Clover — 2023 and Beyond

I’m beyond excited for Clover’s future, and especially with this being the first week with Andrew Toy as CEO. I look forward to everyone who’s followed Clover to see what I and others close to Andrew know he’s capable of, which is leading Clover to become a significant winner in a vital space.

I’ve invested over $40mm in Clover to date. I have a long-term view of the company — my first investment in Clover was made almost 10 years ago, and I’ve made subsequent investments into the company since then. I’m probably more comfortable, than most, in taking an extremely long-view in circumstances when I believe the potential commensurate return is extremely high. Below are some of my thoughts as Clover’s largest shareholder.

Near-term: Profitability

There is, appropriately, a lot of focus on Clover’s path to profitability. When we did our follow-on offering in November 2021, we had a sense that equity market conditions could be quite different in 2022. This motivated us to pad our balance sheet a bit prior to that and I’m happy we did so.

I’d personally like to see Clover get to cash flow profitability as a next key milestone. Achieving that helps demonstrate that a profitable MA plan can be created while doing the right thing for consumers — open, zero cost-access to any primary care physician — where a core driver of clinical value creation is Clover Assistant.

Having spent many years working closely with Andrew, and knowing what amazing things he’s capable of, I’m supremely confident he has the full faculties to achieve that milestone. My personal opinion is that he’s perfectly capable doing so with our existing resources.

Medium-term: Growth

Demonstrating growth in a differentiated way is something I believe Clover has as part of its natural advantage. Today, a significant amount of MA industry growth is correlated with marketing payments (over and above commissions) going to agencies (whether field agencies or e-broker agencies) which inevitably sways selling behavior. We have never participated meaningfully in that, as I 1) don’t view it as sustainable long-term, 2) believe it removes the focus from what’s best for the consumer.

I firmly believe that if we maintain focus on what’s best for the consumer, internal decisions are easier to make — the plan design and technology you’re deploying creates a more permanent advantage. I see this in the recent Medicare Advantage proposals with more (appropriately) scrutiny around marketing practices. I expect that scrutiny to only increase.

When Dell Computer went Direct to Consumer in the late 80’s and shunned direct brick-and-mortar sales centers and retail sales specialists that resided in those brick-and-mortar locations, it was considered ground-breaking. Dell instead focused on plowing those savings into consumer value, and it allowed them to also have an enviable cash conversion cycle with a just-in-time inventory approach. They obsessed over ROIC (Return on Invested Capital) which is something you rarely hear about from companies today.

There are some key and obvious differences in our respective industries, however, what personally excites me is the potential to greatly enhance Clover’s ROIC to enviable levels while driving unique consumer value that will become more and more differentiated from the competition over time.

Long-term: Scaling Our Advantage

The following explains my long-term view on Clover (from the Nov 7, 2022 Q3 Clover earnings call):

“This will be my last earnings call as CEO, so I thought it would be good to lay out a few thoughts on the long-term. Firstly, Andrew’s transition to CEO is going extremely well, and there is no better person and leader to be at the helm of Clover for the next many years to come. And speaking as the largest Clover shareholder, I am very confident he will deliver for me and for all of our current and future shareholders in ways that will be spectacular and shocking (in a good way) over the next many years. Now, looking ahead:

[1] Firstly It’s important to remember that the public and private markets have yet to see a healthcare company achieve a positive disruptive impact at scale (vs just a slice of it). It’s simply never happened before. It has occurred in other industries: consumer retail with Amazon, phones with Apple, knowledge acquisition with Google, entertainment with Netflix, cars with Tesla, space travel with SpaceX, short distance travel with Uber, and hotels with Airbnb. Healthcare, Education, and Energy production are three industries where positive disruptive impact at scale has not yet been proven out. Until that occurs, shareholders (current and future) should expect and embrace the skepticism that we face. The human mind is not geared to believe something that has not yet been proven. Our job, at Clover, is to demonstrate that proof.

[2] Healthcare is a vast and complicated system — I’ve been fortunate to be a part of building and investing in businesses (at all stages of lifecycle) across outpatient, hospital, provider, revenue cycle, medical device, data, technology, and therapeutics areas (domestic and international) — as well as many businesses outside of healthcare. This experience provides me with a helpful vantage point — an unusually wide perspective on what works, what doesn’t and what is and isn’t sustainable. Many healthcare prognosticators out there have knowledge in one or two areas, but very rarely across many — that limitation they have is a natural advantage to the team at Clover. One conclusion I’ve come to over the years is that the vast majority of the public market value of healthcare companies today has been created on the back of medical cost inflation. Said more simply, healthcare cost inflation in excess of GDP growth has accrued to mass market value — plain and simple. That is not sustainable — and we are hitting the proverbial “wall” over the next decade with that dependency. Any investor who believes it will be straightforward for large (and small) companies to pivot from a business model of benefiting from medical cost inflation to a model benefiting from medical cost reduction, is not only wrong, but also delusional — and has likely never tried to pivot a business in that seismic of a fashion.

[3] I will boil it down to three areas as to how costs can and will be reduced over the long-term, to the benefit of patients and taxpayers. From my vantage point, I would be very surprised if three things I’m about to describe do not manifest itself within the next 10 years:

• Firstly, less than 1% of acute care hospital services take place in the home. In 10 years, that number will be at least 10% and more likely 30% or higher. That will dramatically lower the cost structure of hospital admissions, and have tremendous negative cost structure implications for hospitals themselves.
• Second [2] — — A significant amount of healthcare technology being developed today has nothing to do with aiding clinicians in making better clinical decisions. Yet, missed treatment options, veering off of evidence based protocols, clinical errors, and knowing when to do something and when not do something are what actually drives costs up. In 10 years, the most valuable healthcare technology companies will be driving true clinical intelligence to clinicians. Healthcare technology companies that are not driving impact in this way will be extremely challenged in 10 years.
• Finally — — A minority of therapeutics coming to market today are truly curative. A decade ago that number was near zero and in a decade from now, the majority will indeed be curative. We will enter an era where an incremental $1 of therapeutics spend will lower medical costs by greater than $1. Therapeutics coming out today are tied to development breakthroughs made ten years ago and in ten years therapeutics will be tied to breakthroughs developed today.
• There are many other areas of cost reduction opportunity — automation, streamlined regulations, better incentives alignment, better access, etc — but the three I described will have massive implications.

[4] What does that mean for Clover?

• What we’ve built in Clover Home Care to date, and what is to come over the next many years in Clover Home Care will be a game changer — it would be an understatement to say that I’m extremely excited about our long-term plans for this area.
• For healthcare technology, a huge portion of our R&D spend is around the Clover Assistant and clinical intelligence for clinicians — our progress to date has been impressive, and for various reasons, will only accelerate.
• Our first foray into therapeutics is our spinout company Character Biosciences (formerly Clover Therapeutics). Character has initially focused on AMD, and is off to a very promising start.

[5] In ten years, I strongly believe that it is possible for Clover to have made the biggest positive impact in healthcare, while simultaneously accruing the largest market value in healthcare, in excess of any healthcare company that exists today. The journey there, while having already been very volatile over the last 10 years, will only continue to be so. We are in the extremely early innings, and I’m excited for Andrew to lead us on this next, and extremely important phase. When I look across the healthcare CEO landscape and my Top 3 list of where value will accrue, it’s obvious to me that Andrew is head and shoulders above anyone else out there.”

The statements contained in this document are solely those of the authors and do not necessarily reflect the views or policies of CMS. The authors assume responsibility for the accuracy and completeness of the information contained in this document.

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