AdaptHealth - Earnings Call - Q3 2020
November 4, 2020
Transcript
Speaker 0
Hello, and welcome to the Adapt Health Corp. Third Quarter twenty twenty Financial Results Conference Call. At this time, all participants are in a listen only mode. A question and answer session will follow the formal presentation. As a reminder, this conference is being recorded.
It's now my pleasure to turn the call over to Chris Joyce, General Counsel. Please go ahead.
Speaker 1
Thank you, Kevin. I'd like to welcome everyone to Adapt Health Corp. Earnings conference call for the quarter ended 09/30/2020. 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 twenty twenty results is posted on our Investor Relations page.
In a moment, we'll have some prepared remarks from Luke McGee, Chief Executive Officer Josh Parnas, President and Jason Clemens, Chief Financial Officer. We'll then open the
Speaker 2
call for questions. Before we start, I'd
Speaker 1
like to remind everyone that statements included in this conference call and in our earnings 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 such forward looking statements because of a number of risk factors and uncertainties, which are discussed in our annual and quarterly SEC filings. Adapt Health Corp. Shall have no obligation to update the information provided on this call to reflect such subsequent events.
Additionally, on this morning's call, we'll 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, Luke McGee.
Speaker 3
Thanks, Chris, and thanks, everyone, for joining the call. Before I get to my remarks on the third quarter, I would like to acknowledge the tremendous efforts of Adapt Health's frontline brand staff, clinical teams and delivery drivers who have played such an important role in Adapt Health's continued service of our patients' health needs during these extraordinary times. Throughout the last eight months, our priorities have been and will continue to be the health and well-being of our patients and our workforce. I'm incredibly proud of the the entire AdeptHealth team and how each and every team member has stepped up to help those in need throughout the COVID nineteen crisis. We ended 2019 as a 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 and management. We continue to be active acquirers of traditional HME businesses in the third quarter. When we acquired the HME assets of Advanced Home Care and Healthline Medical in March, we noted that there would be merit to adding additional density in the Southeast and Southwest. To that end, we acquired Family Medical, a $40,000,000 revenue HME in Eastern North Carolina in mid August and closed on another acquisition in Texas in early October. These additions add important scale in high growth geographies.
We also made several smaller HME acquisitions in the Mid Atlantic, Midwest, and New England during the quarter. We are excited about the key operational leadership from these acquired companies and have retained many as leaders within Adapt Health. In diabetes, we view Solara as a platform on which we can grow a much larger national diabetes distribution and management business. We are excited about the continued market growth in continuous glucose monitors and insulin pumps and believe adoption rates will accelerate. Recently, we closed our first diabetes add on acquisitions with the purchase of Diabetes Supply Center of the Midlands and Pinnacle Medical Solutions.
These acquisitions should add 85,000,000 to $90,000,000 to diabetes revenue in 2021. Our entry into the diabetes supplies and management space, 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 Adapt 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 and a pipeline and plan to continue to be selectively acquisitive as we identify opportunities that deliver financial results in accordance with our disciplined approach while also furthering our strategic goals. Although our pipeline is robust, we are not including future acquisitions in our guidance for the remainder of 2020 or for 2021.
On the regulatory front, we received positive news from CMS last week in regards to the Medicare competitive bid program. As a refresher, the round 2021 competitive bid program was originally scheduled to be effective on 01/01/2021 and encompassed 16 bid categories. On Tuesday of last week, CMS announced they would be proceeding with only two product categories, off the shelf back and knee braces. Although not entirely clear and subject to change, we interpret this announcement to mean a delay in the competitive bid program for any other other categories until at least 2024. Additionally, in the proposed rule, CMS has indicated that they intend to make the higher blended rates in rural territory permanent, which is a welcome development.
We await further guidance from CMS on whether they will be providing inflation increases for formerly competitive bid products and territories. In total, we believe these changes to the competitive bid program and rural rates are positive, and we expect the rate changes for the off the shelf, back, and erases to be immaterial to AdaptHealth. The proposed CMS rule also affirmed Medicare Part B coverage for continuous glucose monitors and expanded the universe of covered CGM devices. Although the vast majority of CGMs that we currently distribute have already been covered under Part b, we view the affirmation as positive. Now I'd like to turn the call over to Josh Barnis, our president, to discuss our innovation activities.
