Blackstone-Backed Fund Health Bet Defies Slump in Brazil

Patria Investimentos SA, the private-equity fund partially owned by Blackstone Group LP, and Kinea Investimentos Ltda are buying medical-diagnostic providers, betting a slowdown at insurers that pay for tests is temporary.

Kinea invested 70 million reais ($34.6 million) in Grupo Delfin, owner of six diagnostic centers in Brazil’s Northeast, and expects to triple the company’s size in four years, said Cristiano Lauretti, a partner and head of private equity. Alliar, the company created by Patria after acquiring stakes in 50 diagnostic units since 2011, is growing at a rate of 50 percent a year, Chief Executive Officer Fernando Terni said.

“It’s a segment that has differentiated growth possibilities, more accelerated than in health in general,” Terni said in an interview. “The sector is still very fragmented and therefore opportunities for consolidation exist.”

With only 25 percent of Brazil’s population insured, Kinea and Patria are counting on growth to rebound even as so-called formal jobs, the biggest generator of new insurance policies, expanded at a slower pace in 2012. About 80 percent of revenue for diagnostic medicine companies comes from health insurers.

Growth Markets

The funds, both based in Sao Paulo, are focusing on regions that aren’t fully served by Fleury SA and Diagnosticos da America SA, Brazil’s biggest publicly traded diagnostics companies, which are among the global industry’s three worst performers in the past year.

Spending on health plans grew at almost 13 percent annually from 2003 to 2011, the most recent year with available data, according to the national health insurance agency, known as ANS. That pace probably slowed last year with the creation of only

1.3 million formal jobs, down from 2.2 million in 2011, said Thiago Macruz, a Sao Paulo-based analyst at Itau Corretora de Valores SA, in a telephone interview.

The deceleration is weighing on Sao Paulo-based Fleury and Dasa, as Diagnosticos da America SA is known. Fleury slid 19 percent in the 12 months through yesterday and Dasa slumped 15 percent. Canada’s CML HealthCare Inc. fell 26 percent. Dasa rose

0.1 percent to 11.51 reais and Fleury gained 0.2 percent to

20.21 reais at 3:51 p.m. in Sao Paulo trading.

A spokesman for Fleury at A4 Comunicacao and one for Dasa at RMA Comunicacao declined to comment on current market challenges and future expectations.

‘Challenging Trends’

“We have seen very challenging trends for the segment of diagnostics in Brazil,” Macruz said. He rates Barueri, Brazil-based Dasa the equivalent of neutral and recommends buying Fleury. Rising costs are also hurting as insurance plans refuse to increase payments for services.

“Health-care cost inflation is being caused by a shortage in the number of physicians and doctors and the high quality of care being demanded,” Macruz said.

In the past decade, more Brazilians have migrated from the free, government-run health-care system to private plans as the middle-class swelled by 36 million people between 2002 and 2012. That pattern should resume as the economy and job creation rebound, Kinea’s Lauretti said.

Brazil’s economy, the world’s second-largest emerging market, expanded last year by 0.9 percent, the slowest pace since 2009. It is projected to grow 3.1 percent in 2013, according to a Bloomberg survey of 30 economists.

Growth Opportunities

High employment levels in the Northeast present growth opportunities, Lauretti said. Alliar is focusing on expansion in the faster-growing regions in states like Minas Gerais and Paraiba, Terni said.

“Whenever you have a city without these services, we go there,” Terni said. “There is repressed demand.”

Brazil’s Northeast has seen the largest regional gains in the middle class since 2002, buoyed by development such as attracting employers such a Kraft Foods Inc. factory. Delfin is the biggest diagnostic-center operator in that part of the country, Lauretti said.

“There is a lot of long-term potential because more Brazilians are aging,” Itau’s Macruz said. “There is a more space to expand the use of health insurance in those regions.”

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