Q3 2020 Adapthealth Corp Earnings Call
Hello, and welcome to the Adeptus Health Corp, third quarter 2020 financial results Conference call. At this time, all participants are in listen only mode a quick.
Sure. That's a session will follow the formal presentation.
If anyone should require operator assistance. Please press star zero on your telephone keypad.
As a reminder, this conference is being recorded.
My pleasure to trigger pull over to Chris Joyce General Counsel. Please go ahead.
Like Devon.
Welcome everyone to adapt health Corp.'s earnings conference call for the quarter ended September 30 21.
Everyone should have received a copy of our earnings release earlier. This morning, if not I'd like to highlight that the earnings release as well as a supplemental slide presentation regarding Q3 2020 results posted on the Investor Relations page in.
In a moment well have some prepared remarks for loop Magee Chief Executive Officer, Sharp corners, President and Jason Clemens Chief Financial Officer, well, then open the call for questions.
Before we start I'd like to remind everyone that statements included in this conference call and in our earnings make.
May constitute forward looking statements within the meaning of the private Securities Litigation reform.
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 such forward looking statements because of a number of risk factors and uncertainties, which are discussed in our annual and quarterly EPS you file it.
That's helpful <unk> no obligation to update the information provided on this call to reflect subsequent events.
Additionally, on this morning's call will reference certain financial measures such as EBITDA and adjusted EBITDA, which are non-GAAP financial measures a table, providing supplemental information on EBITDA and adjusted EBITDA is included in today's first quarter earnings release.
This morning's call is being recorded and a replay of the call will be available later today.
I'm now pleased to introduce our Chief Executive Officer Luc Magee.
Thanks, Chris and thanks, everyone for joining the call before I get to my remarks on the third quarter I'd like to acknowledge the tremendous efforts of adopt health front line brand style clinical teams and delivery drivers.
Such an important role in desktops continued service of our patients help me bring these extraordinary times.
Throughout the last eight months, our parties have been and will continue to be the health and well being of our patients and our workforce I'm incredibly proud of the entire desktop teams know each and every team member has stepped up to help those in need throughout the call that 19 crisis.
We ended 2019 at the fast growing and profitable home medical equipment company with a small medical supplies business with acquisitions in 2020, we have not only accelerated the growth of our home medical equipment business.
But importantly have added a large and growing supplies business with a concentration in advanced diabetes supplies the management.
We continued to be active acquirers of traditional HD depicted in the third quarter. When we acquired the economy assets of advanced wound care and health plan medical in March we noted that there would be married adding additional density in the southeast and southwest to that end, we acquired family medical a $40 million revenue can be in eastern North Carolina in mid August.
And closed on another acquisition in Texas in early October these additions that important scale in high growth geographies. We also made several smaller each of the acquisitions in the mid Atlantic Midwest and new England during the quarter.
We're excited about the key operational leadership from these acquired companies and retain many as leaders in adoptable.
In diabetes, we view this as far as a platform on which we can do a much larger national diabetes distribution and management business.
We are excited about the continued market growth and continuous glucose monitoring.
Foreign pumps and believe adoption rates will accelerate.
Recently, we closed our first diabetes add on acquisitions with the purchase of diabetes supplies and optimism and Pinnacle medical solutions. These acquisitions should at $85 million to $90 million to diabetes revenue in 2021.
Our entry into the diabetes supply the mountains base, along with our incumbency in the sleep disorder space gives us the ability to generate generate useful real time information about the health of our patients, particularly those with chronic conditions. This is a high priority for adopt health as we evolve from a provider of equipment and supplies to a more complete connected health care solutions provider.
We have an active M&A pipeline and plan to continue to be selectively acquisitive as we identify opportunities that deliver financial results in accordance with our disciplined approach also furthering our strategic goals.
Although our pipeline is robust we are not including future acquisitions in our guidance for the remainder of 21 or for 2021.
On the regulatory front, we received positive news from CMS last week regarding the Medicare competitive bid program.
As a refresher around 2021 competitive bid program was originally scheduled to be effective on January Onest, 2021, and encompass 16 bit categories.
On Tuesday of last week, CMS announced they would be proceeding with only two product categories off the shelf back any basis, although not entirely clear and subject to change we interpret this announcement to me the delay and the competitive bid program for any other any other categories until at least 2024.
Additionally, in the proposed rule CMS has indicated that they intend to make higher blended rates in rural territory permanent which is a welcome development.
