All right, good morning, everyone. My name is Matt Blackman. I cover small and mid-cap med tech at Stifel. Thank you so much for joining us at the Stifel Healthcare Conference, day two, and appreciate you attending this session with AdaptHealth. We're very pleased to have Suzanne Foster, CEO of AdaptHealth, to my left. Suzanne joined in May, so this is her first Stifel Healthcare Conference this year, and CFO Jason Clemens, a veteran of several Stifel Healthcare Conferences. Thank you both for joining us this morning. As always, this is going to be a fireside chat format. It's meant to be interactive. If you have questions, please just raise your hand, shout out, do something to get my attention. I'm more than happy to have you folks engaged as well. So anyway, maybe to start, Suzanne, again, welcome.
This is your first Stifel Healthcare Conference, and it might be helpful, and we actually have several companies this year that have new management teams, or relatively new management teams, and so I've been asking everyone in that situation this question, and it's a basic one. What drew you to Adapt, and what did you see in the business before you got here?
Okay, sure. And thanks again for having us. So this space that we're in, the shift to home care, has been something that I've been in healthcare my whole career. I started as a clinical social worker, discharge planning, and then throughout the whole career in med device and life sciences, I was fascinated with how do we push more patients into their home where they want care. And so it's always been on my radar. And when Adapt came to me, I looked at it and said, well, we are shifting care to the home. We have very strong end markets in sleep, respiratory, and diabetes. The business, over the last few years, has driven nice scale through a roll-up strategy.
And it had a couple of years of some one-time events that I think have led it to be undervalued, but that there was real opportunity to fix the basics and allow it to achieve its potential. And so this idea of using scale to advance this type of care was an interesting thought to me. So sure enough, when I got here, switching to the second part of your question, that hypothesis held true that the size and scale was there, but the completion of all of the integration was needed to still be done. So we needed to take a time out and just put in proper governance and metrics and team organizational hygiene, and then look to the potential of what this business could do.
So the last six months has been a lot of organizational fixing, some of the integration issues, and getting very clear on what we have to achieve over the next year.
Where do you think you are in this process? Six months in, is there another six months of this cleaning up? I like that operational hygiene phrase. Where are we in that process?
We are well on our way. We are probably weeks away from finalizing the leadership team. We have put in an operating structure, a cadence for the team that's really clear. We've communicated to the organization. We call it this five-point plan, but it's really just the basics. We just had to be very clear with the 10,000 employees, what are we doing? We're going to become One Adapt, which means we're going to introduce standard work on how we do things. We're going to pause on big M&A and drive organic growth. What does that mean? We're going to strengthen our balance sheet. We're going to increase the census. How do we do that? Through exceptional service. And then most importantly, we're going to begin automating and using AI for some of these very basic processes that we didn't have.
On that last point, what was interesting to the question around what did I learn, the strength of our tech stack was further along than I expected for a company that had all of this roll-up, that we're in a fairly good shape to implement AI and automation quicker than we thought we would be able to. So I would say to you, how much further? Probably 2025. We're going to focus on execution, doing those basic things, getting ourselves really strong, and focusing on the patient experience and providing exceptional service. Then as that flywheel takes place, coming into the back half of 2025 and 2026, we'll look towards that growth again.
Okay. And what's the heaviest lift, do you think, still ahead of you?
The diabetes market.
Which we'll touch on. Yeah.
I'm sure. I'll preempt it. If you look at, we announced we're going to a segment reporting, and that's going to bring real clarity and transparency into how the business is doing. But if you look at, and we'll come back to sleep and respiratory, ticking along, doing nice, we have real core strength there. Our Wellness at Home, we're calling it now, and the supplies business has a little bit of work to do. But with those three segments moving along, if we can fix, and I know we can, the diabetes business, then we'll have all four doing well. And just a word on that. When I first arrived and looked across the business with the diabetes performance, the mistake I made was thinking that it was the dynamic of the marketplace that we had to solve for.
So I got very focused on what was happening in the marketplace. And it wasn't until a couple of months in when we started doing real deep dives, peeling the onion back around internal performance, that I realized this is a big enough market that our competitors are growing. We're not growing. This isn't just the marketplace. This is something that's happening. And we started peeling back the operational parts of the business and found that we had some areas that we have to fix. And the good news is all of them are in our control. But like I said, last earnings call, it's going to take a few quarters just to put those pieces in place.
