SAO PAULO, Feb 16 (Reuters) – Brazil\u2019s public health system has been pushed to the breaking point by one of the world\u2019s deadliest coronavirus outbreaks, but its private healthcare sector is experiencing an unlikely dealmaking boom.<\/p>\n
The push to consolidate, which comes amid rising demand even beyond the pandemic thanks to an aging population, has spawned the country\u2019s biggest takeover deal so far this year, its top IPO in recent years and has lured investors ranging from U.S. private equity firm Carlyle Group Inc to venture capital funds and one of Brazil\u2019s most prominent real estate developers, Cyrela founder Elie Horn.<\/p>\n
\u201cThe Brazilian population is aging at a fast pace. It means there will be a higher demand for healthcare,\u201d said Morgan Stanley Executive Director Cezar de Faria. \u201cGiven Brazil\u2019s budget constraints, it is very unlikely the government will be able to provide all services required.\u201d<\/p>\n
By 2060, people over age 65 will account for 25.5% of the country\u2019s population, up from roughly 10% now.<\/p>\n
Investors and bankers also cite factors including demand for alternatives to the country\u2019s overwhelmed public health system and ample room to boost efficiency at privately owned hospitals.<\/p>\n
Hospital operator Rede D\u2019Or pulled off Brazil\u2019s largest IPO in seven years last December and health insurance providers Hapvida SA and Notre Dame Intermedica SA have proposed the largest merger so far this year in the country, worth around $9 billion.<\/p>\n
Brazilian private equity firm IG4 was so tempted by the turnaround potential for the country\u2019s underperforming private hospitals that it created a company aimed at buying and reviving them.<\/p>\n
After a series of deals, IG4\u2019s OPY Health is now seeking a roughly $100 million private placement to buy six more hospitals, one source familiar with the fund told Reuters.<\/p>\n
Along with the two large deals, OPY\u2019s buying spree shows how a dealmaking boom is transforming the country\u2019s fragmented private healthcare system.<\/p>\n
The recent spate of transactions has bankers actively hunting for the next opportunities in the $197 billion private health sector.<\/p>\n
While the pandemic has not played a direct role in the deal bonanza, it may indirectly bolster growth in the private investments as public clinics in cities like Manaus get pushed to their limits by the coronavirus crisis.<\/p>\n
OPY Health owns one of the largest hospitals serving Brazil\u2019s public health system in Manaus, and has had a lower COVID-19 mortality rate than state-run ones during the city\u2019s recent crisis with oxygen shortages.<\/p>\n
As of Monday, Brazil had 239,245 coronavirus-related deaths, trailing only the United States, and the country had more than 9.8 million infections. (Graphic: tmsnrt.rs\/34pvUyi) (Interactive graphic tracking global spread of the coronavirus: open tmsnrt.rs\/2FThSv7 in an external browser.)<\/p>\n
At the same time, Brazil government regulations cap prices only for drugs and health insurance sold directly to individuals, but not to employer group plans, contributing to lofty margins.<\/p>\n
Rede D\u2019Or, whose December IPO may have been the first sign of the hunger for such assets, now trades at 68 times its earnings before interest, taxes, depreciation and amortization (EBITDA), much higher than larger U.S. peer HCA Healthcare Inc, which trades at 9 times EBITDA.<\/p>\n
Hapvida and Intermedica are also trading at nearly 30 times EBITDA.<\/p>\n
Still, the pricey valuations have yet to spook most investors. Carlyle and Singapore\u2019s GIC sold fractions of their Rede D\u2019Or stake in the IPO.<\/p>\n
\u201cThe boom in Brazilian healthcare is just starting,\u201d said Hans Lin, Bank of America\u2019s co-head of investment banking in Brazil. Share offerings and fundraisings will spark more M&A, he added.<\/p>\n
In a sign of the sector\u2019s relative fragmentation, country\u2019s top-five health insurers have a combined market share of 33%, compared with 68% in the United States, said Morgan Stanley.<\/p>\n
As deals among general hospitals also accelerate, analysts also see potential consolidation in specialized care fields such as oncology or ophthalmology clinics.<\/p>\n
Elsewhere, some startups base their business models on the need to rein in the country\u2019s surging medical inflation, which reached 11.5% last year, more than twice the overall average, said consulting firm Mercer Marsh.<\/p>\n
Diagnostic services startup Labi, which is raising a series B round, found a niche offering blood tests at 10% of the cost of better known firms such as Fleury SA.<\/p>\n
At least eight Brazilian healthcare companies are planning IPOs this year, such as hospital chains Care, Mater Dei and Kora Saude, inspired by Rede D\u2019Or.<\/p>\n
The IPO activity also includes pharmaceutical companies such as Teuto, seeking a flotation worth at least 1 billion reais ($186.23 million), and Viveo, a manufacturer of health products planning to raise roughly $300 million.<\/p>\n
Fundraising activity by healthtech companies is also growing, executives say.<\/p>\n
In addition to Labi, telemedicine provider Conexa, which is backed by private equity firm General Atlantic, is readying a new funding round of up to 100 million reais to acquire more companies. During the pandemic, demand for Conexa\u2019s online doctor visits went from 50 to 15,000 visits a day.<\/p>\n
\u201cBrazilian medicine boards expanded telemedicine services that were previously forbidden, so the COVID crisis gave a huge boost to our business,\u201d said Guilherme Weigert, CEO at Conexa. ($1 = 5.3706 reais)<\/p>\n