June 30, 2017
3 min read

How to look at private equity investment in physician groups: Dermatology

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Gary W. Herschman
Gary W. Herschman

In this first of six articles from the lawyers from Epstein Becker & Green and the analysts from Provident Healthcare Partners, LLC, Steven Grassa and Gary W. Herschman, Esq., delve into the hot sector of dermatology, explaining how private equity investment is growing in this field.

The Super- hot market for dermatology practices

Private equity investment activity in dermatology has been particularly robust since 2012, when private equity capital first began to pour into the sector. Private equity firms’ investment theses were, and continue to be, predicated on macroeconomic growth drivers, such as an increase in skin cancer incidence, skin health awareness, and favorable payor mix dynamics. These trends, coupled with ancillary services, such as cosmetics, surgery centers, and lab services, have increased the demand for the sector at a rapid pace.

Steven Grassa
Steven Grassa

In 2012, Audax Group, a private equity firm known as a first mover in lower middle-market health care investments, acquired a majority stake in Advanced Dermatology & Cosmetic Surgery (ADCS), a Maitland-based dermatology provider with 53 clinics. ADCS then expanded into 14 states with 140 clinics through de novo growth and acquisitions over a short 4-year period. ADCS leveraged its first-mover advantage in a highly fragmented market by rolling up practices that were looking to alleviate the increased administrative burdens of running a practice. Thereafter, other private equity groups began to develop a thesis around the sector, and there are now more than 20 platform investments within dermatology, four of which have traded financial partners over the last year. ADCS, Forefront Dermatology, U.S. Dermatology Partners, and Riverchase Dermatology were all sold in 2016 to other private equity investors enjoying impressive returns.

Proven investment success in these transactions, coupled with macroeconomic tailwinds, have spurred further investment in the sector, with platform investments layered throughout the country. The growing number of private equity-backed groups has increased competition for deals, as strategic players seek add-on acquisition strategies to build regional density and expand geographic reach. At the same time, dozens of other private equity groups are still looking for their first platform investment in dermatology, aiming to replicate successes of some of the first movers in the space.

Outsized demand for groups of size and scale outweighs supply in the sector as platform worthy practices are far and few between. This supply and demand imbalance has driven multiples to some of the highest within physician services. It has also caused investors to come downstream to enact their investment theses and increased the number of smaller add-on acquisitions within the sector. In the first quarter of 2017, there were 14 announced add-on acquisitions with private equity-backed players such as ADCS, U.S. Dermatology Partners, Platinum Dermatology and Epiphany Dermatology aggressively executing roll-up strategies within their respective regions.


Given the stage within the investment cycle, and the rapidity and successful returns for shareholders during the first movers’ exits, expect more trading of financial partners in the dermatology space in the next 12 to 18 months, with multiples remaining on the higher end of the physician service landscape.

Grassa, Steven
Steven Grassa

Top health care regulatory issues in dermatology practice transactions

Dermatology groups should be aware that any major investor will conduct comprehensive due diligence of their debts, contracts, staffing model and general practice operations. In addition to standard areas of diligence — such as employment and malpractice exposures, payor audits, benefit plans, leases — there will be deep diligence on a practice’s regulatory compliance, including in these areas:

  • Coding and billing — whether codes are supported by medical records, whether certain procedures (eg, Mohs surgery) are “over used” compared with industry norms and medically necessary, and whether codes are improperly “unbundled”;


  • Stark Law compliance — especially if the practice constitutes a “group practice” and meets the “in-office ancillary services” exception as per the Stark regulations for lab services;


  • The compensation methodology for shareholders, employees, and mid-level providers, including licenses for laboratory services, laser surgery, etc.; and


  • HIPAA and compliance program review (training, self-audits, reporting, investigations, etc.).

To avoid issues that may cause delays in transactions, or possibly negatively impact a group’s valuation and purchase price, dermatology practices, with the assistance of an investment bank and a legal team, should ensure that their “regulatory house is in order” in advance of proceeding in earnest with soliciting potential partnership/investment proposals from PE companies or other investor groups.

Steven Grassa, an analyst with Provident Healthcare Partners, LLC, focusing on advising health care businesses with an emphasis on physician groups, prepared part 1 of this article. He can be reached at sgrassa@providenthp.com .

Gary W. Herschman, Esq., a member of Epstein Becker & Green, P.C.’s Health Care and Life Sciences practice, focusing on physician group and other health care industry transactions, prepared part 2 of this article. He can be reached at gherschman@ebglaw.com .

Disclosures: The authors report no relevant financial disclosures.