Richard Blann of Cantor Fitzgerald, gives us his thoughts on why the veterinary industry has seen so much action in the past decade and his predictions for how consolidation will change in the next five.
We talk about burnout and career satisfaction within the veterinary space and explore a partnership model that serves both providers’ and investors’ interests and touch on how that model has been tested and used in other verticals.
You’re listening to Consolidate That! Ivan, great to speak with you again, I was going to say see you but you know, we’re on a podcast so it started coming, I’m seeing you but fortunately no one else has to. Welcome back, I’m excited to chat with our guest, it’s – I’ll let you introduce him but I think it’s a really cool new type of guest that we’ve had on the show and talking a lot about the equity side of things so I’ll let you take over.
Yeah, I’m very excited Ryan, good to see you and hear you today. I am very excited to introduce Richard Blann or Rich. Richard is the managing director of Cantor Fitzgerald and he’s a senior advisor to Multi-Site / Retail Healthcare Physician Groups across a number of provider specialty areas including ophthalmology, dental, dermatology, veterinary services, orthopedics, gastrointestinal, urology, ENT and allergy, radiology, and other specialties as well.
Wow, he completed over 65 advisory transactions representing over 70 billion in aggregate value. Rich, welcome to the show, what a pleasure to have you here.
Honored to be a part of the show and thank you for having me.
I have many, many questions. This has been, you’re probably looking at the veterinary industry and what is going on right now here are the multiples increased in the last couple of years, I’m not even talking about 10 years. 10 years is a lot but even like in last year, they went crazy, everybody is jumping in on the veterinary medicine, there’s a lot of reasons for that. Is that specific to us in the veterinary domain or is that what you’re seeing in other verticals as well?
Well, it’s a great question, Ivan. Overall, in the physician practice management space, we’re seeing an explosion of deal activity. It’s largely being driven by a highly fragmented market creating a lot of opportunity for scaled providers to consolidate the sectors. While it’s not unique to veterinary services, I think the vet sector in particular has grabbed the attention of investors that like the strategy and the model of physician practice management consolidation but there are specific elements that makes vet even more attractive than some of the human health specialty areas like dental or dermatology or ophthalmology.
Specifically, driving that interest is the underlying industry growth of mid to high single digits, year over year, a massive opportunity to provide capital to a capital constrained industry for an investment in practices and technology and services. The lack of a reimbursement environment makes vet services extremely attractive when 98% of the payments for services being provided are being done so out of pocket without an insurance or insurance payer for those spaces and the burnout rate in the vet sector is amongst the highest across all specialty areas within the medical field and the consolidators are trying to create platforms that can appease that concern and issue while also giving people an opportunity to be part of something bigger and part of something that’s growing this practices.
Rich, you hit on like our full thesis on all of our topic. I’m going to take what you said and dissect it a bit. First off, I think it’s pretty interesting because I know just in my own area, there was a boom of the urgent cares, human health urgent cares, you saw them pop up everywhere like CVS’s and banks almost and then slowly started seeing some – for at least signs in front of those some of those places. The veterinary industry right now we’re at about 20% consolidated. Where do you think the plateau is for our industry?
I think there’s a really long runway for growth but given the demand by the consolidators and the significant amount of capital that is behind these platforms, we could potentially see the sector getting to a consolidation of 50% over the course of the next five to 10 years. Just to give you one data point that I think is quite a fascinating one, in 202, so in one year alone, over 1,500 vet practices were acquired by consolidators. 1,500 out of roughly 30,000 in the entire industry represents about 5%.
5% of the market was consolidated last year alone and you can extrapolate that data to then think about, “Well, if it’s 5% per year, that could mean 25% over the next five years” which gets us pretty close to that 50% consolidation level.
I think that given the number of players that are in the sector today, the amount of capital that’s behind them and the extraordinary opportunity and demand, we could see this sector consolidate at a much higher rate over the course of the next five years compared to over the last five to 10 years.
Yeah, that’s interesting because I know with us living in it and being in it every single day, I mean, VIS, that’s all we think about all day long but I didn’t know if we had sort of our own confirmation bias on what was happening and the scale of it. It’s interesting to hear a third-party view in that 5% is a major number.
I kind of feel with Rich, we are the third-party VM.
Yeah, he has more datapoints I think than we do. Off the top of his head for sure.
