Retail clinics attract investors

Lang Aston, for HealthLeaders Media, August 4, 2008

Rising consumerism in healthcare has given rise to retail-based convenience health clinics throughout the United States. The concept has grown from an industry anomaly to a disruptive innovation, starting with only 60 stores in 2000 to nearly 2,000 clinics projected by the end of 2008. These clinics are clamoring for a piece of industry revenues, which are expected to reach nearly $4.5 billion by 2011, according to a new report from Kalorama Information.

This tremendous revenue stream has lured new market entrants while invigorating clinic expansion efforts in grocery stores, big box retailers, and other mass merchandisers. Big pharmacy retailers such as CVS/Caremark, which bought Minute Clinic, and Walgreens, which purchased Take Care Clinics, have already acquired clinic upstarts. If these deals are any indication, stand-alone retail clinic chains could become prime acquisition targets in 2008-2009. Expect major food/pharmacy retailers as well as private equity firms to participate in the bidding.

Clinic upstarts

With nearly 1,000 retail clinics in 35 states, the convenient care industry continues to grow in importance on the healthcare landscape. Today, 85% of this market is comprised of independent operators (not owned by chains), with the biggest being RediClinic and The Little Clinic. Many others have tapped this market, including Atlanticare, Aurora Quick Care, Checkups, Early Solutions Clinic, MedBasics, My Healthy Access, Quick Health, Now Medical Centers, SmartCare Family Medical Centers, Solantic, and Target Clinic Medical Associates.

The industry, however, is not expected to continue a rapid growth pace forever, hitting a plateau as the market shakes out those unable to survive--a phenomenon already in the works. Entering the market is one thing, but overcoming the barriers to success and turning profitable is another.

The fundamental stand-alone business model depends on leasing space in retail outlets and securing volumes of nearly 20-30 patients a day just to break-even. Generally, given low per-visit pricing ($20-$50 per visit), it takes two to three years for an individual location to turn a profit. We have already seen a few stand-alone clinics shutter operations, including Medical Marts, CheckUps (in Wal-Mart stores) and Corner Care Clinic (Medicine Shoppe).

To remain viable in an increasingly competitive market, independents have been pushing aggressive development plans, to:

    1) achieve first-mover advantage
    2) establish market leadership position through brand awareness and scale
    3) align or joint venture with local nonprofit hospital operators
    4) pursue ancillary revenue opportunities.

Regardless of the end goal, expansion demands give rise to both consolidation and private capital raising.

Interested parties

Although the convenient care market remains in transition, most indications point to strong industry fundamentals that are driving growth, such as rising healthcare costs, overbooked doctors' offices and overflowing emergency rooms, which prompt patients suffering from minor ailments to seek the services of affordable, walk-in retail clinics.

Other indicators that clinics are not a fad but a mainstay include the fact that payers are increasingly contracting with clinic operators; employers are promoting the clinics--if not establishing employer-based clinics—to help ease rising healthcare costs; the expectation of strong revenues/margins through the cost containment model; and high patient satisfaction for service in retail clinics.

Alerted to the industry’s growth, attractive valuations, and consolidation trends, all of which provide a logical exit and equity return on their investment, private equity buyers remain interested in retail clinics. For example, Take Care got $77 million from private equity firm Beecken Petty O’Keefe & Co. prior to the Walgreen’s deal. Prior to the CVS deal, Minute Clinic had backing from Bain Capital Ventures.

Today, RediClinic is operated by InterFit Health, which has received financial backing from AOL founder Steve Case’s group Revolution LLC. The Little Clinic has received backing from Solera Capital LLC, based in New York, and Orlando-based Solantic has received $100 million from New York-based Welsh, Carson, Anderson & Stowe. While private equity is expected to continue opportunistic purchases of retail clinic companies, they are more constrained by a difficult credit/debt market and a challenging stand-alone business model.

Reticence by private equity firms may give rise to strategic buyers in the retail clinic space. As evidenced by the CVS/MinuteClinic and Walgreens/Take Care deals, retailers are recognizing clinics’ value--namely higher traffic, more prescriptions, and higher front-end sales. In fact, CVS stated in its 2006 Annual Report that the clinics drive more traffic to its stores and that approximately 25% of MinuteClinic patients are new CVS pharmacy customers.

It stands to reason that big retailers interested in attracting more pharmacy clientele will continue to build their in-house retail clinics. Since CVS bought Minute Clinic for $170 million in 2006, it has increased number of clinics from 83 to more than 500 (as of March 2008). Since Walgreens bought Take Care in 2006, it has branched out to nearly 150 clinics, with the projection of 400 stores by the end of 2008.

Other big-box retailers may follow. Wal-Mart has made clear its intentions of aggressively expanding retail clinics in its stores and currently uses a number of independent chains as host operators. Perhaps this relationship could lead to a strategic combination. Conversely, stores remain agnostic as to vendor relationships and capitalize on fragmentation to drive efficiencies and service. Watching from the sidelines are local nonprofit hospital operators who clearly benefit from local branding opportunities with retail centers to drive inpatient volume and ancillary business such as diagnostic imaging and surgery. These hospital systems may emerge as viable consolidators of local retail chains to improve their reach in a local market.

The retail clinic industry is a new and significant trend in healthcare delivery in the United States, which addresses basic problems with our healthcare system: cost and access. But as with innovations in other industries, early stages of development will witness significant capital-raising and M&A activity as the industry rapidly evolves and leaders emerge. Look for this activity to accelerate in 2008 and 2009.

Lang Aston is a managing director at investment banking firm Stephens Inc., specializing in middle market healthcare services investment banking. He can be reached at 615-279-4373 or
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