“In 2016, dermatology was one of the most sought-after subsectors of healthcare services from both strategic and private equity sponsors,” says Ajeya Shekar, Senior Associate at Provident Healthcare Partners, a healthcare focused investment bank.
We talked to Shekar about Provident’s expectations and predictions for dermatology this year.
Overall, investor interest will remain high. “Macroeconomic growth drivers such as increasing skin health awareness, a rise in skin cancers, and favorable payor mix dynamics will continue to not only support organic growth in dermatology practices, but also profitable ancillary service opportunities such as lab services, clinical trials, cosmetic products, and ASCs among others.”
Due to fragmentation, platform acquisitions within the dermatology space are limited. “This supply and demand imbalance will create significant competition for acquisition targets, and high valuations for groups of size and scale. For investors unable to secure a platform, we expect traditionally middle-market private equity groups to come downstream to partner with smaller organizations, or execute upon a roll-up strategy.”
PE firms already invested in dermatology may look to exit in 2017. Provident points to numerous private equity exits and above market returns in 2016 involving the following dermatology practices as evidence of a robust M&A environment:
- Forefront Dermatology’s acquisition by OMERS (previously backed by Varsity Healthcare Partners)
- Advanced Dermatology & Cosmetic Surgery’s recapitalization by Harvest Partners (previously backed by Audax Group)
- Dermatology Associates’ recapitalization by ABRY Partners (previously backed by Candescent Partners)
- Riverchase Dermatology’s acquisition by GTCR (previously backed by Prairie Capital)
Strategic acquirers will increasingly compete with PE firms. “With fresh capital resources and new private equity partners eager to scale their investments, we expect strategic acquirers to become increasingly competitive with private equity firms for platform acquisitions within the dermatology sector. In light of the competition for acquisition targets and positive growth drivers in the industry, 2017 is likely to be a favorable sellers’ market, both from a valuation and structuring perspective.”
With capital a commodity, owners should look for non-financial resources in potential partners too. “Carefully consider not only valuation, but also [the potential partner’s] relevant experience, thesis around dermatology, and philosophical fit with the organization.” In particular, Shekar says, look for:
- Relationships with health systems, payors, and vendors
- Board-level resources (e.g., former healthcare executives with experience scaling businesses)
- The ability to shoulder back-office capabilities such as revenue-cycle management, payor contracting, and HR (for strategic partners)
“Since these transactions are true partnerships that often last for 3 years or more, it is important for personalities and strategies to align well with management and physicians to ensure success post-transaction,” says Shekar. “We typically find successful partnerships to have a continued back-and-forth exchange of new business ideas and growth opportunities, while rooted in a model allowing providers to retain their clinical autonomy.”