We await further guidance from CMS on whether you read providing inflation increases perform any competitive products and territories.
In total we believe these changes to the competitive bid program and roll rates are a positive and we expect the rate changes for the off the shelf back any races to be immaterial to adopt.
The proposed CMS will also affirms Medicare part D coverage for continuous glucose monitors and expanded universe of currency Jim devices, Although the vast majority of CGM that we currently distribute had already been covered under part D. We view the affirmation of positive now I'd like to turn the call over to Josh Burns, our president to discuss our integration activities.
Thanks Luke.
As Luke mentioned, we are extremely appreciative of the entire adaptable.
We had an extremely busy and successful third quarter with operating our core business integrating previously announced acquisitions and closing the new acquisitions mentioned earlier. Additionally, we made significant strides in building, our infrastructure and investing and scalability on that topic. We are thrilled to welcome Brian Brian as.
Our new executive Vice President of managed care, Brian will be focused on helping us expand our relationship with relationships with payers and formulating alternative and value based reimbursement models although.
Although we still face ongoing challenges presented by the COVID-19 pandemic, we've made adjustments in our operations protocols to ensure continued business stability and growth. We are seeing our new starts increasing to pre pandemic level as many facilities have welcome back our operations teams and salesforce within those until.
What is our health system access protocols are focused on keeping our employees equipped with PPD and compliant with pre screening protocols and social distancing guidelines to give some context, perhaps set up hit a low of approximately 30% against pre cobot level and mid Q2.
Q3 was up sequentially off approximately 10% to 15% against pre cobot levels and the last month of Q3 and the first few weeks of October are up mid single digits against pre kogut levels.
Most of our administrative operations remain virtual leveraging our investments in cloud based technology across our bass, our back office functions shift.
Shifting to the ongoing integration focus of our acquired businesses. Our PCL turnaround efforts continue to produce the financial results that we have expected.
Turnaround results don't come easily, but we are applying our expertise and resupply product formulary and purchasing all with solid results.
We're also driving improvements are phds in revenue cycle and efficiencies in labor and other operating expense. We continue to believe PC EPS will be profitable in the fourth quarter of 2020.
We've transitioned the legacy PC EPS CGM business to solera.
And we transitioned the legacy PC EPS incontinence business the active style leveraging the core operational capabilities that came with those businesses.
In addition to our integration work, we continue to stay focused on technology and business processes throughout the balance of 2020 and have big plans for 2021.
Our text and mobile App based orders increasing at axis style ancillary respectively.
Are you described penetration remains a top priority and argued prescribing initiative continued to result in less paper less faxes and greater adoption by our current providers.
Although there are still a long way to go to achieve our goals. There also remains a tremendous opportunity to unlock internal labor efficiencies and referring provider satisfaction.
With continued investment we believe we can drive down operational costs, while offering a better patient experience far more than 1.8 million patients that we service annually are.
Our technology capabilities are advancing well.
We recently launched a pilot for CGM you prescribing built upon the same backbone that we are utilizing within our HIV business and we believe this will help us increase orders to reduce turnaround times. We're also we also recently completed an assessment and validation of our vision for connected care we've.
We plan to launch a pilot in the first half of 2021 that will provide our patients better visibility to their clinical data, including an electronic resupply capability at.
At this point I will turn the call over and welcome our new CFO, Jason Clemens.
Thanks, Josh good morning, and thanks for joining our call I'd like to start by welcoming our new Chief Accounting Officer, Frank Magdlen, who jointed up health in late September in addition to deep accounting expertise Frank has years of experience leading various administrative functions and large public companies. He has already been approved.
Proven to be a great partner in a contributor.
Turning to our results for the third quarter of 2020.
Thats helped generated net revenue of $284 million, an increase of 108% from the third quarter of 2019, adjusted EBITDA was $53 million, an increase of 68% from the third quarter of 2019.
Adjusted EBITDA less patient equipment, Capex was 36 million an increase of 92% from the third quarter of 2019.
These financial results do not include the recognition of funds received in April as part of the Care Act provided what we thought our company is in the process of evaluating the updated post payment notice of reporting requirements published by HHS in late October.
We expect some benefit based on the latest requirements and we will record any benefit as soon as we finish our evaluation, possibly by the end of 2020.
