discussion, I should say. Again, I'm Richard Close, covering Digital and Tech-enabled Health care and Services here at Canaccord. Thank you for coming to the conference again. Pleased to have AdaptHealth as our next presentation or discussion, and to have CEO Suzanne Foster and CFO Jason Clemens here with us for the discussion. AdaptHealth is a leading durable medical equipment company with a focus on sleep, diabetes, and several other categories. Thank you guys for coming to the conference and supporting us and excited to meet you in person for the first time. So Suzanne, maybe just spend a couple minutes in terms of letting us get to know you. You've been on the job here for three months now, I think?
Not yet.
Or 2.5.
But almost.
But, it'd be great to get your background, your perspectives.
Sure.
On the industry, and we'll go from there.
Okay, sure. So, well, I appreciate that opportunity to speak about myself. On the last Earnings Call, I gave a brief update of who I was, but just to recap, I've been in healthcare my entire career, starting as a practitioner at an HCA hospital, as a clinical social worker, and even 30-something years ago, realized the frustration of discharge planning and handing off the patient to care outside the home. From there, worked in a variety of different hospital systems. I have a law degree, practiced law for a period of time, then went back and got a degree in public health policy, studied, you know, regulatory, population health. Made the move over to the business side, was kind of pulled over in a fast-growing start-up to get multiple back...
You know, lead multiple areas of the business, never intending to get out of the legal lane, but have not gone back. Stayed on the business side through a series of med device companies, of Medtronic, Cardinal, most recently at Danaher, on the life science side. And when I got the call about coming back over to the at-home space, it was an intriguing one, because I do believe that this space has tremendous opportunity with the population aging, the need to decentralize care. There's a real need in the healthcare system for what Adapt delivers, and given the scale that Adapt has built over the last couple of years, puts us in a unique position to do this better than anyone else. So it was an incredible opportunity, and it's been a good couple months. 2.5 months.
Okay. I know you went into some of this on the conference call, your first conference call, but your take or perspectives on the lay of the land once you got inside and on the ground. Can you talk a little bit about, like, the positives and I guess I'm more interested in any negatives that you uncovered, you know, as you became more acclimated?
Yeah, sure. You know, both the positives and the negatives, or I'll say opportunities, that I saw in the first couple months have led to what I'm calling this five-point focus area or action plan that I laid out last week. The first one, and they're in order, a particular order based on what I think will deliver immediately, and the first one I talked about was people in standard work. So I mentioned that Adapt is rich in people with experience. Given the multiple acquisitions that were made over the last several years, there are a lot of former CEOs, COOs, Vice President of Sales, of these smaller med DME companies, but know the industry, and they've stayed with Adapt, which is really great.
But there's also, on that side, an opportunity to do some org hygiene and some marrying of some new talent to think about things differently, and to bring people who have seen it at scale. So right now, we're focused on building out the leadership team, but more importantly, providing role clarity to a lot of people in the organization. 'Cause we had built up, kind of in a siloed or duplication in certain areas that we see that we think that we can make, you know, clean up those, those roles, and provide alignment, which would bring clarity to the work that has to be done. So that's ongoing. That has kicked off. We've added some key talents that I'll talk about in a second, and we're gonna continue to do that over the next 90 days.
In that same point one, we also have introduced this idea of standard work. There is a standardization of how we do things that is going to drive improvement in our performance, but also leverage. And so we are implementing standard work protocols. What are the core value drivers and the KPIs that we're delivering on? How we're calling it One Adapt, how do we improve our processes so that each location across the U.S. is standardized, and then we can continue to improve on that. So that's point one, and that's what we've been doing the last 60 days, and we'll be continuing to do for the rest of 2024. Point two was around organic growth, and there we talk about where we need to shore up our commercial efforts.
We have 700 salespeople that are doing a fabulous job out there today, and they will continue to bring in the referrals and build the relationships. But the two areas that we're under-resourced in is in the area of national account enterprise sales, strategic sales. So we've just brought in a Vice President of Enterprise Sales from the Cardinal Medical Supplies business, and we're looking at how do we sell our value proposition to those bigger, larger accounts, where we can be a one-stop shop with our scale and breadth of our portfolio? And then the other area is in our payer engagement, making sure that our clinical and payer relevance is increased, and that we're providing that value to our payers. So those are the two areas that we're shoring up and putting more resources on.
Point three was our balance sheet and free cash. So there, we talked about divesting some non-core assets. We're looking at our footprint. We have 680 locations today. Are they in the right places? Could we do it with less? We don't know, but we have a strategic footprint rationalization going on, all in the effort to pay down debt and increase our cash. Point four is we brought on our first, vice president of innovation, chief medical officer type role, Dr. Philip Parks, military background and civilian leadership at different, healthcare organizations, including Cardinal Health and Exact Sciences. And he's come in in the last several weeks to build out our strategy to increase our clinical and payer relevance.
