AdaptHealth Corp. (AHCO) Earnings Call Transcript & Summary

All right. Good morning. Welcome back to the Barclays Global Healthcare Conference. My name is Tiffany Yuan, I'm on the managed care and facilities team here at Barclays, and I'm pleased to be joined on stage today with Jason Clemens, CFO of AdaptHealth. Welcome.

Good morning. Thank you.

So I wanted to start big picture. Adapt has evolved a lot over the past few years. You've built a variety of capabilities across Sleep, Diabetes, Respiratory. Could you maybe just start with a high-level overview of the key segments, and what you view as the main growth verticals of the company?

Sure. I'd be happy to. So very recently in the latest quarter, AdaptHealth moved to a segmented structure. This was triggered as a result of our new Chief Executive Officer, Suzanne Foster, who's come on board most recently from Danaher. Her view was to run this business in 3 core segments, the first being Sleep Health, which represents about 40% of our revenue, round numbers; Respiratory Health, about 20% and Diabetes Health about 20%. We have a fourth segment that we're calling Wellness at Home, which is essentially everything else. It is -- it includes DMEs, so the traditional bed metal of the industry, wheelchairs, beds, walkers as well as supplies to the home, things like urology and ostomy, incontinence products with the idea that the Wellness to Home segment is feeding ancillary revenue into the core, into those 3 core segment. So in terms of the outlook and the growth drivers for Sleep Health, it's a very it's a very large market. I mean the TAM, essentially for Sleep are Americans with obstructive sleep apnea. It represents about 32 million to 33 million Americans that have the chronic disease. However, only 6 million to 7 million are actually on therapy for treatment of the disease, which is primarily CPAP and BiPAP therapies that AdaptHealth is the nation leader in. Past the growth there, I mean, certainly, you got population growth. There is just the underdiagnosed nature of OSA that with more awareness, wearables, the various watches in the market and other co-therapies are coming to market and it's just generating more awareness in general. And so the demand for Sleep Health, sleep testing and the products that we offer continues to grow very steadily. And so we've been glad to participate in that. As it relates to Respiratory, this is really aimed at treating patients with advanced respiratory illness, predominantly COPD as well as other advanced respiratory disease states. Americans with COPD of about 20 million patients, and again, an under-diagnosed population there as well. Estimates are around 14 million to 15 million patients are actually on therapy for COPD. In terms of growth for this part of the business, it's fairly muted year-over-year growth depending on the year, we see typically 2% to 4% unless there's anomalies. And the revenue, however, continues to compound very slowly. So we typically add about 1 million or 2 million per quarter sequentially into this line of business. The reason is that COPD is often discovered upon flu season or COVID season. Patients come in and they present to the hospital with a respiratory problem, they get stabilized and oftentimes patients are determined to have underlying COPD. That may call for a nebulizer with neb meds that come with that nebulizer to heal the lungs, and we offer all of those products. The challenge with COPD is it only advances and there is no cure. So at some point, the patient will need oxygen, either stationary or portable or both at home and then ultimately, the lungs won't ventilate. So nonevents of ventilation will be required before the patient goes to an acute facility that's going to have invasive or mechanical ventilation. But we're there across the entire patient journey. So particularly as we find patients earlier in the disease state, we're there to help treat them and care for them, and that can be a multi-decade journey with the company. So we get to diabetes, also a very large market, highly under diagnosed. Our TAM for CGMs and for insulin pumps that we provide patients. It's around $7 million of the -- depending on how you look at it, 30 million to 80 million diabetics in the U.S. Access has continued to improve there. And so it's a large and growing market. We've talked about some internal operational missteps that we're in the process of correcting, and we've shown some good progress in the latest quarter. But there's a lot of that -- of growth in that market as well.

Okay. Got it. So in 2024 and 2025, it sounds like you're making a lot of meaningful investments across the business. You're expanding your labor force. You're also increasing your exposure to capitation, and you've guided to flat margins year-over-year in 2025. Can you maybe walk through the puts and takes to achieving flat margins in '25?

