Greetings, and welcome to the AdaptHealth Announces Agreements to Acquire Solara Medical Supplies and ActivStyle Inc. conference call and webcast. At this time, all participants are in a listen-only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. It is now my pleasure to turn the call over to Chris Joyce, General Counsel. Please go ahead, Chris.
Thanks, Kevin. Good morning. I'd like to welcome everyone to AdaptHealth Corp.'s conference call to discuss the acquisition of Solara Medical Supplies and ActivStyle, which we announced earlier this morning. Everyone should have received a copy of our press release. If not, I would like to highlight that the press release, as well as a supplemental slide presentation, is available on the investor relations page of the AdaptHealth website. In a moment, we'll have some prepared remarks from Luke McGee, Chief Executive Officer of AdaptHealth, Josh Parnes, President of AdaptHealth, and Steve Foreman, CEO of Solara. We will open the call for questions. Before we begin, I'd like to remind everyone that statements included in this conference call and in our press release may constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act.
These statements include, but are not limited to, comments regarding our financial results for 2020 and beyond. Actual results could differ materially from those projected in forward-looking statements because of a number of risk factors and uncertainties, which are discussed in our annual and quarterly SEC filings. AdaptHealth Corp shall have no obligation to update the information provided on this call to reflect such subsequent events. On this morning's call, we will reference certain financial measures such as EBITDA and adjusted EBITDA, which are non-GAAP financial measures. This morning's call is being recorded, and a replay of the call will be available later today. I now please to introduce our Chief Executive Officer, Luke McGee.
Thanks, Chris, and thanks everyone for joining the call this morning. Today, we are pleased to announce the acquisitions of Solara Medical Supplies and ActivStyle. These are highly strategic and complementary supply businesses that will fit neatly on AdaptHealth's platform and further our strategy and vision. Solara, with the revenues of approximately $225 million, is the largest independent distributor of continuous glucose monitors, as well as a comprehensive suite of diabetes management products that also includes insulin pumps and ancillary supplies. Solara's best-in-class management team immediately establishes AdaptHealth as a leader in the high-growth diabetes market while continuing to diversify the company's revenue streams and increase its exposure to recurring supply sales. These attributes squarely align this acquisition with AdaptHealth's long-term strategy of delivering connected healthcare solutions in the home.
An important element of this acquisition is a strong management team led by Steve Foreman, the CEO, and Keith Crawford, the Chief Commercial Officer of Solara. We are excited to welcome them and their talented associates at Solara to the AdaptHealth team. ActivStyle, with revenue of approximately $60 million, is a leading distributor of incontinence products and related home medical supplies. Importantly, this acquisition adds critical mass and accelerates growth and synergy capture within the Patient Care Solutions supply business that we acquired earlier this year. Gayle Devin, CEO of ActivStyle, is joining the AdaptHealth leadership team along with her key lieutenants. Gayle is a successful HME executive and adds important depth to our management team. On page three of the investor presentation we posted on our website this morning, we lay out the key elements of the Solara and ActivStyle transactions.
We've agreed to acquire Solara for $425 million, comprised of $362.5 million in cash and $62.5 million in AdaptHealth common stock issued to the sellers. In addition, we've agreed to acquire ActivStyle for $62 million in cash. Of the total combined consideration of approximately $490 million before fees and expenses, approximately $425 million is in cash, and $62.5 million is in AdaptHealth common stock. We believe these acquisitions in aggregate will contribute EBITDA and EBITDA less CapEx of approximately $60 million and $55 million in 2021, respectively. We've identified approximately $7 million of run rate cost synergies, which is included in these numbers, and we anticipate significant accretion in the first full year of ownership. We plan to fund the cash portion of the purchase price through a combination of incremental equity and debt.
