Nov 29, 2018

The concerns surrounding Acadia Healthcare

Data:; Chart: Axios Visuals

Over the past few years, Acadia Healthcare has saddled itself with huge amounts of debt, and top executive insiders have sold off stock in droves — a situation that doesn't inspire confidence in the future of the company.

Why it matters: Acadia is one of the largest operators of behavioral health facilities in the country, making it an important part of the nation's response to the opioid epidemic as well as broader mental health and drug addiction treatment.

Driving the news: Rumors have swirled that private equity firms, specifically KKR, are close to taking Acadia private, but nothing has been substantiated. Separately, a recent article by Penn Little, who runs his own investment firm in Chicago, raises red flags about Acadia's business. (Little does not trade Acadia stock but said a short position "would appear appropriate.")

  • Acadia is sitting on $3.2 billion of long-term debt thanks in large part to buying a bunch of facilities in 2015 and 2016, according to the company's latest quarterly filing. That number that has barely budged since the beginning of 2016 and mirrors the debt-laden situation of other brick-and-mortar health care companies like Community Health Systems.
  • Acadia's "net debt to EBITDA," a ratio that shows how well a company can pay down debt with the money it's generating, is well above what most financial experts say is tolerable. And it's raised the eyebrows of skeptical Wall Street analysts.
  • It could get worse: "With interest rate hikes, we are getting to a point where Acadia is going to have a hard time paying its debt," Little said in an interview.
  • Acadia is also hurt by the fact health insurance payments for mental health and addiction services are "bad" right now despite federal parity laws, said Emily Evans, a health care director at Hedgeye Risk Management.

Between the lines: Top executives and directors commonly sell stock, but they usually keep a decent amount to at least give the perception of long-term confidence in a company. That's not happening at Acadia.

  • Acadia CEO Joey Jacobs and Reeve Waud, the founder of his Chicago-based private equity firm that created Acadia, together owned more than 30% of the company in 2013. That's declined to less than 2% today.
  • Waud cashed in $1.9 million of stock earlier this month. Although a federal filing says the sale was predetermined in March, it still occurred just before the company's third-quarter financial release that missed Wall Street's expectations. He similarly had a smaller planned stock sale days before Acadia's second-quarter miss. Acadia's stock is now 28% lower than the price Waud sold at this month.
  • The Justice Department previously investigated another behavioral health company that Jacobs led, Psychiatric Solutions, over questionable compensation practices.

The other side: Acadia did not respond to multiple requests for interviews. Waud did not respond to questions, but a spokesman at an outside firm representing Waud's private equity group said Waud has followed federal rules that govern predetermined stock sales.

The bottom line: Interviews and financial documents indicate Acadia, a provider of mental health and substance abuse treatment for thousands of patients, is not on solid ground.

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