Our position on the front lines of private equity's interest in specialty practices and surgery centers gives us a unique perspective. We can clearly see signs of private equity acquisition interest beginning to spread to other medical specialties. In this episode we identify the key reasons for the interest in new specialties and provide some directional thinking on what specialties look attractive and when acquisition momentum could begin to take hold.
Eric: You know, I think that what the PE firms and what investors are really trying to figure out is what are the other specialties where they can deploy capital and be successful the same way that they've been successful in dermatology and the same way that they feel they are being successful so far in ophthalmology.
Narrator: Welcome to PF insides, hosted by the leadership of Physicians First Healthcare Partners. If you're a physician, practice owner, or an ambulatory surgery center owner and you're wondering how to navigate the mergers and acquisitions ecosystem, this is the podcast for you.
Andy: Good morning everyone. Welcome to PF insights. This is your host, Andy Snyder, managing director at Physicians First Healthcare Partners with me, my sidekick, the managing partner, Eric Getter.
Eric: Hey, Andy. Good morning.
Andy: Probably don't like being called that, but it's all right. I'm the host.
Eric: No, I love it.
Andy: I get a little bit of free will here. All right. Well today we have episode 14, and we're calling this one: What's next? Consolidation on the horizon.
At Physicians First Healthcare Partners we do predominantly deal with ophthalmology consolidation right now, but we have clients in other specialties and we're constantly talking with investors about consolidation, acquisition opportunities in other specialties. We hear a lot about podiatry, orthopedics, orthopedic spine, and gastroenterology practices.
What we're going to dive into today is kind of what specialties are on the horizon, but why as well, the reasons behind it. So, Eric, with that, I'll kick it to you.
Eric: Yeah. I think that what the PE firms and what investors are really trying to figure out is: what are the other specialties where they can deploy capital and be successful the same way that they've been successful in dermatology and the same way that they feel they are being successful so far in ophthalmology. There's some commonalities among those specialties. In a way it's a different bucket and it's a different investment thesis from some of the other investments that have been made in more hospital based groups such as radiology practices that primarily serve and have contracts with a hospital or a few hospitals or emergency physician groups.
This is a little bit different because it's clinic based and these are more, I would almost say business like practices. They're more entrepreneurial, they're more physician centered, and they're typically smaller. They're not groups of 200 people. So what our investors thinking about when they're looking for the next thing? And I think they're looking for a lot of the same strengths that they saw in dermatology and ophthalmology when they were putting together those ideas.
A couple of things. One is the demographic trends are really good around them, and frankly right now, I think we see that in most medical specialties that people are aging into care and there will be a shortage of physicians to serve that population, and we also have technology improving such that more care can be administered, more people can be helped by doing more. There are more things available to do. A great example of that is the advent of macular degeneration drugs in ophthalmology, just created a bigger work stream. Same thing with cataract surgery, created a much bigger work stream.
So thinking about demographics in the macro-economic sense, but also thinking about is their technology on the horizon that's going to make something a much bigger deal. We started to see that in fertility. Fertility is a great example of that. That is a specialty that's still very small, very specialized, but is probably going to grow just because of the technology that's available and because people want it, people want that. So we see a lot of investors talking about fertility.
Andy: You need to be fragmented as well.
Eric: Yeah, yeah. Right. Typically we're looking for practices that are for specialties that are fragmented and there's a capability to come in and acquire them and put them together and sell them more for more than the sum of their parts, which is what's being done in ophthalmology and what's also being done in dermatology. A lot of practices, a lot of specialties fit that profile.
Podiatry is an example of one that's probably on the end of being the most fragmented. A lot of small single physician, two physician podiatry practices, and investors are thinking about podiatry as a next place to go because it has a lot of the strengths that ophthalmology has. It's very clinic based. You can do a lot of the procedures at a surgery center. Some of them even been in the office, and it's a profitable profession, so a lot of investors are looking at podiatry. The challenge there is, the challenge and opportunity there, is that it's so fragmented. You have to do a lot of transactions in order to achieve size, but there are a lot of opportunities to do those transactions. So podiatry is an interesting one.
