America’s Largest Freestanding ER Operator with Strong Growth Prospects in Untapped Market

Adeptus Health Inc. (ADPT) owns and operates America’s largest network of community-based, fully-equipped standalone 24/7 emergency rooms under the First Choice brand for adult and pediatric emergencies (such as cardiac events, premature delivery complications, respiratory distress and accidental poisoning) with certified in-house diagnostics and laboratories. Prior to this IPO, Adeptus was a portfolio company of private equity firm Sterling Partners.

Adeptus is capitalizing on a large untapped opportunity by offering convenient emergency care with improved access (facilities are based in population centers, unlike traditional Emergency Rooms (ERs) in hospitals only), reduced wait times (waiting times in ERs can routinely reach 5-6 hours), 24/7 staffing, on-site diagnostics and high quality care that’s comparable to or better than hospital-based ERs.

Adeptus should also benefit from healthcare consumerism where self-insured employers are looking for ways to reduce their overall healthcare expenses and are shifting financial responsibility to patients through higher co-payments and deductibles. As patients up their healthcare spending, they want greater price transparency, more cost-effective care options, higher quality care, increased convenience and more service for dollars spent. These trends favor Adeptus’ freestanding ERs.

Adeptus operates at the higher end of the acuity and emergency care spectrum. Since its founding in 2002, the company has developed a scalable business model with attractive unit price economics, sophisticated data analytics to support its site selection process, proven real estate development methods and innovative marketing.

Adeptus has grown from 14 facilities at year-end 2012 to 32 facilities as of March 31, 2014, with locations in Texas (Austin, Dallas/Fort Worth, Houston, San Antonio) and Colorado (Colorado Springs, Denver). By year-end 2014, Adeptus plans to have 53 facilities in its markets – up 95% annually.

Adeptus plans to add at least 20 new facilities annually over the next several years, targeting mid-sized and large metropolitan markets that are underserved by area ER hospitals. Adeptus currently has 50 new sites in development in existing markets.

Adeptus went public on June 25, 2014, with 4.9 million Class A shares priced at $22 per share, the high end of it filing range of $19 – $22 per share. Shares jumped 17% on the first day of trading to close at $25.75 per share amid solid demand. Adeptus also offered the standard 15% overallotment option to underwriters on 735,000 additional shares which will be filled as shares are already in-the-money.

At $25.75 per share (as of 6/25/2014), with 20.7 million shares outstanding, the company has a market capitalization of about $533 million. Shares closed the week at $25.30 (as of 6/27/2014), well above pro forma book value of about $1.50 per share. Public investors will suffer significant immediate dilution relative to net tangible book value.

Adeptus does not plan to pay dividends for the foreseeable future.

While the primary lot of 4.9 million shares was offered by Adeptus, the 735,000 overallotment shares included 313,586 shares from a selling shareholder and the remaining 421,414 shares offered by Adeptus.

Adeptus plans to use proceeds from the primary lot of 4.9 million shares – about $99 million – to fully or partly repay outstanding debt and retain the balance for working capital and general corporate expenses. Adeptus’ expected proceeds from the sale of 421,414 overallotment shares – about $8.5 million – will be used to purchase shares from an affiliate of Sterling Partners. Adeptus will not receive any of the proceeds from shares sold by the selling shareholder.

Large and Growing Market Opportunity

Across the U.S., ERs are significantly overburdened. Data from the American Hospital Association shows that ER visits are up 47% from 91 million in 1992 to 133 million in 2012, while the number of ER departments is down 11% from 5,035 in ’92 to 4,460 in 2012.


In 2014, the American College of Emergency Physicians gave a D- grade for access to emergency care, primarily because there aren’t enough ER departments to meet the needs of an aging population and a projected influx from the Affordable Care Act.

Adeptus’ freestanding ERs are an essential part of the solution and offer an improved overall patient experience relative to traditional hospital ER care.

Adeptus’ Competitive Differentiators

First Choice ER is the largest freestanding ER provider in the U.S., and is more than double the size of its closest freestanding competitor, and has the proven ability to build ER centers in existing and new markets to further capitalize on its lead.

First Choice offers a superior patient experience with lower wait times and quicker diagnostics/test turnarounds within its facility, and was recently awarded for excellence in a patient satisfaction survey. First Choice maintains the highest standards of clinical excellence with standardized, highly scalable clinical and operational infrastructure that will support continued growth. Further, management believes high regional density provides significant advantages and will focus on growth.

The company has an internal team with significant experience in multi-unit retail expansion, site selection and execution – and this distinctive real estate development strategy supports attractive unit growth and economics. First Choice’s physician compensation and incentives’ model helps attract and retain high quality physicians and clinicians; First Choice also reduces physicians’ administrative workload and allows them to spend more time on patient care.

Adeptus develops its ER facilities to deliver coordinated patient-focused care, and limits the need to move patients around. This focused standalone approach improves patient, physician and staff satisfaction. Adeptus’ facilities offer 24/7 emergency care, are typically 6,000 to 7,000 square feet in size and are located in convenient local community settings. Each facility has about six to nine emergency exam rooms including a specially equipped obstetrician/gynecology room, two high acuity suites and a child-friendly pediatric room.

