All right, good afternoon, everybody. I had to check the watch. Welcome to the Stifel 2023 Healthcare Conference. My name is Matt Blackman, a member of the Stifel Healthcare Equity Research Team. Thank you for joining us in the room, on the webcast for this session with the management of Adapt Health. Let me just give you a quick sort of three or four lines on the company, and we'll go straight into a fireside chat format. As always, questions from the audience are encouraged. Just raise your hand, and we'll try to feather those questions in where appropriate. So just for background, for those of you that may not be familiar with the story, Adapt is one of the largest providers of home medical equipment and supplies in the country.
A broad portfolio, think sleep therapy, diabetes, home medical equipment for patients discharged from acute care, other types of facilities, oxygen, wound care, et cetera, et cetera, et cetera. Really pleased today to have key members of the Adapt management team. To my immediate left, got Jason Clemens, the CFO. To my far left, Chairman and Interim CEO, Richard Barasch. Maybe the easiest place to start is give us an update on this interim status. I know we've had some fits and starts.
Well, some fits and starts.
Maybe talk to us about that.
You know, our goal is to have this seat filled by the end of the year. We're talking to good candidates, and this is a great job. You know, quite candidly, it's been kind of fun for me to be back in the CEO role temporarily.
Okay.
But the
I was gonna ask how fun, but okay.
No, no. No, no, you know, look, we've had our... but I think-
Well, how fun in the context is this something you would consider doing more full-time, or no, it's you-
I would never... I'll do this as long as the board wants me to. So I'm not in a rush. I'm not, you know, I don't have travel plans to, you know, Bora Bora-
Yeah, the day after. Yeah.
in January. So I'm good. But what has been fun for me and interesting and hopefully helpful to the company is I was chairman for a good, you know, for a while, and as a board member, learned quite a bit about the company. Moving down into the weeds, I learned a lot more, and have learned that this company has, you know, phenomenal potential. You know, we've the company's grown and made more money every year since it went public, which I think is a fact that is not as widely known as it should be. We've become, you know, sort of the largest and, well, I won't say dominant, but a dominant player in the Sleep business.
We have a very vibrant Diabetes business, where we had some missteps, but totally solvable, and feel that Diabetes is going to be a big part of our future. Our post-acute business, as you've talked about, is an absolutely critical business for people coming out of the hospital, and I think we do a very good job. So, you know, I've learned quite a bit, and, you know, I was part of some of the, as you say, mishaps on the CEO search. That was behind us, and we're looking forward.
Yeah, and maybe it might be helpful, Richard, because you've got a tremendous background, obviously, in this industry. Maybe just to frame for folks that-
Yeah, I was chairman and CEO of Universal American for, I don't even want to say how many years, but it was more than two decades. We shifted from being an Accident & Health insurer, and I think there are some people in my era in the audience, but the key date for us was the passage of the Medicare Modernization Act in 2003. We pivoted from A&H to Medicare Advantage and Part D and grew to... You know, our, at our peak, we were $5.5 billion of revenue. We were the second-largest Part D carrier. Sold that business to CVS. We also had a very vibrant Medicare Advantage business, which we sold to WellCare, ultimately Centene. So, you know, I've been a public CEO for the better part of my career.
Um-
Returned well to our shareholders.
I think that was the point we were trying to make.
Yeah.
is correct. So what I thought, having sort of pushed through the, the CEO search question, I thought maybe we'd sort of frame this conversation in, in three sections. Let me sort of go through the, the third quarter, a little bit of a recap, some of the puts and takes. It may give us an opportunity to also talk about some of the individual segments. Again, puts and takes and how to think about the outlook. Then maybe talk about some of the more evolving, strategic elements of the story. I think, in particular, the, the value-based contracting, that is now something that you had talked about for several years.
We're now visibly seeing one particular instance, and so I wanna have you guys help frame that opportunity, what it means for the company and, more importantly, how much more opportunity like this is still out there. And then, if we have some time, part of the story historically has been one about inorganic activity. So, certainly touch on where your priorities are, I think, in general, for cash today, and whether or not we should be thinking about the company becoming more or less acquisitive over the next several years. So that's the idea. That's the outline. Again, if there's anyone that has a question within that context or outside, please don't, don't hesitate. So let's start off. We'll talk about the third quarter.
