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Goldman is said to invest in California Skin Institute

Goldman Sachs has invested in California Skin Institute, the state’s largest dermatology practice, four sources told Buyouts.

The investment is understood to have come from the private capital investing unit of Goldman’s Special Situation Group, said three of the sources.

While the size of the investment is uncertain, Goldman’s private capital investment platform offers junior capital to growth and middle-market companies in North America. The unit typically invests $20 million to $150 million though common, preferred and structured equity, as well as through other investment structures.

CSI was founded 2007 by Chief Executive Greg Morganroth, whom sources described as a distinguished physician in the derm universe. What started as a single dermatological surgery practice in Mountain View, California, has expanded to the largest private-practice dermatology group in California. Offerings include general and cosmetic dermatology, laser surgery, plastic surgery and skin-cancer treatment.

With about 25 locations in California, CSI operates the largest skin cancer and Mohs surgery practice in Northern California. Its network also includes diagnostic therapeutic facilities, a full-service pathology department, AAAHC Medicare-approved surgery centers, a varicose-vein-treatment center and a full service dermatopathology laboratory.

While the Goldman financing isn’t the result of a formal sales process, Jefferies conducted what was was said to be a hotly contested auction for CSI a few years back, two of the sources and a third source unfamiliar with the Goldman deal said.

A deal wasn’t struck at the time primarily due to perceived risks relating to a reimbursement change that hurt the margins of CSI’s electronic brachytherapy business, they said. EBT, a type of non-surgical radiation therapy to treat non-melanoma skin cancers, was a significant piece of California Skin’s business at the time. CSI is therefore understood to be smaller today than it was a few years back, the sources said.

Uncertainty about brachytherapy reimbursement came after Noridian, the Medicare contractor for 13 primarily western states, in April 2015 called for physicians to change their billing practices on the use of brachytherapy.

The impact of the reimbursement instructions was visible on the public markets, primarily through shares of radiation-therapy-device maker iCad Inc.

Having traded above $10 ahead of the announced change in April 2015, the company’s shares weakened in the months that followed. Shares of iCad dipped as low as $3.13 in October and November of that year. The stock traded at about $4.73 per share Tuesday afternoon.

Goldman, for its part, has already proved successful in the derm space.

The firm in May 2014 co-invested alongside Varsity Healthcare Partners in Forefront Dermatology (then Dermatology Associates of Wisconsin). Like Varsity, Goldman was actively looking to get into the space at a time when few sponsors were, one of the sources noted.

Goldman’s return on its investment isn’t known, but when Varsity in February 2016 sold its majority stake in the dermatology-services company to Canadian pension plan OMERS Private Equity, the deal commanded a 14x to 15x multiple of EBITDA, sources said at the time.

Representatives of Goldman and Jefferies declined to comment, while those with CSI couldn’t be reached.

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