Speaker 4
Thanks, Luke. As Luke mentioned, we are extremely appreciative of the entire Adapt Health team. 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 in scalability. On that topic, we are thrilled to welcome Brian Breen 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 we still face ongoing challenges presented by the COVID nineteen 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 welcomed back our operations teams and sales force. Within those facilities, our health system access protocols are focused on keeping our employees equipped with PPE and compliant with prescreening protocols and social distancing guidelines. To give some context, PAP setups hit a low of approximately thirty percent against pre COVID levels in mid q two.
Q three was up sequentially off approximately ten to fifteen percent against pre COVID levels, and the last month of q three and the first few weeks of October are off mid single digits against pre COVID levels. Most of our administrative operations remain virtual, leveraging our investments in cloud based technology across our our back office functions. Shifting to the ongoing integration focus of our acquired businesses, our PCS turnaround efforts continue to produce the financial results that we've expected. Turnaround results don't come easily, but we are applying our expertise in resupply, product formulary, and purchasing all with solid results. We're also driving improvements for PCS in revenue cycle and efficiencies in labor and other operating expense.
We continue to believe PCS will be profitable in the 2020. We've transitioned the legacy PCS CGM business to Solara, and we transitioned the legacy PCS incontinence business to ActiveStyle, 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 are increasing at ActiveStyle and Solara respectively. Our e prescribe penetration remains a top priority, and our e prescribing initiatives continue to result in less paper, less faxes, and greater adoption by our referring providers.
Although there is still a long way to go to achieve our goals, there also remains 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 for our more than 1,800,000 patients that we service annually. Our technology capabilities are advancing. We recently launched a pilot for CGM e prescribing built upon the same backbone that we are utilizing within our HME business, and we believe this will help us increase orders to reduce turnaround times. We are also we also recently completed an assessment and validation of our vision for connected care.
We plan to launch a pilot in the 2021 that will provide our patients better visibility to their clinical data, including an electronic resupply capability. At this point, I'll turn the call over and welcome our new CFO, Jason Clemens.
Speaker 2
Thanks, Josh. Good morning, and thanks for joining our call. I'd like to start by welcoming our new chief accounting officer, Frank Mullen, who joined Adapt Health in late September. In addition to deep accounting expertise, Frank has years of experience leading various administrative functions in large public companies. He's already been approved proven to be a great partner and contributor.
Turning to our results for the 2020. Adapt Health generated net revenue of $284,000,000 an increase of 108% from the 2019. Adjusted EBITDA was $53,000,000 an increase of 68% from the 2019. Adjusted EBITDA less patient equipment CapEx was $36,000,000 an increase of 92% from the 2019. These financial results do not include the recognition of funds received in April as part of the CARES Act Provider Relief Fund.
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 2020. Our third quarter financial results are even more gratifying in 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 indexed 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 above 90% of pre COVID levels. The improvement is driven primarily by our operational changes that Josh spoke about earlier as well as growing reopenings of 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 twenty twenty before the disruption caused by
Speaker 3
the pandemic. Our
Speaker 2
third quarter cash flow from operations was strong and remains a primary focus for our management team. As our diabetes and supplies products continue 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 09/30/2020, was $145,000,000 That includes approximately $46,000,000 of CMS advanced payments and $17,000,000 in CARES Act provider relief funds. Adjusted EBITDA for the same period was $126,000,000 Excluding the CMS advanced payments and the CARES Act provider relief funds, operating cash flow was $82,000,000 or about twothree as a percent of adjusted EBITDA for the same period.
In regard to our balance sheet, we ended the quarter with $272,000,000 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 the 2020 guide nor the 2021 preliminary outlook include recognition of the funds from the CARES Act provider relief funds. 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 $935,000,000 to $983,000,000 and 120,000,000 to $127,000,000 respectively, which included ramping contribution from our July 1 acquisitions but did not include contribution from additional M and A following Solara and ActiveStyle.