Okay. And we'll probably expand on that when we get to that section. You did mention rounding out the leadership team. What seat are you still trying, or seats are you still trying to fill? And is there a specific sort of type of person you're looking for with a certain type of experience or someone with operational experience? What's the plan?
We are no longer looking. But we have organized the team in a very clear way. So the way we're organized is we have a Chief Operating Officer who we've announced, Scott Barnhart, experienced operator, thrilled to have him. He's been in the seat now six weeks, eight weeks or so. So we have one COO. We have a Chief Medical and Strategy Officer, Philip Parks. That's all in place. And the third part of that is a Chief Commercial Officer, which we've identified the candidate and will be announcing later this week. And then, of course, we have our CFO, general counsel, Chief People Officer, compliance officer. And that's how we're organized.
And then under that, with the segment, excuse me, with the segment reporting, we've introduced this idea of general managers who really are responsible for those four segments and looking at that full P&L constantly about how do we drive performance within those segments.
Okay. And Jason, tough question with your boss sitting next to you. But what changes for you? And I guess just in your day-to-day, but also does something change philosophically about how you guide or how you think about the business? Just what your new marching orders are, if there are any?
Sure. In terms of, I'll probably go reverse order, in terms of philosophy on guidance, I can't say it's really changed over the last year anyway. We set out on 2024 with what we thought were appropriately conservative top-line numbers, certainly, and on the margin line and on the cash flow line. I'd say on the margin line and cash flow line, we're feeling great. We're confident we're getting the year in a great spot and deliver on expectations. It's that top line and specifically diabetes, right? That's really what's been the challenge here in the second half of 2024. As I think towards 2025, I mean, obviously, we'll guide at the end of February when we report.
But I don't know that Suzanne, I, or anyone else will sign up for more than what we're currently delivering until we're able to demonstrate change within the diabetes business and get back to growth within that diabetes business. I mean, I think that when you look at the underlying segments, those four segments, I mean, sleep is as healthy as it's been ever. We even put out really a two-year kind of compounded look at growth to help illustrate that. Next year, we won't have a tough comp we did this year over prior year. Respiratory, I mean, we're confident we'll continue to grow in those low single digits. We've got some outsized growth right now because Humana is kind of fully ramped and coming in, but that won't happen next year unless we win new contracts.
And so slow and steady growth within respiratory, the same with Wellness at Home. I mean, DME, wheelchairs, walkers, supplies to the home, I mean, that grows generally in line with Medicare population and utilization. And then it comes down to diabetes. When will we get that business back to a growth mode? And so I think that philosophically, as we look towards 2025, you just won't see us signing up for really a lot of improvement over where we're at until we're starting to demonstrate it and just thoughtfully working through each quarter and delivering on what we say we're going to deliver on.
Okay. Well, it's a good time to transition. We can talk about some of the franchises, and let's talk about sleep. We'll start out on a strong note. So maybe, obviously, it's hard to tease out with a lot of the moving parts in the underlying market what sort of the underlying demand picture looks like. Maybe just give us an update of what that looks like, and we can take it from there.
Yeah. I mean, I'd say for the third quarter, the overall business, I mean, it represents 40% of our revenue in sleep. It was up about 3.5%. Underlying that is a patient demand that, like we said, is as healthy as it's been. We reported another quarter over 120,000 new sleep patients. So GLP-1 that have come in, whether they're on a GLP-1 or not, they've been prescribed CPAP therapy, and we've set those patients up. And so those patients have then entered our resupply census, which again hit another record. And that resupply is continuing to just grow and compound. And so again, from a comparable against last year, there were such record setups on account of the Philips recall that there was pent-up demand that we were fulfilling, which was great, but it just meant for an artificially high comp in the prior year.
So if you look two years ago, I mean, that business is up almost 10%. Again, we're not going to go out and sign up for that necessarily in 2025, but it does give an indication of the health of that sleep marketplace and our ability to continue to take market share and to grow within it.
Just out of curiosity, just curious your setup efficiency. They didn't prove it all. I mean, you've obviously had to get through a lot of patients in the last 12 months. I'm just curious as now we're in a more normalized environment, are you able to use some of that expertise that you may have built over the last sort of 12 months? Is that something that helps?
