AdaptHealth Corp. (AHCO) Earnings Call Transcript & Summary

Ladies and gentlemen, the program is about to begin. Reminder that you can submit questions at any time via the Ask Questions tab on the webcast page. At this time, it is my pleasure to turn the program over to your host, Joanna Gajuk. Please go ahead.

Hello, everyone. Thanks so much for joining second day of our third annual Home Care Conference. And, again, my name is Joanna Gajuk. I'm an equity research analyst at Bank of America. I cover some of the Home Care companies. So now, this session we have lined up is with AdaptHealth. They're one of the largest suppliers of durable medical equipment in the U.S. And today, with us is Richard Barasch, Chairman and Interim CEO and also Jason Clemens, the CFO. And like our operator mentioned, there is a way for the audience to participate. It's not just me, so you can go ahead and pose a question to our speakers and I'll be more than happy to relay that question here.

But first, I guess, it's quite topical when it comes to the CEO seat. So maybe can you give us an update there? And I guess, Richard, any interest in staying permanently?

No. I've been in the seat for almost 6 months now and it's been very interesting. I think we've made a ton of progress in these 6 months, the staff and the executive group have been welcoming and welcoming some of the changes that we've done have been, I think, very helpful. So I'm enjoying being in the seat. Having said that, we are in the midst of a search and looking for a candidate who can lead the company into the future. As I said, we're pretty excited about what's going on and looking forward to answering your questions.

Great. So I guess we're just going to wait tight, and...

Yes, but in the meantime, things are moving along very nicely.

Great. So I guess, and just thinking about from your vantage point, and I guess, Jason can chime in as well. But just thinking about the long-term view of this entity, right, you have a lot of different businesses. So maybe you can kind of give us a sense of how you're thinking about the growth for the sleep versus diabetes versus the supplies and DME. There is different drivers, to some degree, for these businesses. So I guess it would be helpful just to give a layer of the line of your thoughts around the entity and different business lines?

Sure. I mean, I'll give the overlay. Jason, make sure I don't say anything that I shouldn't say and he'll will chime in. Our biggest business, obviously, is sleep. We don't expect to grow 17% next year. We've got some comps coming up that are going to be harder. We're through the part of the piece where the supply chain was difficult. So if we can move down to sort of high single-digit growth, we'll be delighted, and we think that's quite achievable. We're not ready to give guidance for '24 yet, so this is all in the nature of just sort of general commentary. The things that we look at internally is the census in sleep and it continues to grow kind of month-over-month, quarter-over-quarter, and that's just an engine of recurring revenue and we are -- feel good about the growth there. So we feel very good about our sleep business. And I'm sure you're going to ask about GLP-1s later on, so I'll hold the answer to that. But even in the face of that, we think we're very pleased with where we are on sleep. Diabetes has been a little bit different. Diabetes, we've -- I think we've been pretty open about acknowledging some of our challenges in diabetes. I think we're very much on the way toward bringing diabetes back to the position it should be, which is growth in line with the industry. Again, we're dealing with headwinds from some of the prior periods. So our revenues have not -- we're kind of flat on, maybe even a little down on revenue. But if you look at it from the inside, the good revenue is trying to outrun the revenue that's more troublesome. And we're sort of in a tight race with that. At some point, the revenue that we're outracing is going to be smaller and the "good revenue" is going to get larger. So we really do expect to resume growth in 2024. Very excited about that. Just a couple of things that are of note. We spent a ton of time in diabetes on making our internal processes better, quicker, less -- more throughput, more electronic ordering, less human intervention, and we're starting to see the benefit of that. And we -- by the beginning of 2024, we will have doubled our distribution force in diabetes, specifically targeted in metropolitan areas where there's a high prevalence of diabetes and which fortunately coincides with a high prevalence of government business as well. So we've taken a bunch of steps to rectify the diabetes issue. On the sort of the respiratory core HME side, Jason has always talked about demographic growth, but we're doing better than demographic growth, and I think that's a testament to what's going on in the ground where we're gaining share. We've got demographics plus share. There were fewer moms and pops, there's less competition at the low level. We have some larger competitors and they're tough, but there's -- we're finding that we're gaining share in that market as well. We do have a bunch of other smaller businesses. We're looking at every one of them to determine what its proper place is in the company. Jason, do you want to add anything?

