Brazilian Healthcare Regulatory change results in investment opportunities for foreign organizations

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1 Brazilian Healthcare Regulatory change results in investment opportunities for foreign organizations See what the healthcare professionals have to say about it 2015 kpmg.com/br

2 Brazilian NHS law amendment - enabling FDI to the healthcare system - paving the way for unprecedented investment opportunities Healthcare Market Size USD Bn (1) 1497 New foreign investments are on the horizon; and no doubt the Brazilian healthcare market is very attractive Francisco Balestrin - Private Sector National Hospital Association (2) Nr. of instal. hospital beds (3) ,5% CAGR Sources: Anahp (1) (2) (3) (5) (6) Brazilian Confederation of Health (4) NHS Section 23 opening doors to foreign investments Brazilian NHS section 23 was amended to allow foreign investment in the Brazilian healthcare sector. The amendment now enables the participation of foreign capital (including controlling stakes), either directly or indirectly, in Brazilian companies that operate general or specialized hospitals, clinics, alongside healthcare support activities, such as laboratories, producers and distributers of drugs, pathology and imaging diagnostics. The amendment is expected to be approved by the Senate and fully enacted in March Prior to the Amendment, foreign capital investments in hospitals and clinics were limited by the Federal Constitution, which considers healthcare as a national strategic sector, hence off-limits to foreign capital with very few exceptions (aid relief linked to UN operations and non-profit health assistance). The Amendment to Section 23 is a clear sign of the Brazilian Government s efforts in revamping the current healthcare system with a view to achieve greater efficiency through increased financing solutions, ultimately leading to a greater exposure of new technology (medical equipment, stock tracking solutions, integrated doctor-patient online monitoring services) as well as competition between players. Foreign investment is not only expected to generate ripple effects on the quality of services for patients, they will also shape top-level decision-making through increased corporate governance. The healthcare industry in Brazil, representing 10.2% (4) of Brazil s GDP, is one of the industries that is growing at an unprecedented rate and promises great investment opportunities. Hospitals supply trailing the surge in demand Recent growth in revenues exhibited by the hospital sector is driven by a series of factors: a growing volume of users due to further health insurance population coverage, aging demographics, increased hospital occupancy rates (+0.7% CAGR from ) (5), longer average stay-in periods, and a surge in incidences of chronicle diseases. Brazil totals 450k hospital beds (3), out of which 64% are private and 36% are public (6). According to the Private Sector National Hospital Association (Anahap), 5 million patients joined the healthcare system while the number of beds exhibited a 18k decrease. The decrease in total hospital beds is a direct consequence of the Public sector struggling to meet growing demand. Up to this date, no hospital group has the size to offer a national coverage. The fragmented landscape leaves plenty of room for regional consolidation plays; BTG Pactual led the industry operating only regionally consolidation play through the acquisition of Rede D or Group in 2010.

3 Net Revenues Per Patient - Day (BRL) (1) ,2% Operating Occupancy Rate (%) (2) + 2.1pts Percentage of Population attended by Insurance Plans (3) Today, 46% of the healthcare system is supported by the government through the Unique Health System (SUS) and 54% by the private sector (4). Both private and public sectors hold deep interest in increasing collaboration through PPP s (Private Public Partnerships); the public sector recognizes the need for more facilities and further access to technology coming from the private sector; on the other hand the private sector is keen to see its investments at work in a wider base market. The growth of the healthcare sector combined with new regulatory change presents unprecedented investment opportunities in the healthcare sector, whether it is in following BTG s steps in the regional consolidation approach or in the provision of high-tech medical technology or services such as integrated communication & billing software, outsourced pooled inventory services, costcutting medical supply tracking devices. Health Plans the surge of unsatisfactory services Seventy percent of the Brazilian population (144 million people) (5), are currently unattended by private health insurance companies, especially individuals living in the North and Northeast regions. Private health plans serve 30% of the market but are not considered satisfactory by their clients, reaching the 2nd position in complaints on the Brazilian consumer rights institute (IDEC). Frequent complaints refer to long waiting timeline. Brazilian healthcare plans are regulated by the Agência Nacional de Saúde Suplementar (ANS), the Ministry of Health agency dedicated to regulating health plans. Mid-2014,the ANS responded to the widespread customer concerns of health plans by temporary banning over 100+ health insurance companies that did not meet the Agency s criteria. 70% 30% Foreign companies have already been investing in the private health insurance sector. In 2012, US based United Health acquired 90% of Amil, the largest Brazilian private health operator with 9% market share, for US$ 4.3 billion (6). A more recent market consolidation play involved the purchase of health insurance Intermedica for US$ 851million by Bain Capital in 2014 (7). Insurance Plan Public Health System In 2013 the number of health plan beneficiaries grew by 4.6%, exhibiting higher growth than registered in 2011 and 2012, 3% and 3.6% respectively (8). The main driver behind this growth is the health plan offered by companies as part of a remuneration package; these company-linked plans represent 65.8% of all health plans (9), whereas a drop off in the number of individual, family and collective plans was noted in the same period. Even though the increase in health plan coverage has been the engine to a flourishing healthcare industry in Brazil, the greatest opportunity lies in improving the quality of attendance and range of services provided. Sources: Anahp (1) (2) (3) Marketwatch (4) (5) (6) (7) (8) (9)