I might start and then pass it to Suzanne for the exciting stuff. I think what we proved out during not just the pandemic, but then with the Philips, with the backlog, the ability to group setups. Actually, we've seen a lot of patient preference for being in a small group of fellow patients. And so that gives you obviously some scale. You can get through more patients, as well as some of the technology on fitting through that can be done virtually. And so we've proven ability to do that as well. And it really comes down to patient preference. I mean, we're going to follow their preference every time. And so there have been some new, I guess, tricks we've learned, if you will, that have been effective.
But really, where the exciting part is, is the effectiveness of receiving that order and setup that Suzanne might have some comments on.
Okay. I was wondering what the excitement was.
Where's he going with this?
Early on, we were looking at what are the conversion rates because that's kind of the keys to our business, right? You get a referral, and how often are you getting that referral all the way through the process? And we've said publicly that it was about 75%. And so there was a falloff. Why is that? Well, there could be insurance reasons. There's all kinds of reasons that it's not 100. But at the same time, we thought, okay, can we Kaizen this? Can we lean the process? What can we do to improve it? And so we're in the middle of that right now where we're looking at the whole workflow and figuring out how to simplify and improve with the idea that if we can do that in one region and roll that out, every point of conversion is obviously a big deal.
And so we're really in each of our businesses looking at how do you drive growth through conversion? And that goes back to the standardization and how we do the work and applying the principles of simplicity.
Yeah. So that's on the front end. I think one of the other keys is on the sort of back end, the resupply. Maybe just talk through some of the competitive advantage you have there, the technology that you're using. And I guess that's something you're going to try to port over to the diabetes business as well. That's sort of a good way to start.
I think the shining star of our business, as I've traveled the business the last few months, is what was just sleep resupply. We have an excellent team there, a centralized location in Nashville. We have a good technology stack around Brightree and the processes. The team really does a nice job on sleep resupply. And so as we were looking at, I was looking at their historical growth and how they've been able to really improve, we had diabetes carved out in a separate resupply. And the question was, why aren't we just using this already expertise that we have? Things aren't that much different. What could we do there? So last month, as we announced, we took that team. We integrated it into our sleep resupply business. And we're now looking at how do we service resupply really regardless of what end market they're in.
That's the end goal: is can we just really become a center of excellence? And we've seen some. We've uncovered a lot. That team has uncovered a lot about how we can improve, and to the point that's why I'm optimistic about this diabetes turnaround, if you will, is in our control because what we've uncovered after the last couple of months when you get really good people on it. They're quick fixes in some respects, quick meaning within quarters.
Yeah. Understood, and that's a good segue into talking about diabetes. Maybe it'd be helpful to take a step back and just sort of frame what's going on in that business. Obviously, a couple of pieces of that business, CGM and pumps, disparate performance in each of those. Maybe just help frame the challenges you're facing?
Do you want to do the history?
Yeah, sure. I guess first, when you think about our diabetes business, a little over $140 million of revenue in the third quarter. The smallest part of that business is distributing pump and pump supplies. So those are all the major pump categories, I think some of you here at your conference this week. So that includes Tandem, Medtronic, as well as some of the newer pumps from Insulet, so the Omnipod 5, as well as Beta Bionics, which is a newer entrant to the market that's growing quite nicely. Pump and pump supplies for us is about a $100 million business top line annually. And that business was flat against the prior year, which was actually good news. Look, it's one quarter. I don't know if it makes a trend.
But for the previous seven quarters, we have been facing a headwind that we've been compressing that pump business as medtech has wildly disrupted the space. I mean, with the introduction of OP5 in August of 2022, distributed only through the pharmacy reimbursement channel versus the medical benefit channel, we had a lot of ground to make up as Tandem lost share, Medtronic lost share. And at the time, two years ago, I mean, we were a very large Tandem shop in terms of distribution. And so some of that pressure that Tandem faced in terms of a product, we rode that wave down. Until recently, we've been able to grow through some of the new products, so OP5 as well as Beta Bionics. So I don't know that we're calling a crossover point yet to get back to growth mode, but we stabilized for the quarter.
So that was good news for us. We're getting closer. So the rest of that business is CGM distribution. And so certainly Dexcom and Abbott with their new G7 for Dexcom and Libre 3 products for Abbott is the biggest part of that business. We were down $20 million year over year within CGM distribution. So Suzanne's talked about the end market, however, is still growing. If you look at the manufacturers, Abbott was up, I think, 25%-26% in the quarter, and Dexcom up a couple of points. But that market in general was growing for the third quarter. Our competitors in the space are also growing. But in fact, we shrank by $20 million. So there's really two factors that are driving this. The first is one that we've been talking about now for a couple of years, which is pressure within the reimbursement channel.
