The healthcare sector attracts interest from the investment community because it’s seen as being more resilient compared to other parts of the economy. But how does the medspa sector compare? During COVID, cosmetic procedures actually rebounded faster than the medical dermatology side. 

On this episode of The Banker's Corner, McGuireWoods' Geoff Cockrell discusses all things medspas with Mike Pisani, Managing Director and Co-Head of Healthcare Services at Houlihan Lokey. They discuss the trends, growth opportunities, and challenges that are present for today's medspas and how that affects investors' views of the space. 

The market has massive opportunity, and looking at the variety of services available, its value could be upwards of $25 billion. Combined with a strong margin profile, the opportunity for recurring revenue, and a cash-pay service line, this makes it attractive to investors. 

The medspa sector currently has a high level of fragmentation both in terms of the number of single clinic businesses that are operating and in how many businesses have been opened within just the past few years. This provides a high level of opportunity for investors looking for attractive deals in the sector. 

Recently there has been a mix of consumer and healthcare teams doing deals in the space. This has also been the approach at Mike’s firm, as they prefer to co-team a medspa deal with expertise from both sides. 

But where is the industry headed? Given the growth in the category and the opportunity still left on the table, true consolidation can be projected to be 5-10 years away still. 

“As we think out 10 years, which is oftentimes irresponsible to do, I think what you'll find is there's going to be some consolidation that exists to create national brand opportunities, but there's also going to be some convergence, where I think we'll see medical derm groups realize perhaps they need new and innovative models outside of their existing clinics,” Mike says. 

Featured Guest

Name: Mike Pisani

What he does: Mike is the Managing Director and Co-Head of Healthcare Services at Houlihan Lokey. He has approximately two decades of healthcare and investment banking experience, including more than 15 years at Houlihan Lokey. During his career, Mike has closed more than 100 healthcare transactions, including sellside and buyside M&A transactions, and private financing and equity raise transactions for public and private companies.

Organization: Houlihan Lokey

Connect: LinkedIn

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This podcast was recorded and is being made available by McGuireWoods for informational purposes only. By accessing this podcast, you acknowledge that McGuireWoods makes no warranty, guarantee, or representation as to the accuracy or sufficiency of the information featured in the podcast. The views, information, or opinions expressed during this podcast series are solely those of the individuals involved and do not necessarily reflect those of McGuireWoods. This podcast should not be used as a substitute for competent legal advice from a licensed professional attorney in your state and should not be construed as an offer to make or consider any investment or course of action.

This is The Banker's Corner, a McGuireWoods series exploring investment trends, solutions, and business issues relevant in today's private equity and finance industry. Tune in with McGuireWoods' partner Geoff Cockrell, as he and specialists share real-world insight to help enhance your knowledge.

Thank you for joining another episode of The Corner Series. I'm your host, Geoff Cockrell, partner at McGuireWoods. Here at The Corner Series, we bring together thought leaders and deal makers at the intersection of private equity and healthcare investing. Today, I'm thrilled to be joined by my longtime friend Mike Pisani from Houlihan Lokey. Mike's one of the best healthcare investment bankers I know, we've worked on numerous deals over the years, and this will be a ton of fun. Mike, maybe introduce yourself and Houlihan a little bit.

Yeah, Geoff, thanks for having me. It's a pleasure to be on today. Mike Pisani, I co-head our Healthcare Services practice here in North America at Houlihan. Been with the firm for almost just north of 15 years and have been advising in healthcare for right around 20. Houlihan Lokey, there's a lot to read on our firm these days, but we've been around for north of 50 years. 36 locations worldwide, north of 2,500 global employees, and right around $1.8 billion worth of revenue. And I happen to, again, sit in our healthcare vertical, leading up a number of our efforts, including our retail healthcare business.

Well, Mike, today I think we're going to talk a little bit about a particular sub-sector in healthcare services, that being all of the interest that we're seeing in med spas and related types of sectors. Maybe to get us started, if you could position the med spa sector within maybe the broader derm universe or how would you segment the med spa sector?

