Behavioral Health Composite

Year in Review – 2018

Behavioral Healthcare Stocks Finish Down – 36% for the Year

2018 was a turbulent year for the Behavioral Health Composite, up nearly 25% through March, only to fall in the last quarter — down 36% for the year.  “It was a rough year for the behavioral health stocks, especially AAC and Acadia. Both companies have taken significant measures to change course.  I won’t be surprised to see more significant restructuring in 2019,” said Cory Mertz, Managing Partner with Mertz Taggart.

To recap…

Acadia Healthcare – ACHC (↓24.0%)

February / March.   ACHC rose nicely in late February through late March on strong Q4 2017 performance, beating both analyst expectations and prior year.  CEO Joey Jacobs commented, “We are pleased with the overall performance for the fourth quarter. Our results met or exceeded our revised expectations. Total same-facility revenue for the fourth quarter of 2017 increased 5.6% as compared to the fourth quarter of 2016.”

April.  ACHC fell on news of a class action lawsuit filed on behalf of ACHC investors that purchased stock between Feb’17 and Oct’17.  The lawsuit alleges that ACHC failed to disclose material information during this period.  On this news, the price of Acadia’s shares plummeted 26% to close.

May.   ACHC rebounded somewhat, on strong Q1 2018 earnings release.  ACHC reported Q1 2018 adjusted earnings of 52 cents per share, which beat the consensus estimates and prior year.

October.  ACHC increased on a rollercoaster October after a down month in September.  The stock rose nicely – 10% during the first few days of the month until, on October 9th, the law firm of Levi and Korsinsky announced a class action lawsuit against the company. The suit alleges ACHC knowingly issued misleading statements about the quality of its then-recently-acquired UK operations and, while the stock was artificially inflated, the CEO and President collectively unloaded $35 million in company shares.  The stock plunged over the next few trading days after the announcement.  On October 18, Reuters reported that Acadia had been approached by private equity powerhouses KKR and TPG Global about selling itself. The buyout talks continue to underscore the interest by private equity firms in the sector.

December.  ACHC had a rough December.  In addition to general market declines, the company was affected by the following:

  • On December 10, Moody’s downgraded its ratings outlook from stable to negative due to challenges the company faced related to its profit margins in the UK business as well as high leverage (>5.5x Debt / Adj. EBITDA)
  • On December 17, the company announced that Joey Jacobs, the CEO and Chairman of the Board, was removed. Debbie Osteen, the former President of the Behavioral Health Division of Universal Health Services, replaced him as CEO.  Reeve B. Waud, Lead Director of Acadia’s Board of Directors, was elected Chairman.  Jacobs, who was forced out by the company’s board, is due approximately $10.3 million for involuntary termination without cause, according to a company filing with the SEC.

American Addiction Centers – AAC (↓84.9%)

February / March.   ACHC rose sharply in late February and March due to both (i) positive Q4 2017 earnings release, with a 125% positive surprise of earnings per share vs. consensus estimates and (ii) the announcement on March 1 of the completion of its acquisition of AdCare for $85 million. The transaction was also accretive. AAC was trading at approximately 11x AEBITDA as of the date of the closing, while paying 10x for AdCare’s $8.5 million in AEBITDA. AAC management has also identified approximately $3.9 million in total synergies over the next 12 months, bringing its pro-forma multiple down to an attractive 6.9x.

August / September.  AAC decreased sharply based on disappointing earnings release for Q2’18.  Despite strong revenue growth, Q2’18 adjusted earnings per share of $0.09 was 50% lower than estimates of $0.18 and lower than prior year of $0.26.  

October.  AAC continued its slide.  Analysts had become nervous for two reasons: 1) very disappointing Q2 earnings, missing consensus estimates by 50%; 2) spurring uncertainty about what AACs future business will look like after a substantial makeover in both operations and marketing.  On October 16, Raymond James lowered its price target for AAC.  Zacks Research then downgraded the stock from HOLD to SELL on October 17.

