LifeStance Health Group, Inc. (LFST) Earnings Call Transcript & Summary

Great. Good morning. My name is Lisa Gill. I'm the health care services analyst with JPMorgan. Sorry, it's Tuesday morning. We have with us this morning, LifeStance Health. With us this morning is Danish Qureshi, as well as Ken Burdick. After we go through their presentation, we will do a quick little fireside chat here at the front of the room. So with that, let me turn it over to you, Danish.

Thank you. So first, let me start off by making clear that we may make forward-looking statements during this discussion today. And so as part of that, this slide covers some of the related disclaimers. So LifeStance Health is a leader in the outpatient mental health sector. We founded the company in 2017, really with a mission to increase access to trusted, affordable and personalized mental health care. Long term, our vision is a truly healthy society where mental and physical health care is unified to make lives better. There's 4 things that really differentiate LifeStance in the marketplace that I wanted to cover. First is that LifeStance is a leading national platform with unmatched scale. By the numbers, what that means, if you look at Q3 of 2022, we employed over 5,400 clinicians. We generated trailing 12 revenue of $820 million, positive adjusted EBITDA of $54 million and operated over 600 physical locations in addition to a very heavy telemedicine component. The second key thing that differentiates LifeStance in the marketplace is our multidisciplinary clinician model, which means that we employ and the key word there is, employ clinicians across the full spectrum of psychiatrists, nurse practitioners, psychologists and licensed therapists. The third area that differentiates LifeStance is our tech-enabled platform, which is really built to support our hybrid delivery of care, which means if you're a patient, you can receive care both in person, again at one of our 600 physical locations or online through our telemedicine platform. And the fourth key differentiator of LifeStance is the fact that we operate on an in-network commercially insured basis, which cuts to the heart of our mission of increasing access to affordable mental health care. As you look at LifeStance, we have been on an unbelievable growth trajectory since the beginning of the company. Again, founded in 2017, we have grown over the past 6 years to over $800 million in revenue and over 5,000 clinicians. Importantly, we now have presence in 34 states, which gives us access to 90% of the U.S. population. So if you are a patient living in any one of these states, again, 90% of the U.S. population has access, either in-person within driving distance of one of our 600 locations or online and through our telemedicine platform, which is really unmatched in the industry as far as scale goes. As we look forward to the future, we'll continue to focus on our key priorities of increasing the size of our clinician base through organic recruiting engine as well as an increased focus on productivity, which means making sure that we are utilizing the time that clinicians give us in the best way possible, reducing administrative time, reducing cancellation rates and better matching our clinicians with patients that are looking for their specific subspecialty of care. Despite LifeStance being a leader in the market, the reality is this is a significant market opportunity. So today, there are over 50 million patients in the U.S. with a mental health issue that a LifeStance Health clinician could address. What that equates to is a total addressable market over $100 billion. That market is growing at double-digit rates, and that's really driven by, one, reduction of stigma related to patients seeking care. Two, is an increased level of awareness of the importance of mental health care to overall health. And three, is both regulatory and reimbursement tailwinds across the industry. So LifeStance is really uniquely positioned as a scaled player in this marketplace to take advantage of this large market that, again, we have just scratched the surface on. So we were really founded to solve 4 key challenges in the marketplace. One, is the lack of access to care that overall increases the disease burden on society. Two, is the lack of affordability, meaning that even if a patient can find access to care, the reality is, the majority of the market remains highly fragmented and is -- operates on a cash pay basis only. The third is the lack of scale and organization that really leads to clinician burnout and turnover among smaller practice groups. And then the fourth is the lack of care coordination, which ultimately leads to poor outcomes and a high cost of care. So the way that we solve these challenges are through our hybrid model of care, which lowers the barrier for patients to get access, meaning that, again, you can go to one of our physical locations anywhere in the country or if you want, you can receive care online, whichever is easier, more convenient, less of a burden for you as the patient. We also have invested through our online platform in a data-driven approach of matching patients with the appropriate clinician to ensure that from the very first visit, you are paired with a clinician that is the right fit for your specific diagnosis. The other way that we tackle the affordability problem, as I mentioned before, as we operate on a 100% in-network basis with commercial insurance. So our patients are able to use their medical benefits that they are paying for through their monthly premiums and do not have to go out of pocket in a cash pay environment, which is what the majority of the industry operates as. And then our culture of clinical collaboration and the use of our digital tools to help reduce administrative burden on our clinicians, helps to take advantage of the scale that we have generated and make this the optimal place for clinicians to be employed. And then finally, our multidisciplinary team of mental health clinicians and our coordination with primary care physicians helps increase outcomes and reduce costs to the overall system. So with that, I'll pass it over to Ken.

