May 21, 2024

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Health is the Main Investment

Inside the corporate dash to buy up dentists’ offices, veterinary clinics and pharmacies

Stephen Hughes/The Globe and Mail

Jordyn Hewer had a plan: Go to veterinary school, get a decade of experience under his belt and then buy his own practice.

The first two steps went off without a hitch. He graduated from the University of Montreal’s veterinary school in 2011. He spent the next 10 years working as a small-animal veterinarian in private practices and shelters in Quebec and Ontario.

But it’s when he got to the third step – buying his own practice – that he ran into a serious problem. In the intervening years, the whole industry had changed.

Major corporate players had entered Canada’s veterinary industry, including VetStrategy – backed by U.S. private-equity firm Berkshire Partners, and recently merged with European pet-care chain IVC Evidensia – and VCA Canada, owned by international confectionery giant Mars Inc. The corporate chains were buying up independent veterinary practices, sparking bidding wars that saw the price of vet practices balloon from three or four times annual gross earnings to 10, 20, even 30 times that at the beginning of this year.

The buyouts meant multimillion-dollar paydays for veterinarians who already owned a practice. But for ambitious young professionals like Dr. Hewer, there was no way to compete. Even if he could somehow secure the funding to buy a practice at the prices they were now going for, he would be saddled with a mountain of debt he would struggle to pay off.

“It’s ridiculous,” said Dr. Hewer, who chose to leave the industry to work for a pet-food manufacturer. “When you translate that to how much debt that represents and how much you would need to pay that back in, let’s say, a five- to 10-year period, the numbers never add up.”

Fuelled by international private equity funds, consolidating firms have been on a tear in other health-professional fields as well, buying up practices in fields such as veterinary medicine, dental care, optometry and pharmacies and assembling them into chains. Practitioners who sell to corporate owners typically get back-office support through the firm’s technology and staff, help with marketing, and reduced management responsibilities. The buyers, meanwhile, get businesses with steady streams of revenue, and profits that can be boosted by centralizing equipment and administrative functions, and ordering supplies in bulk. In the vast majority of cases, the old branding remains intact after a purchase happens, so patients and customers have no idea their once-independent practice has been taken over by corporate ownership.

Consolidation within these fields is still relatively low in Canada, but it is building fast – in less than a decade, nearly a quarter of vet practices have been bought by corporate owners.

“I’ve never seen anything like it,” said Douglas Jack, a leading veterinary lawyer at Borden Ladner Gervais LLP. “I’ve been practicing law for 37 years. It just became a frenzy among the consolidators.”

The recent acquisitions are part of a wave of increased activity from private-equity firms across the globe, as they search for new fields to generate yield by consolidating fragmented industries and extracting profits. In Canada, consolidators have spent billions in sectors as varied as waste management and legal software.

Steven Hughes/The Globe and Mail

The approach has fuelled greater corporate concentration, which critics say will reduce consumer choice and drive up prices by driving down competition. And private-equity’s drive for efficiency could also affect the quality of care, for example by reducing the time a professional can spend on procedures.

In countries where the trend is further along – such as the United States and Britain – some government bodies and regulators are raising concerns that corporate concentration is leading to unfair prices and unreliable care.

“What regulators need to start thinking about is when smaller deals accumulate to the point where a market concentration problem develops, either locally or nationally,” said Jon Shell, managing director of Social Capital Partners, and a veteran of the vet industry in Canada and Australia. “That can be bad for employees and consumer choice. They don’t seem to be looking at these smaller deals at all now, because it’s not a today problem.”

In the past, individual practices were responsible not just for offering health services but for operating business functions, too. Then provincial governments began allowing medical professionals to form corporations, often to access preferential tax treatment. This opened the door to outsourcing administrative services – often by hiving them off into a separate management corporation – and, ultimately, to ownership by for-profit companies. (While most provinces still require that a licensed professional own the medical operations of a practice, corporate buyers can find a workaround that enables them to acquire them. They might employ a licensed professional, for instance, who’s legally eligible to assume ownership of the medical assets.)

For example, Dentalcorp Holdings Ltd., which launched in 2011, has amassed nearly 500 dental practices (about 3 per cent of Canada’s practices) by offering dentists six-to-eight times their office’s annual earnings – about double what had once been the industry’s standard. The dentists are paid out 80 per cent in cash and 20 per cent in Dentalcorp shares.

