SAO PAULO, February 16 (Reuters) – Brazil’s public health system has been pushed to the breaking point by one of the world’s deadliest coronavirus outbreaks, but the private health care sector is experiencing an unlikely explosion of deal-making.
The drive for consolidation, which comes amid growing demand even beyond the pandemic thanks to an aging population, has spawned the country’s biggest takeover deal so far this year, its top IPO in recent years and has lured investors ranging from US private equity firm Carlyle Group Inc to a venture capital fund and one of Brazil’s most prominent real estate developers, founder Cyrela Elie Horn.
“Brazil’s population is aging fast. This means that there will be a higher demand for healthcare, ”said Morgan Stanley Executive Director Cezar de Faria. “Given Brazil’s budget constraints, it is highly unlikely that the government will be able to provide all the necessary services.”
By 2060, people over 65 will make up 25.5% of the country’s population, up from around 10% now.
Investors and bankers also cited factors including the demand for alternatives to the country’s overwhelmed public health system and sufficient room to increase efficiency in privately owned hospitals.
Hospital operator Rede D’Or conducted Brazil’s biggest IPO in seven years last December and health insurers Hapvida SA and Notre Dame Intermedica SA have proposed the biggest merger so far this year in the country, worth an estimated $ 9 billion.
Brazilian private equity firm IG4 was so tempted by a potential turnaround for the country’s underperforming private hospitals that they created a company aiming to buy and revive the hospital.
After a string of deals, OPY Health IG4 is now seeking a private placement of around $ 100 million to buy six more hospitals, a source with knowledge of the funds told Reuters.
Alongside these two big deals, OPY’s buyout demonstrates how the deal-making boom is transforming the country’s fragmented private healthcare system.
A spate of recent deals has bankers actively looking for the next opportunity in the $ 197 billion private healthcare sector.
While the pandemic does not play a direct role in the deal’s gains, it could indirectly drive private investment growth as public clinics in cities like Manaus are being pushed to their limits by the coronavirus crisis.
OPY Health has one of the largest hospitals serving Brazil’s public health system in Manaus, and had a lower COVID-19 death rate than state-run hospitals during the recent city crisis with oxygen shortages.
As of Monday, Brazil had 239,245 coronavirus-related deaths, trailing only in the United States, and the country has more than 9.8 million infections. (Graphic: tmsnrt.rs/34pvUyi) (Interactive graphic tracking of the global spread of the coronavirus: open tmsnrt.rs/2FThSv7 in an external browser.)
At the same time, Brazilian government regulations limit prices only for medicines and health insurance that are sold directly to individuals, but not for group employers’ plans, which contribute to high margins.
Rede D’Or, whose December IPO may be the first sign of a hunger for such assets, is now trading 68 times its income before interest, taxes, depreciation and amortization (EBITDA), much higher than its larger US counterpart HCA Healthcare Inc, which trades at 9 times EBITDA.
Hapvida and Intermedica are also trading at nearly 30 times EBITDA.
However, the expensive valuations have not scared off most investors. Carlyle and GIC Singapore sold a small portion of their Rede D’Or stake in the IPO.
“The boom in Brazilian health care is just beginning,” said Hans Lin, co-head of Bank of America’s investment bank in Brazil. Stock offerings and fundraising will trigger more M&A, he added.
In a sign of the sector’s relative fragmentation, the country’s top five health insurers have a combined market share of 33%, compared to 68% in the United States, Morgan Stanley said.
As agreement among public hospitals has also accelerated, analysts also see the potential for consolidation in specialized care areas such as clinical oncology or ophthalmology.
Elsewhere, several start-ups are basing their business models on the need to control the country’s soaring medical inflation, which hit 11.5% last year, more than twice the overall average, said consulting firm Mercer Marsh.
Diagnostic services startup Labi, stepping up its series B round, found a niche offering blood tests for 10% of the cost of more well-known companies like Fleury SA.
At least eight Brazilian health care companies are planning an IPO this year, such as the network of hospitals Care, Mater Dei and Kora Saude, which was inspired by Rede D’Or.
IPO activities also include pharmaceutical companies such as Teuto, seeking at least 1 billion reais ($ 186.23 million) worth of flotation, and Viveo, a health product manufacturer planning to raise about $ 300 million.
Fundraising activity by healthcare technology companies is also growing, executives said.
Apart from Labi, telemedicine provider Conexa, which is backed by private equity firm General Atlantic, is preparing a new funding round of up to 100 million reais to acquire more companies. During the pandemic, Conexa’s online doctor visit requests increased from 50 to 15,000 visits a day.
“The Brazilian drug council is expanding telemedicine services that were previously banned, so the COVID crisis is giving our business a big boost,” said Guilherme Weigert, CEO at Conexa. ($ 1 = 5,3706 reais)
Reporting by Carolina Mandl and Tatiana Bautzer in Sao Paulo Editing by Christian Plumb and Matthew Lewis