Margin percent. Yes, yes, for sure. So I mean, first on the top line, we're guiding a very modest 1% growth. What we've said about in terms of segment performance, we expect about a point out of respiratory. The reason for that is we're coming off a full year of our capitated Humana agreement across 33 different states, and so it's essentially a tough comp. We said Wellness at Home. We expect to grow about a point that would typically be a little bit higher, but we've just recently completed a disposition of custom rehab assets, which are essentially motorized wheelchairs, and so there's been a slight compression that we're expecting, and we're working through a couple of other dispositions in that segment. Diabetes, we've said that we expect it to be down year-over-year, that certainly now we're aspiring to. But despite Q4, a very, very solid performance in the segment. We're not signing up for too much until we get a few more quarters behind us of getting back to growth mode. And then we expect Sleep to make up the rest. I mean, Sleep should have a pretty decent year -- year-over-year. So certainly, you've got the flow through of margin there. We have made key investments, most importantly, in people and leadership. Suzanne, upon coming in, I mean, we've got 2 dozen kind of senior director and folks, including a couple of chiefs that have come in. They've worked with Suzanne previously at either Medtronic or at Cardinal when she was running their at-home business. Cardinal Health as well as Danaher, I mean, folks that maybe have Danaher and previously and have joined AdaptHealth. And so really high-caliber medtech leadership that's come into this business that this is a new thing for us. Historically, we bought a lot of DME companies and rolled them up, and those folks have gotten promoted and run larger parts of the business. So this is a new approach. I'm very optimistic. Certainly, Suzzane is very optimistic that like just the caliber folks that we're bringing in are going to prove for further margin expansion as we get to 2026. Secondly, we are making key technology investments. We are running what we're calling some experiments with artificial intelligence. We've contracted with some very, very good and talented folks in that area. Right now, we're really focused on intake, which is essentially the referring physicians prescription and supporting documentation that comes to our company as we produce a sales or a rental order and ultimately work to convert the patient as a setup and on to our census. Well, the amount of paper or e-fax that's still floating around this industry, the sector is astounding in -- here in 2025. I mean our company ingests over 5 million pages of e-fax -- fax or e-fax documents every month, which again, I think is astounding, as well as a tremendous amount of e-prescribe data that comes into our organization. We literally have thousands of humans, some onshore a lot offshore that are responsible for taking this unstructured data. Some of this is hand written scripts and notes, and they need to turn that into structured data and information to create sales orders and processes downstream in the company. And so you can imagine how AI can unlock a tremendous opportunity for us there. We're not committing to margin expansion in '25. Due to this, we are committing to pay for these new executives as well as some of the technology with steady margin percent in '25 with an expectation that '26, we'll start moving the needle on the P&L.

Got it. Okay. Moving into the segments now. I wanted to start with diabetes. You mentioned that you're implementing a handful of initiatives to return to organic growth in that segment. Can you maybe walk through the latest progress on those initiatives and just give us maybe a directional sense of timing to return to organic growth?