Sure.
Let's just sort of tackle, you know, really sort of the two bigger pieces of the business and, you know, maybe for lack of better words, Tale of Two Cities, in some respects. We'll start with Sleep. Let's start with the strong part of the business, and particularly in the context of what had been a very challenging last several years for the industry, not Adapt specific. Talk about maybe what you saw in the quarter in Sleep, what that means relative to the issues you're overcoming, and the ability to get after what had been a pretty substantial backlog of patients. Start there, if you don't mind.
Sure. Sure, Matt. So, so I'd start with, you know, you know, meeting that backlog, which, you know, we're, we're confident we're now through the tail end of backlog of patients, you know, setups and scheduling has returned to normal. You know, essentially industry norms and what we've seen over the years. You know, in the first and second quarter, I mean, we had record setups in both quarters, about 130,000 patients in each quarter. You know, that really marks, however, that tail end of backlog as mentioned. And so in the third quarter, as expected, setups have come off a touch, and we will continue to see that over a couple of quarters, as we return to more normal levels. I would-
But you get to monetize it now with the resupply setup.
That's where I'm going.
Okay.
Exactly. So, you know, those big setups mean more and more in, in the resupply census, now over 1.5 million patients. So that, that set company records. We set, we set company records in, our percentage of, of electronic ordering and, and literally pulling humans out of that equation. You know, those investments are, are, are paying dividends for us. And so overall, I mean, yeah, Sleep was... I mean, what's not to like? I mean, it was a great quarter. You know, separately, it was our first introduction of starting to measure and survey, GLP-1 usage. You know, we are... Look, we set up a lot of patients, so, like, that, this data is going to build pretty rapidly.
For the month of October, you know, 7% of those Sleep setups, you know, those patients had been prescribed a GLP-1 for either A1C management or for weight loss management. Yet they still were set up on a CPAP.
Do you have any sense of the duration of treatment of those patients? How long they've been on drug?
That's a great question. It just goes to the question we were talking about in the hall.
We were.
Yeah, this is just, this is new.
Yeah.
We are starting to, as scientifically as we can, to survey our membership and create some longitudinal data.
To control-
We're not quite there yet.
Yeah.
We're just... You know, we've got some impressions of what we think is going on, but now it's, over time, we're going to be able to track it.
You'll be able to track the resupply, the attrition-
Yeah, correct.
... that kind of stuff.
Yes.
Yeah.
Exactly.
7% of the new starts are on the GLP?
Correct. Yep.
And maybe, if you could just take a step back, because I think the power of this may be underappreciated, that you've now shifted from sort of the, you know, filling out the, the census installed base, and now really being able to monetize on the recurring revenue side. Just how that revenue sort of model shakes out-
Mm-hmm.
You know, these are patients that are on product for a long time.
Yeah.
These are not like oxygen patients with a limited lifespan. So just talk about the value of a patient on an annual basis-
Sure.
... now that we're in that sort of part of the story on the login performance.
Yeah, sure. I mean, you know, the average length of stay is about four years for a patient, once they're on CPAP. You know, the first year is really key, getting the patient adherent in the first 90 days, which is required for billing standards. And so we've got 350 Sleep coaches that are—you know, that's what they do all day long. They have workflow that they manage, that prioritizes who to connect with, the questions to ask, how to help the patient, whether their mask is fitting incorrectly or they got to come in to get refit, you know, a variety of reasons.
And, you know, across the industry, about 50% of patients that start on a CPAP are on that CPAP a year later and actively ordering resupply a year later. We, we do, we do a bit better than that, but that's, that's the general expectation. The, you know, in terms of the setup, you got to buy the equipment, you got, you know, you got facility, you got vehicle, you got people in setting it up. But once you're on resupply, you know, the operating expense of managing that resupply is just not that big. And we've got centralized operations in Nashville, and, and, you know, several hundred people there in that, that operation center. The tech we use is very good, and it's integrated across our platform.