Well, that was impressive, Danish. Danish just covered 6 years in 6 minutes. I'll see if I can be as concise. Good morning, everybody. I'm Ken Burdick, and I'm the newcomer at LifeStance. I've been on board for 4 months. My 2 colleagues that you see, were both here from day 1, and it's an incredible story. I'm going to spend more time talking about going forward. But before I do that, in a highly fragmented space, Danish as the Chief Growth Officer; and Kevin as our Business Development Lead had really built something that's incredibly unique, 5,400-plus clinicians in an industry where 95% are independent practitioners. So now that we have that size and scale, we're sort of moving into Chapter 2. One thing I want to mention at the outset is our CFO is not here and just so there's no speculation, he has a detached retina. So Dave Bourdon can't fly. I suggested he take a train. He wasn't crazy about that idea. But we're thrilled to have Dave on board. He comes with 20 years of deep health care experience with public companies. The -- so quickly, the story of building this scale, about 40% through acquisitions, about 60% through organic growth, meaning literally, Kevin's team, 1 clinician at a time through a very powerful recruiting engine. So as I come on board, I sort of see a company that has done a phenomenal job growing. Our challenge now is that we've actually sort of exceeded the infrastructure and not just the infrastructure for today's growth, but certainly the infrastructure as we think about the opportunity ahead of us. I believe that we're at about 1% share. So even though we're large, there's so much white space. It's incredibly exciting. So for the next -- let me go to -- for the next couple of years, this middle column, it's a lot of blocking and tackling because we have to translate the size and scale into something that's highly valued by all the constituents, starting with our patients, then our clinicians, then the payers that we contract with and obviously, our investors. So while it's not particularly s***, what you're going to be hearing much more of from LifeStance is the things that we are doing to drive, first, a scalable platform, focus on end-to-end process improvement, some simplification, and I'll give you an example of that, and standardization. And once we do all those things, which, again, it's just rolling up your sleeves, then we can start to bring automation to bear on some of our core administrative processes. And all that work is going to take place roughly in the next 18 to 24 months. Pleased to say that, well before I started, Danish moved from the Chief Growth Officer to the Chief Operating Officer, right about the middle of the year. And he started this track of, okay, we've now achieved the scale, we've got to improve our operational performance and strengthen our infrastructure. So there was a head start, certainly before I arrived. What we're really positioning this company for is, as we build out and fortify that foundation, we will then set ourselves up for the next big growth run because there's so much runway ahead of us that we want to be prepared for that. If I think about the next couple of years, in addition to the blocking and tackling that I referenced, one of the things that I'm excited about is the work that we are going to do to establish a more strategic relationship with payers. And I spent 40-something years in the payer space. So I know that space reasonably well. We have hundreds and hundreds of payer contracts, which surprised me when I arrived. We're going to pare that down. When I said that on the third quarter earnings call, what I didn't clarify is that we can pare that down and have a very minimal impact on total visits. And so let me make that abundantly clear this morning. The bottom 50% of our payers represent 5.7% of our visits. Now we're not talking about paring down by 50%, and certainly not anytime soon. But the point is, we can simplify our business by not trying to administer all those contracts, where so many of them, I mean, literally more than 100 have a de minimis number of visits attached to them. So there are ways to simplify and standardize that will absolutely not get in the way of the patient's experience and the clinician's experience. One of the things that is exciting that really is now in flight. So it's not like you have to wait 2 years before you start seeing exciting things coming from LifeStance. And since Kevin leads it, I'm going to ask Kevin through the Q&A to reference to this, but you could call it PCP partnerships, you could call it collaborative care. We tend to call it integrated behavioral health, but we are really excited about this opportunity we have to align and partner with large primary care practices so that patients are really getting holistic care. And having been in health care for 40 years, I can tell you, as an insurer for the first 30 years, I didn't get it, and most insurers didn't get it. And what we didn't understand is, we looked at our costs, and we saw all these physical costs, cardiac care and lungs and orthopedics, et cetera, et cetera. And then we looked at the behavioral