Sure. Well, in a simplistic way, there's really 2 big levers. And when you think about the diabetes revenue in a given quarter, most of it, 85% to 90% of it in a given quarter, it's produced from patients that you've brought on to census as a new patient in previous quarters. So it's what we refer to as like either recur or resupply. Secondly is new starts, right? So that's new patients that you're getting from referring providers coming into your funnel that will represent 10% to 15%, depending on the quarter. And so the first thing we did when Suzanne came in, and we were taking a deep assessment of the Diabetes business, was to understand the market growth has been pretty good with CGMs in general. There has been like channel pressure, whether that is reimbursed through a medical benefit versus a pharmacy benefit. So that has been a challenge. In past years, that will continue to be a modest challenge in '25, but much less of a challenge than we've had in last year or in years before. And so it's really about getting that resupply census improving your retention rates and continuing to service those patients. We made significant changes in leadership in the segment in about mid-September. And so one of the things we did was we lifted up all of the resupply operations, and we moved it into our Nashville Center of Excellence that focuses on Sleep resupply. So that team, it's about 1,000 people. They're responsible for 1.66 million patients a year within Sleep. And so I mean, they've been in this for some time, about 15 years, that team has been together. They've got specialized technology that we know precisely when that patient is eligible for certain products based on managed care contracts and their history -- their historic ordering patterns as well as where their payments are, are they up to date or are they ready for and eligible for new products. So that shifted in late September. Pretty amazingly, for the fourth quarter, we had the best retention we've had in our diabetes census in over 2 years. So that was a big deal. So that was the first green shoot. We're not claiming victory, but in terms of stabilizing the resupply census, that was great progress. Now the reason they were successful is that they had diagnosed some missteps that we made operationally, again, previous management, but at the end of the day, I mean, we're all accountable for this. Auto dialers, which are used to connect with patients and identify them as eligible for new product that had run a little a muck. We were over dialing and basically pestering patients a lot of blocked phone numbers, things like that. And then operationally, that team was not reconnecting with patients to engage them -- to reengage them. So this team -- this isn't rocket science, but they did things like dropping postcards to every patient that's ordered in the last 12 months. We receive a staggering amount of inbound phone calls just from dropping postcards to patients in the mail and say hey, you're eligible resupply. Hey, we should talk, having trouble getting a hold of you. And so there are other things that we did, but that is an example. And again, we're in a much better spot on retention. Now when you're pestering or overcalling your patients and your phone numbers get blocked, like the patients are never going to communicate to you that they're upset with you. They are going to communicate to their doctors. So the next time they go in to see docs, they will complain if we're about AdaptHealth, and then that obviously is a challenge in your sales. And so we think -- I wouldn't say we've troughed yet on resupply, but we're certainly turning the corner. It will take a little longer in the sales front. Frankly, we got leadership flying around the country and doing sales right along, apologizing, asking for another chance with referring providers. And we saw some benefit from that in the fourth quarter. I mean, sequentially, our new starts were up in Q4 versus Q3, and it's been some time since that's happened. So again, green shoots there as well. So I mean, those are the 2 big things that we're looking at, certainly, a lot more we're looking at. But so far so good. It was a very decent quarter in Diabetes. We're hoping for a few more to come before we start getting recommitted to growth to our shareholders, but we're hard at work on it.

Great. Okay. Moving on to Sleep. You talked about the strong sleep demand environment. We got FDA approval for sleep apnea for GLP-1 in December. How are you kind of thinking about the longer-term impact?

Collectively, not we.

Yes, it's not you, exactly. How are you thinking about the impact GLP-1 company have...

