Private Equity Investment in Vision Care: Creating a Comprehensive Provider
The vision care sector has continued to attract increasing interest from private equity investors looking to replicate successful investments in related outpatient clinic focused businesses. The widespread success of investment and consolidation within dental practice management and physician specialties such as interventional pain management over the last decade has led institutional investors to seek platforms in related outpatient practices. The eye care sector represents a highly attractive opportunity for private equity given the ability to combine payor-based surgical and primary eye care with cash-based optical products and services that mitigate government reimbursement risk inherent in healthcare services businesses.
Among the three vision care services sub-sectors of optical, optometry, and ophthalmology, there are several industry tailwinds that are projected to drive growth for the foreseeable future. The volume of patients seeking vision care is projected to increase through more widespread eye care coverage under the Affordable Care Act. Additionally, the growing and aging U.S. population will result in increased demand for preventive care from optometrists, as well as significant volume growth in cataract surgery and other age-related conditions treated by ophthalmologists. By age 80, more than half of all people in the U.S. either have a cataract or have had cataract surgery, according to the National Eye Institute, and this will continue to increase the more than three million cataract surgeries performed in the U.S. each year.
Investment and Consolidation within the Optical, Optometry, and Ophthalmology Sectors
Private equity firms and publicly traded entities have led consolidation efforts at varying levels across the optical, optometry, and ophthalmology markets. Despite this, there is still a significant amount of fragmentation within each sub-sector of vision care, which indicates transaction activity and private equity investment will undoubtedly increase, especially within optometry and ophthalmology where there are less than a dozen combined strategic consolidators.
An Overview of the Optical Retail Industry
The optical industry has seen heavy consolidation led by the largest retail providers. According to Vision Monday, the top ten largest U.S. optical retailers represented 30.5% of sales within the estimated $34.4B optical retail market in 2015. Among the top ten providers are well-known retailers such as Luxottica, which operates under brands such as LensCrafters and Pearle Vision, as well as Wal-Mart Stores and Costco Wholesale. Private equity backed groups have also led consolidation efforts in optical, with National Vision, a portfolio company of KKR, and Refac Optical Group, a portfolio company of ACON Investments, attaining top eight market share. Mergers and acquisitions among the top retail providers is expected to continue as evidenced by Vision Source, a previous portfolio company of Brazos Private Equity Partners, selling to Essilor of America, a subsidiary of Essilor International, in July of 2015.
Consolidation within Primary Eye Care
Optometrists (ODs) typically couple primary eye exams and preventive services with optical stores within their practices or at retail locations to allow for dispensing of glasses, contacts, and frames. The optometry industry is highly fragmented compared to optical retail, with more than an estimated 10,000 independent optometric practices in the U.S. and a limited number of platform-sized opportunities. Through recent investments from private equity, the expectation is that there will continue to be heightened consolidation within the primary eye care segment. Groups such as MyEyeDr., a portfolio company of Altas Partners, and Clarkson Eyecare, a portfolio company of Friedman, Fleischer & Lowe (FFL), have made sizeable acquisitions over the last couple years.
In 2015, Monitor Clipper Partners exited its position in MyEyeDr. through an equity investment within its management company, Capital Vision Services, led by Altas Partners and Caisse de dépôt et placement du Québec (CDPQ). MyEyeDr. grew from 41 locations at the end of 2012, the year of Monitor Clipper Partners’ initial investment, to managing a total of 165 optometry practice locations at the time of the recapitalization in August 2015. In the same month, FFL-backed Clarkson Eyecare, also known as Eyecare Partners, made its second sizeable acquisition of the year by acquiring Eyecarecenter, which operates with 61 locations in North Carolina and South Carolina. Clarkson and MyEyeDr. have become two of the dominant players emerging within optometry, and are also among the top eleven largest optical retailers in the U.S. However, both organizations are focused on two of the three vision care service lines and have not yet made a sizeable move into ophthalmology.
The Fragmented Ophthalmology Market
Similar to the optometric industry, the ophthalmology market is highly fragmented with very few practices offering a statewide or multi-state presence. According to the American Academy of Ophthalmology, there are 19,216 active ophthalmologists in the U.S., but the vast majority of the practices within the industry operate with less than 30 physicians. EyeCare Services Partners (ESP), a portfolio company of Varsity Healthcare Partners, has reaped the benefits of first mover advantage within the ophthalmology market through its initial investment in 2014 in a single state provider in Maryland, Katzen Eye Group¹, and has expanded its footprint through subsequent acquisitions of Delaware Eye Care Center, California-based Inland Eye Specialists, and Denver-based Omni Eye Specialists. As one of the only strategic consolidators in ophthalmology along with Vision Group Holdings, a portfolio company of Audax Group, ESP has achieved significant growth in the last two years as it looks to build regional hubs of comprehensive vision care across the country. Its competition remains very limited for add-on opportunities, while other private equity firms have recently provided significant competition for larger platform deals on the market given the attractiveness of the specialty and the ability to replicate Varsity’s early success with new platforms.
Building a One-Stop Shop for Vision Care
Vision care transactions have been largely focused on optical and optometric service lines, and there remains a significant void in the market in terms of comprehensive providers that are able to provide a one-stop shop for all eye care services. Given the emphasis on managed care as part of the Affordable Care Act, this is an attractive model that allows an organization to directly manage the outcomes of all vision care services associated with its patient population.
Optometric practices can look at hiring ophthalmologists, or through transactions, acquire established surgical practices within its footprint to provide ophthalmic services to its patients internally. Historical referral patterns for the surgical practice are a key consideration given the distinct models in terms of service lines offered by ophthalmology practices throughout the U.S. Many ophthalmic practices have grown through co-management with an external OD network and focus exclusively on surgical services with no optical shops, while there are some organizations that have developed a comprehensive eye care model locally where patients can receive primary vision care services through employed optometrists, surgical care through internal ophthalmologists at company owned ambulatory surgery centers (ASC), and also be fitted for and receive optical products all under one roof. These practices provide a highly attractive opportunity for new investors or optical and optometric practices to offer a full suite of vision care with minimal disruption to external OD referral patterns.
With the high level of fragmentation within the optical, optometric, and ophthalmology sectors, private equity investment in a comprehensive vision care practice provides a highly compelling opportunity for de novo growth with acquisitions across all three sub-sectors. Ophthalmology and optometry provide near recession-resistant service lines given the necessity for people to receive timely vision care treatment covered by health insurance. In addition to optical products, cash-based premium cataract services offered by practices that invest into advanced laser technology will continue to improve patient outcomes and public acceptance as well as provide an additional revenue source above the standard government reimbursement for cataract procedures. Investors will continue to compete for platform opportunities with strategic players looking to expand into new markets or diversify service lines and capture outside referrals in-house.
To the extent that it is of interest, members of the Provident team would be happy to elaborate on any of these trends & provide specific insights on particular healthcare niches, specialties, and industry verticals. Please feel free to call (617) 742-9800 for additional information.
¹Provident was the exclusive financial advisor to Katzen Eye Group.