Acadia Healthcare Company, Inc. (ACHC) Earnings Call Transcript & Summary

Good afternoon, and good evening, everyone, and thank you, everyone, for joining us today. Hope everyone is enjoying the third day of the conference. My name is [ Tarun Soni ], and I'm a Vice President here in JPMorgan's Healthcare Investment Banking Group. I'm very pleased to introduce you to Debbie Osteen, CEO of Acadia Healthcare Company; and David Duckworth, CFO of Acadia Healthcare Company. I know they are very excited to present and tell a little bit about their story. So over to you, Debbie.

Good afternoon, and good evening. I'm Debbie Osteen, CEO of Acadia Healthcare, and I'm here with David Duckworth, CFO. I want to thank you for joining the call. We're very excited about the growth opportunities that Acadia has over the next several years. And we're going to be reviewing those and also discuss our diversified service lines during our presentation. And our presentation is posted on our website under the Investors link. Before we get started, please review our safe harbor statement on Slide 2. Slide 4 provides an overview of Acadia. We are the leading pure-play behavioral health care company in the United States, with a full comprehensive continuum of care that offers treatments for children, adolescents, adults and seniors. Our market-leading platform enables us to serve the growing need of behavioral health care services. We have a diversified and comprehensive service offering across mental health and addiction treatment. 238 facilities are spread across the U.S. with approximately 10,500 beds in total. We treat approximately 70,000 patients a day across our service lines. We operate 4 service lines across the country with 49 acute facilities, 36 specialty, 12 RTC facilities and 143 (sic) [ 141 ] CTC locations. Moving to Slide 5. Slide 5 provides key investment highlights, which we will cover in more detail. As I just mentioned, we are the leading pure-play behavioral health care company. providing high-quality care to patients across the continuum of care. We are operating in a highly attractive, growing market with a significant unmet need. We have a very diversified service lines, and we also have a diversified payer mix. That creates stability for Acadia, and it also provides significant long-term growth opportunities. We have a flexible balance sheet and disciplined capital allocation framework to support our market-leading growth. We have a very experienced management team, from the senior level to the facility level, with a successful track record of implementing our growth strategies while maintaining operational excellence and delivering profitable growth. That includes managing through the challenges that we've seen from the pandemic over the last 2 years. As we turn to Slide 6, I'd like to highlight the strong management team that we have at Acadia. I've made some changes over the past 3 years, including the addition of John Hollinsworth and Larry Harrod to oversee our operations team; Isa Diaz to oversee our joint venture efforts; I promoted Dr. Genovese to Chief Medical Officer; and Anne Kelly to Chief Quality and Compliance Officer. Our most recent addition is David Keys, Chief Development Officer. And Dave joined a team that includes Chris Howard, EVP and General Counsel; and David Duckworth, CFO. I'm extremely proud of what we've accomplished since I joined Acadia. The past 3 years have provided me with a unique opportunity to leverage my experience in behavioral health to lead Acadia through a critical period. Most importantly, I'm proud of the team at Acadia and also all of our employees who demonstrate their commitment every day to help many people who need quality behavioral health care. As we turn to Slide 7, we believe the dynamics in our markets offer opportunities for growth. We have a large, addressable and highly fragmented industry. The U.S. mental health market is estimated to be $30 billion and the substance use market is estimated to be $25 billion. There are significant barriers to entry. And this is due to the high specialization and also the regulatory environment. Due to the increased attention on mental health, we believe that there's been a reduction in stigma and a growing acceptance of those seeking treatment. And I believe that's one of the positive things that have come out of the pandemic. We have reimbursement and regulatory tailwinds and they include mental health parity, which provides equal coverage for mental health and physical health. President Biden supports mental health services, and he has a focus to eliminate the stigma of mental health and mental illness and enforce parity regulations. As we turn to Slide 8, we'll go over some of the demand drivers for our business. As we look to the years ahead, we believe Acadia is well positioned to address the needs of those seeking treatment for behavioral health and substance use issues. We expect that demand for our services will continue to increase. Slide 8 provides some of the stats on the current environment and the effects that the pandemic is having on our society. Without question, 2020 and 2021 have been very difficult years for many people and even more pronounced for those that were already struggling with mental health and substance use issues. The chart on this slide represents the percentage of adults who experienced elevated depressive symptoms. Before the pandemic at 8.5%, 27.8% in the early months of 2020 and approximately 33% in 2021. The researchers who conducted this study noted that the outcomes are notably different than those observed from other national crisis. Typically, you would expect the depression would peak following the traumatic event and then lower over time. Instead, they found that 12 months into the pandemic, levels of depression have remained high. The sustained high prevalence of depression does not follow patterns after previous traumatic events. We've also seen a 30% increase in overdose deaths in the last 12-month period that ended in April of 2021. This is the largest number over a 12-month period ever recorded. Studies also demonstrate that the pandemic is significantly affecting the mental health of children and adolescents. The Surgeon General recently issued a public health advisory on the mental health challenges that are confronting youth from this pandemic. Based on research from past pandemics, we believe that the elevated levels of mental health and substance use disorders will remain long after the COVID-19 pandemic ends. As a result, we believe that there will be continued growth in demand for our services.

