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The Sad Saga of Adeptus Health


Editorial Board  |  April 2, 2017

For every success story, there are many more failures. The business news tends to focus on spectacular success stories like Facebook or the recent $24 billion IPO of Snapchat. Business readers don’t like to read or even think about failure. There is nothing illegal, immoral or obscene about failure: stuff happens.

But this is a story about one of the more suspicious flops of 2016. It is the story of Adeptus Health. It may be too early to declare Adeptus a total flop. You can judge that for yourself. By itself, the rise and fall of Adeptus stock provides the graphic details. The suspicious parts require a closer look at the details.

Adeptus Health was founded in 2002 in a Dallas suburb by Thomas Hall using money supplied by certain friends and investors. Hall’s business plan was appealing to anyone who had ever spent hours in a hospital emergency room waiting for care.

Hall formed First Choice Emergency Room and quickly became the largest network of freestanding emergency rooms in the United States. The company set out to change things with a simple formula: quality, clean and fast professional service.

Each of facility was staffed 24/7 with board certified doctors armed with a full range of equipment: CT scanners, full radiology suites, the works. They even have onsite labs that cut the turnaround time down to only 20 minutes.

While conventional hospitals are shrinking ER services, Adeptus was adding. Over 80% of their business was 3rd party reimbursed.   Hospital ER’s loose money, Adeptus financial records showed they earned a tidy sum.

By June 2014 when Thomas Hall and his partners launched a $108 million initial public offering, the company was already the industry leader ready to expand from a base in 3 states western, nationwide.

Obamacare Loved Adeptus

 How is the Adeptus model different? Hospital admittances from Adeptus are less than 4% compared with the national average for ER’s of 11%. And that supported the whole purpose of the Affordable Care Act: better care for more people at a lower cost. 

Infant Industry: Opportunities Appeared Open Ended

The freestanding ER trend was just getting started. There are only 500 nationwide. Compare that to 2,800 retail clinics, 5,500 ambulatory surgery centers and 10,000 urgent care centers and you get some perspective.   In the next decade, the number of freestanding ER’s could easily increase ten fold. There is a world of untapped opportunity here.

Fast Forward: The Winds Have Shifted

Adeptus seemed to have the wind at it back. In April 2016 Adeptus was even named one of the 20 Best Workplaces in Healthcare by Fortune Magazine. The company that went public less the 24 months earlier at a value of just under $400 million had risen to $1,254 billion. The Dom Perignon was beginning to flow.

Today Adeptus has a different a different story. The price of the common stock is just a little over $2.30 per share or a market value of less the $50 million.

What Went Wrong?

The company’s business model is failing. There is concern about the company’s ability to continue as an ongoing entity.  The question of what went wrong at Adeptus may be less important than who did wrong at Adaptus. Here is what is truly offensive.

In June of last year, just as the company stock was reaching an all time high of $72, Adeptus management issues increased guidance for the full year 2016. The old guidance of $635-$665 million in revenues and per share earnings of $2.50-$2.60 was raised to $640-$670 million and $2.55-$2.65 per share. Though not monumental changes, the changes sent a signal to Wall Street that things were solid.

Eight months later, earnings are missing and the stock is down over 90%.

Who Knew What and When Did They Know It

Now here comes the killer. About the same time the rosy outlook was being issued, the company registered a stock offering of 2.75 million shares. Around $72, the stock was at an all time high so you would have to say that management was smart raising money to expand their business. The offering netted about $190 million. That’s enough capital to keep the engines of Adeptus growth going for quite a while.

But wait Adeptus wasn’t getting the money. Founding investors were selling nearly all of their stock pocketing an estimate profit of over $175 million. There are two things wrong with this transaction. First if the original investors saw a great future in Adeptus growth, why did they sell their stock?

And then, what was management’s motive in boosting guidance at the same time of the stock offering? What did they know and when did they know it? You have to admit, the Adeptus story is a litigation attorneys dream. In theory, investors have lost over $1 billion since Thomas Hall issued his glowing guidance. Class action law suites are inevitable. Stay tuned.

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