F-1 1 d847137df1.htm FORM F-1 Form F-1
Table of Contents

As filed with the Securities and Exchange Commission on September 30, 2020

Registration No. 333-                

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM F-1

REGISTRATION STATEMENT

UNDER

THE SECURITIES ACT OF 1933

 

 

Auna S.A.A.

(Exact name of Registrant as specified in its charter)

 

 

 

Republic of Peru   8011   Not Applicable
(State or other jurisdiction of
incorporation or organization)
 

(Primary Standard Industrial
Classification Code Number)

 

Avenida República de Panamá 3461

San Isidro, Lima, Perú

+51 1-205-3500

  (I.R.S. Employer
Identification Number)

(Address, including zip code, and telephone number, including area code, of Registrant’s principal executive offices)

 

 

(Name, address, including zip code, and telephone number, including area code, of agent for service)

Cogency Global Inc.

122 East 42nd Street, 18th Floor

New York, NY 10168

(212) 947-7200

 

 

Copies to:

 

Maurice Blanco

Manuel Garciadiaz
Davis Polk & Wardwell LLP
450 Lexington Avenue
New York, NY 10017

 

Francesca L. Odell

Adam Brenneman

Cleary Gottlieb Steen & Hamilton LLP

One Liberty Plaza

New York, NY 10006

 

 

Approximate date of commencement of proposed sale to the public: As soon as practicable after the effective date of this registration statement.

If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box.  ☐

If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ☐

If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ☐

If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ☐

Indicate by check mark whether the registrant is an emerging growth company as defined in Rule 405 of the Securities Act of 1933.

Emerging growth company  ☒

If an emerging growth company that prepares its financial statements in accordance with U.S. GAAP, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards† provided pursuant to Section 7(a)(2)(B) of the Securities Act.  ☐

 

The term “new or revised financial accounting standard” refers to any update issued by the Financial Accounting Standards Board to its Accounting Standards Codification after April 5, 2012.

 

 

CALCULATION OF REGISTRATION FEE

 

 

Title of each class of

securities to be registered(1)

 

Proposed

maximum

aggregate

offering price(2)(3)

  Amount of
registration fee

Class A shares, par value per share S/1.00

  US$100,000,000   US$12,980

 

 

(1)

All class A shares will be in the form of American Depositary Shares, or ADSs, with each ADS representing              class A shares. ADSs issuable upon deposit of the class A shares registered hereby are being registered pursuant to a separate registration statement on Form F-6.

(2)

Includes additional class A shares in the form of ADSs that the underwriters have an option to purchase. See “Underwriting.”

(3)

Estimated solely for the purpose of computing the amount of the registration fee pursuant to Rule 457(o) under the Securities Act based on an estimate of the proposed maximum offering price.

 

 

The Registrant hereby amends this registration statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that this registration statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933, as amended, or until the registration statement shall become effective on such date as the Commission, acting pursuant to such Section 8(a), may determine.

 

 

 


Table of Contents

The information in this prospectus is not complete and may be changed. We may not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This prospectus is not an offer to sell these securities and it is not soliciting an offer to buy these securities in any state where the offer or sale is not permitted.

 

Subject to completion dated September 30, 2020

PRELIMINARY PROSPECTUS

 

LOGO

American Depositary Shares

Auna S.A.A.

(incorporated in the Republic of Peru)

Representing            Class A Shares

 

 

This is an initial public offering of                American depositary shares, or ADSs, of Auna S.A.A. (“Auna” or the “Company”). Each ADS represents                class A shares.

We anticipate that the initial public offering price will be between US$        and US$        per ADS (equivalent to approximately S/                 and S/                per class A share, based on the US$/                to S/1.00 exchange rate on                 , 2020). We intend to apply to have the ADSs listed on the New York Stock Exchange (“NYSE”) under the symbol “AUNA.” We intend to apply to have our class A shares listed on the Lima Stock Exchange (Bolsa de Valores de Lima or “BVL”) under the symbol “    .”

We have granted the underwriters an option for a period of 30 days from the date of this prospectus to purchase up to                  additional ADSs, at the initial public offering price, representing                 class A shares, less underwriting discounts and commissions.

We have two classes of common stock, class A common stock and class B common stock (collectively, our “common stock”). Each share of our common stock represents the same economic interest, except that, as provided in our by-laws, the class A shares benefit from the right to receive a preferred dividend consisting of 100% of any dividends distributed until we have distributed US$1 billion (or its equivalent in soles) in the aggregate in cash dividends. Each class B share of our common stock is entitled to one vote on any matter submitted to a vote of the shareholders. Each class A share of our common stock is entitled to one vote (together with class B shares) on only the following matters submitted to a vote of the shareholders: (i) approval of corporate management and financial statements; (ii) approval of capital increases or reductions; (iii) appointment, or delegation to our board of directors of the appointment, of our independent auditors; and (iv) application of profits. See “Description of Our Share Capital.”

Each class B share is convertible into one class A share automatically upon transfer, subject to certain exceptions. For so long as either Enfoca (as defined herein) and Luis Felipe Pinillos Casabonne hold in the aggregate 10% or more of the outstanding amount of class A shares, we will have a dual class structure. However, if, on any given date, the class A shares held directly or indirectly by Enfoca and Mr. Pinillos Casabonne represent in the aggregate less than 10% of the outstanding amount of class A shares on a combined basis, then on the date of the call for the next annual shareholders meeting following such event, all the class A shares and all the class B shares will automatically convert into one class of common shares with full and equal economic and political rights as provided under Peruvian law on a one-to-one basis.

Following the completion of the offering, Enfoca, our controlling shareholder, will own approximately     % of our class B shares and     % of our class A shares, representing approximately    % of the combined voting power of our outstanding common stock assuming no exercise of the underwriters’ option to purchase additional ADSs. The remaining     % of the class B shares will be owned by Mr. Pinillos Casabonne and certain of our minority shareholders. All class B shares will be held in trust under a trust agreement (the “Trust Agreement”), pursuant to which the trustee will vote all class B shares held in trust as directed by Enfoca irrespective of Enfoca’s aggregate ownership of our common stock at any given time. See “Description of Our Share Capital—Trust Agreement.”

Neither the U.S. Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense.

Neither the ADSs nor the offering has been or will be registered in the Republic of Peru and therefore neither the ADSs nor the offering is or will be subject to Peruvian laws applicable to public offerings in Peru. The information contained in this prospectus has not been, and will not be, approved or disapproved by the Peruvian Securities Commission (Superintendencia del Mercado de Valores or “SMV”) or the BVL. The ADSs may not be offered or sold in Peru except in compliance with the securities laws of Peru.

We are an “emerging growth company” under the U.S. federal securities laws and will be subject to reduced public company reporting requirements.

 

 

Investing in the ADSs involves risks. See “Risk Factors” beginning on page 26 of this prospectus.

 

     Per ADS      Total  

Public offering price

   US$                        US$                    

Underwriting discounts and commissions

   US$        US$    

Proceeds, before expenses, to us

   US$        US$    

Delivery of the ADSs will be made on or about                 , 2020.

 

 

 

Morgan Stanley    Goldman Sachs & Co. LLC

 

 

The date of this prospectus is                 , 2020.


Table of Contents

TABLE OF CONTENTS

 

 

 

     Page  

Presentation of Financial and Other Information

     ii  

Forward-Looking Statements

     v  

Summary

     1  

The Offering

     15  

Summary Financial and Other Information

     19  

Risk Factors

     26  

Use of Proceeds

     55  

Dividends

     56  

Capitalization

     58  

Dilution

     59  

Selected Financial and Other Information

     60  

Management’s Discussion and Analysis of Financial Condition and Results of Operations

     62  

Industry

     92  

Business

     111  

Management

     142  

Principal Shareholders

     147  

Related Party Transactions

     149  

Description of Our Share Capital

     152  

Description of American Depositary Shares

     166  

Taxation

     177  

Underwriting

     183  

Expenses of the Offering

     191  

Legal Matters

     192  

Experts

     192  

Where You Can Find More Information

     193  

Enforcement of Judgments

     194  

Index to Financial Statements

     F-1  

 

 

Neither we nor the underwriters have authorized anyone to provide you with any information other than that included in this prospectus or in any free writing prospectus prepared by or on behalf of us. We do not take any responsibility for, and can provide no assurance as to the reliability of, any information that others may give you. Neither we, the underwriters, or any of our or their affiliates have authorized any other person to provide you with different or additional information. Offers to sell, and solicitations of offers to buy, the ADSs are being made only in jurisdictions where such offers and sales are permitted. You should assume that the information contained in this prospectus is accurate only as of the date on the front cover of this prospectus, regardless of the time of delivery of this prospectus or of any sale of the ADSs. Our business, financial condition, operating results, and prospects may have changed since such date.

