The behavioral health workforce shortage has long been one of the biggest pain points for providers in the industry. Because clinicians are in short supply, recruiting and retaining them is notoriously difficult.
But in the second quarter of 2021, LifeStance Health (Nasdaq: LFST) more than rose to that challenge, adding 674 net clinicians during its first quarter as a publicly traded company. The result of both organic growth and acquisitions, those additions bring LifeStance’s total clinician count up to 3,975, a 94% year-over-year increase.
CEO Michael Lester touted the clinician success as a “key driver” of the company’s strong revenue performance for the quarter, which came in at $160.5 million, up 91% year-over-year.
Based in Scottsdale, Ariz., and founded in 2017, LifeStance is one of the nation’s largest outpatient mental health providers. It has a hybrid business model, providing a mix of in-person and telehealth services across 31 states, five of which the company just added in Q2.
LifeStance — which went public in June — has more than 450 centers total, and its services are delivered in-network with more than 200 commercial payers nationwide. Additionally, the company differentiates itself with its primary care partnership model, through which it works with more than 2,000 primary care physicians, even sometimes co-locating its clinicians in primary care practices.
In addition to benefiting LifeStance’s Q2 revenue, clinician growth also prompted center margin to improve for the quarter. Center margin for Q2 came in at $51.2 million, up from $25.6 million in the same quarter a year earlier, with margins expanding 140 basis points to 31.9%.
However, the faster-than-expected clinician growth comes at a cost: namely investments in LifeStance’s infrastructure and operations to support that growth, resulting in an adjusted EBITDA margin at 9.1% of revenue in Q2, down 330 basis points year-over-year.
Additionally, LifeStance had less success on the retention-front in the second quarter. In line with the rest of the behavioral health industry, it saw a number of clinicians retire or drop out of the workforce for personal reasons related to COVID-19 in Q2. Leadership described the trend as temporary and noted that turnover hasn’t had any material financial impacts on the company — yet.
“When a clinician leaves the company, it … has an immediate downward impact on the financial performance, as leaving clinicians are typically at full capacity,” CFO J. Michael Bruff said. “That gives us downward pressure on both revenue and center margin dollars in both of the quarters in the back half of this year.”
While clinician growth will eventually offset that turnover, it typically takes newly hired and acquired clinicians four to six months to ramp up to full capacity case loads, Bruff explained.
Multi-pronged growth
Also on the Q2 call, LifeStance’s Chief Growth Officer Danish Qureshi dug into the company’s multi-pronged growth strategy.
The first pillar of that strategy is geographic growth into new markets, both organically and through acquisitions. In Q2, that meant expanding into five new states, but the ultimate goal for LifeStance is to one day be in all 50.
The company’s second growth pillar is building out density in existing markets by hiring new clinicians, opening de novos and making tuck-in acquisitions. In addition to the impressive clinician growth LifeStance logged in Q2, it also added 35 de novos and made 10 acquisitions for the quarter.
Finally, LifeStance’s third pillar is deploying digital services to improve access and better serve patients.
“We’re proud of the rapid growth of our company using a very scalable process that is consistent, repeatable and profitable,” Qureshi said on the call. “And we remain confident in our long term growth prospects. Not only is our total addressable market expected to grow 14% through 2025, but we’re also less than 1% penetrated as measured by both clinicians and patients, providing a long runway of opportunity.”
For 2021 as a whole, LifeStance downgraded adjusted EBITDA guidance to between $47 million and $53 million — about 25% lower than originally projected for the year in the company’s IPO model. The change is “due to accelerated investment spend to support the higher growth but also a result of higher clinician changeover and new hire weight at 50% of the base & related productivity impacts,” Jefferies analysts wrote in a note shared with BHB.
“While we estimate the retention portion of the EBITDA hit was 5-10% ($3.5M-$4.0M) to the prior $68M estimate and management expressed definitively offline that exits are not competitive-related, fears of persistence and the directional move lower in estimates translate to an amplified impact on sentiment and stock down sharply after hours,” the note said.
Still, despite those factors, Jefferies analysts are bullish on LifeStance’s longer-term outlook and expect the aforementioned issues to resolve themselves in 2022.
In term of other guidance for FY 2021, LifeStance expects to log $668 million to $678 million in revenue, as well as center margin of $198 million to $208 million.
LifeStance’s stock price was down 6.14% at end-of-day trading Wednesday, closing at $21.87.
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