Luke mentioned a number of key acquisitions that we made in the quarter as well as Pinnacle on October 1. We expect these acquisitions to be immediately accretive to earnings, and we are therefore raising 2020 full year guidance for net revenue to $1,000,000,000 to $1,040,000,000 adjusted EBITDA to $186,000,000 to $194,000,000 and adjusted EBITDA less patient equipment CapEx to $124,000,000 to $130,000,000 Turning to 2021. We cannot perfectly predict the ongoing impacts of COVID-nineteen, but we continue to believe that our organic growth will return to normalized levels by the 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 and A pipeline is healthy, we are not including contribution from future acquisitions in our guidance.
We believe that the core business will grow at 7% to 10% organically. The Solara and ActiveStyle businesses acquired on July 1 will deliver previously announced full year performance targets, and additional businesses acquired between July and October 2020 will hit their full ramp by the second half of the year. We are guiding to net revenue of $1,300,000,000 to $1,400,000,000 adjusted EBITDA of $260,000,000 to $280,000,000 and adjusted EBITDA less patient equipment CapEx of $180,000,000 to $200,000,000 With that, I'll turn
Speaker 3
the call back over to Luke. Thanks, Jason. In conclusion, I'd like to reiterate my thanks and appreciation for all of our Adapt Health employees. They have stepped up and delivered record financial results while continuing to serve our patients and referral partners with courage and professionalism. I remain more confident than ever about our strategy and prospects.
Operator, please open the line for questions.
Speaker 0
Certainly. We'll now be conducting a question and answer session. Session. Our first question today is coming from Matthew Blackman from Stifel. Your line is now live.
Speaker 5
Good morning, everyone. Can you hear me okay?
Speaker 3
Yeah. Hey, Matt. How are you doing?
Speaker 5
I'm doing well, Luke. Thanks for, thanks for asking. Maybe to to to start, you know, there are always a lot of moving parts in the business. And and, as we think about the the new 2020 guide, is there a way to maybe just help us bridge a little bit how much of that raise and and maybe put it into three buckets? How much of the raise roughly is, are the deals you acquired in the third quarter, plus Pinnacle versus performance of recent deals like Solara or ActiveStyle and and then, I guess, any sort of puts and takes in the organic businesses.
Is it possible to maybe give us some some color across of those, those different drivers?
Speaker 3
So, I mean, I think it's gonna 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. I'm very comfortable even despite COVID, you know, the strength of the resupply business, the way that it starts to bounce back, the q four should be largely in line with, you know, where we started the year. ActiveSound and Solara are running, you know, quite well. We're sort of in the middle of integration activities.
And given that we're only sort of second quarter in, like, there's not a material kind of beat versus expectation yet. Although I I will note that we're very excited about trends in both of those businesses. And so most of the guide, increase is related to the acquisition activity, both completed in q three, and then the Pinnacle deal, which, you know, closed on October 1.
Speaker 5
Okay. That's that's really helpful. And then maybe, Jason, do you have handy what you you guys think the organic growth number was in the quarter? And then I just have one follow-up.
Speaker 2
Yeah. Organic growth for the third quarter was a little over a point. So, you know, in in the face of COVID, I mean, we're actually, you know, pretty pleased with those results. You know, as as you heard in our prepared remarks, starts, particularly around sleep, are coming back. You know, as you know, there's a bit of a compounding effect on that.
So as q two hit in the midst of COVID and starts were down materially, you know, there is a compounding effect of that that we're in the we're in the middle of that that that we're starting to see pull through, going in a positive direction.
Speaker 5
Okay. That that makes sense. And then just just two quickies on on diabetes, and maybe we modeled it a little too aggressively. But Solara looked just a little bit light relative to I'm talking very little light, versus what we were expecting. Just curious how that quarter shaped 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? Is it broader geographic exposure? I suspect it's not really portfolio expansion, and there's probably some combination of all the above. But just any color on that would be helpful too.
Thanks so much.
Speaker 3
Yeah. So, on Solara, yeah, revenue was a little bit weaker than we
Speaker 2
had modeled, but that's really just,
Speaker 3
due to the full follow on impact of the TRICARE rate cut that was known to us in the beginning of the year, and we were just a little aggressive in the way we modeled it. I will tell you that the new start trends are well ahead of budget, in terms of new patients getting set up and also the patients being resupplied. And so from a growth perspective, you know, if you ask me today versus when we announced q two results versus when we closed the deal, I think we're, very pleasantly surprised by the underlying organic unit growth in diabetes. And, you know, once we sort of and we basically have, you know, fully absorbed that TRICARE rate cut and understanding what it means, you know, we're we're very excited about the outlook for our diabetes business across the board. At Solara, at DSCM, at Pinnacle, the market, you know, we believe we are taking share, but the market is growing quite rapidly, as many of you guys know, just with the increasing prevalence of CGM.