No action is being taken in any jurisdiction outside the United States to permit a public offering of our class A shares or the ADSs. Persons who come into possession of this prospectus in jurisdictions outside the United States are required to inform themselves about and to observe any restriction as to this offering and the distribution of this prospectus applicable to those jurisdictions.

 

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PRESENTATION OF FINANCIAL AND OTHER INFORMATION

Certain Definitions

All references to “we,” “us,” “our,” “our company” and “Auna” in this prospectus are to Auna S.A.A., an openly held corporation (sociedad anónima abierta) organized under the laws of Peru and, unless the context requires otherwise, its consolidated subsidiaries.

The term “U.S. dollar” and the symbol “US$” refer to the legal currency of the United States; the term “sol” and the symbol “S/” refer to the legal currency of Peru; and the term “Colombian peso” and the symbol “COP” refer to the legal currency of Colombia.

All references to “EPS” and “EPSs” in this prospectus are to Entidades Proveedoras de Salud in Peru or Entidades Promotoras de Salud in Colombia, as the context requires. EPSs in Peru are private health insurance companies that provide EPS plans, a type of private insurance plan funded through a percentage of contributions to Seguro Social de Salud del Perú (“EsSalud”), the social security regime in Peru. EPSs in Colombia are institutions responsible for collecting and managing funds contributed to the social security system in Colombia and for providing health insurance plans mandated by law in Colombia. See “Industry—The Peruvian Healthcare Sector” and “Industry—The Colombian Healthcare Sector,” respectively, for more detail.

All references to “Enfoca” in this prospectus are to Enfoca Sociedad Administradora de Fondos de Inversión S.A. and/or to the group of entities affiliated with Enfoca Sociedad Administradora de Fondos de Inversión S.A., as the context requires.

Change of Corporate Name and Form

On December 30, 2019, we changed our corporate name from Grupo Salud del Perú, S.A.C. to Auna S.A. Any references to Grupo Salud del Perú herein are references to our company prior to the change in our corporate name. On September 14, 2020, our shareholders approved our conversion to an openly held corporation (sociedad anónima abierta), along with the related amendment to our by-laws and corporate name change from Auna S.A. to Auna S.A.A. Registration of the amendment to our by-laws in the corporations registry of the Peruvian public registry (the “Corporations Public Registry”) is pending and may be subject to objections by the applicable registrar. Our shareholders delegated to our board of directors the capacity to make further amendments to our by-laws only to address any objections the applicable registrar may have.

Financial Statements

Our consolidated financial statements included in this prospectus have been prepared in soles. The audited consolidated financial statements have been prepared in accordance with International Financial Reporting Standards issued by the International Accounting Standards Board (“IFRS”). The unaudited condensed consolidated interim financial statements were prepared in accordance with IAS 34 Interim Financial Reporting. The financial information contained in this prospectus includes our audited consolidated financial statements as of and for the years ended December 31, 2019, 2018 and 2017 and our unaudited condensed consolidated interim financial statements as of June 30, 2020 and for the six months ended June 30, 2020 and 2019, included elsewhere in this prospectus.

Our fiscal year ends on December 31. References in this prospectus to a fiscal year, such as “fiscal year 2019” refer to our fiscal year ended on December 31 of that calendar year.

We have translated some of the sol amounts contained in this prospectus into U.S. dollars for convenience purposes only. Unless otherwise indicated or the context otherwise requires, the rate used to translate sol amounts to U.S. dollars was S/3.5437 to US$1.00, which was the exchange rate reported on June 30, 2020 by the Peruvian

 

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Superintendency of Banks, Insurance and Private Pension Fund Administrators (Superintendencia de Banca, Seguros y AFPs, or “SBS”). We have also translated certain Colombian peso amounts contained in this prospectus into Peruvian soles or U.S. dollars for convenience purposes only. Unless otherwise indicated or the context otherwise requires, the rate used to translate Colombian peso amounts to Peruvian soles was COP1,067.26575 to S/1.00 and the rate used to translate Colombian peso amounts to U.S. dollars was COP3,758.91 to US$1.00, which in each case was the exchange rate reported on June 30, 2020 by the Central Bank of Colombia. These translations are provided solely for convenience of investors and should not be construed as implying that the soles, Colombian pesos or other currency amounts represent, or could have been or could be converted into, U.S. dollars or Peruvian soles, as applicable, at such rates or at any other rate.

On December 27, 2018, we acquired 97.3% of the outstanding share capital of Promotora Médica Las Américas S.A. (“Grupo Las Américas”), a leading healthcare services provider located in Medellín, Colombia. The aggregate purchase price was S/589.3 million (US$166.3 million). We acquired an additional 2.5% of the share capital of Grupo Las Américas on January 3, 2020. The audited financial statements of Grupo Las Américas as of December 26, 2018 and for the period from January 1, 2018 to December 26, 2018, together with the notes thereto, were prepared in accordance with IFRS and are included elsewhere in this prospectus.

Rounding

Certain figures included in this prospectus have been subject to rounding adjustments. Accordingly, figures shown as totals in certain tables may not be arithmetic aggregations of the figures that precede them.

Non-GAAP Financial Measures

We use EBITDA, Segment EBITDA and Adjusted EBITDA, which are non-GAAP financial measures, in this prospectus. A non-GAAP financial measure is generally defined as one that purports to measure financial performance but excludes or includes amounts that would not be so adjusted in the most comparable GAAP measure.

We calculate EBITDA as profit for the period plus income tax expense, net finance cost and depreciation and amortization. EBITDA is a key metric used by management and our board of directors to assess our financial performance. We calculate Segment EBITDA as segment profit before tax plus net finance cost and depreciation and amortization. We calculate Adjusted EBITDA as profit for the period plus income tax expense, net finance cost, depreciation and amortization, pre-operating expenses for projects under construction, business development expenses for expansion into new markets, change in fair value of assets held for sale and loss on sale of investments in associates.

We present EBITDA, Segment EBITDA and Adjusted EBITDA because we believe they assist investors and analysts in comparing our operating performance across reporting periods on a consistent basis by excluding items that we do not believe are indicative of our core operating performance. In addition, management and our board of directors use EBITDA, Segment EBITDA and Adjusted EBITDA to assess our financial performance and believe they are helpful in highlighting trends in our core operating performance, while other measures can differ significantly depending on long-term strategic decisions regarding the growth of our business.

EBITDA, Segment EBITDA and Adjusted EBITDA are not measures of operating performance under IFRS and have limitations as analytical tools. You should not consider such measures either in isolation or as substitutes for analyzing our results as reported under IFRS. Additionally, our calculations of Segment EBITDA and Adjusted EBITDA may be different from the calculations used by other companies for similarly titled measures, including our competitors, and therefore may not be comparable to those of other companies. For reconciliations of EBITDA and Adjusted EBITDA to profit for the period and Segment EBITDA to segment profit before tax for the period, in each case, the most directly comparable IFRS measure, see “Summary Financial and Other Information—Key Performance Indicators.”