No, I think that was pretty good. I mean, the only item I'd just call out again to reiterate because it's a big deal, is the comparable period. Richard mentioned this, but it just bears repeating. It's going to be just a very tough comparable period. But again, we're high on sequential growth and we expect to continue to deliver that until we get back to more of a normalized growth rate in 2025.

Joanna, what's kind of interesting has gotten lost in some of the noise around the story is that this company has grown in revenue and EBITDA every year since 2019 and in a very sort of consistent way. And there certainly has been some noise in the numbers, but there's a consistent pattern of growth in this company, both in terms of top and bottom line.

Well, when it comes to sleep, you mentioned, right, the GLPs because, obviously, that's very topical, continues to be -- we've done these surveys in the last couple of quarters kind of trying to assess the utilization of these new therapies by -- specifically with the sleep apnea patients. And it's showing like the [ utilization ] is still low, but it sounds like there's a lot of things that might be limiting that use, and some other additional studies are supposed to be coming out, specifically one on patients, I guess, with sleep apnea condition. So maybe that could be a driver for increased utilization. So how do you kind of think about this progressing as time passes? And, I guess, how could this broader use of GLPs impact that business eventually?

Yes. It's a great question. And other than "fixing and improving diabetes", this is the most topical thing for us as well. We're starting to talk. We're on sleep now, so we understand that there's a theory that the TAM is going to decrease at some point, the growth rate may slow. You -- BofA came out with a study, it was either -- one of you come out with a study that said only 3% of people using GLPs who are on CPAPs can discontinue. If that is the case, then it's much, much less of an issue than we would anticipate. There's also a lot of questions about attrition, whether people are going to stay on the drugs, what happens, how much they're going to lose, et cetera, the cost of the drugs, who's going to cover it. From our perspective, and I'm giving you a personal view. GLPs are going to matter as time goes on. There's no issue about that. There is going -- and I'm very happy about that as a human being and as an American. If Americans get healthier, that's a good thing for everybody. Specifically for our sleep business, even if it -- and by the way, I am a proponent of the theory that more conversation about sleep apnea is going to increase the funnel of people coming in, because sleep apnea is still highly, highly under diagnosed and even when diagnosed, highly under treated. So I think there's an additional TAM out there that we're not even considering yet. So having said all that, having given you all the qualifications, let's assume that there is going to be pressure. Our view is that we're the largest in the category, we can keep getting -- we can keep building share. We've got a very vibrant distribution force, and we'll continue to make our presence known in our markets and continue to build our census. Two, is we're highly focused on what I'll call the middle of the income statement, which is the cost of doing the business. We're bringing technologies to bear. We're leaders in electronic ordering. We're leaders in sort of bringing new technology to bear so that we can be even more efficient than we are. And we continue to think that given our size and given our investments in technology, we'll be able to improve margin. But what we also think is very interesting, is we put business on the books and we have an attrition rate. And we think we can improve the attrition rate. And a lot of that's going to do with our commitment to doing more for our members and providers than just providing equipment. We're in the process of standing up a bunch of pilots that will allow us to use the vast amount of data that we've got in our midst to improve the sleep health. And as I think we've talked about, plenty of our -- lot of our members, also a lot of our sleep members also have diabetes. So work with them on the comorbidities as well. So we're not putting our head in the sand on GLPs. We're going to -- our job is to just be much better at what we do so that even if there's a slightly lower TAM, we're still going to be the vast leader in the category.

Right. And I want to say, at some point, you had mentioned you also will be collecting your own data, right on that sleep, and I guess or the sleep apnea patients using the GLP. So when do you think you will have enough data to kind of better sense -- to get a better sense of the impact? And I guess do you expect the readout on this study in March to kind of change the utilization by this patient cohort?

