The next in our series of posts sharing key takeaways from panels at the Healthcare & Life Sciences Private Equity and Lending Conference discusses investing in ophthalmology. It is authored by our colleagues Amanda Roenius and Holly Buckley.

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Private equity investment in ophthalmology and optometry practices has remained steady over recent years, and, according to experts who spoke on a panel titled “Key Opportunities and Issues in Ophthalmology Investments” at the 16th Annual Healthcare and Life Sciences Private Equity & Finance Conference, held in Chicago on February 20 and 21, 2019, private equity investors still have their eyes on this space.

Experts included Brett Skolnik, Managing Director at Provident Healthcare Partners, Andrey Vakhovskiy, Principal at HIG Capital, and Andrew Welch, Managing Director at Revelstoke Capital Partners. The panel was moderated by Holly Buckley, Partner at McGuireWoods LLP.

Here are five key takeaways from the panel discussion.

1. With acquisition activity accelerating, the vision space remains ripe for investment. Investments of scale are often highly competitive. Experts commented that while investment in this space may have lagged behind some other healthcare sectors, such a dermatology and dental, investors have seen tremendous success over the past few years, and competitors have taken note. Experts estimate that while there are approximately thirty (30) investors currently in the market, the vision space remains highly fragmented, so there is still tremendous room for consolidation.

2. Physician alignment remains the key to success, but such alignment must reach beyond compensation. As is the case in numerous other subspecialties, the number of retiring ophthalmologists is outpacing the number of physicians who are beginning their careers in this space, which creates competition for recruitment of talent. This landscape puts additional pressure on investors to develop innovative incentive and alignment strategies. Experts discussed a number of these strategies, emphasizing that while raw compensation will always remain a consideration, other benefits and the cultural fit matter just as much. Investors should consider ways to engage younger physicians, such as through involvement in committees, research, platform development, and alternative work arrangements.

3. Investment in vision practices brings additional benefits to consumers through high-volume ancillary businesses and premium services. Many ophthalmology and optometry practices own ancillary business lines, such as ambulatory surgery centers and optical shops. While these ancillary businesses are often lucrative for investors, they also provide investors the opportunity to add value to the practice through the provision of proactive and comprehensive management and compliance strategies. In addition to ancillaries, vision businesses can diversify from a reimbursement perspective by providing premium eye-care service offerings, such as LASIK, premium intraocular lens, and dry-eye treatments, all of which are generally cash pay and provide healthy margins.

4. Retina practices present attractive investment opportunities, but such investments are often costly. The retina subspecialty has seen an increased demand for investment from private equity. Experts opined that this increase in demand is likely due to the unique dynamics of this subspecialty, including but not limited to injectable drugs, such as those used to treat wet age-related macular degeneration (e.g., Lucentis, Eyelea, and Avastin), which are highly profitable. Investment in retina also poses challenges, however, as the price for such specialty practices is generally high.

5. Experts predict a flurry of growth followed by consolidation in this space over the coming years. Transaction volume is expected to accelerate in the near future, with additional platforms being formed and add-on targets being acquired. Experts caution, however, that there is the potential for growing too quickly, urging investors to take careful consideration in selecting practices with whom to partner.