On the acquisition side, you know, I think it was a mix of, you know, obviously, when we acquired Solara, you know, we said we viewed it as a platform, and now we've done two acquisitions. And I would expect that, you know, over the next year, we'll we'll continue to do more to add both geographic density and exposure. Pinnacle, absolute strong player in the Southeast, high diabetes prevalence in those states. And so that was an attractive of piece of business for us. Very good management team, sort of good systems.
We are fortunate that both DSCM and Pinnacle were run the same billing software we do. On the HME side, when when we did the deals earlier this year in March, you know, we did say that we like to kinda do more than one deal to really establish ourselves in a geography. And so, you know, we were able to do that in the third quarter, in early October in Texas and Southeast. And then there were some small tuck ins. You know, we did the deal in Western Pennsylvania that gives us some more density there.
We have we already had existing operations. Did a small deal to expand our footprint and give us, additional growth opportunities up in New England and did a very, very small deal in the Midwest. We continue to see a nice pipeline of acquisition activity, and so it will likely, at this point, be, you know, some slight geographic expansions. New England and the Upper Midwest are still underpenetrated for us. And then on the diabetes side, you know, we'll look to continue to add scale there.
Speaker 5
Alright. Thank you. Very helpful, and congrats again on a great quarter.
Speaker 3
Thanks, Matt.
Speaker 0
Thank you. Our next question is coming from Steven Tunnel from SVB Leerink. Your line is now live.
Speaker 3
Good morning, guys. Thanks for the question.
Speaker 6
I guess I'd ask you about competitive bidding and how much you're reading into what happened there. So so the fact that CMS pulled out 13 to 15 product categories, all the ones that had been through the program in the past, at least one round, You know? And and the reason they cited, right, that they didn't get effective savings from the bids. Like, 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.
Speaker 3
Yeah. I mean, it's always dangerous to try to read too much into, what was just the press release from CMS. But, if we back up and, you know, as we told, most of our investors and and the analysts, you know, we did expect that there wouldn't be savings. There will actually be increases in a number of categories given how far rates have come down, in certain categories and given how noncompetitive certain markets are. So I'd say it's not a huge surprise.
And, you know, if you wanna be a complete optimist, you would say that, you know, not getting savings in the competitive bid program, it, you know, it may not be 2024. It actually may be a permanent sort of delay or cancellation of bidding, in these categories because they didn't get the savings they want. You know? At the same time, who knows? I will say it doesn't feel like trying to eke out savings from the existing bid category should be a high priority at CMS now.
I think that, you know, the market has told CMS that they had found the bottom and maybe even found below the bottom on rates. And so, we're excited about having rate stability for the next three years. Certainly gives us, you know, visibility and confidence in executing our plan.
Speaker 6
Very helpful, Luke. And I guess as as I talked to, you know, folks in DC to figure out kinda what what led to that, I think, I heard a lot about sort of the structure of bidding and ultimately going with the clearing prices, potentially, the the big issue from guys who've kinda gone through all the bids. So, do you read anything into to this reflecting on, like, the structure of the market? Right? Like, I think there there's a train of thought that goes well.
If this is the outcome, perhaps the industry at this point is stable and maybe consolidating and no longer to longer looking to sort of outdo itself on bids. Or maybe it really just is the changes to the the the structure of the competitive bidding program. So I don't know if you had any specific comments there, but I'd be curious to hear your thoughts.
Speaker 3
We we welcome the changes because, you know, clearing price actually does reflect market supply and demand. And so we do think that moving from what was a sort of a noneconomic, you know, median bid process that the industry and noted economists had sort of had challenged in 2013 and 2016 when they did it. The move to clearing prices, the move to market based economics, and now the market has spoken and said that the rates, you know, were you know, if you wanna read between the lines, know, are too low as they exist. We do believe that the market will continue to consolidate. And so, you know, again, we we welcome the the delay or cancellation.
