Consumer Healthcare: The Platform Opportunity in Vision, Dental, and Veterinary Care

Well before the COVID-19 crisis, many healthcare, consumer, and retail investors recognized the value-creation potential at the intersection of these two essential industries. Now that consumer healthcare has shown its resilience, investor interest has only intensified. Here, senior bankers from the Harris Williams Consumer and Healthcare & Life Sciences Groups discuss opportunities in two specific subsectors in which they have collaborated.

Five Key Criteria

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.

“Despite being impacted during the initial onset of COVID-19, the sector is bouncing back strongly,” notes Corey Benjamin, a managing director in the Harris Williams Consumer Group. 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 2021.1 “Our more recent experience confirms that deal volume is growing, and likely will accelerate through 2021,” says Benjamin.

Here, we highlight the vision, dental, and veterinary subsectors and profile four recent acquisitions that exemplify the continued opportunity for investors in these areas.

A Keen Eye on the Vision Segment

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.2

Growth is primarily being driven by the aging population and increasing prevalence of chronic ocular conditions: Individuals aged 65 or older account for the vast majority of spending on medical vision services.3 By age 75, approximately half of all Americans have cataracts,4 and glaucoma incidence is projected to increase nearly 50% by 2032.5

The segment’s resilience is driven by a number of factors. Patients typically have work done on their eyes when they need it, regardless of the economic cycle. Furthermore, a general shortage of ophthalmologists drives high physician utilization and provides for a stable reimbursement environment, which is underpinned by a growing prevalence of insurance coverage for vision care. Low-acuity surgical ophthalmic procedures, such as cataract surgery, are also well-suited for ambulatory surgery centers (ASCs), which larger and more sophisticated operators can establish and configure to be vision specific. Doing so helps optimize physician and patient workflows, improve outcomes, and generate cost efficiencies.

It’s also an attractive space for consolidators, says Andy Dixon, a managing director in the Harris Williams Healthcare & Life Sciences Group. “Historically, the ophthalmology specialty was extremely fragmented, with very little private equity investment,” he says. “In the last four to five years, consolidation has meaningfully accelerated, and we expect that trend to continue and even accelerate coming out of 2020. While some platforms are building scale within general (anterior) ophthalmology, others are vertically integrating downstream into medical optometry as well as upstream into retina and other sub-specialties to capture referrals.” Dixon notes that while private equity firms have completed more than 30 platform investments in the vision industry since 2014, the sector continues to be fragmented, with a limited number of providers of scale.

Consolidation also provides the opportunity to drive greater provider utilization, says Dixon. As platforms come together, ophthalmologists are in environments where they can be more efficient, focusing more of their time on surgery and other “top-of-license” activities, allowing pre- and post-operative and other types of care to be provided by medical optometrists and other clinicians. Many small physician-owned practices want to become platform add-ons to broaden their networks, expand access to patients and referral networks, modernize their practices, and relinquish administrative duties.

Case in Point: NVISION 

nvision.pngNVISION® Eye Centers, a leading provider of ophthalmology services, is an excellent example of the investment opportunity in the vision sector. “Its business has more than fully rebounded from early COVID-19 headwinds, and it has the strategy and infrastructure in place to fuel continued rapid growth,” says Cheairs Porter, a managing director in the Harris Williams Healthcare & Life Sciences Group. Harris Williams recently advised NVISION on its sale to the Ontario Teachers’ Pension Plan.

NVISION is a leading vision practice in the western U.S. with 43 locations, including eight ASCs. It employs a hub-and-spoke model to build density in core markets, thereby improving brand equity, efficiencies, and utilization at its ASCs. The company prioritizes secondary metropolitan areas with favorable demographics and competitive dynamics. It has developed a highly successful acquisition model, having integrated 31 clinics and ASCs via acquisition from its launch in 2010 through 2019.

With its roots as a refractive practice, NVISION has expanded its services over time into performing cataract surgeries and other medical services and now offers a diverse, medically focused service mix that provides a highly stable revenue base.

Its heritage operating in a consumer-driven refractive services market enabled it to develop unique capabilities to engage customers and effectively broaden its base. For example, NVISION can use refractive procedures to fine-tune or “touch up” cataract surgery, which removes the cataract while restoring a person’s vision to 20/20, improving residual nearsightedness, farsightedness, and astigmatism. “NVISION has a much higher success rate than the industry average in completing the surgery effectively the first time, which benefits the patient as well as the business,” adds Dixon.

The Increasingly Healthy Dental Segment

Historically non-cyclical before COVID-19, the dental sector was one of the consumer healthcare segments hit hardest by the pandemic. However, patient demand has rebounded, particularly for high-quality businesses that are proving they can operate safely and effectively in the COVID-19 environment.

The dental segment is an approximately $138 billion market, with a forecasted 1.8% CAGR through 2024.6 Investment by institutional capital over more than a decade has led to the creation of larger platforms in the vertical. However, consolidation opportunities remain: Independently owned clinics still account for 82% of the sector, creating substantial acquisition-based growth opportunities.7

Multi-site dental service organizations (DSOs) bring benefits to patients and staff that independent dental offices are less able to provide. For example, sophisticated DSOs often can invest in more sophisticated patient marketing, as well as engagement and scheduling tools. They are increasingly seen as employers-of-choice for dentists, as they generally offer a better work-life balance, fewer administrative burdens, and greater financial security. Such platforms are also poised to scale, using existing infrastructure to spur growth.

