While private equity is no stranger to dermatology, having invested in the specialty for 15+ years, the opportunity for dermatology practices to partner with private equity continues to be as prevalent as ever. In 2023 alone, according to Pitchbook Data, there were nearly 85 practice acquisitions completed with the vast majority made by a handful of private equity backed strategic platforms (i.e. Forefront Dermatology, PhyNet Dermatology, Schweiger Dermatology, among others); this activity occurring during a year when private equity and venture capital investments in healthcare services fell 59%, its lowest value in over three years, according to S&P Global Market Intelligence data. Dermatology transaction volume kept pace with the 2020 – 2022 period which was widely known as some of the most active years in healthcare services M&A on record.
Dermatology Transactions 2019 – 2023 (2024 through 5/31)
Dermatology Trends
Trend 1 – Mergers of Existing Platforms
Within the realm of strategic platforms, there was a sizable merger of two prominent platforms that occurred in 2022 when QualDerm and Pinnacle Dermatology decided to join forces, ultimately creating what is now known as QualDerm Partners, A Skin & Aesthetics Wellness Family. More recently in January 2024, Schweiger Dermatology acquired United Skin Specialists to expand their geographic presence in the Midwest, a geography historically dominated by Forefront and others. Currently, there are 35+ private equity-backed dermatology platforms throughout nearly 20 states, and that number is expected to keep growing as consolidation within the space continues to mature.
PGP expects to see more mergers as consolidators themselves start to consolidate with each other, for example the successful merger of Platinum Dermatology Partners and West Dermatology in 2022, Waters Edge Dermatology merging with Riverchase Dermatology to form Aqua Dermatology, and the merger of QualDerm Partners and Pinnacle Dermatology, as aforementioned. In addition, we also expect to see more second and third bites, and recapitalizations to continue in earnest, as evidenced by the recapitalization of Epiphany Dermatology, whereby CI Capital sold the platform to Leonard Green & Partners, DOCS Dermatology’s sale from Sheridan Capital Partners to Skyknight, and Forefront’s third bite selling from OMERS to Partners group, all recapitalizing in 2022. While 2023 was a bit of a slower year for 2nd bite activity given the uncertainty around the rising interest rate environment, PGP has proprietary insights into other groups seeking their second bite, which is why the dermatology market has maintained heightened levels of activity despite a transaction slowdown overall. There is an appetite to add a few more practices to these platforms as they prepare to hit the market themselves, presenting a significant opportunity for dermatology practice owners looking to explore a sale.
Trend 2 – “Skin Health” – Dermatology Platforms Interested in Adding Plastic Surgery Clinics and MedSpas
In addition to new platform investments and 2nd and 3rd bite transactions, one of the major trends that has been increasingly prevalent in the last couple of years is longstanding dermatology platforms such as Forefront, QualDerm and DermCare becoming interested in acquiring plastic surgery, medspa, and aesthetics practices, expanding their service offerings and enhancing their ability to serve patients from a variety of medical and aesthetic skin health needs. This is evidenced by QualDerm’s aforementioned rebrand to “A Skin & Aesthetics Wellness Family”. In addition to legacy players becoming acquisitive of cosmetic practices, private equity began to directly focus on partnering with plastic surgery and medical aesthetics practices. Platforms like Cosmetic Physician Partners (100% physician owned), MedSpa Partners (backed by Persistence Capital Partners), Skin Spirit (backed by KKR), and newly formed Ascend Plastic Surgery Partners (backed by Sheridan Capital Partners) are just a few examples of this new wave of PE-backed players in the space.
Current Dermatology Platforms
*Initial Platform Investments Only – Does Not Include Acquisitions in Adjacent Markets*
The Private Equity Strategy
While private equity firms vary significantly regarding fund size, strategy and resources, all initial investments into the space are made with the intention of helping their physician partners achieve economies of scale. This is done through both organic growth & geographic expansion, inclusive of add-on acquisitions, de novo expansion, and the enhancement of ancillary services. To ensure this is done in the most efficient and effective manner, dermatology private equity backed groups employ highly experienced operators at both the board and practice level. Through strategically deployed capital, experienced operators, and physicians that can focus solely on delivering exceptional clinical outcomes, the creation of scale can be expedited.
The result is partners across the footprint benefiting, both clinically and financially, while simultaneously driving returns for their private equity backer. Dermatology private equity backers are determined to achieve their target return on investment (ROI) and understanding how they plan to achieve their goal is essential to a successful partnership. It is the groups that sacrifice patient outcomes for short term economic gain, or do not have an established growth vision that tend to fail. Understanding the broader competitive landscape and strategic vision of financial and strategic partners is paramount before entering a transaction.
Once an inflection point is achieved, the private equity backed dermatology group will look to sell the platform to a new financial partner that may or may not already have an existing dermatology business. This second sale will generate a “second bite of the apple” for physician shareholders which, assuming a successful partnership, leads to another successful economic outcome or “Third bite of the apple”. Examples of such are Forefront Dermatology and Advanced Dermatology and Cosmetic Surgery who have both experienced major liquidity events with their “second bites” and are well on track to their third sale. While the dermatology private equity strategy has multiple successful examples in the space, as aforementioned, there are groups that have struggled comparatively. In groups that have been less successful than others, opportunity remains. As the private equity dermatology consolidation wave continues, the largest, most successful groups in the space have, and will continue to, acquire those that tried and failed to do the same. The result is the initial hoped-for outcome the physician shareholders were looking for at the outset, albeit at a slower pace. This is all the more reason physicians need an advisor on their side in order to help navigate potential partners and weed out the ones who do not have a successful track record.
Why Now?
