Discovery Behavioral Health Sets Sights on Complementary Deals, Two New States

Last year was a busy one for transactions in the addiction treatment services market, with few in the industry as active as Discovery Behavioral Health (DBH), a portfolio company of Webster Equity Partners.

Based in Los Alamitos, California, DBH is led by CEO John Peloquin, who helped strengthen the company’s already firm market foothold in 2019 with acquisitions in Maryland, California and Washington state.

The company didn’t waste anytime setting up its robust M&A pipeline. DBH was founded in 2018, after Cliffside Malibu — a Los Angeles-area addiction treatment provider where Peloquin was CEO — merged with Center of Discovery — a PE-backed behavioral health provider that offered a variety services in 11 states. Peloquin was named CEO of the new combined company in May 2018.

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Even before that transaction, Peloquin was no stranger to behavioral health dealmaking. He has more than 20 years experience working in the field and formerly served as division president of CRC Health Group, a behavioral health provider and former subsidiary of Bain Capital.

In 2015, when Peloquin was with the company, CRC was sold to Acadia Healthcare (Nasdaq: ACHC) for $1.3 billion, which at the time was the largest behavioral health care sale ever.

Behavioral Health Business recently caught up with Peloquin to discuss DBH’s past and future growth, which could include entrance into two new states. He also delved into how he addresses skepticism toward the addiction market and other industry challenges.

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You can find BHB’s conversation with Peloquin below. Portions of the conversation have been edited for length and clarity.

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BHB: Thank you for taking time to talk with us. To start, can you tell us about the number of facilities DBH operates and the breadth of services offered?

Peloquin: We provide eating disorder, mental health and substance use disorder (SUD) treatment services. We opened up a few more [facilities] recently in our acquisitions, and we have 97 locations in 12 states.

Our growth strategy is not to just spray a lot of treatment facilities across the country. When we enter into a market, our approaches are to help the community solve an issue.

Where do you find that your core business is among mental health, substance abuse and eating disorder services?

We’re pretty well-diversified.

A lot of the acquisitions we’ve been doing have been in substance abuse and mental health services.

It’s not because of the exclusion of the eating disorder population. The eating disorder segment is smaller than the substance abuse side.

DBH has been active as of late in acquisitions, with three transactions in Q4 of 2019 alone and a few since then, as well. What’s the impetus behind all the recent activity?

All of the acquisitions that we’ve been doing are within the 12 states we already provide treatment services.

For example, we bought a [center] in New Jersey that was more concentrated on substance abuse services for the community. We already have a lot of market density for eating disorder and mental health services in the surrounding states.

We have been very selective and strategic in making sure that we offer complementary services because we do believe there’s a comorbidity between all the service lines that we offer.

What does DBH look for in acquisition targets?

First and foremost, all of them have to have a clinical commitment towards positive outcomes.

The second is geography. Where can we enter? Is there an opportunity to align our services into a community? I get a lot of offers for acquisition targets that come in, and I say no to most of them.

The third pillar is alignment. How can we add value? We don’t target turnaround strategies. It’s about how our services and platform infrastructure can help an organization to grow.

PE has taken a considerable role in this industry, from strategic investments to outright purchases. You guys are PE-backed. Can you talk about how important PE’s presence has been in the industry as a whole?

I worked for a company [CRC Health Group] that was sold by Bain Capital. It was the largest behavioral health care deal in history at that time on the private equity side, and there was some reaction of, “Oh my gosh, the private equity companies are coming in, and they’re only going to pillage and plunder.”

Overall, I believe the investment from private equity has been to the benefit of the industry resulting from a demand for clinical standards and standard of care.

You have over 20 years of experience working in behavioral health, during which time the opioid epidemic in America has skyrocketed. As far as delivering services, has opioid treatment been your biggest challenge?

I would have to say during my tenure, I’ve never seen more of a game changer than the opioid epidemic. And as treatment providers, we had to adjust to that epidemic rapidly.

As an example, medicated-assisted treatment (MAT) was viewed as an inferior treatment long ago. MAT has since become accepted, which, for me, is positive, and it’s maybe a silver lining of the opioid epidemic — that people would not discriminate against a particular intervention like MAT because of a certain personal bias. Rather, it’s just another tool out there that people can use to get well.

Given the opioid epidemic and the fragmented state of the addiction market, do you believe that there is more room for the industry, on the whole, to grow?

SAMHSA publishes data for behavioral health. Their reports will give you the size of the gap of services from people who they estimate are in need of treatment [versus] those who are actually receiving it. And it’s a pretty astonishing gap.

Since I entered the industry it has continuously evolved into consolidation. You see a lot more larger providers. A lot are trying to do rollout strategies or are just trying to get bigger through buying anything.

I think other premium providers of quality should continue to grow because I do believe they are in it for the same reason, which is to provide access to care for people who are in need of services.

I believe there’s still plenty of room for more market participants to help more people.

In your opinion, what do you think it takes for a provider to be able to experience the kind of growth DBH has?

I think what sets us apart is that we make a strong commitment to the customer experience and clinical standards. All else is secondary when the patient is taken care of first.

Can you talk about a time when you might have experienced pushback around opening a clinic in a community? How did you convince others that you just weren’t there for a quick buck, if you will, but rather to provide a service to those who truly needed it?

When I was with CRC, we made plans to open up a [MAT] program in Vancouver, Washington. We were met with picket signs and a whole host of hostilities toward entering that market.

Once I had heard the local unrest about entering into the market, we stopped and had community meetings for six or seven months, even though we already had our license to open. People asked questions regarding crime, how the valuations of their homes might be affected and a variety of other different things. We were able to help everybody understand what our treatment was.

There’s a fallacy out there that some communities do not have an issue when it comes to substance. When you ask, “Is there somebody in your family tree that has been afflicted by substance abuse?” you’re hard pressed to have that answer be no.

I do believe that having that conversation is important for us, in that we help people understand what we do and what we attempt to do with each and every individual who enters into our treatment facilities.

Lastly, do you have plans this year for Discovery to expand into other states and regions?

We are looking to get into a 13th — and potentially 14th — state.

Our entry into these markets are looked at not in terms of singular services offered. It is about looking to provide a choice among eating disorder, mental health and substance use services.

We do have some plans on the drawing board.

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