Yeah, Geoff, it's a good question. We segment it within our retail healthcare multi-unit franchise. And predominantly because of the four-wall nature of the business, but also the direct-to-consumer elements. Interesting story, we've advised on a number of large-scale medical derm related platforms over the years, and during COVID, one of the things we saw with that client base was how the aesthetic cosmetic side of each one of those businesses rebounded much, much quicker than perhaps the medical derm side, and it got our attention. When you think about the med spa market in general, it's a massive market. It's probably right around $25 billion if you include a variety of other services. Incredible margin profile, nice recurring revenue, obviously a cash pay service line in an environment where you're seeing a lot of wage and margin pressure.

It's one of the interesting levers that many operators can pull, and it's incredibly fragmented. I think nearly half the med spas in this country have been built in the last three and a half, four years, so you've got an incredible amount of white space. And depending on what you read, the market's probably growing somewhere between 10 to 15% a year. So it's been interesting to follow, particularly as it relates to the investor community too, because to your point, where do we put it? We put at the intersection of healthcare and consumer, and that correlates to, I think, where you've seen recent activity. There's been a few trades, some of which have been done by healthcare teams, some of which have been done by consumer teams, and so our approach, as it relates to this market, is to co-team it and cover it from both a healthcare perspective and a consumer standpoint.

How often do you see these businesses as pure play versus connected to more medical dermatology type businesses?

You see about 10 to maybe 20% of a medical derm practice having a cosmetic component to it, more and more, I think, just like you've seen other categories evolve into a specialty-like model. More and more, we're finding that med spas are obviously conveniently located in standalone offerings, but interestingly enough, those worlds seem to be converging quite some. The medical derm groups have been more and more active in an approach to med spas. We've seen some activity as it relates to the plastic surgery side of the market, with some of the larger groups in the medical derm world. And so the worlds are converging, but they're also separating at the same time.

There's been a ton written about some of the new weight loss drugs, injectable and otherwise, that have been coming on the market. Is that transforming some of the med spa universe? I certainly hear in CB people talking a lot about that at both the work level and some at the personal level. Has that been really transformative of that sector?

Not so much in the medical weight loss drugs, although I would say increasingly, more and more, they're becoming a fabric of some med spas as part of an overall health and wellness solution. Injectables are certainly the primary driver, I'd say not only from the clients that we've been spending time with, but also the investor community. Injectables represent a fairly large portion of the overall market, but they happen to be growing faster than other related services like body contouring or laser or product sales, and not to mention it's an incredibly recurring financial profile. I think the statistics out there would suggest that by your second visit with Botox, you're somewhat hooked for life, and so that sort of financial model I think is the primary driver behind why you're seeing an explosion of that related offering inside of med spas today.

A lot of sectors in healthcare, there's interest in them because they are resilient to other things going on in the economy, meaning that if the economy's bad, people still need to go to the doctor. There could be some impact, but there's a natural resilience, especially where you have a lot of government pay. The med spa business is much more personal pay. How impacted by a recession do you think the med spa industry would be?

We've done a lot of work around this. And I think for those investors that have spent real time understanding the category, they get it. For those haven't, that's a typical question that's come up. I think our view is, during the Great Recession, which, by the way, G-R-E-A-T, which was right around 15 plus years ago, I think Botox sales were up right around 2%. And I don't think everybody believes that we're going to go through a similar-like recession, but again, that was 15 years ago and the supply-demand dynamics in the market have certainly changed. Back then, I think this category, particularly as it relates to injectables, was primarily a rejuvenation category of mostly female boomers. Today, it's much more of a prejuvenation category. The younger demographic in this country is frankly the fastest user of these services, and we're also seeing the category skew more male.

The stigma associated with preventive-like aesthetics is largely gone. The Zoom effect, I think, is real. People were just spending more time thinking about their appearance. And as a result, we've seen volumes hold incredibly steady, even as we sit here today having this podcast. Perhaps there's been some softness in pockets as it relates to patient return frequency or spend per visit, but most providers are booked out for weeks to months, and have really good backlog. So as we think about it, we feel it's much more important to take a longer term outlook on the category versus a 12 to 15-month perspective even as an investor because you're playing, call it, two decades worth of megatrends here.