Rich, you touched on a very important topic that sort of the purpose of VIS in our company and internally everybody is sort of driven by that purpose, we think about the providers and in the veterinary domain and the burnout issue that you mentioned.
The hypothesis that we had in VIS is that this is the time when the scarcity of the resources to serve all these customers. Is that the point where businesses will have to pay more attention to the burnout because in the past, it’s been more ignored, I should say. There was sort of a land grab kind of how many I can buy. If you look at the average clinic where the veterinarian is providing about 550 to 600 in revenue thousand a year. If you lose a veterinarian, it’s about 10 months to replace a vet these days.
10 months, so that’s half a million dollars in lost revenue, if he was a veterinarian. I think this is the time when actually paying attention to burnout and how happy people are in the places, this is a paramount importance. Is that something you see in other domains or is it now more specific to veterinary? Do you think this is really the time when we need to start coming out with theses that will change that aspect?
It’s absolutely a dynamic that is plaguing the veterinary industry but it’s not unique to veterinary. We’re seeing it across the board, whether we’re talking about radiology or we’re talking about GI or urology or orthopedics, the demands that the industry is putting on our providers continues to increase.
We’ve seen it play out over the last five to 10 years in human health, where compliance, regulatory changes, have forced a lot of practices to invest a lot of dollars in technology and systems and people but it’s also put the burden on the providers to increase the level of documentation, the level of coding, the level of reporting on top of seeing patients during the clinical days.
The burnout rate continues to go up and what I think is very interesting is – I’m relating it back to our topic here in consolidation is we’ve seen an explosion of partnership-driven models from a consolidation perspective that are trying to create an alternative that aligns the clinical and the doctor interest with those of the economic interest of the investors to create what we’re calling now partnership models that provide entrepreneurial-minded physicians, whether they’re vet or human health, the opportunity to continue to own equity in their practices but also get the benefit of aligning with a platform or a consolidator type model that provides them with capital, with resources, with capabilities that can alleviate a lot of the incremental burdens that the physicians face.
Hopefully, offload a lot of the nonclinical administrative requirements so that we’ve created now an opportunity for the doctors to focus on the deliver of clinical care, not be burdened as much with the administrative aspects of running the practice but not selling 100% and becoming an employee but rather, retaining a large part of the equity and partnering with people that they can align within a true partnership type model to create this new paradigm of what we’re seeing in the consolidation world today.
I know with Cantor Fitzgerald, you guys probably have some different thesis than some other groups that are out there but does that partnership model make the investment more or less interesting or does it – is it sort of indifferent, is it just sort of a different way of looking at the financials of it?
What I’ve seen over the last – let’s call it five years, which is really when the partnership models have accelerated in today’s marketplace is the connection between the clinical performance and the ownership and the financial performance, partnership model are a lot tighter and held together because the providers, the ones who are creating revenue and profitability for the practice are continuing to own equity and if they’re continuing to own equity, they’re a lot more focused on making sure that the financial performance of the business continues and continues to grow versus the old model, which was, “Well, let me just sell my practice, I’ll become an employee and then you’ll pay me a salary and if the business is profitable, that’s great and if it’s not profitable, I don’t’ really care because I’m not an owner anymore.”
I think in today’s world, the partnership model has gained a lot of traction and a lot of interest because it has created and facilitated this alignment between the providers and the investors.
Has that been mirrored or tested in other verticals as well?
Absolutely. It has really taken shape across the entirety of the physician practice management world and we’ve seen a massive shift away from the old model, which was the buy-out consolidation model where they’re buying a hundred percent of the equity and then the parent company comes in and changes the name, they change the practice management system, they change even the way that care is delivered to the patient base, whether it’s human or animal, as well as a whole bunch of other operational changes that usually take place the first day after the closing of the practice acquisition.
The partnership models are more of a glide path transition. I think what appeals to today’s providers is the ability to gain the access to that larger platform but not do it in an intrusive manner that could lead to a disruption of the business and a disruption of the patient flow or any other impacts to the business that could be detrimental to the practice.
That resonates so much with what we are seeing in our domain. I think that the partnership models are becoming stronger and stronger. The only challenge that I see is that – it would be very interesting to hear your opinion. The one thing that we started calling these acquisitions, usually when you look at the asset purchase, you’re purchasing the building if you do or the location, the client list, the equipment, if you’ll kind of break it down. What we’re looking more at, it’s really also an acquihire.