 

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We also show EBITDA of Grupo Las Américas for the period from January 1, 2018 to December 26, 2018, the period prior to our acquisition of Grupo Las Américas. We calculate EBITDA for Grupo Las Américas as net earnings from ordinary activities plus taxes, net financial expense (which consists of financial income and financial expense and which together are the same as net finance cost in Auna’s Segment EBITDA calculations), depreciation and amortization. Grupo Las Américas’ EBITDA is not a measure of operating performance under IFRS and has limitations as an analytical tool. You should not consider such measure either in isolation or as a substitute for analyzing Grupo Las Américas’ results as reported under IFRS. See “Summary Financial and Other Information—Key Performance Indicators” for a reconciliation of EBITDA of Grupo Las Américas to income before income taxes.

Medical Loss Ratio

We use medical loss ratio, or MLR, in this prospectus. MLR is calculated as (i) claims for medical treatment generated by our prepaid oncology plans plus (ii) technical reserves relating to plan members treated pursuant to such plans, whether at our facilities or third-party facilities, divided by revenue generated by our prepaid oncology plans. We believe that MLR is an important measure of our operating performance in our healthcare coverage business as it is an indicator of the percentage of payments under our oncology plans that is used for medical treatment as compared to administrative costs and is widely used in the healthcare industry as a measure of operating efficiency.

Market Information

We make estimates in this prospectus regarding our competitive position and market share, as well as the market size and expected growth of the healthcare industries in Peru and Colombia. We have made these estimates on the basis of our management’s knowledge and statistics and other information from the following sources: EsSalud, the Peruvian Superintendencia Nacional de Salud (“SUSALUD”), the Peruvian Ministry of Health (“MINSA”), the Colombian Superintendencia Nacional de Salud (“SUPERSALUD”), the Colombian Ministry of Health and Social Protection (“MinSalud”), the World Health Organization (“WHO”), the SBS, Fitch Solutions, Emerging Markets Information System (“EMIS”) and the Economist Intelligence Unit (“EIU”), among others. We believe such sources are the most recently available as of the date of this prospectus, from government agencies, industry professional organizations, industry publications and other sources. We believe these estimates to be accurate as of the date of this prospectus.

Offering Information

All amounts contained in this prospectus that have been adjusted to reflect the estimated net proceeds of the offering are based upon the sale of ADSs at an assumed public offering price of US$        per ADS (the midpoint of the price range set forth on the cover page of this prospectus). Unless otherwise indicated, all information contained in this prospectus assumes no exercise of the underwriters’ option to purchase up to             additional ADSs, representing                class A shares.

 

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FORWARD-LOOKING STATEMENTS

This prospectus contains forward-looking statements. Forward-looking statements convey our current expectations or forecasts of future events. These statements involve known and unknown risks, uncertainties and other factors, including those listed under “Risk Factors,” which may cause our actual results, performance or achievements to differ materially from the forward-looking statements that we make.

Forward-looking statements typically are identified by words or phrases such as “may,” “will,” “expect,” “anticipate,” “aim,” “estimate,” “intend,” “project,” “plan,” “believe,” “potential,” “continue,” “is/are likely to,” or other similar expressions. Any or all of our forward-looking statements in this prospectus may turn out to be inaccurate. Our actual results could differ materially from those contained in forward-looking statements due to a number of factors, including, among others:

 

   

our brands’ reputation among our plan members, patients, the medical community and our suppliers in the regions in which we operate;

 

   

our ability to estimate and control healthcare costs, or if we cannot increase our prices to offset cost increases or expenditure increases, at our hospitals and clinics and with respect to our oncology plans;

 

   

the negative impact of the COVID-19 pandemic on our business;

 

   

our relationships with third-party payers;

 

   

competition in a fragmented market like Peru and in Colombia;

 

   

our ability to recruit and retain quality medical professionals;

 

   

acquisitions, partnerships or joint ventures that we make or enter into;

 

   

our ability to integrate our acquired facilities or obtain the expected benefits from such acquisitions;

 

   

our operation of Torre Trecca, and any additional public-private partnerships we may enter in the future;

 

   

our ability to execute our organic growth plan, which includes the construction of additional hospitals and clinics as well as expansion of our existing facilities;

 

   

our ability to continue growing our business at historical rates;

 

   

our ability to provide high-quality, advanced care for a broad array of medical needs to maintain and expand our markets;

 

   

our ability to develop and commercialize new products and services under Oncosalud;

 

   

our reliance on a limited number of suppliers of medical equipment, medicines and other supplies needed to provide our medical services;

 

   

our compliance with extensive legislation and regulations in Peru and Colombia;

 

   

our ability to obtain registrations, authorizations, licenses and permits for the establishment and operation of our hospitals and clinics;

 

   

our exposure to liabilities from claims brought against our healthcare professionals or our facilities;

 

   

our exposure to litigation and other legal, labor, administrative and regulatory proceedings to which we are subject;

 

   

insufficiency of our insurance policies to cover potential losses;

 

   

our compliance with privacy laws to which we are subject;

 

   

a failure of our IT systems;

 

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our ability to maintain sufficient funds to settle current liabilities;

 

   

any loss of members of our senior management team;

 

   

our ability to maintain favorable labor relations with our employees;

 

   

our reliance, as a holding company, on our subsidiaries to conduct all of our operations, and the ability of our subsidiaries to pay dividends and make other distributions to us which could adversely affect our ability to pay dividends;

 

   

changes to IFRS accounting standards;

 

   

economic, social and political developments in Peru, including political instability, inflation and unemployment;

 

   

economic, social and political developments in Colombia, including political and economic instability, violence, inflation and unemployment;

 

   

adverse climate conditions and other natural disasters;

 

   

the concentration of our operations in Lima and Medellín;

 

   

corruption and ongoing high-profile corruption investigations in Peru and Colombia which could have an adverse effect on the Peruvian and Colombian economies;

 

   

political and economic conditions in Venezuela which could have an adverse impact on the Peruvian and Colombian economies;

 

   

developments and the perception of risk in other countries, especially emerging market countries;

 

   

increased inflation in Peru or Colombia which could have an adverse effect on the Peruvian and Colombian economies;

 

   

variations in foreign exchange rates;

 

   

changes in tax laws in Peru or Colombia which may increase our tax liabilities; and

 

   

other factors identified or discussed under “Risk Factors.”

The forward-looking statements in this prospectus represent our expectations and forecasts as of the date of this prospectus. Except as required by law, we undertake no obligation to update or revise publicly any forward-looking statements, whether as a result of new information, future events or otherwise, after the date of this prospectus.

 

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SUMMARY

This summary highlights information contained elsewhere in this prospectus. This summary may not contain all the information that may be important to you, and we urge you to read this entire prospectus carefully, including the “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” sections and our consolidated financial statements and notes thereto included elsewhere in this prospectus, before deciding to invest in our ADSs.

Overview

We are one of the largest and most recognized players in the Peruvian healthcare industry and have a growing presence in Colombia. With more than 30 years of experience in the healthcare industry, we provide oncology healthcare plans in Peru and operate hospitals and clinics in Peru and Colombia that provide high-quality medical services at all levels of complexity. Our mission is to transform healthcare in the countries in which we operate by providing excellent patient outcomes and positive, streamlined patient and plan member experiences at an affordable cost. We believe we are well positioned to fulfill this mission due to our patient-centric culture, scale, innovative use of technology, unique vertically integrated oncology platform in Peru and high degree of horizontal integration in our Peruvian and Colombian healthcare networks, all of which allow us to scale nationally and regionally with cost efficiencies and further advance our strategic development.

