Dermatology Market OverviewDermatology Market

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Dermatology Market OverviewAugust 2013Investment banking services are provided by Harris Williams LLC, a registered broker-dealer and member of FINRA and SIPC, and Harris Williams& Co. Ltd, which is authorized and regulated by the Financial Conduct Authority (FRN #540892). Harris Williams & Co. is a trade name under whichHarris Williams LLC and Harris Williams & Co. Ltd conduct business in the U.S. and Europe, respectively.

DDermatologylMarketM k OOverviewiThe 10.1 billion U.S. dermatology market is expected to grow to 13.1 million by 2017,representingi a 5.3%3% CAGR.CAG Today, there are an estimated 9,600 dermatologists and 7,800 dermatology practices in the U.S according to IMS Health.– 34% of industry establishments are solo practices.– 48% of industryy ppractices include three or more pphysicians.y There is a current shortage of dermatologists that is expected to persist for the foreseeable future. Increasing demand for dermatology services driven primarily by rising occurrence of skin cancer, in particular melanoma, and theaging of the population. The dermatology industry is highly fragmented with consolidation expected due to rising costs and complexity.– Young dermatologists are increasingly choosing multi-physician settings over solo practices. Attractive financial profile with profit margins averaging 20% in 2012.Market Size GrowthFor the Years Ended and Ending December 31, 2009-2017PDermatology Market SegmentationFor the Year Ended December 31, 2011( in millions)CosmeticDermatology, 20% 14,000 12,000Market Size 10 000 10,000 8,000GeneralDermatology, 60% 6,000 4,000Mohs Surgery,12%Other Specialties,5% 2,000Dermatopathology,3% 02009Source: IBISWorld.20102011 2012E 2013P 2014P 2015P 2016P 2017PSource: IBISWorld.1

DDemandd ffor DDermatologylSServicesiIncreased access to dermatologists, greater health awareness, and favorabledemographic trends are driving demand for dermatologic services. Increasing occurrence of skin cancer is a primary driver of rising demand for dermatology services.– According to the American Cancer Society, there are more than 2 million annual cases of basal and squamous cell skin cancer (nonmelanomas)) in the U.S.– The occurrence of melanoma, the most dangerous form of skin cancer, has increased from 47,700 diagnoses in 2000 to 75,000 in 2009. While demand for cosmetic dermatology decreased during the recession, the economic recovery combined with an agingpopulation is driving a resurgence of demand for cosmetic procedures.– 42% of dermatology patients are 60 years or older and 68% are 40 years or older. The Patient Protection & Affordable Care Act (“PPACA”) could also contribute to industry growth due to an increased numberof covered lives and 100% Medicare coverage for annual preventative sessions for seniors.Consumers of Dermatology ServicesAges 60-647%For the Years Ended December 31, 2000-2009Ages 85 and older6%Ages 40-5926%Agesg 75-8413%Ages 19 andyounger14%Ages 20-3920 3918%Annnual Incidence Rates pper 100,000For the Year Ended December 31, 2011Growth in Melanoma Diagnoses252321191715Ages 65-7416%Source: IBISWorld.Year of DiagnosisSource: SEER Cancer Statistics Review.2

ShShortageoff DDermatologistsl iDemand for dermatology services is outstripping the number and availability ofdermatologists. According to the American Medical Association, the ratio of dermatologists to the U.S. population will continue to decreaseover time, particularly in rural areas of the country.– Shortage driven primarily by static residency training capacity for new dermatologists with only 32 dermatology residency positions offered in2012.– Dermatology training, including medical school and residency, takes between seven and nine years to complete. Dermatology practices are hiring non-physician clinicians (“NPC”) to provide a greater number of patient services. Proliferation of minute clinics and other non-dermatologists catering to skin disease has not alleviated demand as fewer than30% of visits for medical dermatology complaints are seen by dermatologists or NPCs.(1)U.S. Dermatologists per 100,000 PeopleFor the Years Ended and Ending December 31, 1970 -2040PNumber of Dermatology Residency PositionsFor the Years Ended December 31, 2008-201245Number of Resideny Positions OfferedTotal Dermatoloogists in the US per1000,00043.532.521.510.5019701980Source: US Census Bureau & AMA.(1)1990200020104035302520082020P 2030P 2040P2009201020112012Source: National Resident Matching Program: Results and Data 2012.The Dermatology Workforce: One Small Specialty’s Experience with an Ongoing Shortage, Jack Resneck Jr, MD.3