Our third quarter financial results are even more gratifying the phase of the slowdown in elective medical treatment as a result of the pandemic as elective procedures have come back. So has revenue across our products that are primarily index to elective and emergency room discharges.
As Josh mentioned, new sleep starts were down 30% in the second quarter, but by the end of the third quarter sleep starts rebounded to about 90% of pre cobot levels.
The improvement is driven primarily by our operational changes that just spoke about earlier as well as growing reopenings on sleep centers.
We continue to believe that as our volumes revert to normal levels, we will grow organically at high single digits. Just as we did in Q1 2020 before the disruption caused by the pandemic.
Our third quarter cash flow from operations was strong and remains a primary focus for our management team.
As our diabetes and supplies products continued to grow patient equipment Capex becomes less intensive. So in addition to adjusted EBITDA less patient equipment Capex, we are keeping a close eye on how much cash converts from adjusted EBITDA.
On a reported basis operating cash flow for the nine months ended September Thirtyth 2020 was 145 million.
That includes approximately $46 million of CMS advanced payments and $17 million and cares Act provided relief funds.
Adjusted EBITDA for the same period was 126 million.
Excluding the CMS advanced payments and the cares act provider relief costs operating cash flow was $82 million or about two thirds as a percentage of adjusted EBITDA for the same period.
In regard to our balance sheet, we ended the quarter with 272 million of cash and we had zero drawn on the revolver under our credit facility.
Now I'd like to turn to our guidance for the fourth quarter and our preliminary outlook for 2021.
Neither of the 2020 guide nor the 2021 preliminary outlook include recognition of the funds from the cares Act provided relief loans.
As announced this morning, we are increasing our 2020 full year guidance for net revenue adjusted EBITDA and adjusted EBITDA less patient equipment Capex.
Our previous 2020 full year guidance for net revenue and adjusted EBITDA less patient equipment, Capex was $935 million to $983 million and $120 million to $127 million, respectively, which included ramping contribution from our July 1st acquisitions, but did not include contribution from additional M&A following solaire in active style.
Luke mentioned, a number of key acquisitions that we made in the quarter as well as pinnacle on October Onest. We expect these acquisitions to be immediately accretive to earnings. We are therefore, raising 2020 full year guidance for net revenue to 1.00 billion to 1.04 billion and.
Adjusted EBITDA to 186 million to $194 million.
And adjusted EBITDA less patient equipment, Capex to 124 million to $130 million.
Turning to 2021, we cannot perfectly predict the ongoing impacts of Cove in 19, but we continue to believe that our organic growth returned to normalized levels by the first half of 2021.
There are a few other key assumptions driving our guide, including end market growth, particularly for diabetes.
Our ability to grow share across our product lines and financial returns on key investments, we're making in technology as well as efficiency projects aimed at our direct and indirect costs.
Although our M&A pipeline is healthy, we're not including contribution from future acquisitions in our guidance.
We believe that the core business will grow at 7% to 10% organically.
Tilera and active style businesses acquired on July Onest will deliver previously announced full year performance targets.
In additional businesses acquired between July and October 2020, we will hit their full ramp by the second half of the year.
We are guiding to net revenue of $1.30 billion to 1.40 billion.
Adjusted EBITDA of 260 million to $280 million and.
And adjusted EBITDA less patient equipment Capex of 180 million to 200 million with less I will turn the call back over to will.
Thanks, Jason.
In conclusion I'd like to reiterate my thanks and appreciation for all of our adapt helping plays has stepped up and delivered record financial results, while continuing to serve our patients and referral partners with courage and professionalism remain more confident than ever about our strategy and prospects.
Operator, please open the line for questions.
Certainly we will now be conducting a question and answer session. If you like to be placed in the question queue. Please press star 100 telephone keypad, a confirmation told would indicate your line is in the question queue. You May Press star two if youd like true question from the queue for participants using speaker equipment, maybe necessary to pickup.
The handset before pressing star one.
One moment, please while we pull for questions our.
Our first question today is coming from Matthew Blackman from Stifel. Your line is now live.
Hi, Good morning, everyone can you hear me okay.
Yes, and Matt are you done.
Im doing well thanks, thanks for asking maybe to start there always a lot of moving parts in the business and as we think about the new 2020 guided you wait it maybe just help us bridge, a little bit how much of that raise and maybe put it into three buckets how much of the race roughly is are the deals you acquire.
In the third quarter, plus pinnacle versus performance.
