The novel coronavirus pandemic is bringing the Brazilian public health system, SUS, to the brink of collapse in many regions. At the same time, the private health sector is experiencing an unprecedented business boom. It is as if COVID-19 has placed a huge spotlight on a scenario that experts have been talking about for some time. The current race for the consolidation of hospital chains and health plan operators, as well as the increasing investment in health-tech startups, reflect the market’s expectation for a growing demand generated by the aging of the Brazilian population.
In recent months, the health Brazilian sector registered the largest merger in its history and the largest IPO in the last seven years. Investors interested in the segment range from the American private equity fund Carlyle Group to Elie Horn, founder of the construction and real state developer Cyrela.
“The Brazilian population is aging rapidly, which means a strong growth in demand for health services,” says the executive director of Morgan Stanley, Cezar de Faria. “Considering budget constraints, it is very unlikely that the government will be able to meet this demand.”
25.5%
It will be the population share over 65 years in 2060 – 10% more than today.
In this scenario, investors and bank executives also say that there is a lot of room to increase private hospitals’ efficiency. Hospital operator Rede D’Or São Luiz made the biggest IPO of the last seven years in December. Health insurance companies Hapvida and Notre Dame Intermedica discuss creating a company that may reach a market value above BRL 100 billion.
The possibilities go beyond activities directly linked to health. The Brazilian private equity fund IG4 launched a company to take care of the hospital’s infrastructure area, from parking to facilities, seeing the potential for major changes in the country. OPY Health, an IG4 company, is supposedly promoting a private placement of shares of at least BRL 600 million to finance the purchase of six more hospitals, according to a source with knowledge of the matter.
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The two large businesses and the wave of purchases planned by OPY show how this new business boom of mergers and acquisitions and capital market transactions are transforming the fragmented Brazilian private health sector, which moves BRL 197 billion annually.
According to experts, the pandemic is indirectly highlighting this potential and helps to increase private investments in the public system. More than 9.8 million Brazilians have already been infected with Sars-Cov-2, and more than 240,000 died.
In Manaus, with the public health system collapsing due to the pandemic, one of the hospitals with the lowest mortality rates and the least oxygen supply problems was Delphina Aziz, whose structure is owned by OPY Health (the hospital serves SUS exclusively). Among the six new hospitals that OPY plans to acquire, one is dedicated to SUS.
Interest is felt in the stock market and also in the rounds of venture capital funds
Rede D’Or shares, whose IPO in December opened the season of big business in the health sector, are being traded today at 68 times its EBITDA (operating profit), well above the multiple of nine times the EBITDA of the US-based hospital chain HCA Healthcare, which is much larger than Rede D’Or. Hapvida and Intermedica are also being traded at almost 30 times their EBITDA.
The high comparative prices of Brazilian companies, however, do not scare investors. Carlyle and Singapore state-owned investor GIC barely sold their stakes in Rede D’Or IPO, hoping that the valuation will continue.
The health sector boom is just starting
Hans Lin, co-head of investment at Bank of America in Brazil.
Offerings of shares and private financing rounds are expected to help boost mergers and acquisitions, says Lin. The truth is that the private health sector in Brazil is still fragmented: the five largest health plan providers have only 33% of the country’s market, compared with 68% in the United States, according to Morgan Stanley.
This is relatively good for consumers because it is a sign of greater competitiveness, but it also shows that the sector – more regulated in Brazil than in the U.S. and with a much greater variety of health and assistance plans – is still subject to a great consolidation.
In the wake of Rede D’Or IPO, at least eight Brazilian healthcare companies are planning their public offerings this year, such as the Care, Mater Dei and Kora Saúde hospital chains. Pharmaceutical IPOs are also expected. That’s the case of Teuto, which intends to raise at least BRL 1 billion, and the manufacturer of medical supplies Viveo, which expects to pull up BRL 1.5 billion.
Brazilian startups try to tackle the sector’s biggest pain points
According to the consultancy firm Mercer Marsh, some startups are basing their business model on reducing medical inflation, which reached 11.5% last year, more than double the overall inflation in Brazil.
The diagnostic test startup Labi, for example, is raising funds in a Series B round and explores the niche of blood tests and vaccines at 10% of the cost of the most premium brands in the country, such as Fleury.
The startups in the segment are also raising more resources, taking advantage of the regulatory easing accelerated by COVID-19. Conexa, a telemedicine service provider, received investments from the General Atlantic fund and is seeking a new round of investments of BRL 100 million for organic expansion and acquisitions. During the pandemic, the demand for distance consultations skyrocketed, and Conexa’s number of appointments jumped from 50 to 15,000 a day. “The medical councils authorized services that were previously prohibited [from operating at a distance or by teleconference] because of COVID-19, and that ended up greatly strengthening our business,” says Guilherme Weigert, CEO of Conexa.
Last week, Alice, a health-tech startup that directly offers health insurance to individuals, announced a BRL 33 million investment. The new round was led by ThornTree Capital Partners, a Boston-based venture capital firm, along with current Alice investors, including Kaszek Ventures, Canary, and Maya Capital. In this round, Endeavor Catalyst became part of the company’s shareholders.
Another example of a segment strengthened by the pandemic is mental health. Due to higher demand, several startups have raised significant rounds to scale their businesses. One of the last mental health startups to announced new infusions was Zenklub, a Brazilian and Portuguese platform for emotional health and personal development. It announced a BRL 45 million round led by SK Tarpon and GK Ventures, with the participation of the current Portuguese investor Indico Capital Partners last week.
Translated and co-written by LABS