O h IIndustryOtherdTTrendsdA number of additional trends will change the landscape of the dermatology industrygoing forward. The number of physicians that practice independently has been declining at a steady rate of 2% per year.– This rate is expected to increase to 5% by 2013.(1) WhilWhile dermatologistsdt l i t havehbeenbrelativelyl ti l slowl tot abandonb d solol practice,ti new dermatologistsdt l i t favorfemploymentlt att a multiltiphysician site or in an academic setting.– Only 5.3% of dermatology residents plan to practice solo and only 13.0% of dermatologists within eight years of residency (“youngdermatologists”) currently have an independent practice.(2)Dermatologists Abandoning Solo Practice(2)Multi-Physician Site Growth DriversFor the Years Ended December 31, 2005 and 2009Percentage of 5.0%40.1%40%44.0%20%39.5% Earn income immediately. Eliminate initial and recurring capital outlaysrelated to solo practice.Focus on patient care rather than administrative andmanagement duties.Leverage established infrastructure.Utilize community of physicians and tackle morecomplexl cases.0%2005SoloDerm Group2009MultispecialtyAcademicOther(1) Accenture Dermatology Survey 2011.(2) 2009 AADA Practice Profile Survey.4

H lhHealthcareRReformfIImpactingi DermatologyDlThe Patient Protection & Affordable Care Act will impact the reimbursementlandscape in the dermatology industry. Delivery and reimbursement of dermatology services will remain in the spotlight as PPACA is implemented andhealthcare reform continues.– Dermatologists account for only 1% of the U.S.U S physician population,population but comprise nearly 4% of overall Medicare expenditures.expenditures– Skin cancer has become the sixteenth most costly Medicare diagnosis accounting for 2.9 billion annually. PPACA will have both positive and negative affects on the dermatology industry:Increase in number of covered lives; 32 million incremental consumers will gain coverage.100% Medicare coverage for annual preventive dermatology sessions for seniors aged 65 and older, a group of patients thatgenerates over a third of industry revenue.Mandated increased payments to primary care providers could negatively impact specialty providers such asdermatologists.dermatologistsLack of reform to Medicare’s sustainable growth rate formula and the creation of the Independent Payment Advisory Boardwill most likely lead to continued annual reimbursement adjustments and uncertainty for physicians, including dermatologists.Source: American Academy of Dermatology (AAD) 70th Annual Meeting.5

I dIndustryL dLandscapeandd M&AThe dermatology practice management industry remains fragmented and ripe forconsolidation. As the regulatory landscape changes, many independent dermatologists are seeking alternative practice models,catalyzing an industry shift towards consolidation. Integrated Dermatology Group,Group a practice management company,company continues to expand by executing a nation-wideroll-up acquisition plan and acquiring practices of dermatologists looking to exit the field. Group Purchasing Organizations (“GPOs”), such as Dermatology Alliance, provide independent dermatologypractices with leverage in order to remain independent.M&A Activity 2011 – 2013YTDDateTarget CompanyAcquirerDateTarget CompanyAcquirerMay-13North Shore Dermatology SCDermatology Associates of Wisconsin S.C.SCNov-12University Dermatology Associates of Washington,Washington D.C.D C Integrated Dermatology GroupApr-13Independent PracticeDermOne, Inc.Oct-12Alta Dermatology GroupIntegrated Dermatology GroupApr-13gloProfessional, Inc.Swander PaceFeb-12Nautilus Health Care Group, LLCHealogics, Inc.Jan-13Dermatology Associates of TylerCandescent PartnersOct-12Center For Dermatology & Skin Surgery, Inc.Advanced Dermatology & Cosmetic SurgeryJan-13Atlantic Dermatology Associates, P.A.Dermatology Clinics of Southwest VirginiasSep-12Southeastern Plastic Surgery, P.C.Piedmont Plastic Surgery & DermatologyDec-12Naples Center for Dermatology & Cosmetic SurgeryPrairie CapitalMay-12Milwaukee Skin Center, S.C.Dermatology Associates of Wisconsin S.C.Dec-12Independent PracticeDermOne, Inc.Feb-12Advanced Dermatology & Cosmetic Surgery Inc.Audax Group; Brentwood Capital AdvisorsNov-12Two Clinics located in Florida KeysAdvanced Dermatology & Cosmetic SurgeryMay-11Evolve Med SpaThe Yash Birla Group6