You mentioned the fragmentation in this industry. Two questions. One is the business model of growth in this sector, how much of it is driven by consolidating that fragmented market versus greenfield new locations for existing platforms? And then secondly, on the consolidation front, where would you describe us in, I assume we're pretty early in the innings of consolidation, but maybe give a little color on fragmentation in the business model?

I think the stats are, there's somewhere around I think 5,000 med spas in this country. 80% of them are single clinic, so that should give you some indication of what the fragmentation looks like. A lot of the growth in the industry is obviously being driven by new patients, but also new units. To my comments earlier, I think nearly half the med spas in the country have been built in the last three to four years. So the category is incredibly youthful. That obviously leads to a consolidation opportunity. And to your point, we're incredibly early. There's half a dozen or so consolidators in the marketplace today.

You look at other categories like medical derm, which we've talked about previously, or animal health on the general practice side, there's three to four dozen in each one of those categories. And so we see decades upon decades of growth, not only as it relates to de novo opportunities and white space, but also consolidation that's likely going to occur. And while there's some signs of that occurring already, with certain of the consolidators who have gotten off, quite frankly, to rapid starts, there's a lot of better things coming too as it relates to a lot of these other med spas, particularly those of which are private equity backed that are experiencing rapid growth and therefore scale that's likely going to occur down the road.

That level of interest, especially when you're talking about private equity buyers that are not just healthcare buyers, often drives higher pricing. How would you describe the current environment for meds spa pricing?

It's probably Geoff, I would say, equivalent to what we saw in vet two to three years ago, if that's a good analogy. You've got a market that I think the last stats were something like 7% of people who are aware of Botox have tried it, which means the addressable market for this service is much larger than it currently is today. That coupled with the growth rate that exists and the unit economics that exists for de novos, which, in my experience, are best-in-class as compared to any other area of retail healthcare, has pushed multiples incredibly high in the space. And I don't think they're going to abate anytime soon. In fact, there's more demand from private equity than there is supply of scaled assets in the market today, which creates that imbalance, which, for sellers, is a beautiful thing.

Yeah, that imbalance of supply and demand on platforms is often a catalyst on the bottom end of the market for brand new consolidations, starting very small to build to a little bit of scale, and then be the product that's sold upmarket. Are you seeing a fair amount of that dynamic?

Yes. That's predominantly what's occurring. There's several lower middle-market funds. There's some middle-market funds and maybe there's a large-scale buyout fund or two that have entered the space to take advantage of that, but most of the activity is building something for some of the larger private equity investors in the category to transact that later on. And so it's a consolidation play of multi-clinic med spas that exist in the marketplace today to build scale and relevance for that next wave of investors who eagerly want to participate in the category's growth.

In other sectors where there haven't been enough smaller platforms that have come together, we would see folks trying to pull together a group of disparate smaller practices. Take, for example, in the PT universe, I've done several deals where there's maybe four to six what had previously been unconnected businesses brought together in the context of a sale. Are you seeing any of that dynamic in the med spa world?

We haven't yet, we haven't yet, but I suspect, over time, that's likely to occur. The beauty, frankly, of this business model is it is cash pay, which means the overhead, typically as a percentage of sales, is smaller than you'd find in other healthcare verticals. You don't need revenue cycle management, as an example, which typically runs, I don't know, 4 to 6% of revenue. So I think the benefits of scale are probably fairly unique in the infrastructure that's required beyond just the marketing engine and brand engine to many of these businesses isn't nearly as acute. And so I suspect, Geoff, there's going to be activity like that, particularly as folks see more and more transactions and realize that those transactions are probably being priced at a level of scale that they don't have today.

Every business is not all headwinds or tailwinds. We've talked about several of the tailwinds in this sector, what are some of the headwinds that these businesses can face?

