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The Healthcare market in

Brazilian Healthcare market: one of the most promising and attractive in the world

Context

Fifth largest country in area and global financial crisis - intensified population, with 8.51 million square in Europe - the Brazilian territory kilometers and about 196 million was the main destination for direct inhabitants, Brazil recorded in 2012, a foreign investment in Latin America, Gross Domestic Product (GDP) of receiving $ 65.3 billion. US$ 2.2 trillion, the seventh largest on the planet. Market estimates indicate Brazil has a fast growing consumer that, in this decade, the country may market, positioned in several be consolidated as the fifth largest segments as one of the largest in the global economy. world. The power of its domestic market in consumer goods and For almost two decades the country services has been particularly has been undergoing a process of promising in the healthcare and economic stabilization which ensured pharma industries. tremendous social advances to . Most notably, for over two Based on those macroeconomic years national unemployment rate indicators an outlook for the hovers around 5% of the economically Brazilian healthcare industry is also active population, which represents, in optimistic, considering the market the view of many experts, a situation growth drivers listed below: of full employment. This improvement • purchasing power increase is also reflected in rising wages and escalating consumption, boosted by • new entrants into the strong credit growth combined with emergent middle class lower interest rates and government tax incentives for durable goods, the white • consumers are willing line, automobiles and construction. to pay for better healthcare services/treatment That meant, over time, an amazing and positive process of development • favorable demographic and social evolution, which allowed conditions the entry of 40 million Brazilians • increasing elderly population into the middle class, strongly boosting the consumer market. In • government initiatives 2012, consumption of 194 million attract investments Brazilians accounted for 61% of the national GDP, and even in a year • consolidation driving of recovery from the effects of the strategic movements

The Healthcare market in Brazil 1 Our vision

Understanding the Brazilian In the Brazilian pharma industry, healthcare market as complex, the government plans to attract local asymmetric, fragmented, with production and research centers high demand, and government focused on value added , involvement/support, amongst others, which will increase the importance of may be a starting point to better Brazilian pharmaceutical market. understand the opportunities and challenges to whom intends to be, or is Primary healthcare program is key already part of it. to prevent diseases, shifting from a model based on curative care in The drivers of demand mentioned hospitals to a preventive care in local above together with strong communities, reducing costs and government support has been a pressure on clinics and hospitals. growth propellant. Public and private interests have been joined through Finally, on certain segments of the PPP´s (Public Private Partnerships), Brazilian healthcare industry it is still rising investments, increasing possible to find competitors with huge efficiency and reducing gaps in the discrepancies in terms of facilities, healthcare public system. technology, management etc.. So, issues like cost reduction, process In parallel, strategic and financial players review, upgrade in management are leading the consolidation process. By information system, training of acquiring or merging companies, these medical and administrative teams, groups or platforms have been created in updating of equipment, are just varied segments of the industry, part of a long list of gaps commonly like medical or dental plans, hospitals, found in most of the companies, clinics, laboratories (diagnosis/ public or private, profit or non-profit imaging), pharmaceuticals, drug organizations. wholesale, pharmacy chains, medical devices and others.

Finally, on certain segments of the Brazilian healthcare industry it is still possible to find competitors with huge discrepancies in terms of facilities, technology, management etc.

2 PwC The Healthcare market in Brazil

The Healthcare sector in Brazil is marked Structure by a significant number of particularities The private market is distributed and for being very complex. However, among individual agents, whereby this sector has undergone profound the service user payindividually or changes and a new business paradigm, collectively paying through groups or making the Brazilian Healthcare market health insurance plans administered one of the most promising and attractive by private companies, cooperatives in the world. medical organizations philanthropic or Among the local characteristics, is self-management. On another side lie the fact that it is the only country in the service providers: hospitals, clinics, the world to have a system of free laboratories, pharmaceutical industry and universal - ie, taxes and others. paid by Brazilians cover all types of The regulation of activities is different consultations and treatments offered for each sector agent. Administrators by System Unified and health insurance plans are highly (SUS) without charging any additional standardized and supervised by the user - but at the same time, private National Health Agency (ANS), while sector spending is greater than that of providers are supervised mainly by the government. For example, in 2009, the National Agency for Sanitary the Union, states and municipalities Surveillance (ANVISA). allocated around R$ 79 billion ($ 39 billion) to SUS, while the private In the field of public health, NHS network contributed approximately management focuses on the Ministry R$ 91 billion ($ 45 billion). of Health, which transfers revenue to states, municipalities and university The SUS is a fundamental structure hospitals, and charities, supervising for healthcare in Brazil, as an the activities. important part of the Brazilians are not able to access the private system. However, with income growth and the expansion of the labor market, more and more people choose to hire private planes because they understand that the services provided are of higher quality compared to those offered by the public system.

