Exclusive: Sun's West Dermatology unites with Platinum Dermatology

Sun Capital Partners' West Dermatology has joined forces with Sterling Partners' Platinum Dermatology Partners, the parties tell Axios exclusively.

Behind the scenes: West is leaning into the burgeoning cosmetic dermatology market, which rebounded quickest from the pandemic, with high-ticket services like chemical peels and botox accounting for about 25% of combined revenue.

• The rest is medical dermatology.
• Sun's Stephen Cella and Sterling's Rick Elfman say the merger will enable more diversification and density in local markets across the Southwest and Southern California, hence stronger doctor communities. That could be key to recruiting top talent amid a specialist shortage.

Details: Sun Capital, which backed Newport Beach, Calif.-based West in 2020, owns a majority stake in the combined business. Sterling, whose investment in Dallas-based Platinum dates to 2016, rolled a minority stake.

• The combined group comprises 103 dermatology practices spanning California, Arizona, Nevada and Texas, employing 170 physicians and 300 total providers.
• Houlihan Lokey advised Sterling and Platinum, while Cantor Fitzgerald advised Sun and West Dermatology.

State of play: There has been some wariness around the recession resilience of dermatology — with PE investment levels declining in recent years, per PitchBook — but a resurgence of well-capitalized sponsors have entered the space in recent months.

• Partners Group acquired Forefront Dermatology at a $1.5 billion valuation, or 15x EBITDA, Axios exclusively reported in February.
• The same month, Epiphany Dermatology garnered investment from Leonard, Green & Partners, and last October, Pinnacle Dermatology was snapped up by BayPine.

• "That has really validated the dermatology industry as an investable landscape, and will probably prompt more capital [in the sector]" which, Cella notes, could send valuations of add-ons higher as platforms compete for scale.

What's next: More M&A.

• The combined organization will target tuck-ins of small groups in existing markets, while larger established practice groups in attractive new markets could also be in the cards.
• "The market is just more fragmented than other spaces," Elfman adds. "A big dermatology clinic is three to four physicians... a fraction of the size of other areas like eye care."

Update: This report has been updated to clarify that the combined organization has 300 providers. A previous version stated 270.