Our 4 diversified service lines offer exceptional high levels of care for our patients and our expansive network of treatment facilities and options enable greater access to care, allowing us to serve the diverse needs of our patients while maintaining a key focus on the individual's needs. And I'd like to give a brief overview of our service lines, starting with a summary on Slide 10. We have a strong diversification across service lines, across payers and across geographies as shown here. We have diversified service offerings, which include acute, specialty, comprehensive treatment centers and residential treatment centers as represented on the chart on the left of this page and each of these services will be discussed in more detail on the next slides. We have a diversified payer mix with Medicaid being our largest payer category and almost 50% of our revenue, but it's diversified as we do receive Medicaid payments from 46 different states as well as D.C. and Puerto Rico and Medicaid payments are received across all of our service lines. Medicaid includes a number of managed Medicare -- or Medicaid organizations that contract with Medicaid programs in the vast majority of our states. Commercial is approximately 30% of our revenue. Medicare is approximately 16% of our revenue, and our self-pay and other revenue is low at approximately 5%. We do have good relationships with our payers. They continue to recognize the importance of the care that the company provides across our service lines. We also have strong geographic diversification across 40 states and Puerto Rico. No individual state represents more than 12% of our revenue and no individual facility accounts for more than 3% of revenue. Moving to Slide 11. Our acute service line is almost half of our revenue and is our largest service line. And in this service line, we provide the highest level of care, including care for patients who are a threat to themselves or others. We are very diversified within this service line with 49 inpatient acute psychiatric facilities across 20 different states and in Puerto Rico. We have a balanced payer mix. We have a stable length of stay and a broad base of referral sources across our acute facilities. We believe there will be continued demand for our acute services, which is rising due to the pandemic as well as the wider acceptance and coverage for those seeking treatment for mental health issues. Therefore, we continue to look for opportunities to grow our services in this area. We are doing that through facility expansions, de novos, joint ventures and acquisitions which we will cover in more detail a little later. Slide 12 presents some trends in the mental health market. We believe the total addressable market is approximately $30 billion. Within this market, 14.2 million adults in the U.S. had a serious mental illness in 2020 and 2.6 million of those adults did not receive any mental health services. On a positive note within this segment, we are pleased to see issues surrounding mental health, gaining more attention in the national spotlight. Many top professional athletes, corporate leaders and other social influencers have come forward to share their own personal struggles and reduce the stigma around mental illness. As a result, we are seeing higher demand as societal acceptance of behavioral health increases with a greater push for access to treatment and expanded coverage options for those who seek treatment and prevalence of mental illness supports strong demand for behavioral health treatment. Positive legislation increases coverage as well as funding for behavioral health care services. Slide 13 provides an overview of our specialty service line. Specialty is 22% of our revenue and is our second largest service line. Within our 36 specialty facilities, we have inpatient residential programs that are focused on treating patients who are suffering from either substance use or eating disorders as well as programs for treating co-occurring disorders. We have a strong marketing platform with a national clinical referral network and a centralized call center to support our specialty operations. Within this service line, we have a favorable payer mix, which includes 64% commercial revenue, and we are positioned as an in-network provider with our payers for a large majority of our services. Turning to Slide 14, we will provide an overview of the substance use market, which we believe is a $25 billion market, of which our market share is approximately $0.5 billion. Approximately 22 million adults in the U.S. needed substance use treatment in 2019. However, only 10% of these individuals reported having received treatment. There has been an increase in substance use related to the pandemic from stress, job loss, isolation and as a means to cope with other issues like anxiety or depression. A recent study reported that excessive drinking has increased approximately 20% due to the pandemic. The next service line is our CTC business, which is summarized on Slide 15, which is approximately 17% of our revenue. With 141 clinics, we are the largest provider of medication-assisted treatment in the U.S. And in addition to the many challenges presented by the pandemic, there are reports that the pandemic is also causing a resurgence in opioid use in the wake of widespread unemployment and isolation. We continue to see opportunities to help people deal with their opioid addiction, and we've opened 10 new locations within this service line in 2021. Additionally, we continue to see positive legislative support for these services and favorable reimbursement trends, which include expanded funding by Medicare and by Medicaid that occurred in 2020. Slide 16 provides more detail around trends in the opioid use disorder market. We are the largest provider and have approximately 10% market share, approximately 9.5 million people in the U.S. misused opioids in 2020 and only 800,000 of those people received treatment. So there is a large number of people that still need treatment for this addiction. Unfortunately, overdose deaths, as we noted earlier, have surged during the pandemic, representing a worsening of the drug overdose epidemic in the U.S. and the largest number of drug overdoses reported for a 12-month period. Turning to Slide 17. We are providing here an overview of our fourth service line, which is our residential treatment centers, our RTC business, which represents approximately 13% of our revenue. This service line provides longer-term residential treatment for children and adolescents with behavioral health disorders. We maintain a strong presence in our existing markets. And we expect to continue to add beds to the services we provide in these existing markets. Slide 18 provides an overview of the child and adolescent behavioral market. Unfortunately, as we also noted earlier, there is strong evidence that the pandemic is causing a huge demand for behavioral health care service among children and adolescents. The American Academy of Pediatrics, the American Academy of Child and Adolescent Psychiatry and the Children's Hospital Association have recently declared a national emergency in children's mental health and the number of children and adolescents with symptoms of depression and anxiety have doubled during the pandemic.