4 January, 2015 São Paulo International Forum of Management and Trends for the Health Sector in Brazil Health sector executives, healthcare investors and government authorities 191 attendees Electronic surveying 18 questions Selected survey responses from the International Forum of Management and Trends for the Health Sector in Brazil In your view, the amendment of Law / 90, introduced by Law / 15, which allowed direct or indirect investment, including control of companies or foreign capital in healthcare, will: 1. Favor healthcare sector growth 2. Bring new technologies and increase access to care 3. Impair the quality of services due to a focus on profitability 4. Indifferent, not a major change for the sector 5.88% 4.20% 39.50% 50.42% Health entities (in relation to people management issues, governance, management and accounting information) are prepared to be acquired and interact with international investors? 1. Yes, without major change 2. Yes, with major change 3. No, they are not ready 4.72% 34.91% 60.38% What is the biggest barrier to health authorities in interaction with international investors? 1. To find qualified people with language skills to interact with investors 2. Adapt to cultural issues 3. Technological challenges 4. Quality requirements and standards 5. Work under pressure to deliver results and goals 6. There will not be any challenges in this interaction 0.97% 8.74% 15.53% 24.27% 23.30% 27.18% In your entity or industry vision, have health entities adequate corporate governance structures? To foreign investors: Market entry strategy Target screening & engagement Deal negotiation Post-merger integration Legal & Regulatory support To local players: Call to Action Business transformation Corporate governance support Financial reporting, ops. & IT Business plan formulation Market expansion strategy Investors Search & Sell side execution Sources : Votação Interativa Fórum Saúde KPMG 1. Yes 2. Yes, but they need to be better 3. We have some governance, but far from ideal 4. I cannot evaluate / compare In your view, the health sector in the short to medium term (2-5 years) will: 1. Underperform, less than the growth of the economy 2. Grow in line with the economy 3. Grow slightly above the economy 4. Grow well above the economy 5. Have extraordinary expansion above the economy 6.56% 8.20% 9.38% 9.38% 15.63% 34.43% 25.00% 50.82% 40.63% Over 89% responded favorably to healthcare sector growth or increased technology transfers as a direct consequence of the law amendment. Even more promising for the sector are the 65% of respondents projecting slightly above or well above sector growth rates over that of the wider Brazilian economy. We do note that most (95%) healthcare sector executives believe that healthcare companies are not sufficiently well documented and internally prepared to receive such capital injections; barriers remain predominantly cultural (50%) and as well as in the qualitative standards to be met (25%). The assessment provided by professionals of Brazilian healthcare depicts the depth of opportunities available to well-advised investors as well as local players seeking further attraction through comprehensible expert-led action plans.

5 Investing in Brazilian Healthcare KPMG s commitment to the Brazilian Healthcare Sector: Regulatory amendment enabling foreign capital in hospitals Currently decreasing supply of hospitals beds & lack of medical services 30% of the population does not have coverage Investment for cost-cutting technology as operator costs are rising Opportunities for market consolidation and regional plays Preparing the right financing and operating structure for growth starts Best practice implementation for sustainable growth Specialized healthcare team to execute and monitor your strategic vision of the future Increase brand recognition in the eyes of all concerned by quality healthcare Audit Advisory Tax KPMG encompasses an extensive array of services combined with deep healthcare sectorial understanding to provide game-changing advisory services for your growth plans. Pre-audit diagnosis elaborating all auditing steps and expectation alignment Identification and measurability of impacts derived from auditing practice changes Auditing of financial statements International Tax & repatriation routes Tax break optimization over financing mix Premium tax deduction opportunities in M&A actions Optimal investment legal structure IT Solution implementation advisory Integrated institution-doctor-patient communication Medical supply tracking technology implementation Business transformation Strategy-to-execution for growth, including market entry and expansion Business planning and feasibility studies Operational excellence, cost cutting and upside identification Supply chain optimization and management Lean and change for healthcare Contract & labor consulting Preparation for local and international accreditation Deal and investment banking advice Buy-side & sell-side preparation, including deal strategy Due diligence and valuation Post-merger integration

6 KPMG Deal Advisory Marcos Boscolo Partner Healthcare Tel: +55 (11) Augusto Sales Partner Strategy Tel: +55 (21) Paulo Guilherme Coimbra Partner Corporate Finance Tel: +55 (21) Roger Widdowson Partner Global Health Center of Excellence Tel: Cris Azevedo Partner Transaction Services Tel: +55 (21) Marc Lebreton Sr Manager Corporate Finance Tel: +55 (21) Cintia Silva Sr Manager Healthcare Tel: +55 (11) kpmg.com/br / kpmgbrasil App KPMG Brasil available for IOS and Android App KPMG Thought Leadership para ipad 2015 KPMG Corporate Finance Ltda., a Brazilian limited liability company and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ( KPMG International ), a Swiss entity. All rights reserved. Printed in Brazil. The KPMG name and KPMG logo and cutting through complexity are registered trademarks of KPMG International. The information contained herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavor to provide accurate and timely information, there is no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act upon such information without appropriate professional advice after a thorough examination of the particular situation.