AdaptHealth Corp. (AHCO) Earnings Call Transcript & Summary

So my name is Joanna Gajuk. I worked at the Bank of America Equity Research, covering small and mid-cap health care facility names. So now my pleasure to have host this session with AdaptHealth. And today with us is Richard Barasch, who's the Interim CEO. Thank you.

1 more day. 1 more day.

Yes, I know. I know, right?

2 more days we're doing this.

And then Jason Clemens, CFO. So we're going to go right into Q&A since we only have 30 minutes.

So there's a lot to cover because the company -- so many different businesses. But maybe we should start with, I guess, Q1 and the guidance since there's a lot of questions like the quarter was pretty good.

Great quarter.

But the guidance -- you could give the guidance. So can you kind of just flesh it out? What happened there essentially?

Sure. Sure. So first, some context setting. So it's been a pleasure working with Richard for the last year.

Thank you.

But I do have a new boss coming in next week. Didn't seem to make sense despite a great quarter maybe moving the bar. So a little bit of context on that. We'd say secondly, when you look at Q2, we thought it made good sense to temper really two things. The first is on the expense side related to the ongoing repair following Change Healthcare's disruption. And so we expect several million dollars of unplanned expense in the second quarter related to the processing of cash as it's now rolling in, right? So we're very confident in free cash flow and kind of where things are going to land. On the front end, the problem that creates on the back end has all the electronic connectivities cutoff of processing your EOBs, your ERNs. If you have the cash in the bank, but you have to post it and apply it properly, that's being handled literally one by one by humans now, mostly offshore, but it's added expense that we need to absorb in the quarter. It could spill to July, but we think we got to contain just to Q2. So that was the first thing that we made an update, too, for the second quarter. The second item is related to our largest business, which is sleep and sleep resupply, the largest revenue line that we report. We've been recently alerted. I think ResMed has made it publicly known that there are some supply chain crunches they're dealing with related to a few of the specific masks, heated tubes and cushions that is creating a back-order situation for us, just about 2, 2.5 weeks before our earnings call. What we presented for Q2 was what we think is a very bad case scenario of essentially working with ResMed, letting that play out and as the orders come in, fulfilling it for patients. Now at the end of the day, there is ability to advise patients that although your ResMed items on back order, we may be able to offer you a same and similar product from any of the other manufacturers that can work interchangeably with your CPAP. You want to be thoughtful about pulling those levers because it can create some just operational challenges downstream, but it is a lever we have at our disposal. And so what we've presented is a view of Q2 that we're confident in, and we think we've got the tools to deliver on.

Great. And I guess on the last point you were making around the commentary from that supplier about certain items that are on the back order. I just want to clarify and make sure I understand because I guess we've heard them talking about some disruption because of the Red Sea. But my understanding was that this [ medical ] supplier manufacturers in Australia and Singapore. So I guess they're shipping through the Pacific instead of through the Red Sea, so I was confused that you said it...

Well, the entry point is Savannah, right? So what they've articulated is rerouting and then creating delays associated with some of this product. So we're working together. They're a great partner of ours, and we're confident that we'll manage to the numbers we put out for Q2.

No, thanks for that. And with this, I guess, specific item you're calling out. So there are some things you can do to kind of mitigate this. So what is behind your outcome? So it sounds like what you kind of included in your guidance is kind of the worst-case scenario. But obviously, it sounds like there's some alternative sort things you can do. So what's the kind of range? Is there a situation where it might turn out not to be an issue? Because the similar question was posed to your competitor, essentially, like all they're saying is cost and they made it sound like they didn't really call it out. So it sounds like maybe something you can actually manage through. So just asking the likelihood of those different outcomes.

Yes. Yes, I mean, for us, we think we've got tools in place that we can do better than what we committed to. And that includes things like offering alternative product, which we do have in stock and in inventory. Again, it's a balance, and we're continuing to monitor, and we intend to deliver on what we committed to.

No, that's great. And since we start talking about sleep, your biggest business, essentially. And you talked about for this year, right, you expected growth would be around the mid-single digits, right?

We do.

