Life sciences deals in Brazil in the post-pandemic era

Renata Fialho de Oliveira
Veirano Advogados, São Paulo
renata.oliveira@veirano.com.br  

Bernardo Guzinski Haas
Veirano Advogados, Porto Alegre
bernardo.haas@veirano.com.br

Introduction

Despite the severe disruption in investment flow in several industries during the coronavirus ('Covid-19') pandemic, 2020 and 2021 were marked by an unprecedented volume of deals in the life sciences and healthcare sectors. Indeed, the pandemic-related crisis that devastated several industries created, on the other hand, a number of opportunities for M&A in healthcare, most of which relied on technology improvement, telemedicine solutions and R&D.

The sector in Brazil faced a surge in M&A during 2020, accounting for a growth of 136 per cent in  comparison to the previous year.^[1] In 2021, both deal volume and deal value continued to increase rapidly: the healthcare sector alone reached around BRL 60bn,^[2] of which approximately BRL 15bn involved publicly held companies.^[3] Conversely, M&A activity in healthcare plummeted to only BRL 12,8bn in 2022^[4] and continued to fall in 2023. The reason behind such a decrease throughout 2022–2023 lies in some difficulties encountered during the pandemic, which created an environment surrounded by uncertainty and volatility.

The following challenges, which some specialists refer to as the 'perfect storm',^[5] greatly affected deal-making in the sector.

Boost in insurance claim counts and increase in the sinistrality rate

While the use of health insurance decreased in the first phase of the pandemic as elective procedures in hospitals were halted, the post-pandemic period was boosted by use of health insurance by the privately insured Brazilian population. This led to a constant rise in the number of health-related claims, resulting in a severe financial impact in the health insurance plan industry. In addition, there was a significant increase in the sinistrality rate after the Covid-19 pandemic, which resulted in insurance companies facing a higher number of doctors' appointments and other connected expenses. Both factors forced insurance cost adjustments with ever-tightening margins.

Aging of the Brazilian population

According to the Institute for Geography and Statistics (Instituto Brasileiro de Geografia e Estatística or 'IBGE'),^[6] the Brazilian population is rapidly growing older. In the past 12 years, the number of elderly grew by 57 per cent. The study also shows that life expectancy is increasing at a continuous pace (although a step back was seen due to Covid-19), reaching 75.5 years in 2022.^[7] This is leading to a higher number of age-related diseases, a boost in medical services (exams, surgery, doctors' appointments, therapies etc) and pushes for higher health-related costs; likewise, current business and financing models are under scrutiny because both health services and health insurance plans have been severely impacted.

Cash restrictions and inflation

The 2020–2021 M&A wave could be partially explained by the combination of cash availability of large health groups, as a result of an escalation in initial public offerings (IPOs) in 2019–2020, and low interest rates (around two per cent), which created a favourable environment for equity transactions. However, the Brazilian economic landscape changed in the aftermath of the Covid-19 pandemic: the increase of interest rates (in 2022, of 13.25 per cent, and nowadays, of 11.25 per cent) followed by a decline in IPOs led to a push for a higher cost of capital. This, together with regulatory uncertainty (among other factors) resulted in a downfall in life sciences deals.

Hence, deal-makers are navigating a challenging time in the healthcare and life sciences industry. Still, the post-pandemic era also presents new opportunities, which emerge from three main drivers: (1) pursuit of innovation and technology, which leads, for example, to an acceleration of R&D processes (drug discovery), and better efficiency in clinical trials and regulatory approvals; (2) focus on core business and potential partnerships; and (3) inorganic growth, including the ability to secure a supply chain of medical products/raw materials (procurement, manufacturing and distribution).^[8]

Trends in the post-pandemic era

Following the Covid-19 pandemic, life sciences deals in Brazil are expected to target lower-risk, complementary and profitable businesses. Given this synergy-orientated focus, it is likely that larger health groups will be eager to follow: (1) verticalisation strategies, by which, for instance, insurance providers acquire hospitals or medical services providers (and vice versa) in order to reduce costs and enhance efficiency; (2) collaboration strategies through joint ventures, partnerships or similar structures; or (3) a different approach for the integration of previous acquisitions, or the consolidation of specialised medical services (niches, eg, ophthalmology, physiotherapy and assisted human reproduction). Likewise, medical technology (MedTech) should also play a significant role in this period in history, aiming at further improving innovation and technology in the provision of health services and ancillary industries, as well as new treatments and drugs.