The Healthcare market in Brazil 3 63% The increase in health plans is principally related to collective contracts business. In Brazil, providing a Plans and health insurance As an example of the private private health plan is one the largest company does not have healthcare market, operators and even 8% of market share. Due to of the benefits most valued insurers ended 2012 with about this fragmentation, the ANS has by employees. Therefore, 48 million beneficiaries of medical encouraged consolidation and 63% of contractors have plans only. In 2009 there were has given significant sanctions to 41 million, which meant, in three collective business plans and groups that do not meet regulatory years, an increase of 17%. There the terms, including price requirements and quality standards. is also the private dental segment, adjustments, are established which ended 2012 with approximately Operators have been more concerned by agreement between 18.44 million beneficiaries, a market with improving their management and the operator and the plan with annual growth in recent years, operational control in order to remain beneficiaries. above 10%. profitable in a highly competitive environment. A tremendous challenge, The increase in health plans is it is worth emphasizing, because in principally related to collective line with the global trend, industry contracts business. In Brazil, providing costs in Brazil are on the rise, mainly a private health plan is one of the due to the ongoing technological benefits most valued by employees. developments and human longevity. Therefore, 63% of contractors have collective business plans and the The country still has a so called terms, including price adjustments, are “demographic bonus”, estimated established by agreement between the to last until 2025, whereby the operator and the plan beneficiaries. population of working age is greater The segment of individual plans, than the general population. It is in which an individual acquires the expected that by 2025, Brazil go into plan directly, has lost share in recent an aging period, greatly expanding years. Because it is a niche in which the participation of the elderly in there is greater regulation by the the total population. Even the end ANS, including control of annual of the demographic bonus period price adjustments by the regulator, represents, according to experts, a many companies stopped using these significant market opportunity for products, although this type of contract Brazilian Healthcare, as the aging still accounts for 21% of the market. population will increase demand for health services. In this situation, given The market is highly fragmented: the weaknesses of the public service, the seven largest operators, all with beneficiaries will give preference to more than a million lives insured, private plans. hold 29.2% of all beneficiaries and

4 PwC Hospitals, clinics and Pharmaceutical industry Public health laboratories The pharmaceutical The pressure of high costs and the Another field that already shows signs is expected to undergo significant need for investment also begin of important changes is the provision changes in the coming years. This to change the dynamics in public of services, especially in hospitals. In segment has a strong concentration: health. Change begins in he form of Brazil, no hospital group has national in 2009, according to IMS Health, the first Public-Private Partnerships coverage: all private hospitals operate the local industry had 378 players (PPPs) projects in . In only regionally. The greatest proof of controlled by 45 laboratories that these models, the government pays the fragmentation of this market is received 91.7% of the total sector private agents through investment in that no Brazilian private hospital owns revenue, which is $ 15.1 billion. infrastructure, technology and human 1% of market share based on beds. The On the other hand, the local capital for the operation of public largest private hospitals in the country research laboratories received only hospitals. are philanthropic and/or nonprofit. $ 140 million of the $ 40 billion in global investments. There are at least two major PPP In this segment there is a huge contracts already running and a demand for new investment, but Another important challenge is the number of similar projects are being the Brazilian legislation restricts high concentration of the distribution set up in several Brazilian cities. international investments in network which lies in the hands of a hospitals. This is the cause ofa few national and regional groups: 65% major national movement, led by to 75% of pharmaceutical distribution hospitals, to amend the legislation is made by local distributors, while so as to allow international groups only 25% to 35% is delivered directly to acquire hospitals, in line with the to retail. pharmaceutical industry, market plans and health insurance and laboratories. However, the sector has benefited from the expansion of household Private laboratories are also a income. From 2006 to 2009, significant niche: market estimates drug sales grew 12.1% per year, indicate global revenues of and despite ANVISA, the market R$ 20.2 billion/year (around regulator, estabilishing additional US$ 10 billion). Another important rules for the marketing of drugs, feature is that these groups have there are no signs of a slowdown in high profit margins and this is the the growth of this sector. Healthcare segment with most merger and acquisition (M & A) activity.

