AdaptHealth (NASDAQ:AHCO) executives outlined the company’s second-quarter performance, portfolio changes and plans to focus capital on sleep, respiratory and home medical equipment businesses during a Canaccord conference discussion.
Chief Executive Officer Suzanne Foster said the company has spent the past two years integrating a business assembled through more than 150 acquisitions, standardizing operations, improving capacity and reducing debt. The company also has been rationalizing its product portfolio, a process Foster said largely concluded in the second quarter.
Diabetes Sale and Cost Reductions
Foster said the diabetes operation represented about $600 million of business and had initially been stabilized after facing declining growth and operational issues. However, the company ultimately concluded that the segment did not offer the expected cross-selling opportunities with its other operations.
She also cited industry changes, including a shift toward pharmacy benefits from medical benefits and the expected return of competitive bidding. Foster said competing effectively would have required AdaptHealth to invest further in pharmacy capabilities and distribution infrastructure.
“The other markets we serve, sleep and respiratory, are much more attractive,” Foster said, adding that Cardinal Health has a warehouse network and pharmacy channel that make it a better owner for the diabetes assets.
The diabetes transaction will leave about $60 million of overhead costs with continuing operations, according to Foster. She said AdaptHealth expects to remove roughly half of those costs during the first year after the deal closes. The remaining amount is expected to be addressed through growth and tuck-in acquisitions in the company’s sleep and respiratory businesses during the second year.
Growth and West Coast Contract Challenges
Foster said the base business performed well in the second quarter, with 16% top-line growth. She attributed 10% of that growth to the company’s West Coast expansion and a contract with a large integrated delivery network, while more than 5% came from the base business.
However, the company is working through two issues: the onboarding of a new capitated contract covering 13 million members and a supplier/manufacturer negotiation involving rebate and volume terms.
AdaptHealth built 40 new locations and added personnel, vehicles and other infrastructure to support the West Coast contract. Foster said the first full quarter of the arrangement exposed assumptions that did not develop as expected, including utilization levels and hospital ordering patterns.
She said certain hospitals in the network classified orders as urgent or stat even when patients may not have needed immediate delivery, increasing service costs. The company is working with its partner to establish utilization baselines and adjust processes through approaches such as drop shipping, technology and revised urgent-order practices.
Foster said she remains confident the company can improve the contract’s cost structure. AdaptHealth also expects to pursue additional fee-for-service business on the West Coast once a federal durable medical equipment provider-number moratorium is lifted. She said the company is awaiting potential news in August on whether the moratorium will expire or continue.
Sleep, Technology and Capital Allocation
Foster described the sleep market as a key growth opportunity, citing increased awareness from wearables and GLP therapies as well as record referral volumes. She said home diagnostic testing, virtual patient setups and artificial intelligence-based mask fitting are reducing the time and friction involved in starting sleep therapy.
The company is expanding its myApp patient portal, which is designed to support patients from diagnosis through billing and resupply. Foster said the app allows patients to order supplies, communicate through chat and ask clinical questions. Sales representatives use QR codes in physicians’ offices to connect newly prescribed patients with the platform, rather than relying on a separate marketing-driven customer acquisition effort.
Chief Financial Officer Jason Clemens said the continuing business should require capital expenditures of slightly more than 13% of revenue, or about 13% to 14%. About 90% of that spending is expected to be patient-equipment capital expenditures. In the second quarter, the company also incurred about $25 million of non-patient equipment capital expenditures, primarily for vehicles, warehouses and related infrastructure supporting the West Coast expansion.
Looking ahead, Foster said AdaptHealth’s capital-allocation priorities are continued organic growth in sleep, respiratory and related home medical equipment; debt reduction to a 2.5-times leverage target; and tuck-in acquisitions focused on sleep and respiratory geographies.
About AdaptHealth (NASDAQ:AHCO)
AdaptHealth, Inc operates as a leading provider of home medical equipment (HME) and related services in the United States. The company focuses on delivering respiratory care, mobility solutions and bathroom safety products to patients with chronic and acute medical needs. Through its comprehensive service offerings, AdaptHealth aims to enhance quality of life and clinical outcomes for patients who require long-term support outside of a hospital setting.
The company’s respiratory portfolio includes products such as continuous positive airway pressure (CPAP) devices, oxygen concentrators, ventilators, and associated supplies for patients with sleep apnea, COPD and other pulmonary conditions.