Obviously, in a perfect world, we could have seen higher rates, but, you know, we understand that also the health care costs need to go down. And we are working very, very hard to make sure that, you know, we can be the low cost provider ourselves, and we can also enable lower cost health care in the home.
Speaker 6
That's great. And if I can just sneak in one last one, then I'll yield. Just the the 1% organic growth rate that that Jason gave out there, how did that compare to your expectations? What were you guys looking for in q three with all that's going on in the backdrop?
Speaker 3
I I think we're pretty happy with you know, in the quarter at 1%, you know, still positive year to date in in light of COVID. We knew q three and and, frankly, the early part of q four are the hardest hit from the compounding of of past rental revenues. And so to be able to deliver that, you know, I'm incredibly proud of the team. I think we're setting up for a higher number in q four and as we go into 2021, you know back to our previously forecast range. Our
Speaker 0
next question today is coming from Pito Chickering from Deutsche Bank.
Speaker 7
Good morning, guys. Thanks for taking my questions. To follow-up on Matt's question on revenues, in the script, you talked about core ops growing organically 7% to 10%. There's obviously been a lot of moving pieces in 2020 due to COVID. You think about organic growth in terms of both rental and sales, should we base off of 2019 due to the tough comps in 2020, so 7% to 10% in 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 in 2021 will come from diabetes?
Speaker 3
So on the first one, it's a good question. Obviously, we've been so acquisitive with even 2019, a hard baseline. You know, obviously, we we we do expect to see growth and core growth in 2020 despite COVID. And we're obviously, if you look year to date, I think we're sort of in a low low to mid single digits, certainly higher than one percent, though, and that excludes B2B. And so, you know, we can follow-up offline about how to model it, but I I don't think that starting in 2019 is gonna be the easiest exercise just given how acquisitive we've been.
On the second piece, you know, diabetes, it's a fast growing market. And so we we would expect our diabetes business, you know, and there's some blend to get to seven to 10 of above market diabetes growth. You should you know, diabetes should be a mid teens grower for us, in 2021. You know? And I think that's probably somewhat conservative.
And if you look at percentage of revenue, you're gonna get to mid twenties, you 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's a similar playbook to execute there that we've done in core HME. And so with those, it could even skew higher.
Speaker 7
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 service, it looks like fourth quarter margins have guided to be 13.7% at the midpoint. 2021 margin has guided to be 14.1% at the midpoint.
Can you walk us through the moving pieces of the margins for 2021? Where are you getting leverage, the impact in acquisitions and any areas of pressure that we should be thinking about?
Speaker 2
Hey, Peter. This is Jason. Thanks for the question. You know, I to your point, a a fair amount of this movement is just profile. And so, you know, this this base business is changing, materially with the the add on in, in diabetes and the, you know, what we're seeing is is very strong growth, yeah, in diabetes.
So you are seeing some of that pull through and just the change in the margin profile in, in in the increase that you mentioned. Additionally, you know, as 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, you know, cost out in in a couple of parts of the business that we're we're very confident in that's that's also additive to the to the profile changes.
Speaker 7
Okay. And then two more quickies. For the m and a pipeline, you mentioned that it was robust. Have multiples changed today versus what you're seeing pre COVID?
Speaker 3
Yeah. I'd say, our success I don't know if it's COVID. I would say I mean, we are a victim of our own success and that there are other people sort of watching what we're doing. And so, you know, all things equal, HME deals that they are marginally more expensive.
You know, you're talking about a half a turn or a turn. And then diabetes, just given the, you know, given the growth profile, you know, we've sort of said historically the HME deals, we think we can buy it four to six times sort of our first year's cash flow. And I still think we can be at the top end of that range, comfortably and and get, you know, sort of significant deals done. On the diabetes side, I think we said when we did it Solar that, you know, deals would be slightly more expensive in diabetes given the growth. But if you look at, like, on a year two basis, they're they're very comparable on that.
You know, think I we stand behind that. You know, larger deals will be slightly more expensive on a multiple basis. Smaller deals will be slightly less expensive. HME will be slightly less expensive compared to diabetes. All in all, still a very, very accretive, financial environment to be an acquirer, but also, you know, what we find in these acquisitions, we're adding talent.
