08 Feb 2013

Brazil May Be Next Health-Care Frontier for Global Investors

Posted by Pedro Costa

Brazil's growing middle class is attracting the interest of foreign investors as the burgeoning health-care needs of Latin America's largest economy hold out the promise of higher returns.

According to the country's census bureau, a decade of steady economic growth has lifted some 35 million Brazilians into a broad new middle class, a cohort now equal to about half Brazil's total population of nearly 200 million souls.

"With the rise of the middle class, there is more demand for services, including health-care services," said Humberto Selecetti, a KPMG consulting group partner. "Many international health-care companies are seeing only mediocre returns in their home markets, so they're opting for investments in countries with greater potential. Brazil is one of these."

According to Mr. Selecetti, only 23% of Brazilians currently have private health coverage of some kind, compared with 77% in the U.S. and 60% in Mexico.

U.S. players have taken the lead in staking out positions in the growing Brazilian market.

At the end of last year, U.S.-based UnitedHealth Group Inc. (UNH) acquired Brazilian health insurer Amil Participacoes S.A. for $4.9 billion.

Earlier this week, U.S. drugstore chain CVS Caremark Corp. (CVS) acquired control of Brazil's Drogaria Onofre, for an undisclosed sum. A person close to the transaction said CVS paid around $300 million for an 80% stake in Onofre, a 44-store chain considered a "boutique" pharmacy brand in the country.

CVS said it views Brazil as an attractive market. It expects the region's health-care and pharmacy segments to grow by double digits annually over the next decade.

The health-care industry in Brazil is now expected to consolidate amid international investor interest. Local companies are likely to be highly cooperative as they seek ways of gaining scale in a potentially huge market. From 2004 through 2012, a dozen Brazilian companies including health insurers and drug retailers opted for stock offerings to help finance their expansion.

"There are some segments of the health-care industry in Brazil which are still highly fragmented, such as pharmaceutical retailers," said Mr. Selecetti. "I'm expecting a consolidation of this segment over the next year or so."

But the well-worn path of consolidation may bring some of its own problems.

One of Brazil's largest drugmakers, Ache Laboratorios Farmaceuticos, has already attracted foreign suitors. However, a dispute among the three families that control Ache threatens to scupper any deal. The company is controlled in equal parts by the Baptista, Siaulys and Depieri families.

According to a person close to the company, who declined to be named, the Baptista and Siaulys families hired investment bank Lazard to evaluate a potential sale of their stakes, while the Depieri family has plans to keep its stake and look for new domestic partners to buy out the others. According to the person with knowledge of the matter, the Depieri family has hired BTG Pactual to develop the new business plan.

Ache's press office declined comment. A spokesman for the company said that the families declined to discuss the matter.

Source: Fox Business