Expertise Beyond the Numbers

Medical Physics M&A: Industry Consolidation Outlook

Acquisition activity in the medical physics industry continues at a rapid pace. With the recent announcement of the acquisition of Krueger-Gilbert Health Physics by Blue Sea Capital in May 2019, there are now three funded private equity firms with medical physics platform investments. The discovery of the industry by private equity has created an unprecedented level of inbound interest to owners of medical physics practices as sponsor backed companies seek to supplement their organic growth via acquisitions.

With the flurry of recent transactions, many physics practice owners have been pondering whether the industry is moving towards a landscape with just a handful of dominant nationwide physics firms. If this is the future of the medical physics industry, what does this mean for the owners of local and/or regional practices?

Acquisition activity in the medical physics industry continues at a rapid pace. With the recent announcement of the acquisition of Krueger-Gilbert Health Physics by Blue Sea Capital in May 2019, there are now three funded private equity firms with a platform investment in the industry. The discovery of the industry by private equity has created an unprecedented level of inbound interest to owners of medical physics practices as all are focused on supplementing their organic growth via acquisitions.

With the flurry of recent transactions, many physics practice owners have been pondering whether the industry is moving towards a landscape with just a handful of dominant nationwide physics firms. If this is the future of the medical physics industry, what does this mean for the owners of local and/or regional practices?

Recent Market Developments

2019 has seen the announcement of two significant transactions in the industry. In May, Blue Sea Capital acquired Krueger Gilbert Health Physics and formed Apex Physics Partners with the goal of pursuing additional acquisitions and/or partnerships with other regional medical physics firms. Later that same month, West Physics, a portfolio company of LNC Partners, announced its first acquisition of Phoenix Technology Corporation, a regional physics firm based in Atlanta, Georgia.

These two transactions are only the most recent examples of the impact private equity is having on the physics market by providing growth capital and acquisition related expertise to a long-fragmented industry. This momentum will surely continue for the balance of 2019 and beyond.

Future of the Medical Physics Industry

With three active private equity sponsors in the industry (Blue Sea Capital/Apex Physics Partners, LNC Partners/West Physics, and L2 Capital/Medical Physics Holdings), the industry should expect continued consolidation as each of the private equity backed platform companies seek to acquire additional firms to supplement their current operations and/or provide access to new regional geographies. In addition to the financial sponsors already invested in the industry, there remains substantial interest from other private equity firms seeking out the limited number of larger independent physics firms as platform companies to gain a foothold in the industry so expect to see at least a few more private equity firms invest into the industry in the short-term.

Despite recent consolidation, the industry remains hugely fragmented and we suspect it will remain so for a long period of time due to sheer number of smaller physics practices that are focused in various local or regional markets. The private equity backed firms do not have unlimited bandwidth so even a few acquisitions per year for each will barely make a dent in overall dispersion of revenue amongst physics practices across the country.  However, market share and competitive dynamics in certain local and regional geographies may be materially impacted by M&A transaction activity.  In addition, ongoing consolidation of hospital systems will create additional pressure on smaller medical physics firms to be able to provide increasing levels of specialization across broader geographies and deal with a more sophisticated vendor selection process.  These dynamics may lead to smaller firms seeking out larger partners.

Impact on Local & Regional Physics Practices

There are several conclusions owners of medical physics practices should keep in mind:

  1. Keep a keen eye on M&A transaction activity, especially in your geographic market or tangential markets. For diagnostic practices, customer density drives profitability margins so firms that acquire in tangential markets may be looking at your home market next. Local M&A deals could result in a more competitive market dynamic and/or a higher frequency of inbound interest as buyers seek to further consolidate in that particular market.
  2. Consider whether your customer base and employees might benefit from a larger platform, especially if your firm is approaching an inflection point. Many smaller firms can grow effectively until they reach 10 to 15 people, at which point continued growth requires a material investment in back end support technology and processes. If your firm does not have the resources or expertise to implement these changes, an acquisition or partnership with a larger firm may allow for continued growth and an enhanced focus on servicing customers.
  3. Assess whether your practice may be interested in seeking out acquisition targets to add scale. If you desire to remain independent, you may be able to seek out small acquisitions to supplement your organic growth.  Adding scale may also help create additional cash flow to support required investments in the infrastructure of the practice.  Owners of firms should have an understanding of what size acquisitions that can reasonably afford before investing significant time in pursuing this strategy.
  4. Have a plan to respond to inbound interest. You likely have already received calls from various parties seeking to have discussions about partnerships and/or acquisitions. Note that your counterparties in these discussions will be professional buyers of businesses. You should be prepared with your own team of advisors to ensure that any discussions and/or transaction process is done in a fashion that protects your business and maximizes the chances of a successful outcome.

 

SC&H Capital has completed numerous transactions in the medical physics industry and continues to see an increase in prospective deals in this space. If you are considering a sale, or have been approached by a buyer, we encourage you to Contact Us in order to guide you through this process.

Greg Hogan is a Director with SC&H Capital and has more than 15 years of professional experience in M&A transaction, financial, and strategic advisory services. He has successfully advised buyers and sellers on a wide variety of corporate transactions valued at over a billion dollars.