So let's start with the impact that GLP-1 has had on our business up until there's up down qualification at the end of December that you mentioned. So we started measuring a lot of different things, but primarily measuring our patients that come in for new sleep setups. So again, we're by far the largest in the industry. We'll set up on average about 40,000 new patients every month on a CPAP. And so from over 1.5 years now, we've been measuring through surveys is the patients been prescribed GLP-1. And why has that occurred if they have been is it for diabetes management is for weight loss management et cetera, what brand of GLP1 are they on, and what's their frequency of usage. Like we're collecting a lot of good data about our patients. When we first started the survey 1.5 years ago, only 5% to 6% of patients were coming in on a CPAP and also on a GLP-1. Today, for the fourth quarter, that's up to 15.3%, up a touch from Q3, up quite a bit over the prior year. We expect that to continue, right? As GLPs, the generics are out there and there's more availability. We do expect that to continue. What we found, which is interesting, it aligns with what ResMed has said about their expectations is that a patient that comes in for a CPAP and they are on a GLP-1 they're actually more adherent than a patient that's not on a GLP-1. And it's not by a small amount. I mean it's a material difference and an improvement. And adherence matters because across the industry for every 10 patients that gets set up on a CPAP in a given month, you'll lose 3 of them, 30% of them 90 days later because you need to prove with data and adherence in our sleep coaches and our competitors do this too for billing purposes, you need to prove that the patient is compliant and they're adherent to the therapy. So we do better than that 70% adherence. We think we're the industry leader in adherence. But if the patient is on a GLP-1, it's actually even higher which is a big deal because over time, that's more patients, they're ordering more resupply their own census longer. So it's that compounding effect of our recurring revenue model. In terms of where that goes with Zepbound. Unclear, we'd say that so far, GLP-1s have proved to be a modest tailwind for our business. We are capable of tracking Zepbound usage for OSA management. But there's nuance here that I don't know that market participants fully understand. Like in our company, for example, we have a large benefits membership for employees and spouses and family and whatnot. Well, I mean, we will pay for a GLP-1, particularly if the patient is a diabetic type 2, and they're using a GLP-1 for managing their diabetes. So we don't have the same policy necessarily for strictly weight loss. And so like our point of view on GLP-1 is used for potential OSA improvement is that the studies that will be published and that will go into all the marketing that we expect is coming when you could see a 50%, 55%, maybe a slightly higher reduction in AHI, which is the apnea-hypopnea index, CPAP is like 87%. And so for our patients, I'm not saying we will or will not sponsor GLP-1 for OSA. But at the end of the day, the CPAP is the gold standard. The American Academy of Sleep Medicine continues to reiterate that it's the gold standard for OSA management. And so right now, our view is that GLP-1s continue to be a very modest tailwind for our business.

Got it. Okay. And then finally, on Respiratory. You mentioned COPD presents most commonly with flu. We're seeing a very historically high flu season...

We sure are, yes.

Can you remind us what was assumed in 2025 guide around flu, and just how we should think about it?

Sure. So when we reported Q4, I mean, admittedly, our Respiratory numbers were lower than we expected for revenue. And the reason for that is that the flu season started significantly later than it typically does. Well, to your point, we've -- the timing has shifted, and additionally, it's a very busy flu season. So we guided just a point of revenue growth in respiratory. We did not assume this big of a flu season, quite frankly, the read-through is maybe we'll do a little better in the first half in Respiratory than we had originally thought. But this is largely timely related. And so big picture, this isn't a huge impact because it really only affects your new starts. The other 330,000 patients that we have on oxygen and 20,000 that we have on ventilation -- these patients aren't exactly out and about too much. So they're exposed to flu. It's not that big of an impact. So it's likely to move the needle in a positive way, and we'll see certainly when we report.

Okay. Got it. I wanted to shift gear a little bit here to some policy items. Obviously, it's been very topical for the broader space. Maybe let's start with tariffs. Can you just help frame the exposure that Adapt has to tariffs? How much of your products today are sourced from that...

Frame it for last week or yesterday or tomorrow or...

Yes, just general.

Sure. So our cost of products and supplies, it's about $1.3 billion a year. Our top 30 suppliers represent 98 roughly percent of that spend. And so we've gone through and conducted an assessment of not just where the product is manufactured, but where the components of those products are manufactured. As expected, I mean, we believe pretty limited exposure to Canadian tariffs. China or Mexico is a different story. And again, this is our best estimates today or a couple of days ago. There could be exposure up to about $10 million to that $1.3 billion of spend. And again, we've made some assumptions on certain componentry can swing pretty quickly from China to Vietnam, and that might not be a problem. Some components in Mexico manufacturer would either have to figure that out. But that is our current view of a bad case scenario. For '25, our contracts are largely already locked in. And so it would take a lot to kind of undo that and figure that out. So that 10% is kind of our point of view in 2026, but that doesn't assume that some -- if tariffs stay, and it's a real impact that we couldn't pass some of that through on reimbursement or to the payer. And so there's a lot of factors that's kind of the best data that we've got today. And I suspect each quarter as we're reporting in '25 as everyone starts understanding the landscape a little better, we'll be providing an update.