Our business was founded in Peru in 1989 as Oncosalud, a healthcare coverage provider selling prepaid plans covering a full range of services for the prevention, detection and treatment of cancer for a modest monthly payment that varies based on plan type and age of plan members and was on average S/51.2 (US$14.4) per month for the six months ended June 30, 2020. Our prepaid oncology plans addressed an unmet need in the healthcare coverage market in Peru at the time and quickly began to grow. Starting in 1997, we began to build our own network of Oncosalud facilities to primarily treat our plan members but also patients of private payers, including patients covered by private insurance. Clínica Oncosalud, our flagship hospital in this network, has a Diamond accreditation from Accreditation Canada International (“ACI”). Oncosalud had over 922,000 members as of December 31, 2019, which was more than each of the private insurance and EPS systems in Peru as of that date, and 888,000 members as of June 30, 2020. Measured by number of plan members, we had a market share of 30% of all private healthcare plans in Peru in 2019 and had the largest market share of any single private healthcare plan, according to data from SUSALUD. Oncosalud currently operates two specialized oncology hospitals and three oncology clinics. Through its vertically integrated model, Oncosalud has achieved high levels of both effectiveness and efficiency: during the first six months of 2020, 97% of Oncosalud members were treated in our facilities, which allows us to control medical costs, manage treatment protocols and provide high-quality cancer treatment. Notably, for the cohort of patients diagnosed between 2010 and 2015, Oncosalud’s 5-year cancer survival rate was 75.5%. In addition, we had an MLR of 41.1% as of June 30, 2020, which we believe is one of the lowest in Latin America, based on the MLRs published by other publicly-traded healthcare companies in Latin America that provide prepaid healthcare plans or health insurance coverage. During 2019 and the first six months of 2020, through our Oncosalud network of facilities, we treated more than 12,500 and 8,400 patients, respectively. By guiding our plan members from prevention through early detection of cancer and then through the full treatment cycle, we take the uncertainty and fear out of cancer treatment and provide top quality care in a compassionate and humane manner.

In 2011, we took our experience at Oncosalud as a provider of first-class patient outcomes at an affordable cost and began to apply it to the provision of a full range of healthcare services via a broader network of facilities in Peru. Through the development and acquisition of facilities since that time, we have built a network of hospitals and clinics located in all of the major cities in the country, with premium clinical capabilities and a wide range of medical specialties and subspecialties. Today, with our Auna Peru network, we own and operate five hospitals and two clinics as well as numerous other facilities providing complementary services, such as



 

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pharmaceutical, diagnostic imaging and clinical laboratory services. We are a provider to essentially all of the private payers in the Peruvian healthcare sector, including traditional private insurers, EPS providers and prepaid plan operators. Our Auna Peru network is horizontally integrated, meaning that patients can access all of their treatment, diagnostic imaging, laboratory and pharmaceutical needs at one of our facilities instead of having to go to different providers for each service. Additionally, for certain high-complexity procedures that cannot be performed at our regional hospitals, patients can be treated at Clínica Delgado, our high-complexity facility in Lima and the flagship hospital of the Auna Peru network. Moreover, we were the first private institution in Peru to implement an electronic medical records (“EMR”) system in 2013 as part of our modern hospital information system (“HIS”), and today all of our hospitals in Peru use our HIS, which allows us to closely monitor and anticipate patient health needs, efficiently manage costs across our patient population and improve medical outcomes and the quality of our services. Through this horizontal integration, we are able to foster a seamless, positive patient experience across each of our networks in Peru. This has enabled us to achieve satisfaction scores from our patients of above 60% on average based on internal surveys of 12,254 patients during 2018 and 2019, representing participation above our targeted sample size of 11,850 patients. These surveys asked participants to rank a variety of metrics on a scale of one to five, including the quality of our infrastructure, the speed with which patients receive care and the attentiveness of our medical personnel, among other metrics. In addition, we are also able to centralize processes, such as procurement of equipment and medicines, and increase our negotiating power with payers, which allows us to more efficiently manage our costs and price our services competitively.

In our Auna Peru network, we own and operate premium medical facilities, employ some of the leading medical professionals in the country and are able to achieve excellent patient outcomes. Our flagship hospital in this network, Clínica Delgado, which we opened in 2014, is the country’s leading high-complexity hospital that has quickly established itself as a standard setter in Latin America, as evidenced by its Diamond accreditation from ACI and its ranking among the best hospitals in Peru across a wide range of categories by Global Health Intelligence (“GHI”) in 2018. We also have six other primary facilities that we acquired, modernized, expanded and relaunched after a series of strategic acquisitions in 2011 and 2012 and now have a presence in all of the major urban areas in Peru. We treated more than 198,000 and 95,000 patients during 2019 and the first six months of 2020, respectively, at facilities in our Auna Peru network, which had a total of 284 beds as of June 30, 2020.

In 2018, we leveraged our experience and success in providing integrated patient experiences and outstanding outcomes in Peru and expanded into Colombia with our acquisition of Grupo Las Américas, one of Colombia’s leading healthcare providers located in the country’s second largest city, Medellín. In 2020, we began the process of rebranding Grupo Las Américas as our Auna Colombia network and expect to complete such process during the first quarter of 2021. In addition, in September 2020, we further expanded our Auna Colombia network with our acquisition of Clínica Portoazul S.A. (“Clínica Portoazul”), a premium high complexity private hospital located in the country’s fourth largest city, Barranquilla, which we are currently in the process of integrating into our network. Our Auna Colombia network provides healthcare services to patients covered by a range of payers in Colombia, including both public and private insurers, and currently consists of two hospitals and five clinics in Medellín and one hospital in Barranquilla, as well as a range of facilities providing complementary services. Similar to our Auna Peru network, our Auna Colombia network is also horizontally integrated, which enables us to be a one-stop shop for all of our patients’ needs and provide them with a seamless patient experience. In our Auna Colombia network, we also have premium medical facilities, employ some of the leading medical professionals in the country and are able to achieve high quality patient outcomes. The flagship hospital in our Auna Colombia network, Clínica Las Américas, is the leading private hospital in Medellín and was ranked the 8th best hospital in Colombia in América Economía’s 2019 Best Hospitals Ranking. We also own the Instituto de Cancerología (“IDC”) in Medellín, one of the country’s largest and leading private oncology hospitals and the only institution in Colombia that is a sister institution of the University of Texas MD Anderson Cancer Center (“MD Anderson”), one of the leading cancer care providers in



 

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the United States. We currently have more than 450 beds and have treated more than 246,000 and 124,000 patients during 2019 and the first six months of 2020, respectively, in the Auna Colombia network.

In all of our networks, we seek to focus proactively on our plan members’ and patients’ health, rather than simply providing services when prescribed to treat disease or other medical conditions. We do this by focusing on healthy lifestyle habits and promoting regular medical check-ups to help ensure our plan members and patients remain healthy and disease is detected early. We believe this emphasis on health allows us to build life-long relationships with our plan members and patients and save lives by detecting and treating disease early on.

Our Hospitals’ Geographic Footprint

 

LOGO

We operate our business through three segments: (i) Oncosalud Peru, (ii) Healthcare Services in Peru, which consists of our Auna Peru network, and (iii) Healthcare Services in Colombia, which consists of our Auna Colombia network. On a consolidated basis, in the year ended December 31, 2019, we generated revenue of S/1,382.6 million (US$390.1 million), profit for the year of S/73.9 million (US$20.8 million), EBITDA of S/226.3 million (US$63.9 million) and Adjusted EBITDA of S/234.4 million (US$66.1 million), which represented an increase of 60.5%, 101.6%, 82.9% and 78.5%, respectively, compared to the year ended December 31, 2018. On a consolidated basis, in the six months ended June 30, 2020, we generated revenue of S/629.7 million (US$177.7 million), loss for the period of S/22.9 million (US$6.5 million), EBITDA of S/72.0 million (US$20.3 million) and Adjusted EBITDA of S/74.7 million (US$21.0 million), which represented



 

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a decrease of 7.1%, 161.7%, 33.7% and 32.9%, respectively, compared to the six months ended June 30, 2019. Revenue, segment profit before tax and Segment EBITDA generated by the Oncosalud segment grew 11.6%, 61.1% and 33.5%, respectively, in the year ended December 31, 2019 compared to the year ended December 31, 2018 and 9.7%, 17.6% and 28.8%, respectively, in the six months ended June 30, 2020 compared to the six months ended June 30, 2019. In the year ended December 31, 2019 and six months ended June 30, 2020, revenue generated by the Oncosalud segment contributed 42.8% and 50.0% to our consolidated revenue. Revenue, segment profit before tax and Segment EBITDA generated by the Healthcare Services in Peru grew 15.9%, 26.2% and 37.6%, respectively, in the year ended December 31, 2019 compared to the year ended December 31, 2018 and decreased 15.3%, 453.4% and 182.6%, respectively, in the six months ended June 30, 2020 compared to the six months ended June 30, 2019. In the year ended December 31, 2019 and six months ended June 30, 2020, revenue generated by the Healthcare Services in Peru segment contributed 34.0% and 31.0% to our consolidated revenue. In the year ended December 31, 2019 and six months ended June 30, 2020, the Healthcare Services in Colombia segment contributed 29.6% and 26.1% to our consolidated revenue.