At the same time, there is a huge movement to enter the domestic market through greenfield investments, especially in regional markets underexplored such as the Northeast and Midwest of Brazil.

The Healthcare market in Brazil 5 Why Healthcare in Brazil?

The country has compelling Healthcare Brazil has political and economic demographic growth drivers, such as stability as well as strong legislation to strong projected GDP per capita growth, protect investors. which will lead to Increased Healthcare consumption, creation of formal jobs and Some trends include: an aging population. • Significant revenue increase in dental The domestic market will continue to plans and home care services; go through an important consolidation • Cost reduction, regulatory trend: Healthcare, Pharmaceuticals & compliance, technology & innovation Life Sciences. are areas of #1 priority to the future market leaders;

• Strong M&A activity with strategic and financial investors playing a role to a consolidation, because of fragmented segments and regulatory environment;

• Public-Private Partnerships (PPP’s) will attract strategic investors to raise investments and efficiency on public health system;

• Increase in local production of medicines driven by government plans.

Brazil has political and economic stability as well as strong legislation to protect investors.

6 PwC How PwC can help

We have an extensive range of services • Evaluation of operational and specialists that can greatly management model. This assessment contribute to the generation of results involves the analysis of internal in the chain of Healthcare: processes and business operations in order to improve the flow of • Financial advice on mergers information and capturing data. and acquisitions to support the This may also include analysis of the strategic discussion, evaluation of ERP level of use adopted in order businesses or assets, structuring to identify areas for improvement and tax planning; in efficiency. Furthermore, the evaluation may extend into areas such • Review of the corporate as portfolio and operating strategy; governance structure, considering the formation of succession • Development of strategic plan planing; aimed at development aspects of the business, such as planning for • Implementation of system medium and long term prospects indicators for managerial, financial of acquisitions and mergers, new and operational analysis. (Business product development, partnerships Intelligence); and/or channel affinities, and • Evaluation of the profile of evaluation of the profile of the portfolio loss ratio of beneficiaries vs. industry trends; operators to identify measures • Alignment of information to assist in reducing occurrences technology with the strategy (disease management and of the organization, seeking to preventive actions); identify solutions that contribute to • Support the development of user improving the efficiency and agility satisfaction survey in order to create of the business and add value in an action strategy approach focused the delivery of services (eg on the beneficiary (loyalty); mobile health); and

• Assessment of the compensation • Development of a mobile strategy model, identifying the cost aimed at providing better access to elements of major procedures. network providers and beneficiaries This evaluation aims to change as well as strengthening user loyalty; the model of payment by results/ • Comprehensive audit and performance and can be used to assurance services designed to support the negotiation with the deliver real value and underpin health plan for improving the investors’ confidence; compensation values, as well as assisting the entity’s management • Tax compliance, consulting and to focus efforts on improving planning services combining procedures to gain efficiency and a strong understanding of the cost reduction; business environment and tax knowledge.

The Healthcare market in Brazil 7 Contacts

For further information, please contact:

Marcio Vieira Marcelo Orlando [email protected] [email protected] [55](11) 3674 3950 [55](11) 3674 3677

Eliane Kihara Cassius Carvalho [email protected] [email protected] [55](11) 3674 3821 [55](11) 3674 3822

8 PwC

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