As we focus on diabetes, sleep, and respiratory health, he's making sure that we are set up to deliver on taking care of those patients with those three very important chronic diseases. And then fourth is around—I mean, fifth is around automation and AI. So we have started some early pilots implementing AI, specifically in our clinical documentation and intake areas. We get a lot of information, unstructured data that comes in, that we have a lot of people who literally take, you know, go through pages of information to find the needle in the haystack that we need then to appropriately bill and deliver that product to the patient. And so we're seeing early signs that we'll be able to automate a lot of that work, and improve our efficiency and throughput. 'Cause I will go back to the sales force part of it.
Even though we have this great sales force, and we're adding additional commercial investments in those bigger accounts, the other area for growth for us is simply conversion. That we're not 100% of every order that comes in results in an order going out, so we have a little bit, we definitely have some areas to improve. So imagine if we're just doing better at the work that is coming our way, that's where we're gonna be a real growth driver for us.
That's very helpful. It's probably worth going over the second quarter since you just reported it. Jason, is there any, you know, key highlights that we should take away from the print and maybe the reaction?
Sure, so, the reaction, that's, you know, probably have some questions for you on that. I'd say, I think what we've gathered talking to the sell side, to, to investors, since the print, I think that, certainly the, you know, Dexcom's, you know, updates for the full year, and that reaction, you know, we're getting a lot of questions around that.
Yeah.
You know, however, our response has been that, look, we had a rock solid second quarter. I mean, we did beat our expectations. Look, it was couple million. It's not like $20 million, but, we felt very good with that. You know, diabetes in terms of CGMs performed against what we expected. We've been flat for the first half, and that's what, you know, that's what we've been saying since the beginning of the year. So, the new sales force is ramping up, making up for some losses on kind of channel reimbursement mix. But overall, you know, CGM, you know, that business is performing against what we expect. You know, pumps were down $2 million, we call it $4 million in the quarter.
You know, we are seeing some of that build back, you know, really timing delay of, compatibility of, like, OP5 and the Dexcom G7, as well as Libre 3. And so just some delays in patient new starts that we experienced in the latter part of the second quarter that, you know, we think we're gonna get much of that back as we get into the third and fourth quarter. So I'd say on the diabetes front, from our view, a very steady quarter. Now, what to get excited about is particularly respiratory just continuing to outperform. You know, we continue to take share. We've recently overcome all the players in DME to be number one in respiratory, so that's oxygen as well as non-invasive ventilation.
You know, I'd say that sleep continues to perform rock steady. I mean, starts were a little better than we thought in the second quarter, up 5%, 5.1% sequentially against Q1, and resupply just continues to be that engine for the company. And so, you know, when we look to the second half, we called out a couple million dollars of new investment from some of the key hires, and there's more that we'll talk about soon, that Suzanne's brought in. A couple million in some of this AI and technology enablement. But we tightened our full year range and recommitted to guide, because in parallel, we've launched some cost out efforts that are gonna be pay-fors for those Q3 investments.
So, you know, we do expect, you know, some of that cost to come out in the fourth quarter. So for the full year, I mean, we feel very good, and we reiterated guidance. I mean, we brought free cash flow up.
Yeah. So, in the rest of our time here, I definitely wanna drill down a little bit more on diabetes and just walk through all that. You mentioned the building out the window here, so I'd like to talk about GLP-1s a little bit, and your thoughts and preparation for that going forward, and then drill down a little bit more on free cash flow, and leverage and whatnot. So first on the diabetes, understand that you're looking at it first half, second half, and feel good about it. First, first quarter obviously outperformed. We all had, I think, pretty low expectations, and you came in above. But, and then second quarter, a little bit underperformance on that.
Can you just walk through all the dynamics of, you know, maybe first the CGM market, what's going on there, the channel, and then we'll get to the pumps?
Sure, Richard. So I'd say firstly, if you rewind to 2023, Q1 to Q2, we just had timing due to a system conversion of CGM patients and some pump patients, but primarily CGM. So, Q1 last year, just an artificially low comp, and Q2 an artificially high comp, which is why we've encouraged folks to look at the first half in total, as opposed to, you know, an outperformance Q1, under in Q2. At the end of the day, it performed, you know, against that timing effect. Big picture market for CGMs, you know, we're seeing our new sales team continuing to ramp.
Like any portfolio, you got some winners and some folks that maybe won't, you know, either need to come up to speed or move on and get replaced. But overall, we feel good about the ramp in the diabetes sales force. As a reminder, for those new to the story, I mean, we picked. We were thoughtful, we think, about picking the markets of where to drop those salespeople into. Up until the beginning of this year, I mean, we had no diabetes sales force dedicated in any of the five boroughs in New York City. You know, Philadelphia, Chicago, Atlanta, I mean, we picked purposely urban markets, and we're dropping those sales folks into selling into primary care business.