So what is the reasonable assumption to be made going forward, '25, plus how we should think about it? Because clearly, there are some reasons why you talk about maybe a little bit slower growth in '24.

Yes. I mean, look, this is a comparable period situation. I mean we think the year will be 4% to 6% growth over the prior year for sleep, right, mid-single digit. We think it could be 5% to 7% as you think out a year and beyond that. And the reason is really related to the rental setups, right? We had record setups on CPAP equipment starting late fourth quarter of '22 and going through the end of the second quarter of 2023. So there was pent-up demand as part of Respironics exiting the market and getting enough supply, not just us, but everyone in the industry to put out that supply on patients. And so there was record starts. And so just the nature of how we get paid for that piece of equipment, it's typically a 13-month rental stream that you'll earn on that piece of equipment. And so at the end of that 13 months, even though that patient is most likely still with you in your census, which is why our census keeps growing, and ordering resupply from you, the rental revenue gets capped. And so the implication of that is despite having record set up a year ago, you need to that your hurdle rate in growing your revenue in the rental lines in the current year. So we said we'd be thrilled if we're flat this year in rental. We achieved that in Q1. Sequentially, we think we'll be $80 million, $81 million in Q2, which, again, that comparable period, you've got a year-over-year compression. But I mean that's the reason, essentially, for the point difference between this year and what we think we'll deliver next year.

That makes sense. And...

Just let me make a fine point here. The key number to keep looking at is the census, and that keeps growing. And that becomes a cumulative number. So that's why we have confidence in growth.

On the resupply, right, exactly. And I guess just to kind of put a bullet on this because, obviously, the other topic related to the sleep business is the GLPs and the discussions around -- we hosted a panel today, too, around this shortage and he said the worst of reimbursement and all these stuff. But I guess, what's your latest view on that? Obviously, we also do our own survey and we've already see it...

Your surveys have been very healthy to our -- because what you're showing is a very small number of people whose behavior is changing away from CPAPs even if they're taking GLPs. And that's -- we know that, that's going to happen. It's going to help a certain number of people. But what we thought was pretty interesting about the recent Lilly announcement about the drug specifically, is they talk about an addressable market that's far in excess of anything that we have been talking about before that. So our broad view, our macro view is that there's going to be more conversation, more advertising, more discussion about sleep and sleep apnea as an essential part of health. And so far -- this is so far, the results of the study for Lilly don't show that their efficacy is better than CPAP. In fact, still quite a bit less efficacious. So we're clear -- we think that the top funnel is going to keep growing. More people are going to be interested, more people are going to be going to sleep doctors as the awareness grows. And our therapy is available, less expensive and better to this point. So we're pretty confident that we're going to be in this for a very long time.

And I guess you mentioned our survey, but I guess you, at some point, mentioned that you will also try to collect your own data for your applications. So any leads...

We are collecting. We're collecting our own data. Well, Jason, why don't you be specific?

Sure. So starting in the fourth quarter upon setup, we're surveying every patient on their history of GLP-1. We -- and the fourth quarter, about 6% to 7% of patients that came in and got set up for CPAP had identified as being on a GLP-1 drug. That number increased in the first quarter. We're up to about 10% to 11% of folks that are getting set up have identified as being on a GLP-1, yet they still came in and they still got set up. What we're now able to do is start cohorting those patients to understand if they differ in 2 key variables. The first is adherence to the CPAP therapy. We have detected no difference between a patient that's on a GLP-1 versus not when their adherence from point up set up through now. The second key item is what are the resupply ordering patterns. Does that somehow change? ResMed has put out a real-world study that says within 1 year of CPAP set up, a patient that's on a GLP-1 drug is going to order 3% more frequently than a patient that's not. And in 2 years, it's going to be 5% more. Now we're not seeing that yet, but we are seeing no change in a patient that's on a GLP-1 drug versus not and the resupply ordering pattern a quarter later. Now it's just 2 quarters of data. So I can't say we have a view on the future other than we're going to continue to survey and monitor the cohorts and report what we're seeing. But patient demand has been steady and our setups are hitting our expectations.

And our adherence rates are actually quite, quite good.