We're adding, you know, business processes. You know? Oftentimes, we find that we found it now in diabetes as well as HME that these, smaller, but decently sized companies we acquire, 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 sort of business, you know, there is some hidden benefit to these acquisitions.
Speaker 7
Alright. And the last super quick one for Josh just to sort of pull him in here. What what percent of all your sales to your 8,100,000 patients go through e prescribing today, and where do you think that goes, in 2021? Thanks so much, guys, and nice work.
Speaker 4
Sure. So currently, we're running about 30% of orders coming through our our through e prescription, and that, you know, obviously excludes the the resupply, which we have our own technology that's that's kinda driving the resupply process. So, you know, the the real friction point with the provider is on that new order. So, really, we have a lot of initiatives going on in q four and 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 e prescribing.
I've mentioned that in my in my comments that that's that's an area that I think is behind even HME, as an industry in terms of adoption of eprescription and kind of automation. So we're putting a lot of effort into that as well, and we feel like cycle times, automation and improvement and kind of both customer and referring provider experience will help us also drive or get additional organic growth there on the diabetes line.
Speaker 7
Great. Thanks so much, guys.
Speaker 0
Thank you. Our next question today is coming from Brian Tanquilut from Jefferies. Congrats
Speaker 8
to the whole team for a good quarter. Guess, Luke, I'll just ask on the M and A front. With competitive bidding kind of behind us now, it seems like. Right? Does that, you know, get get does that get you guys more aggressive, or do you think that because it's easier to model and and maybe the actual purchase price could be higher that we could see more interest from the sellers?
Speaker 3
You know, it's, it's hard, man. So we have a really good pipeline that, obviously, we were working on, you know, prior to competitive bidding. I think we were relatively confident that, you know, there there wasn't gonna be a dramatic result, whether it be on smaller providers or ourselves. You know, we had done a lot of math, and we had shared kind of our perspective that it wasn't gonna be a material impact to us. I do think it there was there was a lot of people just waiting.
In a weird way, I don't know what they were necessarily waiting for, which is I think that they just wanted to know what it was before they decided, you know, whether to to sell or not. And we continue to see, sort of inbound inquiry on a one off basis. We can see continue to see kind of the HME broker community reach out to us. So we do think it'll be an active 2021 on the M and A side.
Speaker 8
Gotcha. And then just shifting to the diabetes side of the business, are you guys seeing any incremental movement or discussions on the medical benefit versus the PBM benefit? And, you know, as you do some of these acquisitions, I mean, how are you thinking about the m and a strategy there if we're starting to see some more shifting to pharmacy?
Speaker 3
Yeah. And so, you know, obviously, our manufacturer partners on the diabetes side, whether it be on insulin pumps or CGMs, have voiced, you know, their desire to see more of the business go through a pharmacy benefit. You know, we we continue to believe that there is a big piece of the business for both those products that will always be under a medical benefit, you know, particularly Medicare affirming Part B coverage. I think we saw one payer in the quarter move to a pharmacy benefit across our entire business. And so is it a gradual new move that's happening?
Yes. Is it a land shift? No. You know, as a reminder, we have pharmacies. You know, both the SEM and Pinnacle have the capability to do sort of pharmacy business.
There are, you know, positives and negatives. It's it's generally lower gross margin business and slightly lower contribution margin business. At the same time, the RCM function and and claim adjudication in a pharmacy is much cleaner, much faster. And our ability to to cross sell to patients, I think, will subsume any pharmacy benefit, you know, movement, which is if we can you know, you know, on either a medical or a pharmacy benefit, we can be providing the insulin pump, whether it be the the Medtronic, the Tandem, the Insulet along with the CGM. To me, there's more upside in that.
You know? And then the other thing I'd just like to point out about the diabetes business is not only are we seeing kind of very robust sort of market growth in terms of new patients being set up on these therapies, But, really, you know, as a reminder, Medicare only started covering CGM in 2017. And so in a census based business where a patient gets set up and then should be on the therapy for a long length of time, we were relatively early in the census compounding, where new starts, you know, so outweigh attrition that we have a lot of tailwinds in our vast diabetes. And, you know, as I said, we we have yet to unlock, although we're starting next year on a pilot, of how we really, you know, kind of try to measure and and manage sort of chronic comorbid patients across diabetes, sleep, and other diseases. And so there's lots of tailwind.