Recent deals like solar our active style and and then I guess any sort of puts and takes in the organic business is it possible to maybe give us some color costs are those that those different drivers.
So I think it's going to be difficult to break into those two buckets, but I can certainly give you. Some context I think our core business is performing slightly above plan that we established at the beginning of the year very comfortable even despite coated the strength of the resupply business the way that start to bounce back at Q4 should be largely in line with where we started the year.
Active down in South Florida are running.
Well, we're in the middle of integration activity given that we're only sort of second quarter end like there's not a material kind of deep versus expectation yet although I will note that we are very excited about trends in both of those businesses and so most of the guide increases related to the acquisition activity. Both completed in Q3 and then the pinnacle.
Deal, which closed on October onest.
Okay. That's really helpful. And then maybe Jason do you have handy what you guys think the organic growth number was in the quarter and then I just have one follow up.
Yes organic growth to the third quarter was a little over a point.
So.
In the face of coded I mean, we're actually pretty pleased with those results.
As as you heard in our prepared remarks starts, particularly around sleep are coming back.
As you know there is a bit of a compounding effect on that so.
As Q2 hit in the midst of coded and starts were down materially.
Materially there is a compounding effect of that that we're in the we're in the middle of that we're starting to see feel through going.
Going in the positive direction.
Okay that makes sense and then just just two quickies on diabetes.
Indeed, we modeled it out a little too aggressively, but solara look just a little bit light relative to pumping very little light versus what we were expecting just curious how that quarter shaked out versus your expectations and then as we think about some of the deals you completed.
In the quarter is there any sort of common theme or thread is it just increasing patient scale as a broader geographic exposure I suspect, it's not really portfolio expansion.
And the price of the combination of all the above but just any color on that would be helpful. Thanks. So much.
Yes, so on so far.
Revenue was a little bit weaker than we had modeled but that's really just due to the full follow on impact of the Tri care rate cut that was known to us in the beginning the year and we were just a little aggressive and we've modeled it I will tell you that that new start trends are well ahead of budget.
In terms of new patients getting set up and also the patients being resupply and so from a growth perspective. If you ask me today versus when we announced Q2 results versus when we closed the deal were very pleasantly surprised by the underlying organic unit growth in diabetes and once we sort of we have basically.
Have you fully.
Fully absorbed that Tri care rate cut an understanding what it means.
So we're very excited about the outlook for our diabetes business across the board SLR at the Pinnacle.
Market.
We believe we are taking share but the market is growing quite rapidly as many of you guys know.
With the increasing prevalence of CGM.
On the acquisition side I think it was a mix out obviously when we acquired the Laura We said we viewed it as a platform and now we've done two acquisitions and I would expect that over the next year, we will continue to do more to add both.
Both geographic density and exposure pinnacle absolute strong player in the southeast Hi, diabetes prevalence.
State and so that was an attractive start piece of business for us very good management team sort of good systems. We are fortunate to both the FCM and pinnacle or run the same billing software we do on the HIV side. When we did the deal as earlier this year in March we did say that we like to kind of do more the one deal to really establish ourselves into.
Geography, and so we were able to do that in the third.
At quarter and early October in Texas, and Southeast and then there were some small tuck ins we did the deal in Western Pennsylvania that give us some more density there. We have we already had existing operations that a small deal to expand our footprint and give us additional growth opportunities up in new England and at a very very small in the Midwest, we continue to see.
A nice pipeline of acquisition activity and so it will likely at this point the some slight geographic expansion new England in the upper Midwest are still underpenetrated for us.
Then on the diabetes side will continue to add scale there.
All right. Thank you very helpful and congrats again on a great quarter.
Thanks, Matt.
Thank you. Our next question is coming from Stephen Tanal from SVB Leerink. Your line is alive.
Good morning, guys. Thanks for the question.
Yes, I would ask you about competitive bidding and Amazon reading into what happened there. So the fact that CMS pulled out 13 to 15 product categories. All the ones that had been Gen program in the past at least one around.
Yes, and the reason they cited right that they didnt get effective savings from the bids I don't know how much to read into that I'd love to hear how you guys are thinking about that and what that may or may not mean for the future of this program.
Yes, I mean, it's always dangerous to try to not read too much into what was just the press release from CMS, but.
But if we back up.
As we told most of our investors and the analysts we did expect that there wouldn't be saving there actually be increases in a number of categories, given how far rates to come down.
