Consumer Healthcare: Eight Subsectors to Watch

gettyimages-1201017313_1.jpgFor many investors active in the healthcare, consumer, and retail sectors, the notion of crossing sector lines has long been appealing. Imagine how healthcare businesses could benefit from customer engagement lessons learned in consumer and retail, for example. And consider the appeal of an essential service like healthcare to investors used to the ups-and-downs of more discretionary businesses.

No wonder, then, that investor interest in the consumer healthcare space is burgeoning as we begin to emerge from the COVID-19 pandemic. Here, senior bankers from the Harris Williams Consumer Group and the Healthcare & Life Sciences Group discuss opportunities in eight key subsectors in which they have collaborated.

Defining the Sector

The consumer healthcare sector includes several specialties, from dental and dermatology to physical therapy, urgent care, and vision. As we describe in Consumer Healthcare: Creating Value by Crossing Industries, Harris Williams has identified five major criteria that influence the degree to which sectors exhibit consumer healthcare characteristics:

  1. Choice. In consumer healthcare, patients have some degree of choice (as opposed to being referred to a specific specialist).
  2. Interaction model. Businesses modeled on consumer healthcare can engage in recurring patient relationships or in situations where the need is more acute, but convenience and brand awareness must be decision drivers.
  3. Location. Most consumer healthcare providers operate in freestanding, highly visible retail environments or via a “store-in-store” model.
  4. Branding and patient experience. Consumer healthcare businesses emphasize branding, consumer awareness, and customer experience more than pure healthcare providers do.
  5. Payor dynamics. Consumer healthcare businesses tend to have a higher degree of patient/cash pay and commercial insurance, with less government pay than other healthcare businesses.

While some consumer healthcare businesses were impacted by COVID-19 shutdowns, by and large the industry has rebounded. Demand stayed strong and many businesses made improvements during the crisis that will have lasting impact on their operating performance.

In fact, a Harris Williams survey from October 2020 indicated that patient volumes in many verticals were returning to pre-pandemic levels or even higher. In addition, the vast majority of sponsors active in the space were planning on completing a new platform deal in the sector in 2021.

“Based on recent deal activity, investor interest is certainly increasing and valuations remain robust,” says Corey Benjamin, a managing director in the Harris Williams Consumer Group.

The Multisite Advantage

“Consumer health segments are proving their resilience and demonstrating that they can operate safely and effectively, even as the pandemic continues,” says James Clark, a managing director in the Harris Williams Healthcare & Life Sciences Group. “Patient demand continues to be strong. And, since infections aren’t being traced back to doctor/patient interactions in any meaningful way, consumer confidence in visit safety continues to rise.”

“We believe many multisite consumer healthcare businesses with private equity backing have proven to be more resilient during COVID-19 due to their greater relative scale and sophistication,” notes Andy Dixon, a managing director in the Harris Williams Healthcare & Life Sciences Group. “Compared to privately held, single-location healthcare providers, these businesses could shift investment and leverage infrastructure in response to the crisis.” 

gettyimages-1169329573.jpgMultisite businesses were able to invest in new technology, such as telehealth in many cases, and their more advanced technology proved advantageous in 2020. For example, more sophisticated digital customer acquisition enabled them to take market share from private practitioners not yet open early in the pandemic. Also, platforms have a greater ability to invest in more systematic development of referral relationships. 

“Multisite consumer healthcare businesses were also able to manage labor across locations more effectively in the height of the pandemic,” adds Geoff Smith, a managing director in the Harris Williams Healthcare & Life Sciences Group. “They could consolidate resources into a subset of locations that could be opened more rapidly and run at greater utilization. They also tended to have better access to personal protective equipment (PPE), which could be moved and shared across locations as needed to provide a safe working environment.”  

Cheairs Porter, also a managing director in the Harris Williams Healthcare & Life Sciences Group, agrees: “The structural improvements that many multisite businesses implemented, such as more efficient labor utilization and technology use, reduced cost initially and will enable them to operate more efficiently going forward.” 

M&A on the Rise

Because of the inherent resilience of consumer healthcare, M&A activity is coming back, and will continue to intensify. M&A in other areas of healthcare, such as the highly resilient pharmaceutical services area, bounced back more quickly than consumer healthcare did in 2020. However, market activity shows that M&A is on the front end of a comeback, as evidenced by several recently closed deals in which Harris Williams was involved. (See Consumer Healthcare: The Platform Opportunity in Vision, Dental, and Veterinary Care.) 