Graham Rosenberg, chief executive officer of Dentalcorp, said he was drawn to the dental industry because it was highly fragmented and highly profitable.

“If you look at most of the practices we acquire, say $2-million to $2.3-million of revenue on average, they are very profitable,” Mr. Rosenberg said. “They have high margins, low capital expenditure requirements. They are great small businesses. And that’s ultimately the value we ascribe to them.”

Mr. Rosenberg founded Dentalcorp after working for Imperial Capital Ltd., a Toronto-based private-equity firm that invests in consumer businesses, including an optometry chain and a maker of pet food.

Imperial, which owns 7 per cent of Dentalcorp, told The Globe and Mail it was attracted to the dental industry because it offered an essential service that was insulated from the effects of cyclicality and recession.

The largest investor in Dentalcorp – at 41 per cent of shares – is L Catterton Partners, a U.S. private-equity firm with ownership stakes in consumer brands ranging from Birkenstock to Peloton that also made a nine-figure investment in Calgary-based optometry chain FYidoctors in 2020.

Rajan Shah, a principal at L Catterton and a Dentalcorp board member, said the firm’s aim is to improve and “consumerize” the patient experience, for example by upgrading a clinic’s technology so they can offer virtual appointments and online booking. “That’s where we believe we can drive value for everyone: physicians, patients and shareholders,” he said.

One risk of this model is that, in most cases, the roll-up companies rack up large debts during their acquisition sprees. Even after a public offering that raised $950-million, which went to paying down the cost of its acquisitions, Dentalcorp still had $752-million in debt remaining, according to a Bank of Montreal research note.

Neighbourly Pharmacy Inc., another roll-up company backed by private equity that went public last year, expects to have 271 pharmaceutical locations across Canada once a $435-million acquisition of Regina-based Rubicon Pharmacies is completed. The merger triggered an automatic review by the Competition Bureau because of its size. (The bureau said it could not share details of the review for confidentiality reasons. In a previous review of the pharmacy industry, the bureau said that standardized pricing could lead to collusion among businesses, which would drive up prices for consumers.)

Many of Neighbourly’s locations are in rural areas or in First Nations, where there may only be one or two pharmacies servicing a community, said CEO Chris Gardner.

“There may not be a lot of pharmacists that may be willing to buy in smaller markets and smaller communities across Canada,” Mr. Gardner said.

Sandra Hanna, who runs a pharmacy in Guelph, Ont., and heads the Neighbourhood Pharmacies industry group, said that, as in other sectors, the rising costs of goods and labour have made it challenging for pharmacists to run their own business.

She said an extra challenge that her industry faces is that revenue can be constrained because the price of drugs is heavily regulated.

“There are increasing pressures on the pharmacy business model, which are forcing pharmacies to seek those bigger groups, and support from a banner or a head office,” Ms. Hanna said. “It’s one of the few industries where costs continue to increase, but reimbursement does not.”

Dentalcorp and Neighbourly have attracted major institutional investment, including from Manulife Asset Management and the OPSEU Pension Trust.

But some in the industry aren’t sure the acquisition frenzy can last.

Mr. Jack, who provides legal advice for independent and corporate veterinarians, said he’s been part of deals in Quebec earlier this year where retiring professionals sold their practices for 28 times earnings before interest, taxes, depreciation and amortization (EBITDA).

“This is unsustainable,” he said. “Your return-on-investment isn’t going to meet the investment objectives of your private equity investors or the bank. Eventually someone is going to say, stop the madness.”

He said he has talked to leaders at the consolidators who say they feel pressure to maintain the pace of growth.

“In my discussions with them, I say: ‘You do realize that these valuations are unsustainable, right? You know that, right?’” Mr. Jack said. “They say, ‘oh yeah, we know that.’ … Well then why did you do it? And I found their response very interesting. ‘It’s because we have to.’”

Mike Mossop runs his own independent mobile veterinarian practice that treats pets in their homes.elizabeth&jane photography/Handout

Large corporate chains insist their ownership has no impact on the medical decisions being made at their clinics.

A corporate partner interfering with the independent decision-making of a veterinarian “would be problematic,” said Jan Robinson, registrar and CEO of the Ontario College of Veterinarians. “I can tell you, honestly, there are rumours that go around that that takes place. We’ve never seen any evidence of that.”