Certain categories and given how non competitive certain markets are so I'd say, it's not a huge surprise the and if you want to be a complete optimum you would say that not getting savings and a competitive bid program. It. It may not be 2024, it actually may be a permanent turn to delay or cancellation of bidding in these categories because they didn't get the cadence they want.
Yes.
Same time.
Who knows I will say it doesn't feel like trying to eke out savings from the existing big categories should be a high priority CMS now I think that.
The market has told CMS that they had found the bottom and maybe even down below the bottom on rates and so we're excited about having rate stability for the next three years, certainly gives us visibility and confidence in executing our plan.
Absolutely and I guess as I talk to folks in DC to figure out kind of what led to that I think I heard a lot about sort of the structure of bidding and ultimately going with the clearing prices eventually that the big issue and you guys had kind of gone through all the big so.
Do you read anything into this reflecting on like the structure of the market and raised like I think there is a train of thought that goes well, but this is the outcome, perhaps the industry. At this point is stable and maybe consolidating and no longer to serve no longer looking to sort out do itself on based on or maybe it really just due to the changes to the structure of the competitive bid.
Think programs that are in a very specific comments, there, but I'd be curious your thoughts.
We we welcomed the changes because clearing price actually does reflect market supply and demand and do we do think that moving from what was sort of a noneconomic median.
Median bid process that the industry and noted economists had sort of a challenge in 2013 in 2016, when they did it the move to clearing prices the move to market economics and now the market has spoken and said that the rates.
Yes, if you want to read between lines.
Are too low and they exist.
We do believe that the market will continue to consolidate.
So again, we welcome the delay or cancellation, obviously in a perfect world, we could have seen higher rates, but we understand that also helped our cost need to go down and we are working very very hard to make sure that we can be the low cost provider ourselves and we can also enable lower cost health care in the home.
That's great and if I can just sneak in one last one then I'll yield just the 1% organic growth rate that any Jason gave out there how did that compare to your expectations. What are you guys looking for in Q3 with all that's going on the backdrop.
I think we're pretty happy with in the quarter at 1%, Yes still positive year to date in light of Covet, we knew Q3 and frankly the early part of Q4, the hardest hit from the compounding of Pap rental revenues and so to be able to deliver that I'm incredibly proud of the team I think we are setting up for a higher number in Q4 and as we go.
20 2021.
Back to our previously forecast range.
Really helpful color. Thanks, a lot.
Thank you. Our next question today is coming from Peter what you're hearing from Deutsche Bank. Your line is that right.
Hi, Good morning, guys. Thanks for taking my questions to.
To follow up on that question on revenues in the script, you talk about core ops growing organically, 710% because.
There's obviously been a lot of moving pieces and 20 2020 due to cultivate when you think about organic growth in terms of both rental and sales should we base off of 2019 due to that due to the tough comps in 20, 27% to 10% each segment for 2019 baseline or is there a better way of thinking about it.
And also.
With recent pinnacle deal how should we think about organic growth in diabetes for 2021, what percent of revenues and 2021 will come from diabetes.
So.
The first one it's a good question obviously, we've been so acquisitive with net even 2019 at heart baseline. Obviously, we do expect to see growth in core growth in 2020. Despite covidien more obviously, if you look year to date I think were.
So we're in a low low to mid single digit certain higher than 1% not excludes b to b and so.
We can follow up offline about how to model it but I don't think that starting in 2019 is going to be the easiest exercise just given up as you know we've been.
On the second piece.
Diabetes, it's a fast growing market.
And so we would expect our diabetes business and there is some blend to get to seven and of above market diabetes growth you should the diabetes should be a mid teens grower for us in 2021, I think that probably somewhat conservative and if you look at percentage of revenue you're going to get to mid Twentys as we continue to grow that and that is just with what we own today.
Again, we like the acquisition landscape in diabetes, we think that there is a similar playbook to execute there that we've done in core HR means and so with those that could even skew higher.
Okay, and then a question on the margins.
There's a lot of moving pieces, obviously on 2021 margins with all the deals you guys have been signing.
On the surface it looks like fourth quarter margins it got to be 13.7 at the midpoint.
2021 guard mergers guy to be 14.1% mid point can you walk us through the moving pieces of the margins for 2021, where are you getting leverage the APAC and acquisitions in any areas of pressure that we should be thinking about.
Hey, Peter this is Jason thank.
Thanks for the question.
