Accendra Health, Inc. (ACH) Earnings Call Transcript & Summary

Well, I think I pretty much covered it all. Yes.

Can you speak to the overall health of that customer? Obviously, utilization has started to really improve pretty nicely over the past 6 to 12 months. Curious if you could opine on the health of your average customer, what is sort of like-for-like growth there. And is that -- has that changed over the past 6 months? Has it improved? Is it stable? Is it getting worse? Curious if there's really anything you can call out there?

Do you want to?

Yes, I think we're clearly seeing the hospital sector or broadly getting stronger, getting healthier. That's -- I think that's part of the utilization being up as part of the demand for our largely consumable products growing at the same time. We follow the public [ many of which are the management ] this week. And it seems like overall, what they're reporting and their plans and we'll hear from customers. It seems like there's hospitals are in a better spot than they were certainly 12, 15, 18 months ago.

As you think about hospitals being in a better position and you think about the competitive landscape, obviously, during COVID, it was a much more challenging environment for your customers. As you think about really the major players in the space, I would compare medical distribution to drug distribution, PDMs, there's only a few players of major scale here. As you think about the pricing environment for your services, has there been any change at all over the past few years? Do you think the market is getting more competitive, less competitive? Is there anything specific that you would call out there?

Yes. I think broadly within Products & Healthcare Services, we would say that it remains very competitive. I'm not sure that there's anything changed substantially recently other than just sort of normalization of both price and volume from a product standpoint. So that continues to be a focus area. But it's a concentrated market, obviously, and it's competitive.

Yes, yes. That makes sense. Switching gears to capital allocation. We talked about M&A being a big piece here. can you talk about debt paydown, share repurchases? What are the other parts of the algorithm here as you think about [ LMI ]? I guess for 2024 and then what's embedded in the 2028 guidance, is there any evolution of the capital deployment strategy over that -- the next 3.5 years or so?

Yes. So I would say we can -- overall, we continue to target leverage south of 3x, and that continues to be a core focus area. During the Q1 earnings call recently, we did talk about reinvesting some of the $740 million of operating cash flow that we had last year, into inventory to address service levels. We've had some inbound supplier challenges in the end of the fourth quarter and in the first quarter. So we've invested in some inventory levels. We'll continue to monitor that to see how we can optimize and then we've invested in inventory to onboard this large new customer. But overall, while we continue to monitor for attractive M&A targets, we continue to focus on paying down debt to get to south of that 3x.

The 2028 targets were built really without any consideration for M&A or return to capital to shareholders. That said, it'd be -- I'd be surprised personally if we got to that part and weren't active in M&A.

Got it. And then as we think about 2024, you mentioned on the last earnings call to expect more limited cash flow generation over the course of this year. Can you talk about the specific factors that are driving the cash flow this year and kind of how that may evolve as you exit 2024?

Sure. So within the first quarter, we had a couple of things happen. We talked about the inventory build. We also had an increase in AR within the quarter. Part of that was driven by some sort of timing changes within our AR sales program of about $20 million, and the remaining $50 million of AR increase was sort of half driven by Patient Direct, partially because of change in just seasonality, change -- being Change Healthcare. And then the other half really being related to onboarding new customers in PHS, which has a tendency to stretch AR in the short term. So that was what's driving Q1. As we look ahead to the rest of the year, we think there's an opportunity to optimize the AR, kind of get that back in line with historical trends. But we have left ourselves some wiggle room on inventory broadly within products and health care services as well as to make sure that we've got -- we've adequately contemplated the investments for the operating model realignment. We've still got some fairly chunky investments there in terms of network optimization and other things for the remainder of the year.

I think that you said the Patient Direct market as a whole is growing about 6%. And I guess, as you think about the core distribution business, 3 major players, how do you think about the competitive landscape within the Patient Direct business? It's obviously a faster-growing market and sort of with longer-tailed growth opportunities. How do you think about the competitive evolution of Patient Direct? And do you see a few players winning? Or is there room for a kind of broader environment for multiple players to win?

Yes. You're talking about really enormous market with thousands of players in it today. And if it has consolidated down for maybe 6,000 to 5,000 players. In the recent years, I think it will consolidate down a few more. But these are very large markets with many, many players. I think that will continue for the foreseeable future. I think there's plenty of room for those of us that are slightly larger in the space and with the growing market to continue to compete effectively. I mean we do butt heads with some of the same names from time to time, but there are also many, many local players in that same space that we're butting heads with every day. As we look around, even the therapies that we're in today, which is most of your larger categories, plenty of room for growth for us, our larger peers and then the smaller players. And as we look further abroad and start branching out concentrically, if you will, I think there's other categories we can get into that are equally as large or not larger. And there's plenty of room for all of us to play in. These are really, really large markets and the demographic tailwinds we see, with the aging population, unfortunately, an increasingly unhealthy population bodes pretty well for the future of the market.

Is there anything you can say about the valuation of private assets in that space? Has it changed? I would assume that during COVID, maybe the multiple has expanded and since COVID, maybe they've come down a little bit. But the opportunity really hasn't changed. I'm just curious, from your perspective, have private valuations for these assets changed at all over the past, I'll call it, since the middle of COVID?