It’s not just the seller because what I’m seeing more and more than when the seller is finally cashing out then there is associates that maybe had their relationship, the promises and other things and if there’s no connection of investors to these associates and they were a part of revenue that is produced then you lose all of that revenue and you don’t retain the workforce.
We’re seeing more and more of that being addressed in more in a format that there’s no scarcity of patients. There’s enough pets right now, there is after COVID, there’s such an increase in pet ownership and the details that people observe at home.
There is really an influx of patients but there is a scarcity of veterinarians but my specific question is, in these partnership models when there is a partial transfer of ownership and you still retain let’s say 30%, 40% of the practice then it looks like that some synergies that you could do as a network after acquisition you can’t leverage them as the whole organization because there is still ownership of one unit by the clinician who owned it.
Then the synergies, if they would exploit all the synergies, the upside that is shared at the central organization is then not shared with the organization from that piece is still retained. Is there any time of conflict where you’re retaining a part of just your one unit rather than rolling the entire thing or partial like the whole cash amount but the ownership is transferred. Is there any loss and synergies if you are doing one or the other?
That’s a great question. Look, you know the models have evolved to the point where the investors and the platforms are trying to create solutions that align with the desires and the interest of the selling doctors. In some instance, the doctor might want to keep equity at the practice level because he or she knows the business. They’ve owned it for many years and they feel like they can keep a closer eye and better understand the financial impact if they continue to own equity at their own practice level.
There are models where the doctor’s equity gets sold to the parent and in exchange, they get back shares in the parent company and then there’s other types of varieties of that that fall in between and not to get too granular around how these things are structured but does a traditional buy out consolidation model deliver a greater synergies than one of these partnership models where the docs are owning at the practice level.
Not necessarily, I mean in theory, the opportunity to create synergy value in the traditional consolidation model would be greater. You think about having a unified brand. Well, their savings on marketing that you could get from having one brand versus 50 brands that are all locally named but for the most part, you’re still getting the benefits of purchasing power on supplies. You are getting purchasing power if you’re using certain third-parties whether it’s for lab work or other types of third-parties that you’re sending out to but the thesis is consistent.
It’s consistent whether you’re a partnership model or you’re a traditional buy-out consolidation model in that you’re building size and scale, you’re creating a corporate infrastructure that takes over the non-clinical administrative services that can be centralized and distributed to the practices in a much more efficient way so you don’t necessarily lose anything if you are a partnership model versus a consolidation model in that respect.
I actually think in many ways, the partnership model can deliver greater synergy potential because you are less concerned about doctor turnover in those environments. Perhaps, you are actually spending less money on recruiting because your doctors tend to stay within the practice with much more regularity and then even taking it one step further, if your partnership model also creates an opportunity for your associate doctors to buy into equity at some point, that further retains the provider base, which in any PPM business, physician practice management business is the number one focus in terms of delivering consistent growing financial performance.
If you have disruption in your practice with your providers leaving and going out and hiring, like you said earlier Ivan, it takes 10 months to replace a departing doc. That’s a material disruption to your business.
Yeah, absolutely and I have a following question to that and it’s more down to operational level. I don’t know how much you see the deals once they leave your desk but I think that now, we keep talking through our podcast and through or thesis on just how to build consolidation at VIS that it’s very important to be fully transparent with your thesis because what we see sometimes and especially in the partnership models and that depends on the horizon of also investment that is done.
A lot of these situations happen when the initial investor or initial executive team with first investor in this, they are coming in and there is three to five-year horizon and they say, “We’re not going to change anything operationally, we’re just going to do the back-office management and everything else” but then at three years, they recap and then they get the next financial institution and then they say, “Well, it’s not us. It’s these new guys” but for people that work there and they partnered up for three to five years, every changed.
They said, “Okay, now we’re changing practice management systems. Now, we’re changing the vendor. Now, we’re changing the lab, in-house lab.” Do you see that inconsistency in messaging and do people walk the walk with how these consolidations perform?
Great point. I think the most successful consolidators whether they’re buy-outs or they’re partnership models, I think one of the key attributes that make them successful is having a very succinct strategy that is well-communicated and distributed not just to the providers but throughout the organization. Having a clear set of goals for the company, having a clear set of goals at the practice level, having a clear set of goals at the individual employee level has provided people with an opportunity to very clearly articulate how they define success and how they track and evaluate success and how they reward success.