We'll now review our pathways for growth and how we plan to work to meet the needs in the market. If we turn to Slide 20. We'll start with our levers for growth. And we will start with the fact that we have a very strong balance sheet. We also have a disciplined capital allocation framework and that supports our market-leading growth. We intend to make strategic investments in our 5 growth pathways as seen on this slide, and we'll review in more detail starting with facility expansions on Slide 21. First, facility expansions provide us with the best return for our investment. When we add beds to a facility, we're able to capture the growth and demand in the market, but we also are able to leverage the existing cost structure, which allows us to improve margins and profitability. With an experienced team in place to execute, we have a very strong track record of facility expansions by adding almost 900 beds in the last 3 years. This year, we plan to add another 300 beds to existing facilities across our service lines. On Slide 22, we'll review our strategy on opening wholly-owned de novos. We believe there are approximately 100 markets with a significant need for inpatient psychiatric beds. In addition, for our CTC service line, there's a tremendous unmet need in many markets across the 32 states that we currently operate in, but also we believe there are several other states that we can enter. In 2021, we opened one acute facility, and we also opened 10 CTC locations during the year. When we build a de novo, we gain market access to attractive geographies that are otherwise inaccessible through acquisitions. We have a strong track record of success with 6 acute de novos and 21 CTC de novos that have opened since 2014. Slide 23 has a map of our inpatient de novos. At the end of December, we purchased the real estate of 2 inpatient facilities and an outpatient building to establish a new behavioral health system in Chicago, Illinois, Montrose Behavioral Health. Our main hospital is 101 beds. We plan to serve adults and also provide geriatric services. Our Clarendon campus will provide children and adolescent services with 60 beds, and this campus also provides excess land for potential expansion in the future. We intend to make significant investments into these facilities. This transaction aligns with our strategy to identify underbedded markets for new facilities and opportunities to meet the criteria of our disciplined capital allocation framework. As we turn to Slide 24, our third pathway is joint ventures. We are partnering with premier health systems across the country to build new facilities. Our JV partnerships are beneficial for both parties. Acadia benefits because we gain market access to attractive geographies otherwise inaccessible through acquisition. We also are able to partner with a system that has an established reputation and a strong market presence. We, by partnering, expedite our ramp-up, and we do this through -- they are contributing their share into the joint venture partnership. We're able to leverage, in most cases, our partners established relationships with payers, Acadia benefits. Our partners, the health systems and hospitals are looking to partner to address numerous issues and first, the increased demand for behavioral health services. Patients are boarding in their EDs and they're occupying capacity on their med-surg floors. They want to repurpose psychiatric beds for other specialties. Some have a lack of expertise in the service line or a lack of capital to replace or upgrade existing aging facilities. They also want to fill current and anticipated gaps in their services for behavioral health treatment in the market. We currently have 16 joint venture partnerships and they're in various stages of development. But we also have a robust pipeline for additional JV partnerships. Turning to Slide 25. You'll see a map of our partnerships across the country, the 7 that we have in operation and the 9 that are in various stages of development. Our next JV that we expect to open is in Knoxville, Tennessee with Covenant Health.