Well you know, yes, it's not -- again, I assume you're talking about the Lilly studies. Again, we're watching like everyone else to see what it says. Our surveying shows that people in our sleep population, many of them are already taking GLPs. This isn't new. Ozempic didn't show up 3 months ago, the Ozempic song is like an earworm in my head sometimes after I watch a football game. And so it's not new. So many -- so let me step back. We think about 25% of our sleep patients are also diabetics. So many of them are already taking GLPs for their diabetes. And so far, it is working out in concert with their sleep therapy, not in opposition to their sleep therapy. That's not a conclusion. That's a supposition based on what we're seeing so far. In order to make -- go from a supposition to a conclusion, we're going to need longitudinal studies about what happens to the cohort of members who have come in and what happens to them over a period of time and whether the GLP actually affects their utilization of CPAPs. But we expect much of our population to be taking GLPs.

Right. Because also on the flip side, you mentioned, right, you think that just GLPs being on everyone's mind like actually could increase the penetration of the sleep apnea being actually diagnosed. And the other dynamic, right, there's data from Dexcom and the other makers of the CGMs, right, that they argue that the GLPs user actually get on CGMs to monitor the disease, right? So how could this dynamic impact your long-term growth outlook for diabetes?

No, it's -- look, I think it's more of a specific connection between going on GLPs and monitoring. That makes all the sense in the world because they -- not the same monitoring exists in sleep except for utilization, not for condition. So it makes perfect sense that if you're on a GLP and you're taking care of yourself, then you're going to want to know how you're doing on -- from your sensor. So we completely agree with the Dexcom view. The view on sleep is more like -- I know this is -- way back in history when DVDs came out, everybody thought the movie theater business was going to shut down. Well, not exactly. It made everybody go to more movies because it increased sort of the visibility of the entire industry. And you're hearing more about sleep now from payers, from cardiologists. It's become -- everybody knows intuitively that not even only intuitively from studies that getting the proper sleep is going to make someone healthier downstream. So increased visibility is going to be nothing but helpful for our business.

And we were talking about diabetes, so I want to stay on that. When it comes to next year, right, so you said sleep very tough comps, but you expect diabetes actually to grow into next year. There's a couple of different right dynamics. So maybe we could talk about that and flesh it out there, right? So first, I guess, is there actually more business shifting to the pharmacy benefit? Because I remember we would talk about there are some plans where it could go both ways. So it doesn't mean that there could be continuation of that shift into the pharmacy. And I guess on the flip side, right, the pump revenues right will be down again next year, it seems like. And then you talk about also the government business growing, but that's clearly lower revenue per patient. So kind of how do you put all these things together that makes you think that in total you could grow next year?

Yes. I mean -- again, I hate to use this analogy, but we're trying to outrun some of the negatives right now and there's plenty of good business going on the books to replace the headwinds of business moving to pharmacy. But we're going to -- as part of 2024, we're going to not shy away from being in the pharmacy side of the business. Margins, while lower, will still have contribution and we'll still increase our census and increase our importance to our various constituents. I'm going to turn it to Jason to be more specific about the impact of pumps.

Yes. A couple of things, Joanna. I mean, firstly, a pretty good proxy for our Pump business is what Tandem is doing and we're a big Tandem shop. They're an important manufacturer in the space, and we distribute a lot of tandem pumps. And so as the Insulet OP5 tubeless pump continues to gain share and take business from not just Tandem but Medtronic, we expect that to continue in 2024. We do think it will be muted year-over-year versus what we saw this year, which was between a $35 million and $40 million headwind. We said, look, just high level might be half that. next year. Of course, when we guide, we'll be more specific. But I think that, that feels reasonable to us based on what we're seeing in the trends and the data. And so to Richard's point, we have a little bit of a headwind, not such a little bit, but the $20 million -- of the $20 million headwind in the pump side of the business for next year. Regarding the pharmacy shift, as Richard said, I mean, we're shifting strategy there to just reposition and get aggressive. Again, get back to growth mode as it relates to pharmacy. Compared to last year at this time, there are far fewer switchers, if you will, that we know about today. I mean, there's been about 5 Medicaid, well not about -- there have been 5 Medicaid offices that have signaled shift as well as 2 commercial payers. But the benefit is that we've got the visibility out the windshield now to know that and to detect that and to plan against that. Finally, I'd say our CGM business, I mean it's grown year-to-date through the end of September. It's up a little over 2%, which is not acceptable in our minds. We are investing aggressively to install additional salesforce focused on selling diabetes products and MSAs that we just haven't operated in previously. So we intend to get back to growth mode. I think you'll see us be very tempered about the expectations on that until we start proving out the sizable investments we're making in that sales force. But we are changing the way that we're attacking and we're going to market.