Is pharmacy a a slight headwind undeniably? But
Speaker 8
Yeah. No. That 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 the q three number?
Speaker 3
Yeah. I I think it's
Speaker 2
a fair way to look at it in terms of a percent of rental revenue. I mean, if you look at our history, we kinda bounce around between, call it, 17 and maybe 24, 25% as a percent of rental revenue. I mean, for the quarter, it was 22 points, and, you know, year over year, was, like, 24 last year. So I I think it's a fine way to to to think about modeling it.
Speaker 3
Yeah. And I I just I think the number is is largely correct. We did you know, we saw a snapback, you know, which we've talked about in drives a bunch of patient CapEx. So, you know, maybe a touch high in in q three just given that we we did purchase quite a bit of app equipment to to meet the growing demand.
Speaker 8
It. Okay. Awesome. Thank you, guys, and congrats again. Thank
Speaker 0
you. Our next question today is coming from Anton He from RBC Capital Markets. Your line is now live.
Speaker 9
Yes. Good morning, guys. Thanks for taking the question. Just a couple of follow ups on some of picking up some of the threads from the previous questions. But really, looking back at kind of competitive bidding, you talk about how that may have impacted sort of your purchasing power overall and relationships with some of the suppliers?
Speaker 3
Yeah. So I think that, you know, because we because it was a big unknown, you know, we had sort of delayed or I'm I'm mutually agreed that, you know, until we had better stability on rate that it wasn't a productive environment to talk about go forward pricing with our manufacturer partners. Certainly, our perspective is, you know, as we aggregate scale, you know, there are a variety of reasons why scale should mean lower purchase costs. You know, obviously, I'm not sure our manufacturer completely agree or want to agree with that approach, but, you know, 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 q one, sort of going back and establishing sort of 2021 and 2022 purchasing targets and relationships with our manufacturers.
Speaker 9
Okay. Great. And then, I'm glad to hear, new past starts are are, are cranking back up. Can you remind us kind of what the, sort of tail revenue from that looks like on the on the supply side?
Speaker 3
Sorry. Can can you say that again, Ethan? I wanna make sure I followed that.
Speaker 9
Just trying to get an an idea for the sort of the timing on, you know, when you you see you could really see the the benefits on the supply side from from, new starts in,
Speaker 3
in CBAP? It's gonna be you know, we get the new supply order, you know, when you set it up. But, you know, I'd say to get the full benefit, it's probably six months. And so, you know, really, as you come into the sort of '1 and q two 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, you know, the optimist would tell me that, you know, COVID has has elongated patient stay on therapy, and patients that would have otherwise fallen off past therapy are now more committed, and so we've reduced the attrition curve.
You know, if that comes, you know, and we're right, and we can keep those patients on coming into q one, q two, yeah, we're gonna see a nice benefit on supply business as it starts to come back.
Speaker 9
Okay. And then one more follow-up that kind of tails off that. It seems like you guys were getting better sell through or better contact with patients just as many were hunkered down through the height of the pandemic. Are you still seeing that? Is that still sort of a durable you know, driver in the in the business as as more people return to work?
Speaker 3
Yeah. I think, you know, we certainly saw the big spike at the '1 and early q two, and we've been able to maintain that. You know, we're it's it's not continuing to accelerate. I think our our resupply team and, you it's led by a gentleman named Matt Cocky, just doing an amazing job. And so, you know, we've been able to, you know, keep keep up the the momentum that we gained.
It's not accelerating. But, again, I think in some of that's due to, you know, the lack of attrition in the census. Great. Thanks a lot.
Speaker 0
Thank you. Our next question is coming from Richard Close from Canaccord Genuity. A
Speaker 10
lot's been covered here. But Luke, I was wondering if you could just go into Connected Health. You mentioned a pilot. Can you give any more details on that timing, what exactly that is? Maybe a little bit more there to start.