And so, you know, we're very pleased that on average, a patient will reorder from us three times a year, between 2.9 and 3 times a year. And the average order size is about $200. So obviously, you got cost of goods on that, but outside of that, you know, there's no CapEx, it's cash.
Yeah.
This is cash that's dropping down and into free cash flow, and a part of our story as we're continuing to generate more free cash flow.
And so-
So, let me... If you don't mind?
Please.
Because I think there's another aspect of it. There's the recurring revenue, but I think the installed base of more than 1,500,000 people who have OSA and are interacting with us 3 or so times a year creates, in my mind, an amazing opportunity to both generate data and to do things for these people to help their health, and to be able to generate data that's helpful to providers and payers.
Yeah.
So we're at inning one on this, you know?
Yeah.
We know, for example, that a very large percentage, 25%-ish, 22%-ish, are diabetics also.
Yeah.
So we're-
Cross-selling opportunities.
It's selling opportunities, but it's also managing chronic comorbid chronic conditions at the same time. I'm a manage-
Is that something you can pitch to a payer as like?
Not yet.
Okay.
Because we haven't proved it yet.
Yeah.
But we're gonna be able to prove it.
Yeah.
You know, I'm an old managed care guy, so not old, but a veteran managed care guy. And you know, so I see just phenomenal opportunity in our patient base.
Okay. I'm curious, Jason, obviously, with the supply headwinds in general in PAP and-
Yep
... supply chain issues overall over the last couple of years, a lot of your CapEx has gone to buy up as many PAP machines.
It did.
Sounds like you're in a good spot on that front in terms of inventory and supply, or?
Well, from a supply perspective, we're in a great spot.
Yeah.
I mean, and really, that's across the product portfolio. I mean, we're, we have the ability to get what we need on patients to meet the demand we've got. So that's not a challenge as we stand here today. We are still working off some of the stockpiling that we did starting late Q3 last year and rolling into the first quarter of this year.
That'd be a higher cost inventory that you're working through the P&L or?
Correct. Yeah. Well, the CapEx.
Yeah.
It's CapEx.
Okay.
So it kind of works through on the patient depreciation line.
Gotcha.
But you're now seeing that effect as we, you know, as a percent of revenue, CapEx was 12% in the first quarter, stepping down to 10.6, I think it was, in the second, and now down under ten to a 9.6, 9.7% of total revenue. And so we, we feel confident, we reiterated our commitment of 10%-12% of CapEx for the full year, and we are, we are getting to that point of achieving a more steady state run rate for capital expenditure.
And then just on the OpEx side, you know, obviously, you had a lot of backlog to go through. I don't know, did you make incremental investments on, you know, folks to get out there and help set things up to sort of plow through that, and now maybe that investment can be redeployed elsewhere?
Yeah. Yes, and it's redeployed to converting, Humana patients-
Okay
... as fast as possible.
But there is an incremental spend. This is just sort of moving from one place to another.
Yeah, left pocket, right pocket.
Yep.
I wouldn't think of it as cost that comes out.
Okay. So how do we think about the longer-term growth profile of Sleep? And we can sort of put GLPs to the side for a second. Still a high single digit, you know, maybe 10% at some point, type growth mark, is that the right way to think?
From your mouth to God's ears, so 10%. But yeah, a high single digit, we think that is still the right way to think about TAM and growth. I think others in the industry, you'll hear similar views from them. And frankly, a huge part of that is just the massive underdiagnosed, you know, population. I mean, we estimate about 30 million Americans living with OSA, only 6-7 million with a CPAP.
Yeah.
So they've been diagnosed, they've been prescribed, they're on active therapy. You know, so as that awareness continues to build, whether it's through, frankly, GLP-1s or Inspire or through just wearables and more focus, we think that the big picture TAM is gonna be very healthy. Now, for next year, we're facing quite a comp in a 16%-17% growth this year over prior year. And so that's something to just acknowledge and be aware of, that we do expect tempered growth over that high comp year-over-year. But sequentially, I mean, we expect to continue to compound patients on both the rental and the resupply census, and continue to compound our revenue in the Sleep business.