Each facility has full in-house diagnostic imaging technology (CT scanners, digital x-rays, ultrasound) with on-call radiologists, and a CLIA-certified on-site laboratory.

Adeptus only employs, and is currently contracted with, 260 board-certified physicians with 16 years of average medical experience.

Through its streamlined process, patients typically see physicians within minutes and do not have to suffer agonizing wait times in crowded ER waiting rooms.


Positive Value Proposition for All Stakeholders

Adeptus’ value proposition benefits patients by offering convenient and immediate high-quality emergency care, reduces administrative overhead for physicians, minimizes unnecessary tests and reduces payor costs, and expands the local community reach of health systems and hospitals (80% of its patients come from within a 5-mile radius).

Recent Business Development Initiatives

Adeptus has used funds from a 2011 investment by Sterling Partners to grow its business through the hiring of senior management (including company CEO Tom Hall), enhanced its clinical and operational infrastructure and entered the Colorado market. Adeptus has also developed strong alliances with health systems such as HCA in North Texas on streamlined transfer procedures to hospitals for continuing care and with Concentra urgent care clinics for follow-up non-emergency care in the Dallas/Fort Worth area.

Adeptus’ Growth Strategy

Adeptus plans to leverage its fine-tuned business model to expand its presence in existing markets because higher facility density is expected to increase scale efficiencies in cost and care contracting (so contracted physicians have a better choice of facilities and greater income opportunities), and branding.

Adeptus plans to market itself through targeted local channels such as the Internet, social media, community sponsorship, field marketing and direct mail campaigns – to increase patient awareness and drive patient volume and same-store growth.

The company will continue to strengthen its alliances with local and regional health systems for referrals to First Choice and transfer for continuing care to hospitals and urgent care locations. For example, its partnership with HCA gives it access to over 5,000 doctors and 11 hospitals in North Texas, assure patients of bed availability for continuing care and avoid hospital ER stays.

With expansion as one of its core competencies, Adeptus plans to develop new facilities in states beyond Texas and Colorado though careful site selection and replication of its regional platform model. Adeptus’ immediate plans are to enter Arizona in 2015 with a small but full-service general hospital.

Every facility is financed on a standalone basis with a combination of cash from operations, senior secured credit and other sources, and competes with local hospital and free-standing ER departments. Free-standing competitors include Elite Care, ER Centers of America, Neighbors Emergency Center, Physicians ER and Texas Emergency Care Center. Adeptus complements, not competes, with community medical practices (such as doctors’ offices) and urgent care centers for referrals and follow-up, non-emergency care.

Revenue Model

Adeptus gets its revenues from patient services and collects fees from patients (private pay, co-pay, deductible), insurance companies and third-party payors such as HMOs, PPOs and private insurers. Patient collections are typically upfront, either as cash, credit card or check. Insurance claims are typically submitted electronically within 72 hours of patient visit, and a centralized in-house team handles billings and collections, with delinquent payments transferred to a third party collection service. In 2013, 87% of the company’s revenues came from four major third-party payors while 13% came from smaller third party payors, self-pay patients and workers’ compensation.

Experienced, Well Respected Management Team

Thomas Hall serves as President and CEO, and joined the company in 2012. Hall has extensive executive level leadership experience at NovaMed, Matria Healthcare and ADP Total Source. Graham Cherrington serves as COO and also joined the company in 2012 as part of their senior management recruitment effort, and was brought in because of his close working experience with Hall and his extensive healthcare experience. Timothy Fielding joined the company as CFO in 2013, in preparation for its IPO. Andrew Jordan serves as Chief Marketing Officer and has extensive experience with retail marketing.

Recent Financials – Adjusted EBITDA Up 100% Annually

For the quarter ended March 31, 2014, Adeptus had net revenues of $38.8 million, operating expenses of $39.1 million and a net loss of $(2.4) million. Pro forma, the company had total assets of $247.6 million, debt and capital lease obligations of $91.4 million and stockholders’ equity of $105.7 million. Q1 was also impacted by IPO related reorganization and administration expenses.

Adjusted EBITDA, after one time expenses, was $5.1 million in the quarter, up 100% from $2.5 million in the year-ago quarter.


For the year ended December 31, 2013, Adeptus had net patient service revenues of $102.9 million, up 40% from $72.6 million in FY 2012. Salaries and wages accounted for about 65% of $102 million in total operating expenses. The company reported a net loss of $3 million in FY 2013, a reversal from a net profit of $3.2 million in FY 2012 due to corporate expansion.

Operating activities generated $6.9 million in net cash for the full year.


Adeptus’ First Choice ER is the leading standalone ER owner-operator in the U.S., with a growing presence in Texas and Colorado, and significant untapped potential in other states. The company addresses a critical gap in ER care with state-of-the-art facilities that complement other local providers such as hospitals and urgent care clinics. The company is cash flow positive with strong Adjusted EBITDA growth. This is a growth play with a focus on building out new facilities in new markets, with significant expenses for build out and marketing. Investors should not overly focus on profits but on getting in on the ground floor on a potential game-changer stock.

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