November / December.  AAC declined very sharply in November and December due to the following:

  • On November 6, AAC reported disappointing Q3 2018 earnings, delivering revenue and earnings surprises of -8.76% and -138.10%, respectively. AAC reported a loss of $11.5 million after reporting a profit for the same period in the prior year.
  • On November 14, Moody’s downgraded AAC’s debt, reflecting very weak third quarter results and lower guidance for the rest of 2018; high leverage exceeding 10x (per Moody’s definition); uncertainty around AAC’s strategy and its longer-term earnings and cash flow; and liquidity concerns. Moody’s stated it believes a covenant breach is likely within the next several quarters.
  • On December 7, AAC announced the implementation of a $15.0 million cost reduction program, which includes laying off 200 employees. In addition, the company made key hires of Michael Nanko as President and Chief Operating Officer, Stephen Ebbett as Chief Digital & Marketing Officer and Dr. Larry Weinstein as Chief Medical Officer.

Universal Health Services – UHS (↑0.8%)

July – September.  UHS rose steadily on its strong Q2’18 earnings release, reported at the end of July.  In addition, on July 31st, UHS announced the acquisition of The Danshell Group (“Danshell”) through its UK subsidiary Cygnet Health Care. Danshell owns and operates 25 facilities with a total of 288 beds in the UK.  The Danshell facilities support and care for adults living with learning disabilities, who may also have a diagnosis of autism, in specialist supported living, residential services and hospitals. Through this acquisition, the company expands into new service lines and new geographical areas, complementary to the existing UK portfolio.

October. UHS declined slightly through the month on lowered outlook for the balance of the year.  On October 26, UHS delivered Q3’18 results, which were generally positive.  Revenue lagged estimates by 1.2% but beat prior year by 4.2%.  However, EPS beat prior year by 36% and estimates by 11.5%, but it was not enough to overcome the somewhat more pessimistic outlook.

Behavioral Health Composite vs. S&P 500 – FY 2018

2018 year in review graph

Valuation – Public Comps

Below are the Enterprise Value / EBITDA and Enterprise Value / Revenue ratios for AAC, ACHC and UHS.  The valuations provide a relative barometer for what smaller companies can expect.  Given the higher relative risk of smaller companies (e.g., less liquidity, smaller revenue base), we typically (though not always) see multiples that are lower than those of the public companies.

Stock Prices

Company 12/31/18
AAC $1.40
ACHC $25.71
UHS $116.56

Enterprise Value/EBITDA

Company 12/31/16 12/31/17 12/31/18
AAC 12.90x 11.58x 10.85x
ACHC 12.04x 10.59x 9.27x
UHS 8.22x 8.72x 8.69x

Enterprise Value/Revenue

Company 12/31/16 12/31/17 12/31/18
AAC 1.39x 1.52x 1.07x
ACHC 2.52x 2.16x 1.83x
UHS 1.46x 1.45x 1.39x

M&A News

December 5, 2018Chicago-based investment firm Frontenac Co. has agreed to sell its Behavioral Health Group (BHG) to Vistria, another private equity firm in Chicago. The deal is expected to close in 2019.  Behavioral Health Group provides medication-assisted treatment for opioid use disorder at 46 outpatient clinics in 11 states.  Frontenac has invested in BHG for seven years.

December 1, 2018Centria Healthcare has acquired Applied Behavioral Associates, LLC, in Marlborough, Massachusetts.  Applied Behavioral Associates provides ABA home and community-based services and Outpatient Behavioral Health Services to children and families in the Metrowest area of Boston.  Centria Autism Services, an operating division of Centria Healthcare, provides ABA therapy for children with autism and their families in in nine states.

November 28, 2018Pharos Capital Group, LLC (Pharos), through its Family Treatment Network platform (FTN), has acquired ABA of North Texas (ABANT), an outpatient autism services provider that serves over 70 children across two offices in Plano and McKinney, TX.