N bl IndustryNotableI dParticipantsP i i# ofOffices# ofPhysiciansAdvanced Dermatology and Cosmetic Surgery (ADCS) is the largest dermatology group practice in the UnitedStates. ADCS has 84 offices throughout the United States, 63 of which are located in Florida.84147Dermatology Associates of Tyler provides skin care services. The company specializes in the provision of sciencebased therapies and treatments. The company also sells skin care products through its aesthetics center. Thecompany was founded in 1996 and is based in Tyler, Texas.710PrivateDermatology Associates of Wisconsin S.C. provides acne skin care treatment, laser skin and rosacea treatment,and skin cancer surgery services to patients of all ages in Wisconsin. The company is based in Manitowoc,Wisconsin.3048Dermatology Clinics ofSouthwest Virginias,PLLCPrivateDermatology Clinics of Southwest Virginias, PLLC offers dermatology services through skin care centers.Dermatology Clinics of Southwest Virginias was formerly known as Derm One, PLLC. The company was founded in1994 and is based in Bluefield, Virginia.57DermatologyConsultants, P.C.PrivateDermatology Consultants, P.C., a dermatology practice, provides medical, surgical, and cosmetic care services inGeorgia. It offers medical dermatology and aesthetician services. In addition, its services include diagnosis andtreatment of skin diseases, preventative skin maintenance, and treating skin problems due to internal disease.37Integrated DermatologyGroupPrivateIntegrated Dermatology Group owns, manages and operates dermatology practices throughout the United States.The company has created a program that provides succession planning to dermatologists looking to retire orprovides practice management services for active dermatologists.NANAPrarie CapitalNaples Center for Dermatology & Cosmetic Surgery, P.A., doing business as Riverchase Dermatology andCosmetic Surgery, operates as a dermatology practice that offers treatment for various types of skin disorders andcosmetic concerns in southwest Florida.810The practice specializes in general, surgical and cosmetic dermatology, in addition to skin cancer treatment,including Mohs surgery and dermatopathology. Northeast Dermatology Associates operates a total of eightoffices and 14 doctors are associated with the ppractice.814U.S. Dermatology Medical Management, Inc., a management services organization, provides medical officemanagement services to dermatology practices that are owned by physicians.3NAThe practice treats various conditions, including skin cancer, acne, eczema, psoriasis, and rosacea. Originallyestablished in Redlands, CA, the company operates over 30 offices in California, Arizona, Nevada, West Virginia,Pennsylvania and Idaho.Idaho In 2002,2002 West Dermatology merged with Las Vegas Skin & Cancer Clinics.Clinics30NACompanyp yOwnershippAdvanced Dermatology& Cosmetic SurgeryInc.Audax GroupDermatology Associatesof TylerCandescentPartnersDermatology Associatesof Wisconsin S.C.Naples Center forDermatologyNortheast DermatologyAssociatesU.S. DermatologyMedical Management,Inc.West DermatologyPrivateVicente CapitalPrivateDescriptionp7

Dermatology Clinics of Southwest Virginias was formerly known as Derm One, PLLC. The company was founded in 1994 and is based in Bluefield, Virginia. 57 Dermatology Consultants, P.C. Private Dermatology Consultants, P.C., a dermatology practice, provides

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