We currently operate in countries that have experienced rapid economic growth and improvements in per capita income and the emergence of growing middle classes in recent years, which we expect will increase healthcare spending in both markets over time. We also believe that the regulatory frameworks in these countries are conducive to further growth in the industry. However, the healthcare markets in these countries are characterized by deficits in medical capacity, poor quality of services and fragmented healthcare service industries with relatively low competition, and we believe that each of these markets possesses high growth potential. We believe that our integrated networks in each market provide us with a significant competitive advantage to capitalize on this growth. We plan to continue to grow in these markets by expanding the capacity in each of our networks and developing new products, such as new healthcare coverage options for our patients. We also plan to explore opportunities in other similar markets in Latin America where we believe our scale, experience and capabilities will give us an advantage.

Our Integrated Networks

Through our operating model, we strive to achieve regional scale and a high degree of both horizontal and vertical integration, adapting to the specific characteristics of each of the markets in which we operate. We currently have three networks: Oncosalud, Auna Peru and Auna Colombia.

Through our Oncosalud network in Peru, we sell prepaid oncology plans covering the prevention, detection and treatment of cancer. For a modest payment that varies based on plan type and age of plan members and was on average S/51.2 (US$14.4) per month for the six months ended June 30, 2020, Oncosalud covers plan members for periodic cancer screenings. In turn, if a member is diagnosed with cancer, Oncosalud covers that member for all consultations, treatments and medication associated with their cancer care, as well as palliative care services. During the first six months of 2020, approximately 70% of the services that we covered for Oncosalud plan members were provided at our Oncosalud network facilities, 27% were provided at facilities in our Auna Peru network and only 3% were provided at third-party facilities. Because the vast majority of services provided to our plan members are provided at our own facilities, we are further incentivized to optimize costs and focus on patient outcomes.

Our Auna Peru network is one of the largest private healthcare providers in the country. We have facilities in Lima, Arequipa, Chiclayo, Piura and Trujillo, which are the principal cities in the five most populated departments in Peru, with each department having a population above one million. Our flagship hospital in this network, Clínica Delgado, is one of the most modern and sophisticated hospitals in Peru, with capabilities for the highest complexity procedures available in the country. For example, Clínica Delgado is one of only two private hospitals in Peru licensed to perform organ transplants and is renowned for having one of the best neonatal intensive care units and maternity wards in Peru. Our other hospitals are equipped for a wide variety of medium-



 

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complexity procedures. Due to the horizontal integration of our network, we are able to be a one-stop shop for our patients, offering all of the treatments they require in addition to diagnostic imaging, pharmaceuticals and laboratory services. We were the first private institution in Peru to implement an EMR system as part of our modern HIS in 2013. Currently used in all of our hospitals in Peru, our HIS also registers our patients’ contact information and manages administrative services, such as hospital admissions and billing, in addition to housing our EMR system. Today our sophisticated technology and advanced data management allow us to closely monitor and anticipate patient healthcare needs, coordinate with our physicians and staff in multiple locations, establish standardized protocols at our facilities and manage and control costs. We are currently building an additional 23,000 square meters at Clínica Delgado, which we expect to add approximately 82 beds to our capacity there and which we expect to complete in 2023. We are also currently building new medium-complexity hospitals in Chiclayo and Piura and we expect each to add approximately 68 additional beds to our capacity between 2021 and 2022 and by 2023, respectively. Lastly, we are also building two new towers at Clínica Vallesur in Arequipa, which we expect to add approximately 23 additional beds there between 2021 and 2022. Certain of these construction projects are currently on hold as a result of the COVID-19 pandemic. This pause notwithstanding, we expect to add an additional approximately 241 beds to our aggregate capacity within the next three years, primarily in the markets in which we already operate.

While we currently provide services only to private payers in our Auna Peru network, we are evaluating opportunities to participate in public-private partnerships (“PPP”) with EsSalud, Peru’s social security program. Approximately 9.3 million people, or 24.4% of the Peruvian population, receive healthcare coverage through EsSalud. We are awaiting approvals from EsSalud for certain project milestones and necessary amendments to the concession agreement to rebuild Torre Trecca, an outpatient facility (which is currently not in use) providing healthcare services to patients covered through EsSalud, as a high-rise treatment center, and begin operating it through a PPP on behalf of EsSalud. This partnership will allow us to provide outpatient services to a large segment of the population that is receiving care through the public sector, a patient population we do not currently address. Through this partnership, once we are able to begin operations we expect to handle approximately 15% of EsSalud’s yearly outpatient volume, or about 1.5 million outpatient appointments per year.

Our Auna Colombia network is currently centered on our facilities in Medellín, including two hospitals, Clínica Las Américas and IDC, one medical laboratory and five clinics, and in Barranquilla, including one hospital, Clínica Portoazul. Our flagship hospital in this network, Clínica Las Américas, is one of Medellín’s leading private hospital focused on high complexity services and specializes in cardiology and bone-marrow transplants, among other specialties. We also operate one of the leading cancer care facilities in Colombia, IDC, and are able to share best practices learned at IDC with Oncosalud and vice versa. Our strategy for our Auna Colombia network is similar to what we have already executed in Peru: we aim to be a horizontally integrated provider with high quality facilities in most of Colombia’s large metropolitan areas. We have already begun expanding our operations and solidifying our presence in Colombia—we are currently completing the construction of Clínica del Sur in Envigado, a city located to the south of Medellín, which we expect to begin operations in 2022 and which will strengthen our presence in the Antioquia region. We are also actively analyzing acquisition opportunities in the country’s other key urban areas, such as Bogotá and Cali.

Our Competitive Strengths

We believe that our key strengths include:

Vertically integrated oncology services network in Peru providing first-class patient outcomes and experiences at an affordable cost

Through our Oncosalud network in Peru, we operate Latin America’s only fully vertically integrated oncology program. The prepaid Oncosalud plans we sell offer our plan members the certainty of a full range of



 

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services in cancer prevention, detection and treatment, including surgery, chemotherapy and radiotherapy, as well as palliative care. We provide these services to our plan members as well as third party payers at an affordable cost, using our networks of Oncosalud and Auna Peru facilities. Our vertical integration has allowed us to be highly efficient and effective, as evidenced by Oncosalud’s 41.1% MLR as of June 30, 2020 and 75.5% 5-year cancer survival rate for the cohort of patients diagnosed between 2010 and 2015. The average age of Oncosalud plan members as of June 30, 2020 was 34.

Moreover, we believe our prepaid oncology plans meet an important need in the Peruvian market, where the vast majority of the population either lacks health insurance or is reliant on the public sector for healthcare coverage, where long waiting periods for consultations and treatments are common and the quality of services is mixed. Cancer is a potentially life-threatening disease, and the prospect of waiting for cancer treatment after being diagnosed is a strong motivation for individuals to seek enhanced coverage. Our prepaid oncology plans take the uncertainty out of cancer care at an affordable cost and cover all aspects of what can be a catastrophic medical condition. We believe the growth in our Oncosalud membership from 266,000 in 2008 to over 888,000 as of June 30, 2020 shows the appeal of our innovative plans. Our plan members include healthcare consumers who do not have any other healthcare coverage, members who are covered by EsSalud but want supplemental coverage for cancer, and individuals who have healthcare coverage from another private payer but want access to our leading expertise in oncology and our integrated care platform.

While 73% of the services covered by our plans were provided at Oncosalud facilities in 2019, Oncosalud is also a significant purchaser of services from our Auna Peru network, with 24% of covered oncology services in 2019 provided by Auna Peru network facilities. We believe that our distinctive platform has enabled us to provide holistic, quality care and produce improved patient outcomes while building a trusted connection with our plan members.