November 27, 2018Discovery Behavioral Health, a nationwide leader in mental health services, has acquired Ambrosia Treatment Center of Medford, N.J., a facility providing evidence-based adult treatment for drug and alcohol addiction.

November 20, 2018Crossroads Holding, LLC (Crossroads), a portfolio company of Revelstoke Capital Partners (Revelstoke), a Denver-based private equity firm, has completed its acquisition of EHC Medical Offices (EHC).  Crossroads is a provider of medication assisted treatment through its established outpatient care centers with 72 clinics located in 11 states.  EHC is located in Knoxville, TN and provides medication assisted treatment services through its team of highly trained and accredited healthcare providers.

November 15, 2018BayMark Health Services, a portfolio company of Webster Capital, announced the acquisition of Metamorphosis, an Opioid Treatment Program (OTP) with locations in Salt Lake City and Ogden, Utah.  BayMark Health Services provides medication-assisted treatment to more than 46,000 patients in recovery from opioid use disorder.

November 14, 2018Private equity firm WindRose Health Investors announced that it has completed the recapitalization of Traditions Behavioral Health. Based on the West Coast, Traditions provides permanent outsourced inpatient and outpatient psychiatric services to institutional and community-based programs. Traditions manages all aspects of psychiatric staffing for its clients, and with the additional capital, the company said in a news release that it plans to expand into new markets across the country.

November 14, 2018Catapult Learning, the nation’s largest provider of special education and instructional intervention solutions, today announced it acquired Capital Education Group (CEG), a leading provider of behavioral health services and private school programs for children with autism and other specialized learning needs.  The CEG acquisition enables Catapult to accelerate its mission of integrating educational and Applied Behavior Analysis (ABA) services, with a goal of improving outcomes for children diagnosed with autism spectrum disorders.

Mid November, 2018Carlyle Group acquired Odyssey Behavioral Health from Nautic Partners in a deal valued at approximately $200 million.  Odyssey Behavioral Healthcare was formed in 2015 as a partnership between Nautic Partners and healthcare executive Scott Kardenetz.  Odyssey has a diversified platform of behavioral health facilities across the treatment spectrum in psychiatric and addiction care in seven primary facilities located in Tennessee, Florida, Alabama, Indiana, and North Carolina.

November 12, 2018Oceans Healthcare announced it has signed an asset purchase agreement to acquire the Biloxi, Mississippi-based behavioral health operations of Merit Health Biloxi.  The acquisition includes the 45-bed Gulf Oaks behavioral health hospital, an outpatient clinic and a therapeutic day school that are presently known as Merit Health Gulf Oaks, but it does not include the Merit Health Biloxi acute care hospital.

November 7, 2018 –  BayMark Health Services, a portfolio company of Webster Capital, announced that it has acquired St. Louis-based SpecialCare Hospital Management.  SpecialCare provides specialized inpatient stabilization and withdrawal management services at 46 acute care hospitals in 13 states.

November 6, 2018Behavioral Health Group (BHG) acquired the Cullman Treatment Center. BHG operates five addiction treatment centers in Alabama and is one of the leading treatment providers in the state.   While the Cullman Treatment Center is the most recent addition to the BHG treatment center network, BHG has added four other locations in the state within the past year.

November 5, 2018FHE Health Group (FHE) announced that it has finalized its acquisition of Treatment Partners of America (“TPA”), an outpatient Substance Use Disorder (“SUD”) treatment provider with facilities in Florida.

November 1, 2018Clearview Capital announced the acquisition of Premier Care and Maintenance and Recovery Services (MARS), a pair of medication-assisted treatment providers for patients with opioid use disorder, by its platform portfolio company Community Medical Services.  Premier Care operates seven opioid treatment programs (OTPs) across Ohio, Indiana, Michigan and Wisconsin with an average daily patient census (ADC) of nearly 3,000, while MARS operates four OTPs in Texas with an ADC nearing 800. Combined with CMS, the nationwide platform is now providing treatment to more than 9,300 patients across 28 clinics on a daily basis.