Even if a corporate owner stays out of the conversations between a medical professional and a client, there are other ways they may have an effect.

Veterinarian Mike Mossop worked for two practices in Ottawa that got bought by VCA Canada. Eventually, he became medical director of one clinic. He left in 2017 to start his own mobile practice because, in part, he said, he began to chafe under corporate ownership.

“There was never anything so blunt in terms of, this is how you should practise,” Dr. Mossop said. “But there is a way they kind of controlled the way you practised indirectly. What I mean by that is kind of controlling certain pricing.”

He said that prices were set by the head office, and standardized across locations in a region. As a result, veterinarians’ decision-making was sometimes swayed by prices.

“It wasn’t direct control, they weren’t saying, use product A over product B, but if they priced it in a certain way, we would always recommend product A,” Dr. Mossop said.

He also said the computer systems that were brought in made it more difficult to offer the discounts some veterinarians opted to offer to customers who otherwise couldn’t afford them.

VCA Canada said it allows “reasonable” discounting in special circumstances, or with the permission of a regional manager. The company said it also runs a charity to provide care for pets whose owners are in dire straits.

“Our prices are higher than some clinics, but are very reasonable given the standard of care,” said Daniel Joffe, VCA Canada’s vice-president of medical operations.

The influence of pricing on decisions has also shown up in academic literature. A European survey of veterinarians in Britain, Austria and Denmark published last year found a little over half of the veterinarians surveyed in Britain – where corporate concentration is very high – said they were allowed to discount fees, while nearly all respondents in the other countries were allowed to give discounts.

Veterinarian Malgosia Mosielski spent most of the past three years in Ottawa as a locum veterinarian, meaning that she did supply shifts at local vet offices, including some that were corporately owned.

Mossop left two Ottawa clinics in 2017 to start his own mobile practice because, in part, he began to chafe under corporate ownership, he said.elizabeth&jane photography/Handout

She said she never saw owners interfere with medical decisions. But what she did see were unhappy veterinarians and technicians who felt they were being pushed to maintain maximum productivity.

“There’s a lot of pressure on them to do appointments constantly,” Dr. Mosielski said.

For example, some technicians said they were told they only had 30 minutes to prepare for a surgery, instead of the 45 minutes they were used to. During the prep time, technicians would make sure tools were sterilized, set up equipment such as a tracheal tube, and do bloodwork. She said that without the extra prep time, technicians would have to choose between coming in early and doing the work unpaid, or trying to rush to fit in all the necessary tasks before surgery started.

“It’s just frustrating for someone from the outside, who’s never worked in a vet clinic, to come in and say you don’t need 45 minutes for that,” Dr. Mosielski said.

The share of corporate ownership in Canada is growing fast, but in some industries is still relatively low: about 5 per cent of dental offices, about 25 per cent of veterinary clinics and about half of pharmacies, according to the companies that spoke to The Globe.

Most professional associations and regulators told The Globe they did not track ownership statistics. For example, among dental regulators, only two – in Saskatchewan and Prince Edward Island – were able to provide the number of corporate-owned dental practices in their provinces.

But in other countries, where consolidation is further along and watchdogs do keep track, data show the situation can change quickly.

In the United States, corporate ownership of dental practices has grown to 30 per cent. The rate of independent ownership has dropped particularly fast for young dentists, according to the American Dental Association. In 2005, 25 per cent of dentists under 30 owned a practice, as did 55 per cent of dentists between the ages of 30 and 34. In 2021, that dropped to 9 per cent for under-30 dentists and 34 per cent for dentists aged 30 to 34.

Percentage of U.S. dentists in private practices

who are owners

the globe and mail, source: american dental


Percentage of U.S. dentists in private practices

who are owners

the globe and mail, source: american dental


Percentage of U.S. dentists in private practices who are owners

the globe and mail, source: american dental association

At the same time, concern about corporate dental ownership has risen. A U.S. Senate committee investigated the issue in 2013 and heard cases of improper procedures on patients, including children. One disturbing account involved a four-year-old boy who was forcefully held down while two root canals were administered – procedures that were later deemed by a pediatric dentist as unnecessary.