We have deliberately chosen to be prudent with our capital structure and maintain leverage levels consistent with past practice. We have received commitments for equity investments from One Equity Partners and Deerfield Management for $190 million and $35 million, respectively. We view these equity investments as an important source of financing, but more importantly, a strong endorsement of our strategy and vision. After these financings, we have significant dry powder to continue executing on accretive add-on acquisitions. As part of the One Equity investment, the board of directors of AdaptHealth will expand by two directors, one of whom will be designated by One Equity Partners. In addition, we have secured committed debt financing from our key lenders for a $240 million incremental Term Loan A. With this additional debt, our pro forma leverage at close will be in line with previously communicated levels.
We expect the transactions to close during the third quarter of 2020 and be accretive to our earnings and consistent with our growth profile, earnings, and cash flow going forward. Both Solara and ActivStyle closely align with AdaptHealth's long-term strategy of becoming a leading supplier of connected health solutions for patients with chronic health conditions. Over time, we believe Adapt is increasingly well positioned to partner with all stakeholders, including payers, physicians, patients, and emerging care coordination platforms to play a meaningful role in the transition to value-based care models. At this point, I'd like to turn the call over to Josh Parnes, AdaptHealth President, to discuss our perspective on how these two acquisitions enhance AdaptHealth's position over the next few years.
Thanks, Luke. To start, I'd like to welcome Steve and Keith from Solara and Gayle from ActivStyle to our team. In addition to furthering our strategic vision, the Solara and ActivStyle transactions are compelling for the following reasons. First and foremost, both are high-quality platforms with strong leadership teams. These are sizable acquisitions for Adapt, and the ongoing engagement of the key leaders of these companies is critical to our success. Steve Foreman, CEO of Solara, will lead our diabetes business, and Gayle Devin will lead the ActivStyle supply business inside Adapt. As well, both AdaptHealth and Solara have invested in state-of-the-art technology and infrastructure, and similarly run on the same back-end systems like Brightree. We also share a strong culture of customer focus, innovation, and teamwork. For these reasons, we're optimistic for a smooth integration of both companies.
Also, both companies are closely aligned with Adapt's core capabilities in resupply and leverage our technology, field sales, and logistics and payer relationships. In addition to recurring revenue similar to our PAP resupply business, the CGM incontinence and urology products help further diversify our overall business. Plus, they expand Adapt's footprint into highly relevant high-cost categories that are experiencing above-market growth trends. Lastly, while highly strategic, these transactions are also financially compelling. We expect the transactions to be accretive to earnings and cash flow starting in the first year of Adapt's ownership. We expect to realize meaningful synergies from both acquisitions on both the cost and revenue side, but particularly on the revenue side through the strong cross-sell opportunity across our patient base. Now I'd like to turn it over to Steve Foreman, CEO of Solara, to discuss a little bit more about the diabetes distribution market.
Thanks, Josh. Before I begin, I'd like to express my excitement on behalf of the entire Solara management team about joining AdaptHealth. We share a commonality of vision in treating patients in the home, and we're excited about the resources available to us at AdaptHealth and look forward to accelerating our growth as part of the Adapt family. The diabetes market is rapidly adopting CGM and connected devices driven by easier-use products and expanding reimbursement. Solara is at the forefront of this growth in a comprehensive portfolio of products and supplies from all major manufacturers in a go-to-market strategy that encompasses products, services, and sales. Over the past several years, Solara has worked to deepen its relationship with Abbott, Dexcom, Tandem, and the other major diabetic stakeholders, while also building out a national sales force to call on endocrinologists, primary care physicians, and other healthcare professionals.
We see a strong runway for growth in this space for the foreseeable future and believe that Solara will be additive to the AdaptHealth overall growth profile. Luke, Josh, we're excited to join your team. With that, I'll turn it over to Luke.
Thanks, Steve. Switching gears quickly to ActivStyle. Though smaller in scale than Solara, the transaction is equally compelling on a strategic level. The company is a leader in the direct-to-consumer incontinence and urological supplies business, which is an important and attractive recurring revenue line for AdaptHealth. It is highly synergistic with the PCS business that we acquired last year. These transactions also materially diversify our product and payer mix, as well as increase the proportion of recurring sales revenue of AdaptHealth, including rentals, to more than 85%. As we've seen in the recent crisis, recurring sale and rental revenue is a source of stability in uncertain times. Additionally, we believe the shift to connected healthcare has accelerated, and these acquisitions continue to position Adapt as a leader in the connected care market.