Speaker 3
So it's sort of multifaceted coming into q one and q two, and, you know, I wanna be clear. I don't expect it to, and we are not in our guidance, including any contribution from Connected Health in 2021. I think we're we're trying to be very cautious to make sure that, you know, although it is such a buzzword, that we can actually deliver value to our payer partners and to our patients, you know, rather than just sort of chase revenue that that is undeniably there to go get. I'm not sure you can get it profitably, and I'm not sure you can deliver results or or we can deliver results, right now. So you know, we we view it in sort of two forms.
You know, the first is getting our patients to to engage with technology apps so we can get more, you know, data from them, whether that be on scale, blood pressure cuff, off their CGM device, off their path device. And so, you know, we were running, some pilots in that, in q one. You know, we've we have a white label partner that we're working with, on the app side, and excited about that. And then probably more exciting for us is, you know, how we then sort of take some of those leanings and learnings and go to payers, whether we get paid on a PMPM basis, which seems to be kind of the the the model du jour that's out there, or we go to a payer and say, hey. Listen.
Either we can share in your risk, or we can do this in exchange for more volume. And, frankly, I'm probably more bullish on either of those models and just sort of trying to articulate a Connected Health PMPM where it's pretty hard to triangulate who's driving the savings for the pair.
Speaker 10
Now will you be using a third party or entity to evaluate the savings, or just any thoughts on that?
Speaker 3
Yeah. Our our preference is going to be to partner in white label right now. I mean, if we got conviction, you know, could we eventually take that in house or purchase something? Yes. But right now, we'll be working with third parties.
Speaker 10
Okay. And then just maybe on the guidance for the remainder of 2020 and then 2020, what do you think the biggest risks are for you guys achieving the expectations that you laid out? Obviously, competitive bidding somewhat in the rearview mirror here, but, just any thoughts on potential, risk out there.
Speaker 3
Yeah. And so for 2020, you know, this is a pretty predictable business. I think I'd say we have high confidence sort of in our guide and, the stability and consistency of the business, which, you know, hopefully, investors are getting comfortable with, that we do have great visibility. This is a, you know, consensus compounding business on rental. It's a resupply business that relies on supplying to existing customers.
And we start the month and the quarter with the hopper pretty well full. I think if you look into 2021, that we've been very done on this COVID. You know? Like, what does the next three months look like? I can't tell you.
I'm I'm terribly optimistic. I I think that we could be in for a pretty rough patch here over the next ninety to a hundred and twenty days. I don't think it's the same as q one, and early q two when it was almost apocalyptic, in places like New York. I think the country is generally dealing with health care system, you know, and learning to deal with COVID, but that's probably the biggest unknown, you know, in in hitting the targets that we put out there.
Speaker 10
Okay. And then my final question, I guess, on m and 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?
Speaker 3
Yeah. No. Certainly, we've had conversations with sellers, and I think that there was a a point of view. If if there had been a blue wave, I think that there would have been people trying to push. I mean, realistically, we're talking about being, you know, fifty five days out from the end of the year.
You know, pretty hard to if you're not already in active dialogue and effectively under LOI, it would be pretty hard to close something. But, you know, it probably depends on exactly what happens with the with the senate. But, yeah, I guess it's just a way to say, I don't think it's gonna change very much. You know, stuff we already have in the pipeline, if you're close enough, I think people probably will prefer to try to crystallize the game in 2020 just given the unknown of 2021. Okay.
Thank you.
Speaker 0
Thank you. Our next question is a follow-up from Steven Tanal from SVB Leerink. Your line is now live.
Speaker 6
Hey. Thanks again, guys. Just a really quick last one. I guess I forgot to ask and just to confirm the what what you did with competitive bidding in the '21 guidance. I think we were using, a high single digit million headwind.
Is that is that what came back? That's all I have. Thanks.
Speaker 3
Yeah. So the guidance, obviously, you know, we we announced our guide for '21 this morning, and so we do know the competitive bid. And so we have 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 2021 forecast.
Speaker 6
Got it. Thanks a lot, guys.
Speaker 0
Thank you. We've reached the end of our question and answer session. I'd like to turn the floor back over to management for any further or closing comments.
Speaker 3
No. I just wanna to reiterate our, as a management, sincere appreciation for the hard work of all our employees that helped deliver the results for the quarter, and we look forward to delivering a great Q4 as well. Thank you.
Speaker 0
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.