But to your point, but a fair amount of this movement is just profile and so this this base business is changing materially with the add on in in diabetes, and the and what we're seeing as very strong growth in.
In diabetes, so youre seeing some of that pull through and just the change in the margin profile in in the increase that you mentioned. Additionally, we're continuing to make investments Josh talked about a number of these areas in.
His prepared comments you know there there are plans of cost out in a couple of parts of the business that we're very confident in.
That's that's also additive to the to the profile changes.
Okay and in tumor Quickies for M&A pipeline, you mentioned that it was robust multiples.
Multiples changed today versus what you are seeing peak of it.
Yes, I'd say are I don't know, if it's cold, but I would say our success and we are a victim of our own success in that there are other people sort of watching what we're doing so all.
All things equal HMH deal that they are marginally more expensive youre talking about a half a turn or return.
And then diabetes just given the given the growth profile, we've sort of said historically at age media. We think we can buy at four to six times sort of first year's cash flow I still think we can be at the top end of that range comfortably and get sort of significant deals done on the diabetes side I think we said when we did it so are the new deals would be.
The more expensive and diabetes, given the growth, but if you look like on a year to basis.
They're very comparable and I think.
We stand behind that larger deals will be slightly more expensive on a multiple basis smaller deals will be slightly less expensive each and me will be slightly less expensive compared to diabetes on all still a very very accretive financial environment to be an acquirer, but also what we find is acquisitions, we're adding we're adding.
Business processes oftentimes, we find that we founded on diabetes as well as a to me that these smaller but decently sized companies require they may have a business process doing one part of our complex business better than adapt and then when you can scale that and bring that across our entire business. There is some hidden benefit to that position.
All right and then last Super quick one for Josh just to sort of pull him in here what what percent of all your sales team for windley patients go three prescribing today, and where you think that goes in 2021. Thanks, a lot guys in this quarter.
Sure.
So currently we're running about 30% of orders coming through our three prescription and then obviously excludes the resupply which we have our own technology. That's that's kind of driving the resupply process. So.
The real friction point with the provider is on that new orders really we have a lot of initiatives going on in Q4 and for 2021 to drive that number north of 50%.
And we're particularly excited about kind of what we're doing on the CGM diabetes business with the prescribing I'd mentioned that in my comments that that's that's an area that I think is behind even a jimmy as an industry in terms of adoption would be prescription and kind of automation. So we're putting a lot of effort into that as well and we feel like site.
Well times automation and improvement and kind of both customer and referring provider experience will help us also drive or additional organic growth there on diabetes line.
Great. Thanks, so much guys.
Thank you. Our next question today is coming from Brian Tanquilut from Jefferies. Your line is.
Hey, good morning, congrats to the whole team for a good quarter.
I guess I'll just ask on the M&A front with competitive bidding kind of behind us now.
Seems like right does that.
Get does that get you guys more aggressive or do you think that.
Because it's easier to model and maybe the actual purchase price could be higher you that we could see more interest from the sellers.
No. It's it's hard as that we have a really good pipeline in New York.
We're working on prior to competitive bidding I think we were relatively confident that there wasn't going to be a dramatic result, whether it be on smart laddered ourselves. We had done a lot of math amid share kind of our perspective that it wasn't going to be immaterial impact to us.
I do think there is there's a lot of people just waiting.
Well I don't know what they weren't necessarily waiting for which is I think that they just wanted to know what it was before they decided whether to sell or not and we continue to see that.
Inbound inquiry on a one off basis, we can see continue to see kind of that each of the broker community reach out to us. So we do think there will be an active 2021 year on the M&A.
Got it and then just shifting to the diabetes side of the business.
Right are you guys seeing any incremental movement or discussions on the medical benefit versus the PBM benefit and you do some of these acquisitions and how you're thinking about the M&A strategy there.
We're starting to see some more shifting to pharmacy.
And so obviously our manufacturer partners on diabetes side, whether it be on insulin pumps, our CGM voice their desire to see more of the business so through the pharmacy benefit.
We continue to believe that occurred thinks this is a business for both those product and will always be under medical benefit, particularly Medicare affirming part D coverage.
I think we saw one payer in the quarter to a pharmacy benefit across our entire business and so.
Is it a gradual net you move this happening yes is it a land chef no.
As a reminder, we have farm is both the EPS Yemen pinnacle, how have the capability to do sort of pharmacy business.
There are.