I think your thesis is largely correct, but there are so many small players in this space. Those looking to exit have a variety of reasons with the exit. It could just be a lot of familial business where it's run it's courses in the family. Some just sort of just want to go a different direction. Some just get tired of the markets or just see more competition coming into the market and want to leave. So at the smaller end, valuations have come down a little bit. There's still more we would trade at and what we had bought at as an example, and the largest space in the higher-quality assets, I think they're stabilized, but I think your thesis that they're probably a little lower than they were. The COVID days is correct.

Going back to the Patient Direct portfolio, sleep is about 1/4 of that part of the business. How do you think about the risks around GLP-1 growth and the potential risk to that business? BofA did a survey that said the weight loss drugs improves obstructive sleep apnea, but it's not a cure. So maybe it would reduce the amount of days that they're using those products. But I'm curious, how have you kind of thought about the risks of that business?

Yes. I mean we've obviously been tracking all the different studies that have sort of been in the news recently and tracking the space broadly. As we look at our internal data, both operational metrics regarding sleep sensors, starts, things like that as well as our financial ones, we don't see any evidence of material impact right now, which I don't think is terribly surprising. I mean, if you think about it on an individual patient level right now, even if you're fortunate enough to have insurance coverage or can pay out of pocket, right? Even getting continuity of supply and ramping through the dose escalation is not an insignificant hurdle right now. So I think it's pretty early days to kind of see it play it out in the market. We also think that there's -- we've talked about the demographic tailwinds. There's also just a huge population of patients out there that are undiagnosed. And some of these therapies may actually sort of expand the market in terms of education and other things. So I think we'll continue to monitor it very closely, but no impact right now, and we don't anticipate anything at least in the short to medium term.

Yes. And then one other question we continue to get. I know you've addressed it before, but on the diabetes side, obviously, some reimbursement risk around CGMs. Just curious what percent of your portfolio would be at risk there? And just trying to think about how that could impact the business?

Yes. So the reimbursement risk that most folks have specifically asked about is the HHS OIG investigation and the CGM reimbursement rates. We don't expect sort of an outcome of that until 2026. Of course, we'll monitor that closely. So I think broadly, we feel good about CGM. What else am I missing on this subject, Jon?

I think overall, I think it's something I would view that as navigable for us. It wouldn't be -- we'll see wherever that lands, but at the end of the day, we would remain just as bullish on diabetes and the CGM reimbursement over time.

Yes. And I would say, I think it's important to note that within that space, our CGM patient population is disproportionately type 1 diabetics. And so as that market continues to evolve, it's important to think about it largely through that patient population.

Going back to the Patient Direct growth rate for a little bit, 8% long-term growth. As we think about your largest businesses in there, diabetes, sleep, respiratory, is there any way for you to rank order growth contribution that you are expecting? Or just sort of how you think about those growth markets or maybe some of your smaller businesses contributing to that 8% in terms of which are the ones that are likely to contribute the most and then kind of down to less?

Yes. I don't think we can necessarily force rank them, but I think we've talked about consistently being pleased with sleep and diabetes, which are big categories for us and growing faster than the average. But wound care and ostomy and some of the smaller categories have definitely performed very, very well and over the long term, could significantly contribute to the strong growth we expect north of the market.

And respiratory is an area where we think we can get better growth than what we have in the past. We need to ramp up our respiratory growth rate. It's been a bit of a slight underperformer for us the last few quarters. But I think Alex is right. There's -- all the categories are growing well. As I've mentioned before, the demographics of sleep in diabetes is going to be hard for everyone to catch up with it. But I think there's really good growth prospects for all the categories we're in right now.

And then with the last couple of minutes here, what do you think is most misunderstood about your story? Or what are you most excited about over the next year with regard to the business?

We talked about the operating model realignment and the projects we have around Patient Direct right now. What I like about that is that we're focused on things we do well today and I think we're maybe best of breed and looking to get better at it. So what is understanding what we call the patient sleep journey and managing adherence rate and getting, making it stickier and making sure we're talking to the right folks to improving our ability to collect and manage our contractual allowances. We're really good at that now and to really -- the fact that we're investing to stay ahead of the pack on that and be really become great at that. We'll continue to invest in, not resting on our laurels. I think it's pretty exciting for the Patient Direct future.

Yes. And I think along the same lines, I think we've gotten a lot of -- we've built a lot of really good muscle over the past couple of years in integrating Apria and Byram and now going through the operating model realignment, which worked really effectively in PHS, and we've got some really promising programs in Patient Direct. And I think that really should position us very well to continue to do some M&A. We think Apria and Byram were very complementary, both largely grew organically, pretty clean platform. Each of them were investing in, making sure that we harmonize them in a way that really lends itself to doing M&A in a clean fashion where we can take some of our strengths and quickly translate it to a target. So I think we've got a lot of really good opportunities organically. But I think if you can do some targeted M&A, it can be a really powerful combination moving forward.

Great. We'll leave it there. Thank you, everyone, for joining us today, and thank you both for the time.

Thanks, Allen.