If you have a strong communication culture across the platform with these very simple but very powerful defined components, you’re on a path to success. You’ve effectively educated everyone throughout your organization on how you evaluate performance and what’s important to the group and then bringing it back to what’s important for each person in each role and with that understanding and communicating that throughout the organization, gives people the confidence that they understand what they need to do to be individually successful. If you have those people all striving to achieve that success, the organization will have success.
You hit some great points about goals there and we’re always talking about goals and the productivity portion of that. What goals and what sort of data are you guys looking at, at the investment level and what sort of data do you have access to and what data don’t you have access to that would make a difference in the way that you evaluate the businesses?
In my role as an adviser, whether we’re advising on the sell side, whether we’re advising on the buy side, whether we’re advising on raising equity capital or debt capital, the focus and physician practice management today is simple: What has the platform done with the practice post-acquisition or post-affiliation compared to what the practice as doing as a standalone before it was acquired? If the platform has good track record in implementing some changes, they don’t have to be dramatic changes but there has to be a strategy, an industrial logic around why they went and acquired that practice.
What they did with the practice after they owned it and the performance should then yield a better result post-affiliation or post-acquisition relative to what it was doing before it was acquired and if that is a track record that is consistent across the acquisitions, you’re going to be the top of class consolidator in the market whether you’re a vet business or dental or ophthalmology.
I think this is where we started our conversations Rich, like how simple is that? What you say you do, you do and then measure it and show it back. How civil is that? Unfortunately, not everybody is doing that and what we’ve seen in our domain is because it was originally sort of this land grab I think scenario, the disconnect between the business development team and the operational team sometimes is so great where you really look after at some of these 50, 80 practices where there is no connection.
The business development is still pushing everybody who has a pulse into the pipeline and then operations get it on the receiving end and say, “We are out of capacity to implement the change” neither these practices are ready for change or burned out to get there, so that’s fantastic. It’s almost like we prepared for this prior to the conversation. Unfortunately, we ran out of time. It always goes so quick with amazing guest like yourself.
We always ask two questions at the end. Is there a book, a YouTube video, TED Talk or something that you could recommend to our listeners that would be interesting to kind of get into your mindset?
Absolutely. I read a fascinating book a few years ago on a topic I never thought that I would have an interested. The book is called, Moonwalking with Einstein, and it chronicles a newspaper writer who’s following the world competition of memorization and a topic that you would think is so obscure it doesn’t apply to everyday life but it’s a fascinating read and it actually provides some guidance to people who want to test their own abilities to remember certain things.
The most fascinating part that I took away from the book was that the people who compete in these tournaments or these championships or what have you are not people with photographic memories. They’re people that have very specific types of strategies on how they can remember numbers, names, people, colors, whatever the topic is that they’re trying to remember but they’re doing it with training and preparation on how to teach your brain how to remember certain things in large lists, in large orders of information being provided.
If anyone is looking for an interesting summer read, I highly recommend it. It is totally off the beaten path but a fascinating book and a lot of fun.
Awesome. Well then, our next question we always liked to ask is, who would you recommend that we have as a guest on the show?
Absolutely. I’ve been speaking with a young entrepreneur for the better part of the last couple of years as he’s built I think a really interesting and fascinating business model in the veterinary space, specifically serving the urgent care part of the market, which in the vet space is vastly underserved between your primary care and your hospitals but Mo Punjani, who is the founder and CEO of Bond Vet based here in New York City started the platform about two years ago with a single urgent care clinic.
Now they’re up to seven or eight clinics here in the greater New York area and the following is fascinating not just because its serving an area of the market that’s gone underserved but they’ve done it with technology, with ease of use and really appealed to the younger community of pet owners that are looking for opportunities to make sure that their pets are well taken care of but doing so in a very convenient tech-friendly type way so that they’re not calling up their GP practice and waiting on hold for 45 minutes but rather have a very cool app that they can schedule appointments on and use that to help them facilitate the care for their pets.
Mo’s built a great business, it’s off to a great start. I think it’s got a lot of growth ahead of it and the opportunities are almost endless.
Yeah, we’re definitely fans of what they’re doing. They’ve got a really unique brand and a cool aesthetic to what they do as well, so great to hear that.
Rich, thank you so much for finding the time. I know you’re a busy guy, this has been fascinating. I think that our listeners will benefit a lot from listening to this episode and I really appreciate you finding the time.
Well, thank you very much. I had a lot of fun, it was great chatting with you guys and look forward to potentially doing this again sometime.
Great, thank you.