And look, I'm pretty ignorant. I'm a med tech analyst, so and these basic concepts, probably go right over my head. But I'm just curious, how do you take share in this segment? What, what is that mechanism?
Customer and referral source by customer.
Okay.
But you alluded to another question about value-based sales, enterprise sales. That's a way to increase our growth rate chunkier, as opposed to the one-on-one referrals. So we have... Our ground game is working. It's, you know, we're doing better, we're using technology, we're out there getting more efficient. We're building our manpower, expanding our regions, especially in D iabetes. But we are very interested in enterprise sales as well. Humana was a great first step for us, but for a payer to bring things into kind of one place, one throat to choke. You know, DME, HME is not a huge cost, relatively speaking, let's say, for an MA player, MA company, but it is a disproportionate number of complaints.
Mm.
It has an outsized importance on preventing readmissions when people go home properly. So even though it's a small cost, it has major effects on for Medicare Advantage and payers. So it's in the interest of payers to have a more efficient base of providers, you know, 'cause there's still lots of mom and pops and, you know, so we're optimistic that there'll be more chunkier sales going forward.
Okay. The last question, obviously, you dedicated a lot of CapEx to buying up CPAP machines, now seemingly behind us. Where do you redeploy? Where is that investment going now? Is it... I mean, I'm just making things up. Is it more POCs or... Just help me understand how you think about redeploying.
Oh, some of our competitors are in the room now. Not going to give away all the secrets.
Okay.
That's right. So, look, there has been some CapEx spend associated with Humana - Start.
Okay.
I mean, obviously.
That's right.
You know, there's a lot of oxygen to be transitioned as part of this agreement. You know, that's really, I guess, where CapEx is going these days. I think, though, that as CapEx, as a % of revenue or just in general, just becomes a smaller part of the pie, one, due to just profile change and just more sales revenue versus rental revenue, and that compounding nature of resupply. As well as, just, you know, the investments we've made in Oracle and in digitalizing the fixed asset fleet, buying smarter, you know, tighter bands on thresholds, you know, just better tracking of equipment in general. I mean, we expect that to drop to free cash and continue to compound there.
Okay. So let's, let's talk about Diabetes. Maybe helpful if you give a quick framework of what the Diabetes segment is-
Sure.
you know, the headwinds have been over the last year or so.
Sure. So, you know, I'd say first, if you think about almost different portfolios inside of the Diabetes category, you know, I'll start with the largest and most important is within CGMs. So we're a distributor of CGMs, both Dexcom and Abbott, also some Medtronic, other suppliers, but overwhelmingly, it's Dexcom and Abbott are manufacturing partners. We distribute in the HME or the medical b enefit channel, as well as the pharmacy channel. We have a 50-state URAC-qualified mail order pharmacy. So that has been, to date, a small part of the business, and frankly, more of a mitigation tool if and when a payer shifts their channel distribution for us to retain the patient on census.
You know, we're continuing to do work to not just rethink, but to redefine our sales approach within pharmacy. We are in active discussions with manufacturers as well as payers on you know, on starting to invest more into chasing those patients, 'cause we think there's value in aggregating patient lives and managing the chronic disease state, whether they're on a... You know, regardless of how you're getting reimbursed for the CGM. Separately, we've got a pump and pump supplies business. Within that product category, we distribute all the major pumps, including Tandem, Medtronic, Insulet's products, most recently OP5, and also some of the newer pump products we've got contracts with.
We're doing a little bit here and there, but in general, we are a large Tandem shop. You know, our pump revenue was about $160 million last year and will be about $120 million this year. And so as Tandem's U.S. shipments have been down 10-11% or so a quarter... You know, I might be referencing an analyst on Wall Street with that. But as that occurs, right, I mean, we're, that, that's impacting us.
Yeah.