I think the biggest headwind today is probably that demand is far outstripping supply of practitioners, and that's a good problem to have. Frankly, I think the med spa category is an attractive one, particularly for nurses and injectors, as compared to alternative settings such as hospitals. And while they can also make a credibly productive and healthy income, in a more physically appealing location environment, that is a challenge. There just aren't enough folks particularly to serve the demand. Although in the world of choice, we certainly think it's an attractive one and we haven't seen really any limitation around that yet. But if this category continues to see the kind of growth, it's going to be important for folks to have creative models around compensation, alignment, recruiting and real human capital energy behind a business in order to service the demand and continue to open at the pace that they've opened at historically.

In a lot of provider service businesses, especially in the retail environment, you end up with a few significant providers that control some of the business, or a lot of the business. In the context of the med spa environment, are there similarly large personalities in these deals or is it all retail branding? Who controls the business flow in these businesses?

Yeah, a lot of it's brand, Geoff. I think what you'll find is perhaps on the plastic side, it's more about the personality and the physician. In the med spa world, I would say it's more about the brand. But that provider-to-patient interaction is incredibly important. I mean, what we found is patients are much more educated today than they have been in the past, particularly around this service, they do their homework. And that injector-to-patient relationship is particularly important, the consultation that goes in, the service that goes in, and the experience, as a result of it, if done well, again, to my earlier points, results in fairly attractive LTV of that patient over time. And so that's definitely evident in these practices, it's important, but you don't have the same type of relationships or key man risk, if you will, or key person risk, if you will, that exists, as you'll find, in some other areas.

So Mike, you've indicated that we're at the early innings of consolidation in this industry. But question, where does this industry go? Is it going to consolidate into larger and larger platforms? Is it going to expand and converge with other similar or adjacent businesses? Where does this industry evolve to?

Yeah, great question. I mean, given the growth of the category and the white space that exists, I think we have at least 5 to 10 years of runway before we start to see some of the consolidation that's typically occurred in other categories that you and I have participated in. The add-on activity is incredibly attractive, the de novo unit economics are wildly compelling, and therefore, I think, individual of these platforms are going to have large degrees of success over time. As we think out 10 years, which is oftentimes irresponsible to do, I think what you'll find is there's going to be some consolidation that exists to create national brand opportunities, but there's also going to be some convergence that exists, where I think we'll see medical derm groups realize perhaps they need new and innovative models outside of their existing clinics, and capabilities to leverage an incredible amount of patient volume they already have coming into their centers today, and almost a defensive strategy to make sure they retain those patients in the future.

I think we'll also probably see some of the plastic surgery and med spa businesses combine. You've got this whole ocean of plastic surgery groups that exist out there. There is some pretty interesting and compelling cross-selling opportunities that exist between these practices, particularly for certain types of patients. And so over time, I think you're going to see both of those pockets develop. And then maybe at some point you've got players that are national in scope and scale that start to attract some of the more creative buyers in the market that are even on the product side who want to create vertically integrated opportunities and tap into this category through a clinic model, et cetera. So I think we'll be doing med spa deals for the next 10 to 15 years, or as long as I'm here at Houlihan. So we're pretty excited about where this market's going in the future.

With that, Mike, I think we'll call it a wrap. Super interesting topic and always a ton of fun to talk with you. Thank you for joining.

Thanks, Geoff, appreciate it.

Thank you for joining us on this installment of The Banker's Corner. To learn more about today's discussion, please email host Geoff Cockrell at gcockrell@mcguirewoods.com. We look forward to hearing from you. This series was recorded and is being made available by McGuireWoods for informational purposes only. By accessing this series, you acknowledge that McGuireWoods makes no warranty, guarantee or representation as to the accuracy or sufficiency of the information featured in this installment. The views, information, or opinions expressed are solely those of the individuals involved and do not necessarily reflect those of McGuireWoods. This series should not be used as a substitute for competent legal advice from a licensed professional attorney in your state, and should not be construed as an offer to make or consider any investment or course of action.