming up on $3 billion, and so obviously, to your point, a couple percent of the market. I think that's the best way to look at it at the basic level. Now, if you looked at it on a product lives level, that's a revenue level. On a product basis, you know, it's probably closer to 5% penetrated, but either way, to your point, it's kind of a small.
Yeah.
Small share. We're seeing a lot of demand for payers to say, "Gosh, I like what you're doing. We have to manage the clinical categories of cancer and cardiology. We've done what we can on the primary care side. We've gotta get at the specialty cost." So the pipeline feels really good right now, based on that dynamic. And, you know, I think from our perspective, we're trying to grow in a way that is also focused on the bottom line. We probably could be growing a lot faster than we're growing. We're growing at 35% organically. That to us feels like the upper bound of what we should be doing to make sure we're also delivering bottom line, particularly in this market environment.
And so we're sort of titrating how much business we take on based on that dynamic.
Okay, that's good. And then we'll just finish with the one target or the target everyone.
Yeah.
Has been focused on.
Yeah.
$300 million.
Yep.
You know, what you said with respect to that, coming out of the second quarter.
Yeah, so we, folks who are less familiar, we had a $300 million run rate EBITDA target, which we've always defined as, you know, kind of clock strikes midnight on 12/31, going to 1/1, our run rate should be at that, at that level by then. That's been our North Star. It's been useful, I think, because we've had a number of different acquisitions and being able to drive everything into that focus. We reiterated it, we feel good about it. You know, everything we're doing lines up against that. And I think, you know, a lot of confidence in the number, but then coming out of that, the, we put some metrics out in addition to continue growing at a kinda 20% EBITDA basis after that.
Awesome.
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Correct.
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Yeah.
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Yeah, good question. I would say price and membership from our existing customers, that doesn't have anything to do with new cross-selling we're doing, is probably 10% of that, because MA is growing and Medicaid is growing, things like that, or Medicaid will be growing post-redeterminations. And the balance would be new cross-selling or new logo selling.
Good. Thanks, Seth.