Hi friends,

Today, we’re diving into Acadia.

They’re the largest pure-play behavioral health provider in the US. And lately, they’ve also been one of the most controversial.

Last week, they released their Q3 earnings and as usual, I’ve been diving into them.

I listened to their earnings call and boy can I tell you, someone really needs to re-invent that format…. Talk about dry! Spice it up a little guys.

But anyway, I digress.

If you’re in mental health, Acadia is an important business to understand. They’ve had their fair share of legal disputes, controversy and media coverage over the last few years. But they’ve also developed a profitbale business model and scaled to billions in revenue. We can learn a lot from them (and their mistakes).

So today, we review Acadia, analyse their Q3 results, and consider what the future might hold for them.

1. Acadia 101

In case you don’t know much about Acadia, here’s the 101.

Firstly, they’re the largest pure-play behavioral health provider in the US.

They operate 260 behavioral healthcare facilities with approximately 11,300 beds in 38 states and Puerto Rico (random). These facilities include acute inpatient psychiatric hospitals, specialty treatment facilities, residential treatment centers (RTCs) and comprehensive treatment centers (CTCs).

They make most of their revenue from their acute services and are heavily funded by Medicaid.

They went public in 2011 and have been growing aggressively since then. Their growth playbook is based on expanding their facility footprint which they’ve achieved by building new facilities, partnering with health systems through JVs or acquiring facilities from other providers.

In 2023, they delivered almost $3bn in revenue and an adjusted EBITDA of $678m. Yep, they’re big!

Also in 2023, they had to pay $400m (yes, million) to settle a terribly sad case in which Acadia was accused of failing to protect a young girl who was under their care.

This litigation is not the only time Acadia has been in hot water in recent years, but more on that later.

2. Q3 Earnings Highlights

Acadia had a strong quarter. Here are the numbers you need to know.

• Q3 Revenue was $816m (+8.6% YoY)

• Revenue growth was driven by;

  • 2.4% increase in admissions

  • 2.1% increase in length of stay

  • 3.9% increase in revenue per patient day

• Salaries and Wages grew in line with revenue (+8.6% YoY)

• Adjusted EBITDA was $194.3 million (+10.5% YoY)

• Adjusted EBITDA margin was 28.2% (-50bps YoY)

• They finished the quarter with $82m of cash and cash equivalents on their balance sheet

• They have $1.8bn in long term debt

But despite announcing these positive Q3 results, they had to revise down their guidance for Q4. Specifically…

• Guidance for full year revenue was revised down by $15m, to $3.150bn

• Guidance for full year adjusted EBITDA was revised down by $10m, to $725m

The market didn’t like this, with the share price down 19% on the news.

This was another big blow to Acadia after a rough two months. Their enterprise value is now down 32% since it’s high in Q1 2024.

This is despite strong revenue growth over the same time period - we can see this in the sharp decline in their EV/Revenue multiple.

So why the revised guidance and fall in the share price?

3. The NY Times Article

Essentially, it’s due to a NY Times article released at the start of September.

The article alleged that Acadia “lured patients into its facilities and held them against their will, even when detaining them was not medically necessary”.

This news had an immediate impact on referrals to Acadia’s facilities, impacted revenue in September and October and has caused them to reduce their guidance for their Q4 results.

Acadia have consistently denied any wrongdoing.

I’d encourage you to go read the NY times article, read Acadia’s response and form your opinion based on that information. Of course, if the allegations are true, it’s deplorable behavior, especially if it’s proven to be systemic.

I’d love to hear what you think of this and your assessment of what is really happening. As always, just reply to this email with your thoughts.

While I’m most worried about these allegations with relation to their impact on human lives, it is also having a material impact on Acadia’s business and investors are worried.

As a result of the news, they have seen less referrals to their facilities. They said they saw an immediate step down of referrals in September after the news broke but to the fact this had stabilised in October (although to be honest, this wasn’t super convincing). Because of this reduction in referrals, they now expect to report lower revenue and EBITDA in Q4.

While they expected patient days to grow by 5% YoY in Q4, they now expect it to be just 3%.

Almost all of the analyst questions on the earnings call were on this topic.

The main question; can we expect the impact of this to be temporary? Or is it the start of a further decline in the Acadia brand, and as a result, referrals?

Acadia’s leadership stated that they believe the results of the article to be temporary and there is little risk of long term damage to their reputation and referral relationships. They are doing a lot to try and prove their commitment to quality, including this website and this very cute infographic.

But until we see results from Q4 and beyond, we won’t know the true extent of the impact this article has had on Acadia’s business.

4. The future of Acadia

So what do we think happens to Acadia next?

There are some market and business factors playing in their favor. But there are also a few strategic priorities they will need to get right in order to continue scaling.

So let’s start with the factors in their favor…

First, they’re serving a large and growing market. The market for Acadia’s services is huge. There are tens of millions of people struggling with serious mental illness and substance use disorder.

There is still substantial headroom for Acadia to continue expanding in this market; through M&A, by building their own facilities and by building new facilities through JVs with health systems. They are also expanding the number of beds in their existing facilities.

In Q4 of this year, they expect to add 700 new beds, 300 of those in existing facilities.

And in the next two years, they expect to deliver over 2,000 new beds to drive revenue growth.

Secondly, they have developed a profitable business model. They have built facilities, a service model and reimbursement relationships that can operate profitably and generate real returns. Assuming they are doing everything right from a patient quality perspective, this is impressive and encouraging for their future.

If they have strong profitability on a per-facility basis, then their roll-up and expansion play makes a lot of strategic sense. Remember, their revenue is also well diversified across geographies, services and payers.

Now, what must they need to do to turn these tailwinds into meaningful growth?

Focus on quality. Apologies for stating the obvious, but Acadia cannot afford another scandal. If they can demonstrate a true commitment to quality, then they can maintain trust with referrers, investors and the community at large. This is absolutely critical to their success.

Also, I just really want them to do right by patients. Perhaps I am naive or perhaps I am just a delusional optimist, but I do believe that the only mental health companies that will succeed in the long term are the ones who actually help people get better. Acadia must do this. They must focus on quality, help patients get better and ensure that there is no malpractice in their facilities!

Finance their growth. Acadia’s growth strategy is expensive. It requires significant investment in building or buying facilities. To do this, they’ll need to continue to raise capital, almost certainly in the form of debt.

They already have over $2bn in debt and a Debt:Equity ratio of 64%. So far, the interest on this debt has been manageable.

But if their share price continues to be challenged and if lenders perceive the risk of their business to be increasing, their ability to continue to borrow at good rates will be affected.

Access to capital at attractive rates is key to Acadia’s expansion.

Investors, prosecutors and referrers are going to be keeping a close eye on Acadia in the coming months.

And so will I.

That’s all for this week.

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Keep fighting the good fight!

Steve

Founder of The Hemingway Group

P.S. feel free to connect with me on LinkedIn

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