Case in Point: Midwest Dental

midwest.pngMidwest Dental, one of the largest DSOs in the country, has more than 230 offices located primarily in the upper Midwest and New England regions, built over more than 40 years. “This is a great example of high-quality businesses drawing investor interest in the multi-site dental space,” says James Clark, a managing director in the Harris Williams Healthcare & Life Sciences Group.

Harris Williams recently advised Midwest Dental on its sale to Smile Brands, a portfolio company of Gryphon Investors. The combined company is now one of the largest DSOs in the country, representing 650 offices and over 8,000 employees, including 2,200 dentists and hygienists operating in 30 states.

“Midwest Dental stands out for its significant scale, density in attractive markets, and long track record of growth,” notes Dixon. “Its recurring, hygiene-driven model and focus on building long-term patient relationships has driven a high patient retention rate and loyalty.”

Dixon says add-on acquisitions are a core focus and competency, with a proven partnership model for dentists. At its founding and during early stages of growth, the company operated in smaller communities, affiliating with practices to provide support and ultimately an exit strategy for founding dentists. Over time, Midwest Dental expanded to larger markets, where it continues to focus its strategy today.

Midwest Dental has a collaborative approach and true partnership with dentists, making it the dentist-preferred partner among DSOs, says Clark. “The company has made strategic investments in infrastructure and practice management culture to lay the groundwork for future growth. Its sophisticated marketing is highly successful at attracting new patients, helping Midwest Dental to grow at an above-market rate.”

The Booming Veterinary Segment

bigstock-female-veterinarian-bandages-c-244767334.jpgAs of 2018, veterinary services was a $43 billion market, growing at a projected CAGR of 4.6% through 2021.8 It is a highly resilient segment due to pet owners’ propensity to spend despite financial challenges. Demand for veterinary services actually accelerated in 2020, spurred by a significant increase in new pet ownership as people found themselves with more time at home.9 In addition to their inherent resilience, veterinary services are largely private pay, an attractive characteristic for investors. They are also less subject to the malpractice concerns facing human healthcare providers.

With these tailwinds at their backs, investors are building sophisticated platforms with significant scale. Some are taking an integrated veterinary services approach, combining general practitioners, specialty veterinary services, emergency services, and retail. However, even with these trends, the market remains highly fragmented, with substantial opportunity remaining to consolidate the subsector.

Case in point: Pathway Vet Alliance

pathway_0.pngFounded in 2003, Pathway Vet Alliance has grown from a single veterinary practice to include over 270 general, specialty, and emergency practice locations, as well as more than 85 THRIVE Affordable Vet Care locations. It also includes the management services organization Veterinary Growth Partners, which supports over 5,500 affiliated and unaffiliated member hospitals with education, training, and coaching services. Harris Williams recently advised Pathway, a portfolio company of Morgan Stanley Capital Partners (MSCP), on its transaction with TSG Consumer Partners (TSG).

Pathway has differentiated itself by focusing on the unique needs of each practice, partnering with local teams to implement their vision and work with their values. It has also built an integrated pet care ecosystem that meets the needs of pets, pet families, and pet care providers nationwide. “Through its integrated platform, Pathway is well-positioned to capture greater share of customer wallet and serve pet owners’ comprehensive needs over their pet’s lifetime,” says Geoff Smith, a managing director in Harris Williams’ Healthcare & Life Sciences Group. “Given the company’s strong and growing national footprint, integrated service offering, and consumer focus, we believe Pathway is poised for tremendous continued success.”

Case in point: MedVet Associates

medvet_0.jpgMedVet is a growing nationwide network of 24 specialty and emergency services veterinary hospitals. Its specialty focus allows MedVet to provide the best possible clinical care. It also gives specialists the opportunity to work among other specialists, and, as new specialties are brought into each location, there’s continued opportunity for organic growth. Harris Williams recently advised MedVet on its investment from entities affiliated with the Goldman Sachs Merchant Banking Division and SkyKnight Capital. The company had previously received minority investments, which supported its expansion from five hospitals to its portfolio of 24 hospitals today.

“The transaction is indicative of the strong interest and activity that we’re seeing from investors in the veterinary services sector,” says Smith. “We are excited for MedVet’s management, veterinarians, and employees, and look forward to following the company’s bright future.”

The Outlook

The vision, dental, and veterinary specialty subsectors within the multi-site healthcare sector have nuances that make them unique. However, they share strong fundamentals that make them attractive investment opportunities. They have weathered the pandemic, with many businesses returning to higher year-over-year volumes. While at different stages of consolidation, these subsectors are still highly fragmented, providing the opportunity to build sizeable platforms and drive substantial growth.

Select Relevant Transactions

Published February 2021
 
Sources:
1. Harris Williams Consumer Healthcare Operator Survey, 2020.
2. IBIS Industry Reports, National Eye Institute data, HW proprietary data and internal estimates.
6. IBIS World
7. Ibid
8. IBIS World; Wall Street Research
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