Brazilian Healthcare Firms Scramble for IPOs

The health plans firm Amil is the latest active player in the Brazilian healthcare sector to seek an initial public offering (IPO). The next few weeks are also expected to see listings for Drogaria Raia, Brazil’s fifth-largest drugstore chain, and Farmasa, a medium-sized manufacturer of generic and over-the-counter medicines. Maritima, another insurance firm that offers health plans, is expected to hold an IPO by the end of the year.

Brazil’s Health Firms Stampede to List on Stock Market

Since 2004, IPOs have taken place at a frenetic pace in Brazil’s healthcare sector, as firms in all areas of the industry look to gain scale in the face of tough competitive, regulatory and pricing pressures. Taking just one high-profile example, the diagnostic services firm DASA has expanded at a meteoric rate, gobbling up a number of smaller firms ever since its IPO in 2004 (see Brazil: 31 August 2007: Brazilian Diagnostics Lab DASA Makes Another Acquisition).

Largely thanks to IPOs, the drug retail sector is heading for consolidation; leading player Drogasil launched a tender in July, raising US$183 million in an auction that was heavily over-subscribed (see Brazil: 18 July 2007: Foreign Investors Give Seal of Approval to Brazilian Drug Retail). Drogasil is the clear leader in a market where the top five chains control only 18% of sales. Its competitor Droga Raia is expected to list later this month, although with annual turnover in the region of US$1 million per year, it is a far smaller concern. Nevertheless, the decision to seek a listing on the São Paulo Bovespa index illustrates that capital increases, and subsequent expansion drives, are becoming a prerequisite for survival in this sector. In general terms, Brazil’s pharmacy sector is benefiting from high-margin generic drugs, but as competition in this segment increases, scale will necessarily play an increasingly important role. This trend is set to affect wholesaling, too, with Brazilian drug distributor Profarma now seeking to expand its geographical reach (see Brazil: 1 August 2007: Brazilian Drug Distributor Profarma Improves Results). Even so, there is some way to go, as Profarma’s market share is only around 10% in Brazil. On the manufacturing side, the small-scale over-the-counter (OTC) drug-maker Farmasa is planning an IPO, as it seeks to boost its share of a market that is overshadowed by larger firms such as Sanofi-Aventis and the home-grown concern Aché. Critically, prices in the OTC market are much more lightly regulated than prescription drugs, with sales value reported to be growing strongly. However, international firms have upped the ante in recent months (see Brazil: 11 July 2007: Multinational Drug-Makers in Brazil Turn to OTC Segment).

Meanwhile, the insurance sector continues to respond to different imperatives. As medicines are not widely reimbursed in the private retail market, a number of mergers in the sector have been driven by the regulator ANS’s tough controls on health plan price increases and new regulations on liquidity. After several lean years, however, profitability is at last increasing (see Brazil: 5 June 2007: Wider Uptake of Private Health Plans Reported in Brazil). This has not prevented the need for a number of acquisitions, with soon-to-be-listed insurance concern Amil acquiring its peer Blue Life earlier in 2007. Elsewhere in the reimbursement chain, the local HMO Medial has launched an aggressive expansion strategy, as it seeks to transform itself into a full-service private healthcare concern with a presence in niches ranging from managed care (especially following the purchase of Amesp Saude) to hospitals. The company believes that its horizontally-integrated business model will deliver substantial cost savings.

Outlook and Implications