So that $20 million, it represented about a third.
When you say pressure, it's opening up of the pharmacy option for some folks or?
Well, and yeah, maybe to get specific. So let's take the state of Louisiana, Medicaid. So we had bought two businesses that were pretty deep in Louisiana over the years. Well, January 1st of 2024, the state made a decision to move all reimbursement to a pharmacy channel only and not through medical reimbursement, which is our, that's what our business is and was. And so we do operate today. We've sort of set up a pharmacy in Louisiana, and we're able to service patients that are on Louisiana Medicaid. But right now, it's pretty small. We will grow it. It's going to take time. But the effect of that on January 1 is all the patients that we had on census as of January 1st, and we were getting paid every month last year for distributing products, that all shifted.
That TAM dropped on us within that state.
When you say shifted, you lost those patients?
We lost those patients, and so there were a handful of markets where that happened in 2024, many fewer than what we saw in 2023 or even in 2022. But we have had this headwind that we've had to grow through, and so for Q3, it was in the order of about $7 million-$7.5 million. And so we've been facing this all year. It's nothing new. Nothing's changed. We just haven't put out and sold enough product to grow through that, and so on the sales front and on the resupply front, or some of these things that are within our control, makes up the other two-thirds of that $20 million gap that Suzanne spoke about. Look, some small tweaks that were already have been made within our resupply operations as part of that Nashville team coming in. We think in pockets there was overuse of auto dialers.
Frankly, just trying to get ahold of your patients too frequently, it upsets people, right? I mean, I think we all know what it's like for someone to be dialing your phone again and again. You're going to block the number. And so we have uncovered instances of this that these are things that can change fairly quickly. But we think it's going to be a couple of quarters until we're really showing that growth. But when you unpack Q3 and the details of what's happening within the diabetes business, that's where we stand today.
So talk to me a little bit about the pharmacy headwind, I think in particular. Can you participate at all in pharmacy? You have e-prescribing because this phenomenon obviously has manifested in CGM, and I think we're probably where we're going to end up being from a steady state, but you look at the pump market, the durable pumps are now trying to go through the pharmacy channel, so it almost feels like there might be another wave of this somewhere down the line. Help me understand how you can in the future participate more in that pharmacy opportunity.
Sure, well, I mean, we have today within our infrastructure a 50-state mail-order pharmacy. URAC qualified. And so we do have the ability to participate. Depending on the state, there are brick-and-mortar requirements. So there are some states that currently we are not participating in, but certain ones, California, Louisiana, I mean, there are others that we have stood up brick-and-mortar pharmacies. So we have an ability to compete and to grow there. Today, our pharmacy business in diabetes is about 7%. That's the largest it's been. We're not high-fiving yet, but it is up a touch from Q2, up a touch from Q1. So.
Is that largely CGM or is it?
It's actually largely the new pumps that you talked about. So there is ability to grow there. I think certainly you need to be smart about picking your states, picking your markets of where you want to turn on that growth. But we are strengthening the capability to distribute through pharmacy. And then we're laser-focused on our cost structure of distributing because that reimbursement tends to come at a lower level. And so you really have to have your operations fine-tuned in order to maximize your margin on the business.
And so as I think about your sort of cleaning up the business now, maybe a year from now, the business might be in a better position, whether it's from a profitability standpoint or a growth standpoint, to maybe take on more pharmacy. Is that sort of the way to think about it?
Yeah. We are definitely bringing it back to the basics, fixing the fundamentals, and then over the next 12 months, we will selectively pick where it makes sense.
And I think there was also a sales force expansion that you undertook, sort of a recurring theme in medtech sales force expansion and some dislocation. Worth talking about that for a little bit as well, where you are in that.
I can touch on it. For just diabetes.
Yeah, just diabetes.
So like I said, it was in January of 2024, around the Q4, Q1, we announced that there was a sales force expansion, essentially doubling it. In hindsight, what I see is that there was, I guess, just a fundamental belief that if you put more feet on the street, that you're going to grow. And like I said, as we peeled back the onion, we realized that this was much deeper than just a pharmacy shift in the industry or putting more feet on the street, that we had to service that business. And the way we were servicing it really was not helping our salespeople go out and be most effective because, like we said, we had introduced some technology that was probably trying to contact patients too much.
