Sector spotlight: Dermatology
The $14.0+ billion dermatology market is forecast to grow at an annualized rate of 2.4 percent over the next five years driven by an aging U.S. population, rising disposable incomes and increased health insurance coverage. Strong volume growth coupled with significant provider fragmentation has made the sector attractive for investment and acquisition. Since 2015, over 85 acquisitions of dermatology practices have closed.
We expect this trend to continue, with practice groups of scale attracting intense interest from private equity firms seeking to establish platform investments. Smaller dermatology practices will also continue to garner interest from private equity-backed consolidators seeking “tuck-in” acquisitions to expand their geographic footprint and/or range of service offerings.
Factors driving consumer demand and ongoing merger and acquisition (M&A) activity in the sector are as follows:
- Adults 65 and older account for one-third of industry revenue and an estimated 50 percent of individuals who live to age 65 will develop either basal cell carcinoma or squamous cell carcinoma. As this group grows, the number of patients requiring care for skin cancer will increase, as well as the number of patients desiring elective cosmetic procedures.
- Increased funding of Medicare and Medicaid, as well as improved coverage from the Affordable Care Act, are providing access to dermatological care to more Americans. One of the key provisions of healthcare reform benefitting the dermatology sector is full coverage of preventative care. Preventative care is especially important in reducing the cost of dermatological care due to the highly manageable nature of skin cancers that are caught early.
- Rising disposable incomes are driving demand, particularly in cosmetic dermatology, which represents approximately 21 percent of all dermatology services. Cosmetic procedures (such as Botox injections, laser hair removal and anti-aging procedures) are typically minimally invasive and paid for entirely out-of-pocket by consumers, resulting in high profit margins.
- Growth in industry demand and the historical concentration of dermatologists in major metropolitan areas has resulted in a shortage of dermatology specialists and substantial “greenspace” left for new practices in many rural and suburban markets across the U.S.
- Private equity is very active within the dermatology sector, backing several of the most established platforms, such as Harvest Partners purchasing Advanced Dermatology & Cosmetic Surgery from Audax Group and GTCR’s acquisition of Riverchase Dermatology, which was previously backed by Prairie Capital. Despite these notable consolidation plays, the market remains highly fragmented, creating a favorable environment for continued M&A activity.
For more information on this topic, or to learn how Baker Tilly Capital specialists can help, contact our team.