Horizontally integrated regional healthcare networks providing excellent outcomes, seamless patient experiences and significant network-level efficiencies

Our Auna Peru and Auna Colombia networks are horizontally integrated, which we believe allows us to produce excellent patient outcomes and foster a seamless patient experience, while leveraging significant network-level efficiencies to provide our services at an affordable cost. Our Auna Peru network consists of five hospitals, two clinics and several facilities offering complementary services, such as diagnostic imaging and clinical laboratories, while our Auna Colombia network consists of three hospitals, five clinics and several facilities offering similar complementary services. We offer a wide range of medical services, from primary care to high complexity medical services, and have premium clinical capabilities in both networks. In addition, each of our networks is comprehensive and well-coordinated across departments and clinical areas, enabling us to work with the most complete information for each patient and maintain disciplined population health management. This in turn allows us to closely monitor and anticipate patient health requirements, offer patients a streamlined experience and achieve excellent medical outcomes. By covering all of our patients’ healthcare needs in a coordinated manner, we enhance customer satisfaction and bolster our reputation for quality and our brand awareness, which results in greater customer loyalty and demand for our services.

In addition to providing high quality patient outcomes and experiences, our Auna Peru and Auna Colombia networks provide us with multiple network-level efficiencies that we believe would be difficult for competitors to replicate. For example, our scale as a healthcare provider allows us to negotiate favorable rates for the procurement of medicines and medical equipment, providing us with sizeable cost efficiencies. The scale of our network also allows us to attract the best doctors and management talent in the market. We are able to implement systems, such as information technology (“IT”) and enterprise resource planning systems, on a centralized basis, which also provides us with substantial cost savings. Finally, we believe that our horizontal integration provides us with increased negotiating power with third party payers, particularly private insurance companies and other



 

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healthcare payers. Due to our high-quality care and scale, we have become a “must carry” provider for major private health insurers in both countries, meaning that including our Auna Peru and Auna Colombia facilities in their in-network coverage has become important for their plans to be competitive within their markets. This has allowed us to negotiate favorable prices for our healthcare services.

Premium clinical capabilities at all levels of complexity

We currently operate five general hospitals, two specialized oncology hospitals and five clinics in Peru with a total of 393 beds in both our Oncosalud and Auna Peru networks and two general hospitals, one specialized oncology hospital (IDC) and five clinics in Colombia with a total of 450 beds in our Auna Colombia network. Our facilities specialize in medium and high complexity medical services, such as oncology, cardiology, neonatal care, neurology, trauma and organ and bone-marrow transplants. Our flagship hospital in our Auna Peru network, Clínica Delgado, which has a Diamond accreditation from ACI, is one of only two private hospitals in the country that are licensed to perform organ transplants and is renowned for having one of the best neonatal intensive care units and maternity wards in Peru. Clínica Delgado physicians also performed the first ever thorax abdominal aorta endoprosthesis implant in Peru, and only the third in Latin American history. Our flagship hospital in our Auna Colombia network, Clínica Las Américas, is the leading private hospital in Medellín specializing in high complexity services, including oncology, cardiology and bone-marrow transplants, and was ranked as the 8th best hospital in Colombia in América Economía’s 2019 Best Hospitals Ranking. In Peru through our Oncosalud network, we believe we are one of the best radiotherapy institutes in the country and are one of the only private healthcare providers with a PET scan and cyclotron, which led Clínica Oncosalud to receive a Diamond accreditation from ACI in November 2019. Clínica Delgado and Clínica Oncosalud are the only two facilities in Peru with a Diamond accreditation from ACI. Our premium clinical capabilities are central to the strength of our reputation and our brand, our “must carry” status with health insurers, our ability to attract the best doctors and, most importantly, our ability to provide high-quality care to our patients and plan members.

Proven track record of inorganic and organic growth with active expansion plans in progress

The scale of our networks has been a key component of our success to date, and we believe increasing our scale will increase our efficiency and competitiveness in the future. We have a proven track record of inorganic and organic growth that we believe provides us with the know-how and experience to continue expanding our networks. We have grown inorganically by successfully negotiating seven strategic acquisitions in Peru in 2011 and 2012 to launch our Auna Peru network, which included expanding into Callao, Arequipa, Piura, Trujillo and Chiclayo, urban areas where we did not previously have a presence through Oncosalud. After each acquisition, we invested in upgrading and standardizing each facility to conform to our standards for how a facility should be laid out, equipped and operated. In addition, we acquired Grupo Las Américas on December 27, 2018, marking our entry into the Colombian healthcare market and the launch of our Auna Colombia network. For the period from January 1, 2019 to December 31, 2019, the first full year of our ownership of our Auna Colombia network (which comprises our Healthcare Services in Colombia segment), our Healthcare Services in Colombia segment saw the following: revenue increased by 22.4% to S/409.4 million from revenue from ordinary activities of S/334.5 million (COP357,007.03 million), profit before tax decreased by 57.6% to S/11.4 million from income before income taxes of S/26.9 million (COP28,733.1 million) and Segment EBITDA increased by 26.7% from S/46.1 million (COP49,203.0 million) to S/58.4 million, in each case as compared to Grupo Las Américas’ results for the period from January 1, 2018 to December 26, 2018 prior to the acquisition.

We further advanced our regional expansion in September 2020 through our acquisition of a controlling stake of Clínica Portoazul, a distressed and highly levered private hospital located in Barranquilla, Colombia. The aggregate amount of our initial capital contribution was COP69.417 million, which represents 66.55% of the outstanding share capital of Clínica Portoazul. We believe there are several value opportunities in our acquisition of Clínica Portoazul, including its premium infrastructure with opportunities for operational improvement and



 

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expansion in oncology services. In addition, it provides us access to Barranquilla, the fourth largest city in Colombia and a market with an attractive demand that is currently covered by low-quality services. Our expansion into this new market increases the potential to create a multi-city healthcare franchise in Colombia with high negotiation power with insurance companies.

We have a dedicated integration team with more than eight years of experience and we believe we have been able to achieve these improved operating results in our Auna Colombia network primarily due to the implementation of our protocols and our consolidation and streamlining of its operations. We expect our integration team will continue to have a positive effect on our profitability and growth in the near future as we continue to expand through acquisitions in Peru, Colombia and other similar markets in Latin America.

We have also grown organically by building our own facilities and expanding the existing facilities. For example, we built our flagship hospital in Peru, Clínica Delgado, from the ground up in the Miraflores district of Lima, one of the city’s prime residential areas. Clínica Delgado was designed by Gresham Smith & Partners, one of the leading architecture firms for healthcare facilities in the United States. We commenced planning and construction in 2011 and started operations in 2014. By 2017, Clínica Delgado had established itself as the leading high complexity hospital in the country, offering more than 40 specialties and subspecialties.

We are also currently expanding some of our existing facilities, including Clínica Delgado and Clínica Vallesur, where we expect to add approximately 82 and 23 additional beds, respectively, by 2023 and between 2021 and 2022, respectively. We have also started construction of new hospitals in Chiclayo and Piura, Peru that will each have approximately 68 beds, where we expect to start operations between 2021 and 2022 and by 2023, respectively, and we are currently building Clínica del Sur in Envigado, Colombia, which we expect to add approximately 144 beds to our Auna Colombia network in 2022.

The successful execution of organic and inorganic initiatives has allowed us to increase the number of beds in our networks on an aggregate basis from 130 in 2012 to 698 as of the date of this prospectus and we expect to add over 385 beds by the end of 2023.