So I guess, how hard is it when it comes to growing the government business and putting the sales force in place?, I mean, I guess, who are you taking the business from, right, essentially, and how hard is for [ these ] people to kind of overcome it and kind of market share shift, essentially?

Yes, I think some of the market share shift is going to come from people who are [ finger pricking ], not just the other people in the CGM business. One of the interesting things that we've learned, particularly in Medicaid populations is that there's still a high prevalence of finger sticking. And as we get more programmatic in the business, I think we're going to be -- and as more governmental payers, including Medicaid payers cover more of the CGM possibility, I think that's going to be a big part of where we're going to get business. So it's not just from being a better competitor, it's going after companies -- after not companies, but after segments of business that are underpenetrated at this point.

And when it comes to targets, I guess we talk about how you're thinking about the top line growth. Obviously, next year has all these different dynamics. But I guess by now, it's going to be a while ago. But I guess September 2022, right, the company had outlined this 2025 targeted margin. So how should we think about that? Is there a reason to think this 25% target is still achievable with everything that has been happening this year and into next year?

Yes. I think, Joanna, I'd say that, look -- when we look back, I guess, a little over a year ago now of our expectations of 25%, I mean a couple of things have changed. I mean, one, diabetes growth, right? We were wrong, right? It has not performed as we expected in those -- in the model for 2025. Frankly, it's -- we think it's premature to formally change or withdraw that guidance until we've got a new CEO in place. And we have a chance to respond formally to our longer-term plan and what we think those targets should be. Because after all, we have a new leader that's signing up for them and we're just -- until we have the person in place, it's just premature to do so. I'd say big picture in terms of margin as well as free cash flow conversion, we are still comfortable with those targets. The question is on timing. And again, we won't have anything formal to say here on this call, but I think to expand 4 to 5 points of margin between now and 25, I mean that's a high hurdle. But we think big picture that they are good targets, and I think you'll see us formally respond with the timing on those targets here in the coming quarters.

Great. Makes sense, I guess. So we're going to wait to see the CEO announcement and then hopefully, not long after that, there's going to be a more update that's quickly understood there. And another big topic is the Humana contract, which had some initial bumps, right? So maybe there's also a question from the audience actually on that. Anything, I guess, in Q4 that differs from Q3 that you have seen? And I guess the more bigger picture question, does this kind of initial rollout taking longer? I guess than initially expected? Does it impact the long-term view of this contract? And as it relates to this Humana contract, where, I guess the thesis would have been that if things go well, that should lead to more of those, right? So does that initial rollout taking slower, does that impact your view of what could come in some time when it comes to winning more of those?

Richard, do you want to start? And then I'll...

Yes. I mean, I can start with the second one. We're highly, highly motivated to do more of the same sorts of things. And I think we're seeing good reception from potential participants, partners in that business. The sales cycle is long. So it's going to take a little bit -- a while, but we're -- we think that there's -- we think that's very fertile for us going forward. Jason, I'll pass to you on the financial side of that.

Yes. Yes. Look, there's no change in our view of the profitability of the contract once we've got substantially all the patients transitioned. So we believe that the structure works great for Humana. I think it works great for us, great for providers, great for patients. And so there's no change at all in our view of the profitability of the contract, as well as, as Richard said, the TAM, if you will, and our desire to chase it. I'd say that it really comes down to timing. We've learned a lot through this transition already. I'm sure there's more to learn and it's a long list. I think at the top of that list is recognition for a patient that is on a rental census with a competitor and that might have been on that rental census with their competitor for a very long time. Well, the way that we've structured the contract, frankly, there's a bit of an outsized penalty, if you will, for every patient, every -- at that patient level that we don't transition timely or as soon as we'd like. And that's what's getting us. We talked, I think, in detail about that in the earnings call. And what's changed in Q4, I mean, we've talked about our expectation to do $5 million better, top and bottom line in Q4 than we did in Q3, so a sequential improvement, and that comes as a result of transitioning more and more patients. We're transitioning about 1,000 patients a week, net. If we continue that pace, we should be substantially transitioned by the end of the first quarter. So we think we'll exit Q4 with a profitable run rate, and we're very confident we'll have a profitable contract in Q1, and then that'll continue for the future.