Got it. Okay. And then beyond tariffs, there's been a lot of other policy items floated. It seems like Medicaid funding reform has been the latest that's been in focus. Your financial disclosures show government revenues fairly small at about 25% of total. Could you maybe provide the mix between Medicaid and Medicare, how you're...

Sure. Yes, I mean, Medicaid is in the single digits of our total revenue base. Within DME, I mean, we -- as an industry, we push for Medicare parity by state. There are a handful of states that have -- the Medicaid will pay 100% of Medicare, most don't. And so you're talking about small dollar amounts for DME at already a discounted rate within Medicaid. And to put things in perspective, I mean DME represents about 2% of Medicaid budgets or just payer budgets in general. And so if there's impact, obviously, unclear if there will or won't be. Hospitals, physician services, I mean, certainly, that's where the bulk of spend is. So I wouldn't say we're losing sleep on this at the moment. We're certainly keeping our eyes and our ears open.

Okay. Got it. kind of shifting back to the enterprise here, you extended the Humana contract last year...

We did, yes.

You've also signed on some more capitated business...

We have.

What sort of level of interest you're seeing from MA payers for your services? And maybe how has that evolved since signing...

It's as robust as it's ever been in general, but specifically for capitated contracts. We have made significant investment in people, process and technology to operate these contracts. I mean we've got people that all they do all day long is they price these deals. They pitch part of our analytics team. They pitch these deals to payers as part of managed care operations, and then they manage utilization. I mean we've got dedicated onshore resources that all they do is field calls and escalations from Humana patients. If they're underutilized, we don't care. Our point is to provide excellent service to our capitated partners. We are continuing to refine the Humana operating model that we use to operate this multiyear agreement. And that's essentially we're productizing, and we're pitching that to other payers. The model makes a ton of sense for payers. I mean, it gives them -- rather than hundreds of DME operators in a given state, you can go down to 1. And we're happy to commit to SLAs that we're quite confident we'll be better delivery, better operational delivery, better clinical outcomes than our competitors by doing that. We're also willing to offer a modest reimbursement relief in exchange for a lot of volume at once. And so from the payer perspective, I'm not a payer person, but I think this is a bit of a no-brainer at least in terms of assessing whether this makes sense or not. And like I said, we've got a robust pipe. We're working it very hard. We have not assumed any additional contracts in guidance other the ones that we delivered in the fourth quarter. So stay tuned.

Okay. And are you seeing interest from any other payer types outside of MA, whether that's commercial or Medicaid?

Modest. MA is really the bulk of where we're focused on. Commercial, there's a couple that have expressed interest, and we're actively pricing and negotiating. We'll see where it goes. Medicaid is a little behind that curve, but it makes a lot of sense whether you're a commercial MA plan or Medicaid one.

Right. And maybe just in the last seconds here, you've announced several asset divestitures recently. How are you thinking about the broader asset portfolio from here? Do you think there's still more room to trim?

Well, I mean, there's always -- I mean, I think you're always assessing a large portfolio, like a lot of people in the room do that. I'd say that we sold our customer rehab assets last year. We're very happy to have moved that along to a good, stable operator. We announced a definitive agreement to sell certain incontinence assets. We announced that just happened. We expect to move that asset here in the coming quarter or so. So I'll provide an update. And then finally, we're working on some home infusion that, frankly, we've kind of collected over time of acquiring HME businesses. Pretty great market infusion these days. We're just not a scaled operator. It doesn't drive ancillary business into the rest of our core. And so that's something that we're taking a hard look at, and we expect to provide updates as we go along.

Okay. Got it. Well, it looks like we're up on time, Jason, thanks for your time today, and enjoy the rest of the conference.

Thanks for having us.