spend, and it really wasn't that significant. So quite honestly, we didn't spend a ton of time on it. We've now come to realize, and I realized it mostly when I started working with a Medicaid population, is that you can't manage somebody's physical chronic conditions, if simultaneously, you aren't managing their mental health conditions. And the comorbidity, so the presence of both and the population is about 30, 35. In Medicaid, it was about 40%. So it's highly prevalent. And so now insurers, you probably hear many of them talking about the importance of behavioral health. Well, that's for 2 reasons. They recognize that to optimize total cost of care, you do have to make sure you're paying attention to chronic mental health needs. And #2, they're struggling with access issues, as Danish referenced. The employers, their customers are saying, you don't have a sufficient network. And so we're really well positioned to address that issue. I wish that we could fast forward to 3 years from now, because 3 years from now, when we've done that hard work, that heavy lifting, that's when we can really take this size and scale and data and create true differentiation and optimization. And what excites me about that is that the data and the analytics that we will be able to provide can for, maybe the first time in the mental health space, really start to support the value proposition with patients, with payers, et cetera. So you'll have to hold and be a little bit patient until then. But I'm looking forward to that stage. In terms of this exhibit, there's really just one thing that I think is important, and that is what's bold in here. We have no plans near term for either a debt or equity raise. We are going to operate with a significant amount of discipline as it relates to capital deployment. What do I mean by that? A company that has grown about 40% through acquisitions, we are going to dramatically reduce our M&A at least for the next year. While that will certainly have a positive impact on capital deployment, we're actually doing that more because during this reset period where we really want to get our arms around what we've already grown, we'll beef up the organic engine recruiting 1 clinician at a time. But as you probably understand, when you start doing M&A, every acquisition brings its own flavor, its own variation. And so in the process of standardizing what we already have, we're not going to keep adding to the variation. Once we've gone through that, we will re-gen that engine that Kevin has built and does so well. But for 2023, you should expect to see far, far less acquisition activity than you have historically. So I wish I could say it was more exciting. But when I think about the next 2 years, I think about operational discipline, prioritization and focus, clear goals and accountability, which these guys could speak to because I am a fanatic about that and then strengthening our core capabilities. There are lots of ways that we can expand going forward. But right now, we're going to stick to our knitting, outpatient hybrid mental health. And there is so much runway that at this point, I'd say Danish and myself spend a fair amount of our time trying to get everybody to say, let's just stick with what we have. Yes, we can go into this new service area. We can treat this new customer segment, but not right now. We just have to strengthen our existing business. And then in terms of investment highlights, these are the things that I think about. This truly is a very unique company. We have unprecedented patient demand. It's one of the areas that has bipartisan support, most recent bill out of Congress was very, very favorable to the mental health space. This is not going to be a story about quick win. I've worked in large companies, all of my life. So my DNA is just wired for long-term value creation and that's what we're going to be about. And then while we are one of the largest, we're not very well known. I had not heard of LifeStance before I was approached with this opportunity. So I'm excited about building a national brand where people think about LifeStance as the place to go for outpatient mental health that is affordable, that's personalized, and that uses evidence-based medicine. So that will be a journey that we're on, but that journey also starts with creating a consistent experience for our patients. And so when we take these 86 acquisitions, many of which have been integrated, but there's still some variation in administrative processes. When we standardize that and we can create that consistent patient experience, that will then jump start our efforts to create that national brand. So it's an exciting future that we have ahead of us. We're thrilled. I'm thrilled to be here. I didn't appreciate how unique this company was. But in the past 4 months I've learned, as Danish mentioned, that most of outpatient mental health is self-pay and that many, many clinicians don't accept insurance. That was unique to me. So I love the mission. I think the model makes a ton of sense, and it's all about execution right now. So thanks for your time. We're going to now answer some questions.