Yes. No, actually, I had it on my list to ask you about that because obviously, you outperformed the industry. So can you maybe share them out?

Here's -- I was Chairman of this company for a few years before I became CEO. I knew the company, but until I actually sat in the seat, I really didn't understand how effective our people are at helping our patients use their therapy properly. We have 300 sleep coaches?

350.

We're not getting paid for that. That's our cost, and it's our cost because we believe adherence is good for us economically, but it's also good for the patient. So it's one of these nice things that where our effort is helping our patients deal with what's not an easy therapy for some people. And there's no issue about that, deal with it better, and it works. Same in respiratory. What I've come to learn about Adapt is we have an incredible depth of respiratory experts, technicians, whatever you want to call them, but they're experts. They know what they're doing. They know how to set patients up properly. And sort of the next level for us in both, and actually in diabetes and in respiratory is to prove what we think is intuitively the case that we're helping downstream costs tremendously. And we believe we're pretty close to being able to prove that out on respiratory. And with 1,000 professionals whose work, it is to help our patients use the therapy better.

No, exactly. And you mentioned diabetes, and maybe we can shift gears a little bit, just to make sure we cover the main business lines here. So diabetes actually was a nice surprise, positive surprise in Q1, right? Things are -- at this week, from what could tell, things are going well there. So you, I guess, obviously, didn't change your guidance specifically, but any commentary about does it change your view for the year? And does it change your view kind of going forward in '25?

I'll give you a qualitative answer, and I'll let Jason do the quant. Qualitatively, we're in a different spot than we were a year ago. A year ago, we had operational challenges, we had management challenges, we had a distribution force that was -- what's the opposite of not growing? And so it was a part of the business that really needed fixing. And I talked about this on the first call that I did a year ago. And we're not declaring victory. We're not doing a victory lap. We've got a fantastic President of Diabetes. We've restructured the inside of the company from an operational perspective. We've intentionally opened up the pharmacy channel in places where it will work for us. So it's a very different picture. It's going to take time. And yes, the first quarter was a nice surprise. It was great. But we have to sustain that. And we've got some tough comps that Jason will describe, but the picture is very positive from the inside.

Yes. I think for the full year, our expectation hasn't shifted. I mean we thought that a flat year would be a good year. Some of that is absorbing a $15 million to $20 million headwind on our pump business as we're lessening that headwind and continuing to put out more tubeless-based pumps than tube-based pumps than we ever have. So second quarter in a row, we put out more tubeless pumps, which is really the growth engine behind pump and pump supplies. And so as we're continuing to turn that portfolio, if you will, we're making progress a little faster than we thought. CGMs, we doubled the field force, starting to get production there, but we don't want to get ahead of ourselves. We don't want to overshoot. Our expectations, it takes a lot of time to get a salesperson on the ground opening doors, getting them effective. I mean it just takes time. So we're working on that. We still think that a year-over-year compression in the first half followed by growth in the second half, getting to full year flat and positioned for growth in '25, we're still confident in that.

That's great to hear. And I guess you mentioned that you opened new pharmacies ready to kind of participate more in this channel. So obviously, that's been a headwind to this segment on shifting -- some of the payers shifting into pharmacy. So where are we at on that? I mean is there a potential risk because, I guess, the company clearly has deemphasized the commercial going after the government payers? But I guess inside the government bucket, it seems to me that there's also Managed Medicaid, Medicare Advantage. So can you give us a sense of like where these payers are that is there a risk that they should shift to?

Strategically, we can't just be in the medical channel. It just doesn't make sense. So we have to figure out ways to benefit in the pharmacy channel, both in terms of volume. There's a second part of this that I think is important is we're also in the same way we're -- I just alluded to this. We're very much through pilots that are proving that our adherence is because of intentional work on our part is better. I think intuitively, there's a sense that if people use their CGMs, use the data, going to manage their diabetes better. The next step for us is to prove that we're actually having an impact on anyone's C scores, which we think is going to prove to be the case. But if we're able to make that case, and we're able to make that case to payers, that should induce them to want to do more business with us. Speaking as a former payer, it would for sure matter to me if my CGM supplier also cared a lot about outcomes.