So on that comment, I guess, when it comes to being substantially done by the end of Q1, right, and then coming back to this being profitable. So that seems like that will be an incremental year-over-year EBITDA coming through from this contract, right [indiscernible]?

Correct. Yes, correct. And we'll help frame that a bit more specifically when we turn to guidance.

All right. And then, I guess, at the [ study specs ], because obviously now there's been a lot of that kind of delayed, I guess, in transition of these patients. But I guess, how would you frame this contract resulting in market share gains? Because I guess that's clearly what's supposed to be happening here. And then what comes with that, my question is the economics, right, is it that the PMPM rate you're getting is offset by more volumes? Or actually, this is more revenues per patient coming through versus what would have been just regular fee for service going on?

Well, I'd say there are some specific questions we'll answer. There are some that we won't. But what I could offer is that the PMPM rates that were priced, modeled, accepted, we're very comfortable with all those. That's what supports our view on the profitability and sustainability of that with the overarching contract. I would say next, in terms of market share, yes, for these 33 states, if you're a Medicare Advantage HMO patient, we're the only game in town. And so -- not so on the PPO side of the business. I mean, we have a preferred relationship with Humana, and -- but in terms of HMO, yes, it's absolutely incremental to market share. Finally, I think that being with a partner like Humana, who's continuing to grow, they're obviously a big player in Medicare Advantage. We'll grow with them. I think that there's various views on expectations of their growth for 2024. And again, if you're in these 33 states, I mean, these patients will come onto our census on a PMPM and then we'll take care of them through the services we provide.

So talking about the PMPM rate and you made it sound like you're comfortable with that, and that's all you're willing to say. But is there also like a quality bonus or anything around the outcomes or such?

Yes, very good question. There are not bonuses attached to patient outcome nor to quality components or patient sat or things like that. There are SLAs in the contract. We meet weekly with Humana and weekly reporting, and we've got a dedicated onshore operation that all they do is manage patient concerns and patient potential escalations for this Humana population. So it's part of the infrastructure that we've invested in to support the contract. This team is doing a great job. We are doing better than projected in terms of those key metrics that are obviously very important to our patients and as important to Humana. So we think in terms of that part of the contract, yes, the timing has been a challenge, but in terms of an orderly transition and properly taking care of the patients that are coming on to census, we're doing a good job so far.

Okay. But is there a view that there could be some modification to it and you would be also kind of more taking risk as in like getting some extra money for outcomes?

Well, it's not structured that way today. I think our view is, look, we intend to hit it out of the park for Humana in these patients and make sure everybody is -- we're doing a good job everywhere. And yes, we hope to win more business, whether it's with Humana or other providers, other payers. I mean, we want to demonstrate that it is indeed possible to take this much business at one time in all of these markets and we're best built to support that. And so that's really a big picture of what we're trying to accomplish.

Okay. So I guess, how will you evaluate the success of this contract? Because I mean, so far there've been some delays, but I guess when you will be able to say like, hey, this is performing well or maybe above expectations?

Well, I mean, I think like anything else, it's quarter-by-quarter. I mean, we provided some perspective without the actual numbers, in terms of profitability. So we'll report out on Q4 and again in Q1. I think in terms of SLAs and meeting Humana's expectations. I mean for, I think, competitive reasons, we won't be so specific about that. But I think at the end of the day, the measurement is, will be can AdaptHealth structure and sign more deals like this, potentially with Humana, potentially with other payers. But strategically, this is where we're going. So we'll be reporting on that.

So when it comes to that particular one, you mentioned payers. But is there interest from other entities, like complicated physician groups or maybe even like some of these health systems, right, that offer hospital home and need like DME being delivered to home on time and maybe these are smaller, but still there's a lot of logistics involved with that?