I mean, you know, now the proliferation of tubeless pumps from OP5, I mean, that is changing the dynamic and the sales cycle. Now, we think that there will be headwind next year. We do think it will slow down versus what we saw this year, because, one, Tandem's just continuing to come with new products, lighter, you know, somewhat less cumbersome products, as well as we are distributing OP5s in our pharmacy channel, and that is continuing to build. And then there's compounding with that as you're continuing to ship the resupply-
Right.
... comes with it. So, I mean, that's a framework of just the kind of the economics of each of the products that we participate with.
So how scalable is this pharmacy opportunity? Rather than it being sort of a, you know, a defensive strategy, is there a way to sort of really make it an offensive strategy? I-
I mean, there's a couple of ways to look at that. I mean.
And the only thing I would bring up, too, is obviously the entire CGM space is now almost entirely through the pharmacy. We'll put Medtronic to the side.
Well, Medicare.
For now, on the basal side.
Yeah, and Medicaid still has a ton of opportunity.
Fair.
... on the DME side, so.
Yeah, and we'll talk about basal.
Yeah.
But we just heard yesterday that Beta Bionics, a small upstart-
Yeah.
... going through the pharmacy.
We work with them.
Okay.
Yeah, yeah, we work with Beta Bionics.
All right. So, but yeah, how do you scale that?
Well, I-
Or can you?
... think that, well, you certainly can. I think that... Look, is there huge economic value today of chasing a script paid, you know, Express Scripts or, you know, Caremark, et cetera? I mean, no. I mean, the economics for someone like us today is not great on that. Now, there is opportunity as you bring volume, you know, get, you know, repriced on cost. You know, that is a prong of the strategy. But we think some of the bigger areas are... Look, there's a number of Medicaid offices that within 2023 have shifted to a pure pharmacy distribution channel. And then, you know, with the MCOs, you know, that carries through.
Look, this is a population that, you know, the Medicaid offices are chasing cost, obviously. But when you start thinking about outcome and what we're able to bring to that table, even if distributing through the pharmacy channel, but managing the data from the CGMs and the devices to assist that patient on, one, staying compliant, as well as, helping them with their chronic disease state, look, there's opportunity there. And so, you know, it's certainly more of an offensive strategy than what we've done historically in defensive strategy. But, I mean, ability to scale is that, that's not so much the issue. It's more of picking the right places to play-
Yep
... which is, again, what we're... That's, that's what we're working on.
You broached the subject of Medicare, and obviously, Medicare patients have to go through the DME. So what are you seeing in the early, to the extent there's something to be seen in the early uptake-
Basal, basal.
The uptake and adoption of the basal indication?
Yeah. We'd be cautious to say that we've seen much yet. I mean, it's still pretty early in the game.
Would you be able to tell what that patient, you know, in terms of...
Well-
... whether intensive or?
It's nuanced, depending on the diagnosis, you know, ICD-10 diagnosis code, et cetera, et cetera. I mean, it is nuanced. We are seeing more Type 2 patients than Type 1 patients than we have previously. Now, is that all basal? You know, we... Again, it's too early for us to comment on that. But, you know, we are putting out more Type 2 sales orders than we have historically.
Okay. So, how do we think about the Diabetes business here? And, you know, maybe it's not the right way to phrase it-
Mm.
... but it's sort of, you're in a period of sort of transition, in some respects or-
I think that is the right way to phrase it.
... or evolution, however you wanna frame it. You know, in the nearest term, what's the best way to think about your ability to grow that business at a rate better than what it's, we've seen in the last sort of-
Well, part of the problem, part of the issue now is we're outrunning some old issues.
Yep.
You know, the business was heavily indexed to commercial. That shifted faster, so-
You're close to the end of that, right, mix shift, I think? Or remind us again now.
For the nationals, yes.
Yes, okay.
Now, but in pockets, right? I mean-
There's still-
Yeah, there's been 5, 6-
There's still stuff to work through.
5 or 6 Medicaid offices this year have shifted.
Yes.
So there will be some to chase.
That's right. So we're still chasing a little bit out of this.