Before taking questions, I'd like to reiterate how excited we are to have the opportunity to partner with Solara and ActivStyle and their management teams. We believe these acquisitions will continue to propel AdaptHealth's business into the future while executing on our long-term strategic vision. Operator, please open the line for questions.
Thank you. We'll now be conducting a question and answer session. If you'd like to be placed in the question queue, please press star one on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star two if you'd like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing star one. One moment, please, while we poll for questions. Our first question today is coming from Mathew Blackman from Stifel. Your line is now live.
Good morning, everyone. Can you hear me okay?
Yes.
Okay, great. Maybe Luke, to start with you, should we assume that your willingness and want to do these deals and do them today is a reflection not only of the importance of these incremental opportunities, but also the confidence you have in the base business today and the trends you're seeing?
Yes. I'm humbled by, and we talked about it a few weeks ago on our quarterly call, just humbled by how well the team has responded to this crisis, both to care for our patients and to provide product to our referrals and to make sure that our payers had access for their members. We continue to have confidence in our core business. The resupply business is strong. It is a source of stability in uncertain times. Obviously a few weeks ago, we reiterated our guide for the year. Being able to do these transactions, we feel grateful that we've been able to work on these while the core business has remained stable.
Okay. I just have a couple of follow-ups. You gave us some of the sort of the pro forma mixes. I'm just curious, what do these deals do to your competitive bidding revenue and EBITDA exposure mix when all is said and done?
Obviously, we've disclosed in the past about a little less than 1/3 of our revenue, actually a little less than 30%, was subject to competitive bidding. Effectively none of the products here, whether it be continuous glucose monitors, insulin pumps, incontinence, urology or ostomy supplies, none of those products is in the competitive bid program. It's a little uncertain now whether the bid program is going to go forward or whether there'll be future changes. They've already taken non-invasive ventilation out. We are proceeding as if it will sort of continue as scheduled with us finding out bid winners later this summer and then effective rates January 1st, 2021. One thing we liked about these business lines, we like to continue to make sure that we're not overly exposed to any one exogenous factor that can impact our business.
I think we've communicated that across most of our product categories, we don't expect to see significant rate impact from bidding, but it's always nice to expand your business where there definitely won't be any rate impact from bidding. If you looked at our pro forma revenue, none of this incrementally, almost $300 million on an annual basis that we're adding, none of this is competitive bidding exposed.
Okay, that's what I thought. My final question, is there any way, you touched on it briefly, but is there any way to quantify what's called the comorbidity overlap of your sleep franchise and diabetes? I think really sort of the next important question is what role can you and Solara together now play in sort of in building CGM awareness across your sleep install base and frankly, across your install base more broadly?
Yeah, it's a great question, Matt, and it's one of the reasons we're so excited. Also very intentionally picked a CGM partner. We've been surveying the landscape, and we wanted to pick a partner that just had a best-in-class management team so we could immediately start thinking about those things. Steve and Keith have just done an amazing job building a business at Solara. When we look at sort of the opportunity in front of us, we think that it's significant double digits, comorbidity probably potentially north of 20%- 30% for just either pre-diabetic or diabetic crossover to our sleep apnea patients. Now, that's not saying that all of those patients are eligible for a solution like a continuous glucose monitor. What we will do is we are in regular monthly contact with most of our sleep resupply patients monthly or quarterly.
As we talk to those patients about making sure that they're getting their needed supplies on the sleep side, we'll ask them about whether they are a diabetic, whether they are a multiple daily injector and might qualify for CGM. We think that there's a significant opportunity just to make our patient base more well aware. At the same time, there's an opportunity for us to go to our acute care hospital partners where we're getting respiratory discharge business or maybe mobility business to further highlight that we can handle the supplies categories, uro, ostomy, incontinence. We're seeing a continued trend is these large integrated systems have diabetic centers of excellence. We're able to, and it's been exciting for us being able to, we can provide the Dexcom, the Libre, the Medtronic product. We can also provide the Tandem, the Insulet.