Well, you want a job in business development?

Sure.

No, no, no. I mean, this is exactly where we're going. We want -- we've been a company that has been operating largely on individual referrals from specific doctors for specific patients. We have a lot of hospital relationships. But again, those are largely individual referrals that have to be processed on an individual basis. Getting large pieces of business at once is good for everybody.

And I guess maybe, we still have a couple of minutes left. When it comes to Medicare by reimbursement. So there's a couple of things there. I guess, this year, rate update will be likely less than last year. I don't think we know it or do we know it. And I guess what are your expectations, I guess, for the Medicare rate upgrade? And what I'm trying to get at is that, is that going to be enough to offset the labor cost? How do you think about wage growth into next year?

Sure, Let me take that in parts. I would say that, just high level, we would expect to maintain or beat labor as a percent of revenue in 2024 versus 2023. So that's probably all I'll say about labor until we get to guiding early, call it February, like February next year. I would say in terms of kind of the regulatory environment reimbursement, it's -- look, it's a complicated year, I'd say, it seems we say that every year. The DMEPOS fee schedule, I think as many know, is an inflation anchored measure through June of the prior year, they pulled the previous 12 months on CPI-U and that number we know today. That number is around 3%. Secondly, which is down considerably more than half, to your point, over the prior year. So I think it is a reasonable assumption to believe that DMEPOS fee schedule increases would be down versus the prior year. Secondly, there's a labor productivity factor that Medicare applies against that inflation measure. Hard to estimate that. But you can look at the prior year to maybe come up with some assumptions. But the company, I think we're not going to speculate on that until the rates are printed. Frankly, the rates could be printed as early as this week. Historically, they are kind of the 6th, 7th kind of in that time frame in December. So I think everybody in the market as, I mean, we'll know soon. What is less clear than that is what's referred to as the 75/25 for those in the call not familiar, you could just Google in DME, 75/25, it'll come right up to get some context. But, in summary, the industry benefited through the CARES Act with increased reimbursement and those rates were extended as part of the PHE and then ultimately, extended through the end of 2023. So those rates are set to expire at the end of this calendar year. Now, there is a lot of activity in Congress on this. There's an act in the Senate as well as a bill coming out of the Energy and Commerce Committee in the house. And we won't speculate on the result of this and the result of this might not be known until as late as February, frankly. And so certainly, our eyes are on it. Certainly, everyone in the industry is doing what you'd expect in terms of sending the message to Congress that, look, inflation has been ripping in all industries, but in ours, in particular, for a number of years, and this reimbursement is critical, not just for the national and the regional operators, but for the mom and pops to sustain. So I think that the messages have been send and we'll see what happens.

And I guess the last piece on the reimbursement, the competitive bidding. So CMS last time around when they tried to do it, they kind of concluded that it wouldn't really get much of a lower prices, but -- and they put a pause, but they left the door open for it to come back, so maybe they would kind of include new categories. So kind of your thought process, like would you expect this to come back to the point where like in 2025, we might see this or that's too late by now, it will be more like '26?

Well, what we know today is it won't be 2024. That's been formally delayed. And to your point, in the last round of competitive bid, the CMS ended up canceling 14 of the 16 categories. because they -- I'm paraphrasing here, but they didn't achieve the economic benefits that they expected. Look, it's hard to say. I mean, there has been no formal cancellation of the program. So we'd expect the program to be reinduced at some point. Again, we won't speculate today on when that could be other than it won't be sooner than 2025.

Great. And one follow-up. I mean, we spoke about this earlier, but I guess somebody wants to maybe pinpoint an update to the timing for the CEO announcement. So yes, is there a way to think about this? Like, should we expect the next 3 months or 6 months or any kind of...

I don't. It's -- the search committee is busy at work. I don't want to speculate. But it's top of mind, top of priority.

No, definitely. Yes. So...

And we want to get it right.

No, exactly. You definitely want to make it right. Get it right. So thank you for this. And Richard, Jason, thank you so much for the time. We really appreciate you joining us today, and thanks to the audience, and happy holidays. And we still have one more session. So those interested in the home infusion, please stay tuned for the next session. Thank you.

Joanna, thanks for having us.