“Many consumer healthcare businesses will soon be able to demonstrate nine months or more of ‘normalized’ operating performance coming out of the height of 2020’s spring shutdowns,” says Dixon.  “This will help investors gain comfort with the predictability of their financial performance and earnings profile at new volumes and cost structures, so they can pursue transactions with greater confidence and conviction.” 

The continued vaccine rollout should further reduce any remaining investor concern about the sector’s prospects. As a result, Harris Williams expects that deal activity in these segments will continue to accelerate, especially in these eight subsectors.

1. Dermatology

As of 2018, the dermatology segment was a $14 billion market with a projected industry CAGR of 2.4% through 2021.1 

It has a stable reimbursement outlook, paired with attractive margins. “While traditional medical-surgical offerings are less cyclical, many of the cosmetic products and services are more discretionary in nature and typically follow broader trends in consumer spending,” says Smith. “Nonetheless, demand for discretionary services has held up very well throughout the pandemic.”

The dermatology vertical is extremely fragmented. Consolidation within dermatology remains in the early stages, with a growing number of platforms more frequently supported by institutional capital. Just over 4% of practices are currently owned by industry consolidators,2 and private equity firms continue to scale and look to acquire medium-sized providers. Acquisition multiples are expected to remain robust, given strong private equity interest and a shortage of scaled practices.

2. Fertility

The U.S. fertility services market is estimated to exceed $8 billion in revenue, while the global market generates $40 billion.

The segment’s growth is strong as well, projected to exceed 10% CAGR through 2022.3 Growth is driven by factors that include more women having children later, as well as more advanced and less risky infertility treatments, both of which increase demand for services. Barriers to entry in the industry are high, with significant initial costs to set up a new IVF lab, considerable clinical and scientific expertise required to generate strong outcomes, and high demand for reproductive endocrinologists and embryologists, resulting in only a moderate number of new clinics each year.

Consolidation within the fertility vertical has accelerated over the last few years, with strong interest from institutional capital and a number of emerging medium- and larger-scale platforms. However, less than 20% of practices are affiliated with industry consolidators.4

3. Physical Therapy

Physical therapy was a $35 billion market as of 2018, growing at a projected 3.6% CAGR through 2020.

Demand for physical therapy has historically been highly stable with strong secular growth drivers. Among these are the aging population, increased focus on preventive care, and a growing desire to lower hospital readmission rates­—so much so that payors are increasingly demanding physicians first refer patients to physical therapists rather than surgery.  

The physical therapy vertical has seen ongoing consolidation over the past few years, with platforms of various sizes present throughout the industry. “A number of large strategic and private equity-backed operators have emerged over the last decade. They have been highly successful implementing both de novo and acquisition-based expansion strategies,” notes Nathan Robertson, a vice president in the Harris Williams Healthcare & Life Sciences Group. About one-quarter of practices are owned by industry consolidators, representing significant additional opportunity within the sector for investors.6

4. Urgent Care

Urgent care is a $24.9 billion market growing at a CAGR of 2.4% through 2022.7

Shortages of primary care physicians, coupled with rising costs and wait times at emergency rooms, is stimulating demand for urgent care centers to provide noncritical care. Lucas Scholl, a vice president in the Harris Williams Healthcare & Life Sciences Group, shares this example: “The average cost for an urgent care visit is $150, while emergency room visits average over $1,300. It’s no wonder that insurers are increasingly raising reimbursements for urgent care centers while raising emergency room co-payments. More and more often, we are seeing urgent care centers partner with health insurance providers seeking to control costs.”

While some fragmentation remains within the urgent care vertical, several large players have been driving consolidation in the industry over the past number of years. “There’s a visible and active presence of both mega and medium-sized platforms,” says Clark, “but about two-thirds of platforms have fewer than 100 clinics in their portfolio.” New business models are also emerging, including joint venture partnerships with hospitals; hybrid models that combine primary, urgent, and emergency room care; and rural-focused strategies to supplement areas underserved from a primary care perspective.  “COVID-19 has understandably impacted urgent care financial performance very positively,” adds Scholl. “Industry players and investors are still working through how to determine a future steady state for businesses in the segment.” 

5. Vision

The U.S. medical vision sector presents a significant growth opportunity, supported by strong, resilient demand and a fragmented market landscape ripe for consolidation.