The dermatology industry has seen significant growth due to an aging population, increased awareness of skin disease, and increased demand for elective cosmetic procedures. For example, the industry benefits from an aging population with over 69% of dermatology patients being over the age of 401. Considering the median age of the entire U.S. population was 39 in 2022 (U.S. Census Bureau), the demand for dermatological services is poised to rise. Another industry tailwind is the continued prevalence of skin disease and individuals being more proactive to address these conditions; skin cancer affects approximately 9,500 Americans daily, according to the American Cancer Society, with annual treatment costs estimated at $8.1 billion2. This shift in age demographics coupled with widespread market fragmentation is a major factor contributing to recent and continued growth.
Despite private equity’s longstanding presence in dermatology, particularly when compared to other specialties private equity has invested in, it is estimated that only 10-15% of dermatology practices in the United States are owned by private equity3. As demand for dermatology services continues to increase at the macro level, practices are more frequently turning to dermatology private equity backed groups for the comprehensive infrastructure, physician network and strategic capabilities they can provide to create efficiency and reduce administrative burden which allows providers to care for more patients.
With the dermatology landscape evolving, it is becoming more challenging for smaller practices to compete. Groups are heavily motivated to transact in an effort to control their own destiny while they still maintain leverage in their respective markets. Further fueling that interest is the fact that dermatology groups of all sizes continue to receive premium valuation consideration as established private equity backed dermatology platforms across the country look to expand their success in existing and new markets. Competition and success amongst private equity backed dermatology platforms is driving very seller-friendly deal structures along with attractive economic consideration, making the private equity option increasingly appealing.
Key Considerations For Practice Owners & Why an Advisor Is Important
When evaluating a potential partner, it is extremely important to find the right fit to ensure a strong go-forward partnership. PGP advises that four critical factors are considered when evaluating whether a partner is right for your practice
Maximize Economics and Achieve Most Favorable Deal Terms
Strike appropriate balance between total EBITDA credit vs the EBITDA multiple
Receiving credit for various tangible growth initiatives in the business (new locations, new providers, new service lines, etc.)
Achieve Clinical Autonomy
Ensure there is a strong level of go-forward governance control at the local level
The practice maintains directional control at the company, including work schedules, vacation days, work location, and retention of staff
Maintained control of provider recruitment and retention
Ensuring potential partners have the resources to execute against the strategy
Access to capital and economies of scale
Adequate level of administrative and operational resources provided (Accounting / Finance, IT, RCM, Marketing, HR & Recruiting, Business Development, Legal, etc.)
Track Record of Success
Partnering with experienced healthcare / PPM ‘Operating Partners’ with a history of adding significant value and operational guidance in the PPM space
Proven ability to align with young and newly recruited providers
Exceptional key performance metrics (recruitment, attrition, location growth, service line expansion)
While many independent groups may initially feel they can navigate a transaction without an advisor, those that have gone through the process with an experienced and reputable firm in their corner will be quick to highlight the significant value add from both economic, partnership and educational perspectives. Ensuring that each shareholder is prepared and fully understands the dynamics within a transaction is crucial for the future success of the business.
A seasoned healthcare transaction advisory team can ensure that the most attractive outcome is achieved. Through a formalized competitive marketing process, an advisor can ensure the practice maximizes their economics and transaction terms. A transaction process also allows the practice to interview multiple private equity partners and choose the group that presents the best ‘fit’.
Even if a group is approached by a buyer or has a buyer in mind, it is essential to run a process considering the practice has one opportunity to choose the right private equity partner, supplemented by the value a process drives regarding both deal terms and economics.
Creating Value after the Transaction
One of the biggest questions practice owners have is what happens after the transaction is consummated? In reality, if you are doing a transaction with a reputable private equity platform, physicians will largely continue to operate “business as usual”. The private equity partner will look to implement certain growth initiatives, but these initiatives will all be items that were discussed at great length in advance of consummating the transaction. On the clinical front, physicians will practice medicine the way they always have. Clinical autonomy is maintained, and an advisory firm like PGP negotiates this on the physician group’s behalf. As for infrastructure capabilities, groups that lack back-office sophistication will typically integrate into the “platform” practices EMR, Accounting and PM systems. Outside of day-to-day operations and clinical delivery, the most notable change is the holding of rollover equity in the new partnership by selling physicians. Due to the fact a substantial liquidity event is experienced, shareholders are required to utilize a percentage of their proceeds in the form of equity in the new enterprise. This is desired by the private equity firms as they want to maintain alignment with the physicians that they have invested in, creating a shared goal of a “second bite of the apple” when the platform ultimately experiences a subsequent sale 3–7 years down the road.
Private Equity Value Creation
Gaining Payer Leverage
Capturing In-House Ancillary Services
Centralizing Infrastructure and Operations
Resulting In
Sustaining Organic Growth
Conclusion
The consolidation within dermatology continues to accelerate into the second half of 2024 and PGP expects the pace to continue into 2025. Whether a practice outwardly desires private equity partnership, questions the rationale and effectiveness of a PE partner, or downright disagrees with private equity, it is essential to get educated and ensure your practice is positioned for continued success in your market.
For those that choose to go down the path, it is imperative that culture and alignment, not simply economics, is the first goal. The role of an advisor like PGP can be the difference maker not only in knowing who can be trusted and who has a track record of success, but in ensuring an economic outcome that is satisfactory when transferring the ownership of your business.
If interested in pursuing a transaction, learning about private equity, the private equity strategy, transaction dynamics, or activity in your market, please utilize the information below to contact the PGP team and schedule a discussion.
1Benjamin, C. et al. (June 22, 2022). Industry Spotlight: Dermatology. Harris Williams.
2The Skin Cancer Foundation. (January 2023). Skin Cancer Facts & Statistics: What You Need to Know.
3Journal of Drugs in Dermatology (April 2023)- A Systematic Review: Landscape of Private Equity in Dermatology From Past to Present