Thank you very much, and thanks for all the comments. Ken, you kind of started the conversation around -- you've only been here for 4 months, but when we think about LifeStance, can you maybe just talk about what you've seen now that you're on the inside versus your expectations when you took the job 4 months ago?

Sure. Some of that I've referenced, like I didn't realize how unique the business model was. It just had never dawned on me that you had all these clinicians that didn't accept insurance. So you had so many people paying out of pocket. When I think about out of pocket, I think about deductibles and coinsurance, and that's it, not paying the full freight. The other thing that I probably should have expected, but I've been pleasantly surprised at, I ran a company called WellCare, and we were focused largely on Medicaid population with some Medicare Advantage. And I thought that we were purpose-driven, and we were. But as compared to LifeStance, there's really no comparison. Every employee that I have met feel so strongly about the mission. And as Danish and I were talking about this morning, many of our employees have had direct experience with the mental health system. So they have a passion about creating greater access. And if any of you or any of your loved ones have tried to access the mental health care system, you know that typically, you're talking about months that you have to wait, not weeks but months. So that's...

That's a lot of out-of-pocket dollars.

Yes. That's a huge issue. Let's see. And I guess the other thing, which I didn't fully expect and I addressed in my remarks was, up until Danish becoming the Chief Operating Officer, it really was growth, growth, that was that mantra, that was the priority. That was the metrics. And going forward, while growth will continue to be important, it's going to be a much broader set of metrics that we use. I'll call it a balanced scorecard, and it's going to have service levels and it's going to have retention, and it's going to have profitability, every bit as important as growth because I think you have to deserve the right to grow. And we will do that when we execute up to our capability.

One of the key differentiators for LifeStance was that kind of hybrid model of -- we'll come -- I can come into your office and I can see a clinician or I can do it from the comfort of my home. How are you feeling about the competitive landscape today? Is that still a key differentiator in the marketplace?

I'm going to let Kevin take that. What was it, Kevin?

Thanks, Lisa. And by way of a quick introduction, I'm Chief Development Officer. I joined the company at its inception about 6 years ago now. I oversee all of the growth functions, M&A, clinician recruiting, referral marketing and partnerships and enterprise partnerships. With respect to the competitive landscape, we're still seeing a ton of interest from all of the key stakeholders in behavioral health. That said, we're not seeing any major new entrants in the hybrid space. We think that our physical locations, our payer contracts, our formal and informal relationships with referral sources are a big competitive advantage for us in that space and then offering both in-person and virtual care for our patients and for our clinicians allows them the flexibility that they're looking for, both in their care as well as in how they want to work.

And Kevin, maybe just talk about where we are in virtual health care. I know like the plan was to kind of get back to 50-50, it was still much higher than that. Where do you think it is? Well, where is it today and where do you think it's going to go?

Well, I can tackle that. So pre-pandemic, we were running about 5% of our total visits being virtual, 95% in-person. At the peak of the pandemic, it was the inverse. Right now, we're running around the high 70s being telemedicine, the remain being in-person, but we are seeing that steadily return. For us, the reality is, we're agnostic. We've really built a hybrid model that's meant to be flexible wherever a patient or a clinician wants to receive or deliver care. And so the only thing that really changes for us is how we drive operating leverage to our real estate footprint, which is something that we spend quite a bit of time on now, thinking about how to optimize.