Solid financial growth backed by strong operating fundamentals

We believe that the quality of our services, the scale of our networks and our focus on cost efficiency has allowed us to achieve market-leading financial performance, even as the Peruvian and Colombian economies have experienced moderate growth levels as compared to the previous decade. In the year ended December 31, 2019, we generated revenue of S/1,382.6 million (US$390.1 million), profit for the year of S/73.9 million (US$20.8 million), EBITDA of S/226.3 million (US$63.9 million) and Adjusted EBITDA of S/234.4 million (US$66.1 million), which represented an increase of 60.5%, 101.6%, 82.9% and 78.5%, respectively, compared to the year ended December 31, 2018. Although we generated a loss for the period in the first six months of 2020 due primarily to the COVID-19 pandemic, we maintained a gross margin of 37.2%. We believe our gross margin historically and for the period ended June 30, 2020 solidly places us among the most profitable healthcare network operators in South America, including those in countries with more advanced healthcare systems such as Brazil and Chile, based on gross margins published by other publicly-traded healthcare companies in South America.

Management team, board of directors and shareholders with industry know-how and strategic vision

We believe that the combined strengths and proven experience of our management team, board of directors and shareholders has succeeded in making Auna one of the premier companies in the healthcare industry in the Andean region. In addition, we believe the track record and depth of knowledge of our management team provide us with a distinct competitive advantage. Our chief executive officer, Luis Felipe Pinillos Casabonne, has been working at Auna in various roles for nearly 20 years, and led the expansion of our business into general



 

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healthcare services and the development of the Auna networks in Peru and Colombia in conjunction with Enfoca, our controlling shareholder. Our chief financial officer, Pedro Castillo, served as CFO between 2010 and 2014 of Maestro Perú S.A. (“Maestro”), which had been acquired by Enfoca and expanded to become Peru’s leading home improvement retailer. Mr. Castillo was a key player in Maestro’s strong performance during the period, as well as in its landmark sale to Falabella Perú in 2014.

Our controlling shareholder, Enfoca, is one of Latin America’s foremost investment firms and has a proven track record of contributing to our and other consumer-facing companies’ growth in the region. Enfoca has contributed to the implementation of best-in-class corporate governance practices that we believe positions us well for sustainable long-term growth. In addition, Enfoca has actively participated in many of our management-level committees, including our executive, infrastructure and human talent committees, and helped drive the execution of our growth strategy. We believe that our controlling shareholder’s continuing support, engagement with management and long-term vision for growth gives us a competitive advantage.

We believe we will be able to continue to attract and retain the best talent in the healthcare industry in our markets, as our brand and our networks have become among the most prestigious in the healthcare industry in the Andean region.

Our Strategy

Our mission is to transform healthcare in the countries in which we operate by providing excellent patient outcomes and a positive and streamlined patient experience, all at an affordable cost. We believe our patient-centric culture, our use of technology and agile teams to enact change, and our capacity to scale with cost efficiencies nationally and regionally drive our strategic development. To achieve our mission and strategic direction, we rely on the following:

Leverage our culture to continue enhancing the experience of our plan members and patients and our ability to provide first-class medical outcomes at an affordable cost

We believe that demand for our services is driven by our ability to offer high quality healthcare services that produce first-class medical outcomes at integrated facilities that meet all of our patient needs and that provide a seamless experience at an affordable cost. As a result, our ability to continue enhancing the experience of plan members and patients within our networks is central to our growth strategy. We believe we have a unique patient-centric culture that focuses on proactive interactions with our plan members and patients to promote health objectives, including through innovative uses of technology, with the goal of fostering life-long relationships with them. We believe we can leverage our culture to continue enhancing the plan member and patient experience in the future.

In our Oncosalud network, we put significant emphasis on healthy lifestyle habits and regular medical check-ups to help ensure our plan members remain healthy and that cancer and any other illnesses are detected early. With our focus on healthy living, we are well positioned to detect and treat disease early. This allows us to have a greater impact on plan member health as treating disease early typically provides better patient outcomes. Early detection also strengthens our connection with each patient and enhances the likelihood that we will be the provider of choice for patients for other services over time. In addition, detecting diseases and conditions early also allows us to control costs, as many diseases, including cancer, are both less expensive to treat and more likely to be cured if detected earlier. Incorporating best practices learned over 30 years of experience in Oncosalud, we are increasing our prevention and early detection services in our Auna Peru and Auna Colombia networks as well. As we continue to roll out prevention and early detection programs, we expect to significantly increase the utilization of population management techniques and data analysis that further enhance our preventive medicine approach.



 

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In recent years, we have increasingly differentiated our networks by harnessing technology that enhances the patient experience throughout the treatment cycle. For example, we were the first medical group in Peru to launch an EMR system that is accessible to doctors and staff, and we currently have our HIS in place at all of our hospitals in Peru. We intend to expand our HIS to the Auna Colombia network as well. We also have introduced kiosks and a mobile app, which allow our patients to make and pay for appointments in a convenient manner. These investments in technology allow us to provide standardized information in a timely and accessible manner to our healthcare providers, which not only eases the burden on our healthcare staff, but also enables us to provide efficient service to patients and their families. We plan to continue investing in technology to enhance the patient experience at our networks and that will allow us to stay in closer touch with our patients after they have left our direct care.

Expand our patient and member universe and leverage compelling socioeconomic dynamics in the markets where we operate

As the Peruvian and Colombian middle classes continue to expand over the next decade, we expect their constituents will increasingly demand high-quality healthcare services and products at an affordable cost, particularly if public sector capabilities and infrastructure continue to lag behind. Our more than 30-year track record provides us with extensive knowledge about our patient and plan member populations. With our growing Auna platforms, we believe we are well positioned to capture a significant portion of this currently underserved market in Peru and Colombia. In order to do so, we intend to expand our offerings, focusing particularly on the underserved segments of the population, and enter new market segments. For example, in Oncosalud, we have recently launched two new plans, a new lower-cost plan covering the most common and treatable cancers, which is expected to be within the economic reach of a larger segment of Peru’s population and a prepaid plan covering general healthcare services. We have also recently introduced a pilot for a plan covering a range of other potentially catastrophic diseases and conditions that require hospitalization and/or complex treatments. We expect to officially launch this plan in 2020. We are also considering introducing other prepaid plans in Peru covering other healthcare services. In addition, we are entering new market segments. For example, through the Torre Trecca PPP, once we are able to begin operations, we will provide services to a patient population previously attended only by public sector service providers, and we may seek to enter into additional PPP agreements in the future. We believe expanding our patient and member universe will not only increase our brand awareness and demand for our services, but also provide us with increased economies of scale, allowing us to continue increasing our efficiency levels over time.

Continue to expand our networks through organic and inorganic growth

The scale of our integrated healthcare networks in Peru and Colombia is central to our success – it increases our brand awareness, allows us to achieve cost efficiencies at the network level and improves our bargaining power with third parties, including third party payers and suppliers of medicines and medical equipment. As a result, our scale provides us with the resources to continually improve the quality and breadth of our healthcare services. Due to the relatively low penetration of healthcare services in both Peru and Colombia, deficits in medical capacity and, particularly in Peru, the generally poor quality of most public and many private healthcare alternatives, we believe there is significant room for growth and we intend to continue investing in our business and adding facilities to each of our networks. Our goal is to have a presence in all of the major urban centers in the countries in which we operate, and in doing so increase our patient and member universe. Although we have a well-established presence in Lima and other large cities in Peru, there are several cities in Peru where we do not currently have a presence that have sufficient potential demand to be attractive markets to enter. Additionally, in Colombia, we currently only operate in the Medellín metropolitan area and Barranquilla and we are seeking to establish a presence in several of Colombia’s other major cities. We seek to add facilities to our networks that meet our standards of quality in terms of expertise of available medical staff, modern infrastructure that enables efficient operation and ease of access for patients and plan members in terms of location.



 

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In Peru, we are currently focused primarily on organic growth, as we have developed a proprietary model that we believe is the best vehicle for our expansion throughout the country. Since 2011, we have worked on developing a blueprint for the development of new medium to high complexity medical facilities based on our experience to date in building, modernizing and expanding facilities. This blueprint, which we refer to as the Auna Model, sets forth what we believe are ideal parameters in terms of number of beds and number of outpatient, emergency and operating rooms at a facility in order launch the new facility, or add capacity at an existing facility, and reach profitability effectively and efficiently. We are currently using the Auna Model for the expansion of Clínica Vallesur in Arequipa and for the construction of two new 66-bed facilities that we believe will be the leading hospitals in Chiclayo and Piura.

