Investors Find Opportunity in Fragmented Healthcare Imaging Equipment Service and Repair Industry
What’s Now?
If you needed an MRI, ultrasound, mammogram, or CT Scan 15 years ago, you likely went to a hospital for your imaging appointment. Today, more and more third-party imaging centers have opened in the communities surrounding hospitals, making imaging more accessible to healthcare consumers. As such, imaging is becoming increasingly prevalent as a diagnostic tool, and both the number of imaging machines, different modalities, and the frequency of their use has risen dramatically.
The proliferation of imaging equipment across multiple locations within a hospital’s network, as well as within the independent imaging center industry, has created the need for rapid servicing capabilities. If one of your three MRI machines goes down at a hospital, you can (begrudgingly) withstand several days or even a week of downtime for repairs, as imaging is not your main revenue source and redundant equipment is typically available. On the flip side, when an imaging center’s only MRI machine goes down, they’re losing revenue every minute the device sits idle. Timely service, parts, and repairs are not a nice-to-have in the imaging center industry, they are essential.
A handful of OEMs exist in the imaging equipment manufacturing space, and they have traditionally offered warranties and sold service contracts along with their machines—but their priority has historically been on equipment sales, not service, and smaller customers tend to get the short end of the stick while large hospital systems are given priority.
Over the past ten years, service technicians trained and certified during their tenure as employees of imaging machine OEMs have struck out on their own to form independent service, parts, and repair businesses. Many of these Independent Service Providers (ISP) have scaled significantly through organic growth, piggybacking on relationships developed during their time as OEM employees.
In the last decade, the ISP landscape has become even more legitimized as companies that started as small, regional outfits have become more sophisticated and expanded geographically. They have developed the technology, relationships, and processes needed to remotely diagnose problems, rapidly respond to service requests, efficiently procure replacement parts, and provide excellent customer support.
The emergence of the ISP industry wasn’t without resistance from OEMs, however. Several manufacturers have vigorously defended their turf and often become quite litigious against ISPs, but courts have ruled in favor of allowing ISPs to continue operation in order to promote competition.
Fragmentation among ISPs makes the space ripe for private equity investment. Some high-profile PE groups have already put significant capital to work in the space, consolidating businesses and creating some with real scale.
For example, The Jordan Company’s platform, Avante Health Solutions (formerly Jordan Health Products), is focused on the complete lifecycle of medical, surgical, patient monitoring, diagnostic imaging, cath/angio, and radiation oncology equipment, including sales, installation, service, repair, sourcing, and refurbishing. They have strategically grown the business through organic growth and targeted acquisitions.
Additionally, since 2015, Baird Capital has been invested in Alpha Source, a manufacturer and distributor for multi-vendor service parts and accessories for various modalities with a national ultrasound equipment field service offering and acquired BC Technical in late 2017 to add scale and technical capability across additional modalities.
In short, the ISP industry is no longer in its infancy—its existence having been validated by court rulings and underwritten through private equity investments over the past handful of years.
What’s Next?
OEMs continue to attempt litigation to stop ISPs from advancing their technology-driven service offerings. In October 2019, Philips filed a lawsuit against Summit Imaging alleging the ISP is “hacking” Philips devices, including ultrasound machines, to bypass password controls required to run diagnostics, service the machines, and perform updates. Philips charges a fee for these services and claims Summit is illegally gaining access to these devices for monetary gain [1].
Summit maintains their activities are legal and ethical and filed a response denying Philips’ claims—asking the judge to dismiss the lawsuit [2]. If history is any indication, such outstanding lawsuits will likely maintain the trend of legitimizing ISPs and promoting competition in the space.
Emerging remote diagnostic and repair technologies will make technology-driven ISPs even more relevant going forward, minimizing the need for onsite visits. ISPs will emphasize their abilities to decrease downtimes through predictive analytics, proactively diagnose issues through AI, and service equipment remotely.
For example, remote monitoring of a machine’s temperature could allow the service provider to alert the onsite team to shut the equipment down if it is running too hot, preventing more serious issues that could lead to longer downtimes or more costly fixes.
Despite some prior consolidation and investment, the space remains largely fragmented, and investors have ample opportunity to gain efficiencies through a roll-up strategy. The ultrasound space is particularly active given the sheer number of ultrasound machines in operation across the country. Companies boasting expertise in MRI and CT scan equipment are also especially interesting, given these are higher-ticket items, and they can be more expensive to maintain and repair.
What’s Your Why?
As the son of a parent with a chronic illness, I have been deeply interested in the healthcare industry for many years. I know firsthand how quality healthcare can improve the lives of patients. I also have great respect for entrepreneurs who can recognize an opportunity in a dynamic industry—spot a market inefficiency—and dedicate themselves to building a business around it. Working alongside these entrepreneurs to take their companies to the next level by securing growth investments or selling their businesses is extremely rewarding.
About Adam Stormoen, Managing Director, Healthcare
Adam Stormoen is a Managing Director at Cascadia Capital in the firm’s Healthcare group, focused on serving clients in Medical Products and Healthcare Services. Adam brings 20 years of investment banking experience advising and financing middle-market private and public companies. Throughout his career, he has closed several dozen M&A transactions, as well as public and private capital raises for clients across a wide array of Healthcare sub-verticals, including Medical Devices, Healthcare Services, and Healthcare Technology. Before joining Cascadia, Adam was a Managing Director at Duff & Phelps in the Healthcare Practice. Previously, Adam provided investment banking services to clients while at Roth Capital Partners, Dougherty & Company, LLC, and McGladrey Capital Markets.
Read Adam’s full bio here or email him at astormoen@cascadiacapital.com.