The total vision sector is estimated to be about a $47 billion market, with medical vision accounting for approximately $10 billion. Medical vision is expanding more rapidly than the broader industry, with 3% to 5% annual growth.8 Growth is being driven by an aging population, increasing vision insurance coverage, and a rising prevalence of chronic eye disease. The non-discretionary nature and stable reimbursement environment has increasingly attracted investors to the space. In some platforms, optometrists and ophthalmologists are combining as a single source of comprehensive eye care.

The vision landscape is highly fragmented, consisting of an estimated 18,000 ophthalmologists and 41,000 optometrists. “Consolidation is accelerating with private equity buyers leading the charge,” says Dixon. “There are a growing number of private equity-backed, medically focused vision platforms seeking add-ons of smaller providers to create density within existing markets, expand the scope of services they offer, and enter new geographies. More than 25 businesses now have institutional backing,” he adds.   

6. Dental

The dental industry includes restorative, preventive, and diagnostic services and is an approximately $138 billion market, with a forecasted 1.8% CAGR through 2024.9 

The sector is generally noncyclical with strong underlying fundamentals, despite being negatively impacted by pandemic shutdowns.   

It is a segment in which private equity has invested for more than 15 years, and there are numerous platforms of scale. Larger platforms are also beginning to consolidate, such as SmileBrands and MidWest Dental, a transaction on which Harris Williams advised. However, despite the tenure of activity, significant opportunity remains. Independently owned clinics still account for 82% of the sector, creating substantial acquisition-based growth prospects.10 

7. Veterinary

As of 2018, the veterinary services segment was a $43 billion market, growing at a projected CAGR of 4.6% through 2021.11 

It is a highly resilient segment, as pet owners show propensity to spend regardless of their financial situations or pandemic restrictions. Demand for veterinary services actually accelerated in 2020, spurred by an additional 11 million homebound people adopting pets.12 Unlike human healthcare, veterinary services are all private pay, an attractive characteristic for investors. As penetration in the pet insurance market increases, this will likely drive even more demand for services.

There is intermediate consolidation as investors begin to scale platforms and leverage infrastructure. Smith highlights how the segment is evolving: “There is robust private equity interest in the segment and certainly there are purchasing, marketing, and administrative cost advantages offered by scale. Some groups are taking an integrated veterinary services approach, combining general practitioners, specialty veterinary services, emergency services, and retail. There are also new models emerging such as urgent care veterinary clinics.” Despite the highly fragmented universe of veterinary hospitals and influx of institutional capital, Smith says the vast majority of providers remain independent.

8. Medical Spas

Medical spas are a roughly $10 billion market as of 2019, growing at a projected CAGR of 18%.13 

“There is a general trend toward increased acceptance and penetration of aesthetic services such as facial injectables, like BOTOX®, skin rejuvenation treatments, laser hair removal, and body shaping treatments, and that is propelling the segment,” says Benjamin. “Platforms in this space report high utilization and strong interest in services from both existing and new customers, and many are operating at volumes above what they experienced prior to COVID-19. Anecdotally, we have heard from some med spa operators that consumers have increased their attention on self-appearance from months of working from home and seeing themselves on video calls.” 

The sector remains highly fragmented, with only about 15% of locations managed by management services organizations (MSOs).14 Single location and small chain concepts tend to be less sophisticated, presenting attractive opportunities to build platforms and take share through better marketing and lead generation, the roll out of additional services, optimized staffing, and other efficiency-driven programs.

Conclusion

Operators across the consumer health sector report growing optimism about economic conditions as patient demand continues to strengthen. In many ways, the resiliency of the sector through COVID-19 strengthened the investment thesis. More sophisticated multisite operators demonstrated they can deliver on many of the promises underlying investment, such as the benefits of scale with respect to technology and labor utilization. Leaders showed that they could react quickly to market shifts. And platforms continue to attract physicians and clinicians away from private practice. These are all net positive indicators of the continued opportunity for consolidation and platform growth in these segments going forward. 

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Published March 2021 
1. IBIS World
2. Wall Street research
3. CDC, Allied Market Research, Global Market Insights.
4. IBIS World
5. IBIS World and Health Value Group
6. Wall Street research
7. IBIS World
8. IBIS Industry Reports, National Eye Institute data, HW proprietary data and internal estimates.
9. IBIS World
10. IBIS World
11. IBIS World; Wall Street Research
13. AmSpa Medical Spa State of the Industry report, 2019
14. ibid
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