And so that's where we're chasing the healthy growth in the Type 2 diabetic, either the MDIs as well as the basal population. As the CGM penetration into those patient populations, it's gonna continue at a healthy clip. That won't go forever, but for 3-5 years, you know, much like what happened in the Type 1s, that penetration will continue to pick up, and so we're chasing that growth there. You know, as it relates to channel reimbursement, we called out two state Medicaid offices earlier this year that switched entirely to a pharmacy reimbursement, as well as a single commercial payer, ex.
Single state, Upper Midwest, but for us, it was a really big market because we had acquired a couple of companies over the years that had a lot of business in that state. And so the effect of that is, you know, day one after that transition, a lot of patients that we had on census, they immediately come off your census, and now you gotta close that gap by investing in your pharmacy, getting more business there, as well as your new sales team coming up to speed and driving more volumes. And so for the first half, that's why we say flat. We were-- That's what we expected. We expected some losses on channel reimbursement. We expected some gains on volume, and, you know, so far, so good.
As you think about CGMs for the rest of the year, is it the new sales force that's gonna drive, you know, growth? And what do you think CGM is.
Yeah.
When we exit.
Sure.
2024?
Yeah, good question. You know, when we first guided the year, we said CGMs, first half, we expect flat. By Q3, we expected a point or two of growth over the prior year, and by Q4, we expected 3%, maybe 4% over the prior year, as the sales team, you know, continued to grow and ramp through that. I'd say based on, you know, the first half results and watching the trends, you know, not so confident that diabetes will hit that 1-2 in Q3 and 3-4 in Q4. Closer to flat is probably what we're looking at. However, again, on that, you know, the other 60% of our business in sleep and respiratory, both outperforming, we think it's gonna be plenty to make up any difference.
You know, so if we had to predict it now, our exit rate, it's gonna be flat. It could be up a very touch, it could be down a very touch, but it's gonna be in that area.
Okay. And then quickly on pumps. You know, that's been going on a headwind for about a year and a half now. Where do you stand on the pumps? And now I guess the hang-up was the integration between the CGM, and that's complete. If you can just update.
Sure, for that, for the and for Q2.
Yeah.
I mean, it was just kind of a timing effect going into Q3. But you know, big picture, I mean, pumps and supplies, it's, it's about a $100 million business for us, you know, so it's still a pretty small part of overall diabetes and certainly the company. You know, we had predicted a $15 million-$20 million headwind in pump supplies this year over prior year, and you know, that's down significantly from a year ago. The reason is, as the tubeless pumps hit from OP5, from Insulet back in August of 2022, like, as Tandem quickly lost share, and Medtronic as well, quickly lost share to the tubeless pumps, we had a lot of TAM ripped out.
Since then, we've been putting out more and more units with Insulet Omnipod, and now with Beta Bionics, which is, you know, an interesting product, like, we're putting out a lot of those units as well. So there will be a crossover point of when, you know, we're putting out more of those units to make up for some of those losses. Encouragingly, the Tandem Mobi, I mean, you know, just started this quarter, second quarter for us. You know, it was interesting as they reported a pretty significant portion of new Mobi starts were folks that had previously switched to a tubeless, and now they're coming back because they appreciate the algorithm, you know, that Control-IQ offers in the Tandem Mobi. And so we'll see how that goes.
It's too early for us to really get too excited about it, but, but we did put out Mobis in the second quarter. We expect to put out more as the year goes on.
Okay. Suzanne, maybe tackle the GLP-1s a little bit.
Yeah.
You know, last August, I think ResMed reported, or it was all the craze, GLP-1, and, you know, everyone's stock went down, and every healthcare services company was going out of business next year. Joking. So you know, you're coming in new, right? So how did you.
Yeah, sure.
think about GLP-1s, and I'm... Am I stepping into this business that's gonna be disintermediated?
Sure. Yeah, exactly. I mean, I looked at it as well in making the decision to come here, and my interpretation of it is, is it going to allow for some people to get healthier, you know, and take off weight and improve? Sure, but I do believe from a higher level priority, that it is gonna drive awareness. So I haven't... You know, ResMed's been out there talking about top of the funnel, and I get that. That was kind of my philosophy, too, was if you're going to drive people into their primary care physicians and their doctors seeking GLP on a weight loss, they're still required, you know, when the indication is for OSA, to go get a sleep study. So they can't, you know, go around it.