A bipartisan Senate report ultimately slammed the conduct of the companies and said that corporate ownership of dental offices went against the spirit of state laws that said practices must be owned by licensed dentists. (As in Canada, U.S. rules vary by state, but even in those that required full ownership by dentists, corporate chains found a way around it through management agreements.)

A USA Today investigation in 2020, which included the accounts of whistle-blowers, alleged that a chain – North American Dental Group – put pressure on dentists to increase the number of procedures they conducted in order to meet revenue targets. The story included the account of a three-year-old boy in Ohio who was given seven root canals, which other dentists later deemed unnecessary. (After publication of the report, North American Dental Group published a web statement that denied the company put pressure on dentists and said any negative experiences represented a small number of the millions of patients the group saw.)

And, in December of 2021, the Massachusetts Attorney-General sued the Aspen Dental Management Inc. for alleging the chain advertised free dental procedures, and then charged clients afterward and denied many insurance claims from low-income residents. The suit claims Aspen did not live up to an agreement struck in 2014, the last time the company was accused by the state of improper conduct.

The share of corporate ownership in Canada is still relatively low, accounting for about 5 per cent of dental offices, according to the companies that spoke to The Globe.Ryan Remiorz/The Canadian Press

Michael Davis, a New Mexico dentist and advocate for independent ownership, said large dental groups are given lenient punishments, such as fines, and then allowed to continue their previous behaviour.

“Nowhere near enough sentencing is being done,” Dr. Davis said.

Britain has been the prime example of how quickly consolidators in the veterinary sector can move. According to British government statistics, 89 per cent of veterinary offices in the country were independently owned in 2013. Then corporate groups went on a buying spree. By 2021, only 45 per cent of offices were independently owned.

The Competition and Markets Authority (CMA), Britain’s competition regulator, has launched two investigations in recent months of mergers between veterinary chains, because of concerns that the resulting companies would have monopolies in some areas of the country.

“The CMA has received a number of complaints in recent years about higher prices or lower quality services as a result of too many vets’ practices in the same area being under the control of a single company,” Colin Raftery, CMA’s senior director of mergers, said in a statement.

The CMA said, for confidentiality reasons, it could not share specific complaints of price-gouging. But the amount of money spent on pets in Britain has climbed from £2.6-billion (about $4.1-billion) in 2013 to £4-billion in 2021. (For comparison, Statistics Canada said it does not track spending on veterinary services.) A Daily Mail report in 2021 about private ownership of vet practices included a story of a woman who took her cat into a chain-owned after-hours clinic and was charged £220 (about $346) for a consultation – more than six times the previous fee of £34.

One of the chains with a big presence in Britain, IVC Evidensia, merged with Canada’s largest chain, VetStrategy, last year.

Orin Litman, CEO of VetStrategy, said the company is mindful that the competition regulator watches for when one player acquires more than 30 per cent of local market share by buying practices. But he said his understanding is that it is fine for a single practice to take a larger share of the market if it does so organically, by winning over customers from its competitors.

“Whenever we’re in meetings, we’re always looking at our different markets and once you get to 25 per cent, we’re like, okay, let’s leave this market and let’s just focus on providing great service and growing it organically,” he said. “Let’s not look to grow by acquisition or partnership in this market any longer.”

According to consulting firm Aldwych Partners, about a third of local markets in Britain have one chain that owns more than half of the available services.

Aldwych’s Andrew Taylor, who previously worked at the competition regulator, said there were many reasons why spending on vet services has gone up in recent years, such as supply chain issues driving up prices, or wage increases to boost retention.

But he said he’s sure lack of competition has played a role.

“With the amount of market concentration we have here in the U.K., I would be surprised if none of it was attributable to consolidation,” Mr. Taylor said.

Some professionals have another reason for wanting to sell their businesses: The pandemic has made it a very hard time to run a practice.

Mentally, many pharmacists, dentists and veterinarians are burnt out. They performed essential services throughout the pandemic, dealing with stressed and sick patients.

“The strain on the independents is definitely palpable,” said Enid Stiles, a Montreal veterinarian and past president of the Canadian Veterinary Medical Association.

But, like others in her industry, Dr. Stiles wonders whether something else will be lost in the drive for consolidation.

“I am concerned about the human side, the part that makes us people,” Dr. Stiles said. “Will that change? Will vets become less a part of a community and more a part of a global equity market?”

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