We've talked in the past about value-based care and your relationship with primary care doctors. And I think you commented about how important mental health is as a component of overall health care. Can you maybe just talk about your journey around value-based care. I think you were running some pilots at one point and the relationships around primary care physicians.

Yes. So we are running some pilots. I would say, none of them at scale. But having spent so much time on the medical side, even though it has been dominant in discussions now for, I don't know, 5 to 7 years, value-based care still is a small minority of the care that's delivered in the United States today, still largely fee-for-service. And that's on the medical side. On the mental health side, it's in its infancy. Right now, when we talk to employers and we talk to payers, they would view value-based care, if we just said we're going to guarantee that somebody can get access to an appointment in 2 weeks. So value sort of in the eyes of the beholder. I do think that over the next several years with the data that we can bring to bear, we're going to be able to show a reduction in cost of care, which is what people typically think of with value. And that may be the first time that in the mental health space, people are able to really attach an ROI. And I have this thesis that one of the reasons why mental health has historically been underfunded is because unlike a broken leg or a heart ailment that John Couris treats at Tampa General Hospital, it's much more difficult to say, yes. Because of the work that we've done, this is now fixed. So we -- I'm really enthusiastic about what we're going to be able to do going forward. And part of that is because of this collaborative care. This is really catching on, and it's an exciting development where -- in some places, we actually are co-located with primary care. And once you can start sharing progress notes and treat the whole patient, that's -- that's gold. That's really valuable.

One of the things we've talked about over the last year especially is, is just the clinician environment and hiring clinicians. You've called out capacity constraints in recent quarters and you worked to balance those demands in the marketplace. Can you maybe just talk about what we're seeing today as far as capacity goes, has it had any impact on utilization. And in particular like, clinicians was always that the one big metric that we watch. Is that still the right metric to watch when we think about growth for the company?

Yes. So why don't I start off and tackle that and maybe Kevin can add in as far as it relates to organic recruiting. But our focus right now is ensuring that we really drive 2 key priorities. One is continued focus on growing the -- our overall clinician base with a heavy shift now towards organic recruiting as the primary driver there. And then the second piece is productivity, which is made up of capacity, the total time that clinicians are giving us, as well as utilization. So how we are effectively filling that time. So the focus over the past kind of 6 months since I entered into the COO role has really been on the productivity side to ensure that as far as utilization goes, we are minimizing the amount of time lost to administrative tasks, that we are reducing the number of cancellations and no shows that end up wasting valuable clinician time as well as ensuring that we are optimizing the amount of time that is being spent seeing patients through our matching algorithm. So you've heard me talk about in some of the earnings the rollout of OBIE, which is our online booking intake engine. And what it really does, is ensure that from the very first appointment, our clinicians are matched with the appropriate patients and vice versa so that there is stickiness, that there is a higher quality of care that's delivered, and ultimately, everyone wins in that process. But Kevin, do you want to add on around organic recruiting, what you're seeing?

Yes. And to put some of the -- what we're doing around the statement about investing in our organic growth team is, we've taken a systematic look and review at the journey from first contact with a potential clinician, all the way through their first 90 days with us at the company and made significant investments and improvements along the way, starting with the clinician team understanding the profile, both professional and personal of what makes a great recruiter, enhancing that team to ensure that we have the right people on the team. Looking by geography, do we have the right number of clinician candidates, if not, optimizing the number of clinician candidates to support the goals, ensuring that the process from first touch, from a marketing approach all the way through interview, signing a contract is seamless. And then once they've signed a contract, the onboarding process, some of which we have full control over, some of which we don't, through credentialing is as seamless as possible. And then once they've started that we have touch points up until the clinician is full and their schedule is full with patients to their satisfaction.

And do you feel like this is helping with retention rates as well -- the touch points that you just talked about?