For Healthcare PE, Dermatology is Hot

Private equity is increasingly turning its attention to consolidation plays as few doctors are specializing in the sector

As consumer demand for both cosmetic and medical dermatology continues to grow so has the interest of private equity. Add to that a fragmented market, a trend of doctors retiring, and a dearth of newly licensed doctors coming into the field and there is an exciting consolidation play for investors.

“There is a mismatch between supply and demand, which sets the stage for growth,” explains Elizabeth Campbell, vice president at LLR Partners.

The firm recently announced a $35M capital infusion for Schweiger Dermatology Group, a provider of medical, cosmetic, and surgical dermatology services in New York and New Jersey.

Sixty percent of dermatologists over the age of 60 are currently working out of solo practices, says Campbell. As these doctors look to transition into retirement, a sale to an acquisitive investor building a platform is attractive because a private equity firm can afford to pay a premium for the practice, while the founder would otherwise have to settle for a steep discount to sell his or her practice to a junior-level partner.

“There is a confluence of factors to consolidate the industry,” says John McKernan, vice president at The Riverside Company. McKernan expects dermatological demand to grow between 6 percent and 8 percent annually for the next five years.

In January, the firm invested in The Dermatology Group, a physician practice management company with locations throughout Northern and Central New Jersey.

Just as dermatologists leave the workforce, fewer doctors are opting to specialize in the space, and this shrinking pipeline is further constraining the sector.

Those are not the only challenges the sector is facing. With health insurance regulations and managed care continuing to become more complicated, dermatologists are finding more of their time is being spent on paperwork, such as back office accounting, contracting, information technology, marketing, scheduling, and other services. As a result, they are able to spend less time treating patients. Turning over this part of the business to a private equity firm that has expertise frees up doctors to focus on medicine. That last factor is welcome news for baby boomers, who are reporting an increase in skin conditions, including cancers.

McKernan says only 10 percent of skin conditions are treated by dermatologists. That means these doctors are called upon to see only the most complicated of cases. Given the shrinking number of dermatologists combined with the increasing demand for them, private equity could play a significant part in managing this important part of the patient care continuum.