They're gonna get the sleep study, and the doctors are gonna say, "We can probably start you on both, but you need the gold standard treatment." And so, if it has the benefit of some people coming off therapy, I do believe that top of the funnel, in a very under-diagnosed population, is gonna drive volume. So we have seen, and Jason will talk about, we track the data. You know, we've tracked the data of patients who now are on GLPs, and my understanding, quarter-over-quarter, it was 6%, 5% or 6% in Q1?
Actually Q4.
Q4, I'm sorry.
Yep. It's up to 12% in Q2, and so it, which makes sense, right? There's supply chain issues.
... that alleviated for GLP-1s, and awareness, generics, et cetera, right? We expect that the number of new OSA patients that we're starting on CPAPs, the penetration of GLP-1s is just gonna increase.
Yes.
We are monitoring that very closely. If you're on a GLP-1 or if you're not, is there a difference in adherence? There has not been yet. Is there a difference in resupply? There has not been yet. And is there a difference in attrition? And no, not yet. Now, again, ResMed has real-world study that they're suggesting that the difference will be that the GLP-1 patients will actually be more adherent, and they're gonna resupply more. We haven't seen that yet. You know, but each quarter, you'll hear that in our prepared remarks. We'll report out the data. We're keeping a close eye on it. You know, and we'll see, we'll see where it goes. I mean, we're hopeful on what ResMed said.
Yep.
But you know, we're not hitching our, you know, wagon up just yet. I mean, we're gonna have to see it in our own data.
Is there any example that can be gleaned from, you know, the diabetes? These drugs have been being used on the diabetes front. I mean, obviously, Solara and-
Mm-hmm
... or whatnot, you guys acquired it not too long ago. I mean, but is there anything that can be gleaned from that or?
As it relates to GLP-1s?
Yeah.
Yeah.
Yes, sir.
You know, we have not. We did launch a survey on diabetes to have an understanding, and in certain pockets of the country, I mean, it was at least 20% of patients were on a GLP-1 for their A1C management, and other pockets of the country, it was higher. You know, we haven't looked at does that change adherence. I mean, we believe what Abbott and Dexcom have said, that their data shows that it does improve adherence. 'Cause after all, a patient that's on a GLP-1 drug for A1C maintenance-
Mm
They're gonna be very interested in monitoring the
Mm
Perform. Is it working, right? And so the adherence on CGM is, you know, in their view, going up, and that makes good sense to us. I mean, we've focused on the money and the resources on sleep, since it's just the largest part of our business, and we just think that there's more unknown there that we wanna keep a close eye on.
You'd mentioned, you're raising the bottom end of the free cash flow range or.
Yep
Moving that up. Can you just talk more about free cash, your thoughts on, you know, where you want this leverage and reduction in leverage, and just capital priorities?
Well, we'd say, you know, our stated leverage target was 3x or less.
And we came just under that as we exited Q2. You know, certainly this is a topic Suzanne and I spent a lot of time on. We intend, through the balance of the year, to continue to delever, and so as free cash is generated, if there are proceeds from additional non-core asset sales, all of that, you know, for disposals, will go against delevering. You know, you should expect a small deal here and there over the next 12 to 15 months, but we're talking maybe $5 million in a specific business or geography, or $12 million here, or, you know, small, manageable numbers, nothing large or of scale. I mean, I think once we're in that mid-2s, you know, and we're already talking, like, what becomes highest and best use?
You know, is there interesting M&A? Possibly, but again, we're growing confident in our ability to take business as opposed to buying it, which is, you know, at the end of the day, obviously a better approach.
Those investments, you know, putting them back in to improve our throughput, that conversion, I think is a good use of cash as well, as opposed to just going out and, you know, buying the patient books.
Mm.
So we'll continue to drive down, and to your question, you know, mid-2s, 2.5 or something on the leverage, but we're gonna get stay after that. That's the priority.
Okay, great. I will open it up. We have one minute if there's any questions from the floor. Okay.
Zachary with Canaccord Genuity as well. Could you clarify the 5%-6% and the 12% growth metrics you were talking about as it related to OSA? What, what was that?
Yeah, so not growth metric. Of the new patients that we start on a CPAP, we're measuring. We have a survey that we ask every one of those patients, you know, a series of questions. "Are you on a GLP-1?" et cetera. Over 30% of people respond to that survey, so I mean, we're talking about tens and tens of thousands of patients, even in a single quarter, that we're getting responses from, so it's a, you know, pretty good response rate. Of that population that we're setting up, when we first started measuring back in October of last year, it was 5% or 6% of new patients had identified they were on a GLP-1. Today, in the second quarter, it's 12%, and it's inched up from then until now.
We think going forward, it'll continue to penetrate, and more of the patients we're seeing are gonna be on a GLP-1. But we'll keep reporting that out each quarter.
Okay, I think we're out of time. All right.
Perfect.
Thank you very much.
Thanks for having us.
All right, thanks.