We're really able to be a comprehensive solution for these diabetic centers of excellence. That's something that we're going to, hopefully at AdaptHealth, we have a little bit broader relationships with acute care systems. Solara has focused historically more closely on both the manufacturer relationships and then increasingly over the last two years of the endo and PCP relationships. We think that there's a real opportunity not just in making our existing embedded census aware of the solutions that Solara and frankly ActivStyle can offer, but really going to our referral sources, particularly large integrated health systems. One exciting thing, and Solara just recently announced it, is a partnership with the Cleveland Clinic. That will be a template for us, which is, and Solara did a good job of building that and closing that sort of partnership without any involvement from AdaptHealth.
We'll certainly use some of our relationships with systems like that to see if we can't be a more comprehensive solution provider to blue-chip health systems like that.
I really appreciate it, Luke, and congratulations, everybody. Thanks.
Thanks, Matt.
Thank you. As a reminder, that's star one to be placed in the question queue. Our next question is coming from Brian Tanquilut from Jefferies. Your line is now live.
Hey, good morning. Congratulations to everyone. I guess my first question for Luke. As I think about the growth rates of these businesses that you're acquiring, do you mind just walking us through what the trends have been or maybe even talking about kind of like industry-level growth for, say, CGM and then continence business?
Yeah. I think that, just focus on CGM first. We believe overall the market for CGM is poised to expand significantly to 20% per annum over the next couple of years. We're well aware that there is sort of multiple benefits, a medical benefit and a pharmacy benefit that can be accessed for CGM and some of the large manufacturers have expressed an interest in expanding the capabilities in the pharmacy benefit. Solara was a choice of ours because they can offer dual benefits. They do have a mail-order licensed pharmacy in all 50 states and is in-network with several of the large PBMs. We want to be able to access that 20% sort of market growth.
Importantly, just like we've seen in our core HME business, we do believe that, particularly with COVID, share is flowing to the people with connected solutions, with technology that can make life easier on referrals and manufacturers. Certainly Steve and Keith have done a great job of building that at Solara. We do think that this can be certainly a double-digit growth business for us going forward. On the CGM side, Solara has a very close relationship with Dexcom, as well as good relationships with Abbott and Medtronic. Dexcom's growth, public company, you guys can all see that. We are excited to continue to deepen that partnership. Then on the pump side, whether it be with Tandem, who's experiencing phenomenal growth, Medtronic, Insulet, we really do want to be that comprehensive solution provider.
If you pivot to ActivStyle, incontinence is a lower growth business for sure, but we still think it is sort of mid-single digits. One thing that'll be interesting for us is ActivStyle hasn't had as broad a payer portfolio as AdaptHealth has, particularly in the managed Medicaid space. One opportunity, ActivStyle primarily acquires the first time their patient from some direct-to-consumer advertising. What this does is it widens the top of the funnel, which is, they can just ingest more leads that are qualified. When I say qualified, we have the insurance to take those leads, and then make sure that that patient can get the product they need.
The nice thing about the ActivStyle business is once you bring a patient on service, they stay on for quite some period of time, and you're just resupplying them either on a monthly or quarterly basis. The market itself is probably a low- to mid-single-digit growth. If we can use both our payer and our referral relationships to maybe diversify their source of inbound customers, we think that we can drive a little bit higher growth than that.
Luke, to follow up on that point. In your guidance of about $7 million in synergies, are you including any revenue growth pick-up, or is that all cost and efficiency synergies?
That's really the cost and efficiency in the $7 million. Certainly, we think that there will be additional incremental revenue synergy over time. Almost all of that is, whether it be cost of goods, with getting the additional scale of manufacturers. ActivStyle's done a really nice job of sourcing a private label incontinence product that will help our acquisition costs there. There's certainly some labor overlap, some back-office synergies. To your point, we're excited about the potential for revenue synergies. They're just a little bit hard to quantify, and so they're not included, and we hope to deliver them.