The verticalisation strategy has been on the rise and confirms the consolidation tendency in the sector. In December 2020, Grupo Dasa, one of the largest laboratory groups in Brazil, acquired Grupo Leforte, a group of hospital centres located in São Paulo, for BRL 1,77bn.^[9] Moreover, in December 2022, Rede D'Or São Luiz (RDOR3), the largest Brazilian healthcare group, completed the acquisition of SulAmérica Seguros, a longstanding Brazilian health insurance group;^[10] this was certainly an emblematic transaction and a clear example of the trend that marks the post-pandemic period.

Large groups are also keen to adopt partnership strategies. In this sense, in January 2023, Fleury Group, Grupo BP and Atlântica Hospitais formed a joint venture aimed at providing specialised medical services to cancer patients.^[11] In March 2023, Atlântica Hospitais and Hospital Israelita Albert Einstein created a joint venture to develop and explore a hospital in São Paulo.^[12] Later, in June 2023, Porto Seguro, one of the largest insurance companies in Brazil, and Oncoclínicas, a health group controlled by Goldman Sachs, created a joint venture with the purpose of offering specialised medical services to cancer patients.^[13]

Among the aforementioned strategies, another approach tends to focus on a series of acquisitions targeting specialised medical services. Oncoclínicas has been active in acquiring oncology companies.^[14] Fleury Group directed its attention to orthopaedic companies;^[15] on the other hand, Vision One, an investment company of XP, decided to focus on ophthalmology clinical centres and hospitals.^[16] Nonetheless, 2024 is expected to be a year for the further integration of previous transactions. Healthcare deals in the past years have reached unprecedented levels; hence, rather than acquiring additional businesses, larger groups may be keen to focus on how to better improve intra-group integration for better efficiency.

Life sciences deals in Brazil: solutions for structuring deals

As we have seen above, Covid-19 did not completely halt M&A activity in Brazil, but rather reshaped the drivers and legal solutions required to tackle the challenges in the sector. From a legal perspective, the impact of Covid-19 in Brazilian M&A is mostly seen on the: (1) due diligence exercise; (2) negotiation of risk allocation; and (3) alternative consideration provisions.

Due diligence

The due diligence exercise aims at enabling the prospective buyer to identify the target's material assets, rights, duties and liabilities. As a result of the Covid-19 pandemic, the scope and depth of legal due diligence concentrated mostly on three areas: (1) regulatory; (2) material contracts; and (3) intellectual property. The reasons behind this relate to the following: (1) Brazilian authorities have enacted several resolutions and laws changing the rules for marketing, labelling, manufacturing, importing, exporting and commercialising medical products/raw materials; (2) the prospective buyer will require assurance that the supply chain is not easily disrupted; and (3) MedTechs have been on the rise and, thus, the prospective buyer will require assurance that the new technology or innovation is lawfully owned by the target.

Risk allocation

Based on the conclusions of the due diligence exercise, the parties negotiate the risk allocation of the business, that is, which liabilities the prospective buyer is willing to assume and what shall be covered by the seller's indemnity obligations. Therefore, both the representation and warranties, and indemnification package are thoroughly negotiated, which may include the negotiation of collateral to the buyer's benefit, such as insurance coverage, partial withholding of the purchase price or the creation of an escrow account.

Payment structure

Given the unavailability of cash, larger health groups may be keen to structure part of the payment of the purchase price through either: (1) earn-out provisions; or (2) the delivery of shares issued by the prospective buyer. Earn-out provisions are commonly negotiated when there is uncertainty with respect to the value of the target, in which case, the parties agree on a lower purchase price, and, on the achievement of certain milestones (eg, earnings before interest, tax, depreciation and amortisation (EBITDA)) by the target, the prospective buyer pays an additional amount to the sellers. Another alternative to tackle this cash-restriction challenge is for the prospective buyer to pay the purchase price with shares issued by the prospective buyer.

Conclusion

It is still too early to see how health and life sciences M&A will be fully reshaped after the Covid-19 pandemic, but, certainly, in the recent past, it is fair to say that we have already seen significant changes in terms of drivers, deal structuring, diligence and models, with an important trend towards collaborative approaches (ie, partnerships, joint ventures and collaborations) rather than pure equity acquisition. It will be interesting to observe the developments and present a bird's-eye view of the following years in perspective.

Notes