Another thing that investors are thinking about are what are the revenue sources in a given specialty? What's the capability use in ASC? That probably is the reason that people are the most interested in orthopedics right now is that there's a shift that's ongoing of orthopedic procedures being done in an outpatient setting versus being done at the hospital, and joints are kind of on the ... joint replacements, total joints are kind of on the forefront of that, and they're moving in a big way toward the ASC, and that's going to continue, probably.
Same thing is true with spine. That's kind of gone back and forth and now there's more and more of that being done in the ASC, which is good. At specialty hospitals too. But opportunities to do things outside of this normal practice revenue that will create additional revenue for an investor and for the physicians. That's why people are thinking about that. I think that gets us to talking about ASCs to another thing that's of interest, and that is the shift outside the hospital.
There's just a big shift to paying attention to the cost of care. Usually that means doing procedures in surgery centers rather than at the hospital, doing procedures in the office if you can rather than at the hospital. Investors right now, it seems, want to be on the right side of that shift, which means that they're investing in practices that are benefiting from that, from things moving more and more outside of the hospital, like orthopedics.
We see a lot of those commonalities. Also, fundamentally looking for areas where they can either drive more revenue or they can cut expenses and they're not going to cut expenses by firing people and those kinds of things. You're going to cut expenses by achieving better supply contracts through scale. For example, in ophthalmology, getting better deals with Alcon, getting better deals on retina drugs, whatever that may be, or in orthopedics getting better joint replacement hardware, finding better sources for that. All those things. There has to be some kind of a ability to improve things, either on the revenue side or the cost side. Those are what people are looking at.
The ones that we've seen, I think, and this might be what you're going to get to is ... and there's kind of a list I think of ones that we hear a lot, that is probably worth mentioning. We talked about podiatry being of interest. That might be one of the places that we kind of start working on more soon.
Andy: Yeah. A followup question I was going to ask is just: what is the timeline for all of this? With ophthalmology, I would argue that we saw the first significant investments in 2011 kinda up in the northeast, and then it was quiet for a few years. We saw some more investments come in 2014, a couple of 2015. 2017 was really just an explosion that's continued into 2018. We have so many different buyers now and it's a very competitive landscape and it's a strong economy, there's a lot of forces working for this thing to keep snowballing. Are we going to see that kind of slow onset of growth with these other specialties? Or do you kind of think it's being knocked on the door right now and it's just going to be kind of blown wide open?
Eric: I think we're gonna see a big uptick in volume in the next few years in other specialties. I think we're going to see that. I think we've already seen a little bit of investment in spine, a little bit in orthopedics. A ton of investment has been made in gastroenterology, on the surgery center side, and now there's starting to be a lot of investment on the practice side. I think that those things are going to pick up a lot pretty soon. I mean that that stuff could pick up a lot in 2019. I think podiatry will pick up a lot too. I think that might take another couple of years until that really starts gaining momentum. I think there are already some investors interested and I think there will be acquisitions in 2019, and 2018 frankly, in podiatry, but I think we're going to see the big entry maybe a year or so later.
But ultimately I don't really know. We don't have a crystal ball about that. These things could pick up a lot sooner than we expect or later than we expect, but we do know that there are a lot of people out there looking for opportunities right now, and there are probably people who are negotiating and trying to close deals in these specialties that have not been announced yet. And once a couple of big things get announced, it's really going to gain momentum. It's going to snowball like you said.
Andy: Yeah, I think within the physician communities it's always about watching someone else go first, let them be in the bellwether and then it really, from there, maybe it just takes an article or two being published about how it was such a great experience. Then it really leads to an explosion of growth. It'll be interesting to see what happens here in the next few years amongst several different specialties.
I think we can both agree that this is more of a subjective topic than a lot of the things we typically talk about, so there might be people out there with different opinions. We-
Eric: That's fine.
Andy: We encourage you to look this up, go to the website, www.PhysiciansFirst.com. Give us a call. We'd love to hear your input, whether you're a physician or an investor, just a casual listener of this podcast.
Eric: Yeah, yeah. Yeah, always interested in having conversations about that, about what's next and what investors are thinking or answer questions for them. We always like doing that stuff.
Andy: But I think that's a wrap for today. We appreciate your time. We thank you for being with us and we'll catch you next time.