No, that makes sense. One of the things you talked about was you alluded to the term connected solution. How do you see Adapt providing the connected and offering to, whether it's payers, patients, or, the medical community? Where do you see Adapt eventually positioning itself in that connected solutions strategy?
Yeah. I think our thought process is probably accelerated. I think we've recognized over time, we have hundreds of thousands of CPAP patients who have a connected device in their home that we monitor for compliance and make sure that they're eligible for resupply. We already have built the systems to take and then ingest data off of the connected device in the home and then do something with it, which is make sure that patient is using it or it qualifies for the resupply, and then talk to that patient and make sure that we can then send them their supplies. I think that what we're accelerating now is saying, okay, well, we built the remote monitoring capabilities. We have staff to do that. We have clinicians who can intervene. Why can't we do that across more product?
As we started to ask ourselves that question sometime last year, CGM just felt like a very natural sort of fit. These products are connected. With patient consent, we could get access to sort of blood glucose information from the Dexcom unit. Now, that's not going to happen tomorrow, to be clear. Over time, if we can start pairing some of the information that's coming off of a continuous glucose monitor with some of the information that's coming off of a CPAP machine. What we've seen in the COVID environment is an increased demand to put other type of connected devices into the home, whether it be a pulse oximeter, a scale, a blood pressure cuff, all things that are natural in our supply chain.
We started to talk to our manufacturer partners about making sure that we have a connected option we can distribute, then that can allow a physician to do remote monitoring. It can allow us to employ and continue to build out our capabilities on the remote monitoring side, potentially pair that with some algorithmic sort of teaching and training tools for the patient. We think, given the breadth of offering that we have, it's not just one product, it's not just diabetes, it's not just sleep apnea. We can go to, whether it be a payer, a hospital system, a self-insured group, and talk about, "Hey, listen, we are fully staffed, and we can give you a menu of options.
We can offer it to you à la carte." Importantly, when we're talking to these members or patients in the home, it's not just, "Hey, listen, we're calling to check in on you." It's, "Hey, we're calling. We're going to send you your supplies. By the way, we noticed you weren't using this. We noticed that there was a different pattern. Can we help?" We think that is just a differential sort of relationship with the patient than almost anyone else out there who's offering a connected health or population management solution.
I got you. Last question from me, I guess for Josh. Obviously, the deals have gotten bigger. You've done a series of sizable transactions this year. How are you feeling about your bandwidth to integrate, and then your thoughts on any potential disruption from putting all these deals together?
Yeah, I think, we've done everything from restructured type of deals to larger transactions with more seasoned management teams. I think what we're realizing as we scale is we still have bandwidth to do some of those restructuring deals, but they also, like you said, pull a lot of bandwidth out of your team. I think what's particularly exciting with these two deals is both the systems that they're on, but more importantly, the management teams that they're coming with. I think our bias now, as we look at some of these deals, is really evaluating the management team and do they have the ability to step up and contribute to Adapt and help us scale.
I think now with these two teams, both on the Solara and the ActivStyle team, very seasoned teams, very experienced, very sophisticated, also technology-forward companies, that are going to be, I think, easier to integrate than a complete do-over, like we've done in the past. I think that allows us, frankly, to scale easier, because as we grow and as we do more acquisitions, we're relying more and more on solid management teams and solid people within the companies. Really both what we're getting with these companies, not just strong companies, but also strong talent that comes with it as well.
I appreciate that. congrats again, and good luck.
Thanks, Brian.
Thanks, Brian.
Thank you.
Operator, are there any other questions?
Not at this time. I'd like to turn the floor back over to Luke McGee for any further or closing comments.
Thanks, everyone, for joining the call today. Again, thank you to Steve and Keith and Gayle for joining our team. We're excited about the opportunity in front of us and looking forward to executing on our plan. Have a great day.