And so there was friction amongst the sales force trying to get more business when we were hearing from the industry like, "Well, first you got to fix your operations." And so that was the eye-opener where we said, "Okay, we're going to hold on a second. We're going to fix the operations and start with us. And then as we go out and make that service promise to our patients and to our physicians, then our sales force will have more success.
Yep. No, that makes sense. And to the extent you're willing to comment, obviously your largest CGM customer, you're going through some issues as well. One of the issues they talked about was relationships within the DME channel. What's going on there? We talked about friction in the past. Is there something you can educate us on on what exactly the friction may be and how you guys are working through it?
Sure. Well, I mean, I know Jason said publicly that took us off guard too because we thought we had a strong relationship. So following that comment, I personally went out there with the team and we met with Dexcom that you're referring to with those comments. And we had a very good conversation around was that intended at us. And it wasn't. Let me at least tell you what was said to me was that they did a sales force expansion. And a lot of their expansion, which he has said publicly, was pharmaceutical background reps who didn't understand DME. And so the idea was they are working to educate their pharmacy background reps on the importance of the DME channel. And we are participating in that. We're helping educate. And so we have a strong relationship there.
We don't think that was aimed at us, so to speak, but there was an idea that they had swung potentially too far to the pharmacy side focus-wise and that they forgot that the DME side of the business is an important part of diabetes.
How much is pricing an issue in CGM? I mean, I don't know how much you want to talk about your pricing strategy with your manufacturers, but none at all. Okay, fair enough. But I mean, are you seeing a pushback at all on the manufacturers on some of the pricing? We hear about competition between the two, but I'm wondering what filters down to the DME side.
You're right. I'll answer that carefully. I think in our business in general, not just CGM, across all products, I mean, there is this concept of, I mean, the reimbursement and the DMEPOS fee schedule published by CMS. It's really intended to pay for that product on the patient at point of delivery and the entire supply chain that has allowed for that. So that goes not just to DME providers that are putting product on patients, but it also then goes to the manufacturers, to R&D, to raw materials. I mean, it's that entire supply chain network that as rates go up or down, there is a pass-through component of this. So I think in any given year, I mean, with any of our manufacturers, they may be willing to give on price on a certain product.
We may be willing to pay more for a certain product depending on what's important strategically to those companies. I mean, that's all the details of the commercial relationship. But I'd say that of all the CGM manufacturers, they've been constructive in listening to what's important to us and what we need to help drive more growth. Because at the end of the day, there's so much end market and we all want to participate together. And that's what we're solving for.
Yeah. And your business is about volume.
Absolutely.
You need the patients. Got two minutes left. Maybe transition here and talk a little bit about cleaning up the business. You're selling some non-core assets. More to come. How should we think about that? And how do you identify what is non-core?
Sure, so we started a process certainly beginning of this year. It was probably about a year ago, actually, that we were looking at seven or eight different product categories, so these are underneath the six products that we report today, like sleep and respiratory, etc., and we took a good hard look on full allocations. What are these businesses growing at? What are their margin profiles, and most importantly, are they driving ancillary business into our core, and our core, as we've now said with segmentation, is really around sleep, respiratory, and diabetes, and then everything else that we distribute and we participate in is intended to feed that core or to be ancillary. A ventilation patient typically needs wheelchair mobility as well as potentially incontinence and urology, right, so these components fit in with each other, but it's really, I mean, our focus is that core.
Recently, we did announce that we sold certain custom rehab assets, which are essentially powered wheelchairs. We sold to National Seating & Mobility. We completed that transaction within the third quarter. We were pleased with that. We think we've got a good partner there, good operator in NSM going forward in the event that we cap business and we want to pass through some of that business. We've said that we're working on a couple of other potential programs. None of this in even an aggregate is more than $100 million, right? It's a fairly small amount of our business. Within the DME category and the other category, there are examples of products that have built up over time, much like custom rehab, that might not be as ancillary. Home infusion is an example of something that we are assessing.
Some direct-to-consumer incontinence is a concept we're assessing. And so time will tell if there's moves to be made here or if we ultimately decide to just keep the business and continue to grow in the business. So I'd say a lot of words to say more to come. Stay tuned.
All right. I think we're at time here, so we'll stop it there. Thank you so much for coming. Really appreciate it. Thank you all for.