[noise] positives and negatives, it's generally lower gross margin business and slightly lower contribution margin business.
Same time, the RCM function and claims adjudication in a pharmacy as much cleaner much faster.
And our ability to cross sell to patients I think we'll subsume any pharmacy benefit movement, which is that if we can.
Either medical or benefit we compete the fighting the insulin pump whether it be the medtronic the tandem the interim.
Along with the CGM to me there is more on that in that and.
And then the other thing I'd, just like to point out the diabetes business that not only are we seeing kind of very robust sort of market growth in terms of new patients being set up and there is.
Really.
As a reminder, Medicare on started covering CGM in 2017, and so in a sense is based business, where a patient gets set up and then should be on the therapy for long time that we're relatively early in the sentence compounding where new starts so outweigh attrition that we have a lot of tailwinds at our back diabetes.
So sad.
We have yet to unlock although starting next year on a pilot of how we really kind of try to measure and manage chronic comorbid patients across diabetes sleep and other diseases. So there's lots of tailwind is pharmacy.
Slight headwind undeniably.
Yeah, no that's okay that.
That makes sense and then.
I guess for Jason just a quick question on patient Capex as a percentage of revenue from rentals is this a good number to be using going forward. The Q3 number.
Yes, I think its a fair way to look at it in terms of a percent.
Rental revenue.
I mean, if you look at our history, we've kind of bounce around between call. It 17, and maybe 20 or 25% as a percent of rental revenue for the quarter was 22 points and year over year was like 24 last year. So I think it's a fun way to think about modeling it.
Yes, just.
The number is largely correct we did.
Two thoughts snap back, which we've talked about it.
Drives a bunch of patient capex.
Maybe a touch high in Q3, just given that we can get purchased quite a bit of equipment to meet the growing demand.
Got it okay awesome. Thank you guys congrats again.
Thank you. Our next question today is coming from and Todd.
RBC capital markets. Your line is our lives.
Yeah. Good morning, guys. Thanks for taking the question.
Just a couple of follow ups on some of the picking up some of the threads from from the previous questions but.
Really a looking back at it kind of competitive bidding and.
Can you talk about how that is.
Impacted.
Sorry, your purchasing power overall and relationships with some of the suppliers.
Yes, so I think that you know because we because it was a big unknown, we had sort of delayed or and mutually agreed that you until we have better visibility on rate that it wasnt a productive environment. So you talk about go forward pricing with our manufacturer partners and certainly our perspective is as we aggregate scale.
There are a variety of reasons why scale should mean lower purchase cost.
Obviously, I'm not sure our manufacturer partners completely agree or want to agree with that approach, but we feel quite strongly about that so now that we have rate stability I think you'll see us over the next few months, maybe into Q1 sort of going back and establishing sort of 2021, and 22002 purchasing targets and relationships with our manufacturers.
Okay, Great and then.
Glad to hear a new patch starts are are are cranking back up can you remind us kind of what the sort.
Sort of tail revenue from that looks like on the on the supply side.
Second can you say that again, it's on I want to make sure I followed that.
Just trying to get an idea for the sort of the timing on when you see you could really see the benefits on the supply side from.
New starts in and see that.
It's going to be we get the new supply order.
When you set it up but I'd say to get the full benefit it's probably six months and so really as you come into the second half of Q1 and Q2 of next year. That's when our rental revenue should have recovered based on the decline as well as you should see some snapping back of the supply I think that the unknown and the Optum.
This would tell me that cobalt has has elongated patients stay on therapy in patients that would have otherwise fallen off therapy are now more committed and so we've reduced the attrition curve if.
If that comes.
And were right and we can keep those patients on coming into Q1 Q2, yet we're going to see a nice benefit on supply that starts come back.
Okay, and then one more follow up that kind of.
Tails off that.
Hi, It seems like you guys were getting better.
Sell through or better contact with with with patients just as as you know many were hunkered down.
For the high of the pandemic are you still seeing that is that is that still sort of a durable.
Driver in the in the business as more people return to work.
Yes, I think we certainly saw the big Spike at the end of Q1 early Q2, and we've been able to maintain that it's it's not continuing to accelerate I think our resupply team.
Yes, led by gentlemen in that Kaki, just doing an amazing job and so we've been able to keep keep up the momentum that we gained not accelerating but again I think in some of that's due to the lack of attrition in census.
Great. Thanks, a lot.