Yeah.
Once we hit a good spot-
Steady state.
... we should grow at least as much as Medicare.
Okay.
Whatever that turns out to be. You know, Medicaid is gonna be mixed in terms of... They're not, I think there's still opportunity in the DME benefit, but only if you can offer value-
Yeah.
... in the use of data.
Yeah.
So, you know, that's what our job is to do. And our job is also to convince manufacturers that we're adding value and, you know, be able to take something different than the margin that might have been available. So I think there's a view that adherence on the pharmacy channel isn't as good as adherence on the DME channel. And, you know, the manufacturers have to think about that, too. So, you know, this is an evolving issue, but the key for us is we can't just raise our hand and ask for more money, we have to add value.
Yep, makes sense. We got 3.5 minutes. Let's talk about something exciting. Not that this wasn't exciting.
Look, look at the audience, they can barely, you know, contain themselves.
Keep feeding them steak, so I think everyone's passed out. Let's talk about the Value-Based Care contract opportunity, and use, I guess, Humana as sort of a perfect case study.
Yeah, so there's sort of two ways to think about this. One is, it's really value-based buying, as opposed to Value-Based Care.
Gotcha.
That's fine. I'm not, you know, I'm not minimizing it. It's a way for a payer to aggregate and do a better job on reducing pain points. That's probably the main reason why someone, you know, a national payer would want to do this. More efficient, better CAHPS scores, better patient experience. And we can provide that. We can, you know, we're also gonna be much better than they were about giving them good data, 'cause, you know, they're getting data from one place as opposed to multiple places. Important. So that's the value-based buying side. The Value-Based Care side is the use of data to help modify downstream effects. In Medicare Advantage, you know, monitoring A1C scores is a triple-weighted Star category. That's money, it's actual money.
So if we can help a payer with their, with those scores, that's like, check, check, check. CAHPS scores are quality, quality and, satisfaction scores. And that has nothing to do with the fact that if we do a good job, we are going to make outcomes better. Hard to manage, hard to, hard to track, but all doable for us. And we w-
Mm-hmm.
We wanna be as the partner of choice for payers, not just payers, but risk-taking primary care groups, systems, and just have a much richer offering than just CGMs.
Got it. Started off a little slow, maybe is the way to phrase it. Maybe just give people a sense of what you're sort of working through here, and when you think, and not the right way to phrase it, but sort of be at fighting weight, where you got everything you need, and you got everybody transferred, and I assume this would be a point of learning for future potential deals?
Yes.
Okay.
Absolutely.
Yes.
Yep, absolutely. Look, as we exited the third quarter, we had about 19,000 patients to transfer. You know, we're transferring about 1,000 a week, a little more than that now. So just, you know, run the math. We will be at... That's to support the words of, we believe we'll be substantially transitioned by the end of the first quarter.
Mm-hmm.
You know, the work required to do that at this stage, like the buyouts with competitors are essentially complete. We got some deals done, some deals we did not get done, that was some of what we discussed on the call. When you buy out that equipment, that's a big bang, you go from 0 to 100 of... You now have the equipment that the patient's been on. They might have been on that concentrator for 3 years. And now, you know, you've got it on your census, and it comes with the patient data to support the patient accounting, that's obviously required. As part of that, in cases where you don't have a buyout, yeah, I mean, you're working literally patient by patient.
Let's take that same patient that's been on oxygen for 3 years, you know, you need to work with that referring physician office, which you may or may not have a relationship with.
Yeah.
You know, so it's cracking open that door. It's essentially a new order. I mean, you've got to process the documentation for the oxygen saturation scores from three years ago, that substantiated the referral. And it kind of goes on and on. So it's the devil's in the details at a patient-by-patient level, but you know, the good news is, we've just now topped 1,000 per week. Yeah, we're deploying tremendous resource against this, because it's in everyone's best interest, the payer, the patient, us, to get everyone fully transitioned as fast as we can.
Yeah. Okay, I think we went a little bit over-
Good.
But that's fine. Appreciate it.
Thank you.
Thank you so much.