On Slide 26, the fourth pathway of growth is through M&A. The industry continues to be fragmented, which we believe will lead to further M&A opportunities. And as we look into the future, M&A is an opportunity where we will utilize our disciplined capital allocation framework to evaluate all M&A opportunities, whether it's a tuck-in opportunity or a larger system. We are through M&A transactions able to penetrate new or geographically attractive markets. M&A transactions often offer opportunities for synergies through our integration efforts, and we have proven strategies to identify, integrate and improve facility operations. Our platform that we have built across our service lines and across the company provide the ability to seamlessly integrate tuck-in acquisitions into the company. Slide 27 provides an overview of a recent transaction that we did complete at the end of last year on December 31, 2021. CenterPointe was the acquisition, and it is the largest, dedicated behavioral health provider in the state of Missouri, with 4 inpatient hospitals with 260 acute beds and 46 specialty beds as well as 10 outpatient locations, we were able to extend our footprint into these high-growth markets across the state of Missouri. It is an attractive market for an acquisition because Missouri is a state that requires a CON. This transaction aligns with our growth strategy to expand our operations through select acquisitions, and it met our disciplined capital allocation framework. On Slide 28, the final pathway that we'd like to discuss is extending our continuum of care. We are seeing opportunities to expand our outpatient programs into markets that currently don't have a full continuum of care. In 2021, we added 28 comprehensive outpatient services, including PHP and IOP. And we added those programs at our acute and specialty facilities. We also see telehealth as an opportunity to expand our continuum of care for our patients, both now and patients in the future. We believe increasing the utilization of our telehealth platforms will help broaden our community outreach. It will assist with physician coverage. It will support increased opportunities for group therapy and encourage more timely patient assessments. We have announced a number of transactions throughout 2021 across all of these growth pathways that we've summarized. And Slide 29 includes a summary of these announcements. We are proud to partner with 6 new health systems across the country to build 7 new facilities to address the demands in our partners' markets. And with our partnerships with SCL Health and with Fairview, we will enter 2 new states for Acadia, Colorado and Minnesota. Our 2021 joint venture and acquisition announcements will contribute over 1,300 beds to be opened or added to our operations. Slide 30 provides an overview of our 4 growth pathways and the total number of beds that we expect each pathway to contribute over the next few years. Starting with the first row, our facility expansions. We expect to continue to add 300 beds a year to our existing facilities, and we are looking to accelerate and add to these projects. With our de novos, with the real estate acquisition in Chicago, we expect to open the 60-bed children's facility in 2022 and the adult facility in 2023, and we also expect to open an 80-bed facility in Indio, California, in 2022. We believe that we'll continue to add 1 to 2 inpatient de novos per year thereafter, along with 6 to 10 CTC locations. With JVs, in 2021, we announced 7 partnerships with health systems, which will open over the next few years. In 2022, we expect to open 2 JV facilities, one with Covenant Health in Knoxville and one with Lutheran Health Network in Fort Wayne, Indiana. The acceleration of our JV openings is expected to be seen in 2023 and 2024 with 4 to 5 new joint venture facilities opened per year. With acquisitions, we will continue to assess opportunities based on our disciplined capital allocation framework. In total, we added 681 beds in 2021 and we expect to add over 600 beds in 2022. In 2023 and 2024, we expect to add between 800 and 1,100 beds due to the increase in the number of joint ventures and de novos that we expect to open. I would also like to provide a few comments about our fourth quarter 2021 operating trends. While we are not formally providing any preliminary results, we want to confirm that demand for our services continues to be strong. While the labor environment continues to be challenging and many facilities have faced added temporary challenges related to the COVID surge starting in December, our facility and corporate leadership team is managing through the challenges as we've done all year. And as such, labor is available to meet the increasing demand that we see. Our labor costs are manageable, and we continue to see year-over-year volume growth and other strong operating trends. We plan to report our fourth quarter results and 2022 outlook in more detail in February.

I'll make some closing remarks and just say that our experienced team, as David said, here at our corporate office but also in the field, have navigated through many challenges this past year. And at the same time, they provided consistent quality care for those seeking treatment for mental health and substance use issues during a pandemic. We are pleased that we've laid a strong foundation for growth in 2022 and beyond. Acadia is well positioned to continue executing our growth strategy and solidifying our position as the largest and leading stand-alone behavioral health care company in the United States. Thank you for joining us today, and please reach out if you have questions.

Thanks a lot, Debbie and David, for your thorough presentation. And I hope you and our viewers have a great rest of the conference. Thank you, everyone.

Thank you.