Russian private healthcare company to IPO to fund expansion

By bne IntelliNews September 18, 2012

Ben Aris in Moscow -

Russia's leading private healthcare company MD Medical Group is hoping to cash in on growing enthusiasm for Russian equity with an October IPO to raise more than $150m, which it will use to continue its rapid expansion.

MDMG plans a London listing in October in two parts. A $150m primary issue of 30% of the company as global depositary receipts will be offered and used to fund the company's growth. There will also be a secondary issue of existing shares at the same time, the size of which has yet to be decided, but could be "significant," according to a source close to the deal.

The Russian economy has been on sick leave for most of this year as industrial production declines, but not the private healthcare sector, which has seen almost uninterrupted growth since the crisis in 2008.

Dr Mark Kurtser, chairman of MDMG's board and the driving force behind the group, tells bne in an exclusive interview that his business was barely affected by the global economic collapse four years ago. "The government was quick to step in and prop up the economy," Dr Kurtser said during a short break, still dressed in his operating room smock that is his version of a work suit. "Incomes have continued to rise throughout the following years, couples that have already put off having a family for a decade are still having babies as a result."

MDMG's timing is excellent, announcing its plans to float on the same day that Russia's biggest bank Sberbank said it would make a secondary offering of a 7.6% stake worth an estimated $4.9bn, which is expected to turn investor attention back to Russia. A window of opportunity seems to be opening for Russian would-be issuers and a string of companies have announced IPO plans in the last few months.


MDMG specializes in reproductive and maternity services to the 38m people that are thought to make up Russia's emerging middle class. Russia's health service is good, says Dr Kurtser, who is one of the most famous doctors in the capital, but people come to the private clinic to jump the long queues for something like fertility treatment and also for the better service. "We offer IVF [in vitro fertilization] not just to deal with infertility, but also as a service for people that want to have children, who are suffering from other problems like cancer or are in their late reproductive years, but not covered by the government quotas for help," says Kurtser, who was also appointed chief obstetrician and gynaecologist for Moscow City in 2003. "MDMG is the Russian market leader in IVF, and we continue to develop this area of our business, as there is a significant deficit in the availability of IVF support in Russia."

The business is also growing thanks to the reversal of a decades-long decline in the population. Russia's population shrank from 146m in 2000 to 142m in 2008, but since then birth rates have turned positive and last year Russia recorded its first population increase in two decades to 143m. The Kremlin concentrated its medical resources on halting the demographic decline several years ago when the current prime minister, Dmitry Medvedev, was still the first deputy prime minister.

The IPO is also well-timed from a political perspective, as Medvedev relaunched the offensive to improve Russia's healthcare at a government meeting on September 12, calling for new, "large-scale investments" in the medical sphere. "It is evident that huge injections in scientific research, technical re-equipment, and infrastructure are required. It is also necessary to integrate international industrial and scientific industries into the system. These and other key targets are provided in the development strategy of the medical sphere," Medvedev said at a government meeting.

Fertile ground

MDMG was founded in 2003 and in 2006 opened its flagship $100m private maternity hospital in Moscow with the help of a $70m loan from state-owned Sberbank. Some 18,000 patients a year now come through MDMG's doors, of which 2,000 are coming for IVF or other reproductive help.

The business has grown fast and the company now operates 12 clinics and hospitals in Russia, plus one in Ukraine, that earned the company RUB851m ($28m) in the first six months of 2012, up 59% on year. The company estimates it will continue to grow at 35-45% a year and plans to open more clinics and hospital in the regions.

Medical service companies enjoy both corporate tax and VAT exemptions, and there is a tax rebate for Russians using private services of up to RUB120,000 ($3,530) a year. And there is currently a debate in the Duma that could allow private clinics access to the state's mandatory health insurance scheme by 2015; Russia's constitution grantees universal healthcare, but the state is still struggling to provide enough services on its own.

Still, the sector is relatively new: Russian spending on healthcare has been growing by 21.2% a year since 2006, much faster than incomes, which have grown by 13% a year over the same period. By 2011, Russians were spending an average $525 a year on healthcare (of which half goes on pharmaceuticals), a sixth of the OECD average of $3,698, and well behind the world leader, the US, which spends $8,362 per citizen in 2011, according to MDMG.

The company specializes in gynaecology and obstretrics, which account for 58% of revenue, but it has built up a self-contained vertically integrated service that, unusually for a private Russian clinic, offers in-patient care in the company's 184 beds. In addition, the hospitals cover everything from testing to outpatient treatment. The rest of the company's revenue is more-or-less evenly distributed between paediatrics, IVF and other support services such as stem cell storage.

MDMG is the largest company in the sector, but already faces competition in this increasingly attractive sector. Amongst the other companies is Medicina (one hospital), GEMC that operates the European Medical Centre (with four clinics and two hospitals) and Medsi (30 clinics) - all of which offer general medical services. In addition, there are three smaller companies that offer women's services and IVF: Scandinvia (four clinics and eight beds), Bliznetsy (less than 10 beds) and Medlaif (six clinics and 17 beds).

Investors are also waking up to the opportunities too. Medsi is one of the biggest private healthcare providers in Russia. Owned by industrial conglomerate AFK Sistema, it has been opening clinics as fast as it can, and in April teamed up with the Moscow City government and private investors to raise capital to pay for more expansion. Medsi issued shares in April matched by the City with $205m worth of property for a 24.98% stake, while the private investors contributed the same amount in cash for the same stake, leaving Sistema with majority control. The group wants use the money to expand its chain of clinics and build three in-patient hospitals across the country.

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