Thank you. Our next question is coming from Richard close from Canaccord Genuity. Your line is now live.
Great. Thanks, congratulations on the quarter.
A lot's been covered here, but I'm just wondering if you could just go in the connected health you mentioned a pilot can you give any more details on that timing what exactly that is.
Maybe.
Maybe a little bit more there to start.
So it's sort of multifaceted coming into Q1 and Q2 and.
I want to be clear I don't expect it to them and we are not in our guidance, including any contribution from connected health in 2021, I think we're trying to be very cautious to make sure that although it is such a buzzword that we can actually deliver value to our payer partners and to our patients rather than just sort of chase revenue that is undeniably there to go get I'm not sure.
You can get it profitably I'm not sure you can deliver results are we can deliver results right now and so we view it in sort of two forms. The first is getting our patients to treat engage with technology apps that we can get more data from them, whether it be on scale blood pressure cuff oxygen device on their path.
Advice and so we were running some pilots in that in Q1, we have a white label partners that were working with us on the outside and excited about that and then probably more exciting for US is how we then sort of take some of those leanings and learnings and go to payers and whether we get paid on a PMPM basis.
What seems to be kind of the the modeled as youre that's out there or we go to a payer and say hey lets in either we can share in your risk where we can do this in exchange for more volume frankly.
I'm, probably more bullish on either of those models and just sort of trying to articulate it connected health PMPM, where it is pretty hard to triangulate who's driving the savings for the fair.
Now will you be using a third party or entity to evaluate the savings or just any thoughts on that.
Yeah, our preference is going to be to partner and White label right. Now I mean, we got conviction could we eventually take it in house or purchase something yes, but right now we will be working with third parties.
Okay.
And then just maybe on the guidance for the remainder of 2020 and 2020, what do you think the biggest risks are for you guys achieving the.
The expectations that you laid out obviously competitive bidding somewhat in the rear view mirror here, but just any thoughts on potential risk out there.
And so for 2020.
This is a pretty predictable business I would say, we have high confidence sort of in our guide on this stability and consistency of the business, which hopefully investors are getting comfortable with that we do have great visibility. This is a consensus compounding business on rental it's a resupply business that relies on supplying to existing customers and we start the month in the quarter.
We're pretty well full.
I think if you look into 2021 of the great on its code.
What does the next three months look like I can't tell you.
Terribly optimistic I think that we could be in for a pretty rough patch here over the next 90 to 120 days I don't think it's the same as Q1 and early Q2 and it was almost a pop apocalyptic in places like New York I think the country is generally dealing with health care system.
Learning to deal with Covance, but thats, probably the biggest unknown.
In hitting the targets that we put out there.
Okay and then my final question I guess on M&A, obviously, we're still waiting for results from the election here, but.
Any thoughts on whether it goes either way in terms of how that potentially impacts closing acquisitions as we head into the year end.
Yeah, No certainly we've had conversations with sellers and I think that there was a point of view if there had been at Glu wave I think that there would have been people who are trying to push I mean realistically, we're talking about being 55 days out from the end of the year.
Pretty hard to the if you're not already in active dialog and effectively under ally it would be pretty hard to close something.
But.
It probably depends on exactly what happens with the with the Senate.
But I guess, it's just the way to say I don't think it's going to change very much.
We already have in the pipeline if you're close enough I think people probably will prefer to try to crystallize again in 2020, just given that none of 2021.
Okay. Thank you.
Thank you. The next question is a follow up from Stephens at all from SVB Leerink. Your line is that right.
Thanks again, guys just a really quick last one I guess I forgot to ask and just to confirm what you did with competitive bidding in the 21 guidance I think we are using like a high single digit million headwind does that that came back up that's all I have thanks.
So the guidance obviously.
We announced our guys are 21 this morning, and so we do know the competitive bid and so we had previously said that we thought it was a mid teens revenue headwind and sort of a high single digit sort of net headwind. So those have come out of our 25, yes.
So I needed. Thanks, a lot guys.
Thank you. We appreciate of our question and answer session I like to turn the floor back over to management for any further or closing comments.
No I just want to reiterate.
Our as managing sincere appreciation for the hard work of all our employees that helped deliver the results for the quarter.
We look forward to delivering a great Q4 as well thank you.
Thank you that does conclude today's teleconference. You may disconnect. Your line at this time and have a wonderful day, we thank you for your participation today.
[noise].