In Colombia, given the market fragmentation and the relatively larger number of high-quality facilities operated by third parties than in Peru, we are currently focused primarily on inorganic growth. In September 2020, for example, we acquired Clínica Portoazul, a private hospital located in Barranquilla, Colombia. We have identified a robust pipeline of other opportunities that can help us continue to expand our presence in the country, and we believe our proven integration capabilities position us as a natural market consolidator. Our acquisition strategy in Colombia is focused on the key urban areas in the country, such as Bogotá and Cali. We are also pursuing organic growth in Medellín where we already have a strong presence through the construction of Clínica del Sur, a state-of-the-art hospital providing medium and high complexity services in Envigado, a city bordering Medellín that has low hospital penetration. We are using the Auna Model to build Clínica del Sur and expect to launch operations at the facility in 2022, which will further strengthen our position in the Antioquia region of which Medellín is the capital.

In addition, we are continually evaluating expansion opportunities in other markets in Latin America that are structurally and demographically similar to Peru and Colombia and may seek to enter new markets in the future. As we expand our healthcare networks, we will increase our horizontal integration, which we believe will allow us to continue capturing increased demand for our services and generating substantial cost savings and synergies across facilities.

Continue enhancing and increasing the value proposition of our networks

Our ability to offer high quality healthcare services across our Auna Peru and Auna Colombia networks has been a significant contributor to demand for our healthcare services and has made us a “must carry” for healthcare coverage providers in Peru and Colombia. Through the breadth of our networks, we are able to be a one-stop shop for our patients, offering treatments in addition to diagnostic imaging, pharmaceuticals and laboratory services within our network of facilities. In addition, with the benefit of our technology and the standardized information it provides across facilities, we are able to provide patients care at any of our facilities, even if it is not the usual location at which they obtain healthcare services. For example, if a patient typically receives healthcare at one of our lower complexity facilities, but needs a high complexity service, we can access their medical records at another facility that is able to provide the high complexity service, which allows us to provide efficient service across our network. We intend to place a greater focus going forward on differentiating the role that each of our facilities has within the networks so that we can increase the value proposition of our networks overall. While high complexity services will be centered at Clínica Delgado in Peru and Clínica Las Américas in Colombia, we intend to increase the complexity of services that all of our facilities can handle in each of our markets where the need for higher-complexity services justifies it, particularly in the hospitals in provinces outside of Lima and Medellín. To complement our existing network, we intend to open new lower-complexity facilities in residential areas closer to our patients, providing easy access to care. We believe this will increase our touchpoints with patients, boost our brand awareness and foster further loyalty to our networks, while also deepening our horizontal integration and our ability to achieve network-level efficiencies.



 

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Summary of Risk Factors

Investing in the ADSs representing our class A shares involves risks. You should carefully consider the risks described in the “Risk Factors” section beginning on page 26 before making a decision to invest in the ADSs representing our class A shares. If any of these risks actually occur, our business, financial condition or results of operations may be materially adversely affected. In such case, the trading price of the ADSs representing our class A shares would likely decline, and you may lose all or part of your investment. The following is a summary of some of the principal risks we face:

 

   

we depend substantially on our brands’ reputation among our plan members, patients, the medical community and our suppliers in the regions in which we operate, and any negative impact on those brands could have a material adverse effect on us;

 

   

our operating results may be adversely affected if we are not able to estimate or control healthcare costs, or if we cannot increase our prices to offset cost increases, at our hospitals and clinics and with respect to our oncology plans;

 

   

we may not have sufficient funds to settle current liabilities and as a result we may continue to have negative working capital from time to time;

 

   

our business has been and continues to be impacted by the COVID-19 pandemic and the extent to which the COVID-19 pandemic impacts our business, financial condition and results of operations will depend on the duration and severity of the pandemic and the level of continued disruption to regional and global economic activity, which are impossible to predict at this time;

 

   

we have identified material weaknesses in our internal control over financial reporting. If we are unable to remediate these material weaknesses or otherwise fail to maintain an effective system of internal controls, we may not be able to prevent or detect a material misstatement of our financial statements, and may not be able to accurately or timely report our financial condition or results of operations, which may adversely affect our business and the price of our ADSs;

 

   

our revenues and results of operations are affected by our relationships with third-party payers, and any change to, or deterioration in, these relationships could have a material effect on us, such as, for example, due to limitations on reimbursement and, in some cases, reduced levels of reimbursement for healthcare services as a result of changes in Colombia’s social security system, the Sistema General de Seguridad Social en Salud (“SGSSS”), in recent years;

 

   

the healthcare industries in Peru and Colombia are competitive, and if we are not able to maintain or grow our competitive positions, our business, financial condition and results of operations may be adversely affected;

 

   

our performance depends on our ability to recruit and retain quality medical professionals, and we face a great deal of competition for these professionals, which may increase our labor costs;

 

   

any acquisitions, partnerships or joint ventures that we make or enter into could disrupt our business and harm our financial condition;

 

   

our performance is dependent on economic, social and political developments in Peru and Colombia, and our results of operations may be negatively affected by recent political instability in Peru;

 

   

following the completion of the offering, Enfoca, our controlling shareholder, will own approximately      % of our class B shares and     % of our class A shares, representing approximately     % of the combined voting power of our outstanding common stock assuming no exercise of the underwriters’ option to purchase additional ADSs. The remaining % of the class B shares will be owned by Mr. Pinillos Casabonne and certain of our minority shareholders. All class B shares will be held in trust under the Trust Agreement, pursuant to which the trustee will vote all class B shares held in trust as



 

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directed by Enfoca. Certain of our officers and a majority of our directors may be employed by or otherwise affiliated with Enfoca, which could give rise to potential conflicts of interest; and

 

   

we are an “emerging growth company,” and the reduced reporting requirements applicable to emerging growth companies may make our ADSs less attractive to investors.

Corporate Structure

A simplified organizational chart showing our corporate structure is set forth below.

 

LOGO

 

 

 

*

We own 100% of all of our operating subsidiaries, other than Clínica Miraflores, Clínica Vallesur and Clínica Portoazul, of which we own 94.17%, 88.23% and 66.55%, respectively.

Corporate Information

Our principal executive offices are located at Avenida República de Panamá 3461, San Isidro, Lima, Peru. Our telephone number at this address is +51 1-205-3500.

Investors should contact us for any inquiries through the address and telephone number of our principal executive office. Our principal website is http://auna.pe/. The information contained in, or accessible through, our website is not incorporated by reference in, and should not be considered part of, this prospectus.



 

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Implications of Being an Emerging Growth Company

As a company with less than US$1.07 billion in revenue during our last fiscal year, we qualify as an “emerging growth company” as defined in the Jumpstart Our Business Startups Act of 2012, or the JOBS Act. An emerging growth company may take advantage of specified exemptions from various requirements that are otherwise applicable generally to public companies in the United States. These provisions include:

 

   

an exemption from the auditor attestation requirement in the assessment of our internal control over financial reporting pursuant to the Sarbanes-Oxley Act of 2002; and

 

   

to the extent that we no longer qualify as a foreign private issuer, (1) reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements and (2) exemptions from the requirements of holding a nonbinding advisory vote on executive compensation, including golden parachute compensation.

We may take advantage of certain of these provisions for up to five years following our initial public offering or such earlier time that we are no longer an emerging growth company. We will remain an emerging growth company until the earlier of (1) the last day of the fiscal year (a) following the fifth anniversary of the completion of our initial public offering, (b) in which we have total annual revenues of at least US$1.07 billion or (c) in which we are deemed to be a large accelerated filer, which means the market value of our class A shares that is held by non-affiliates exceeds US$700 million as of the prior June 30th, and (2) the date on which we have issued more than US$1.0 billion in non-convertible debt during the prior three-year period. We may choose to take advantage of some but not all of the above-described provisions. For example, Section 107 of the JOBS Act provides that an emerging growth company can use the extended transition period provided in Section 7(a)(2)(B) of the Securities Act of 1933, as amended, or the Securities Act, for complying with new or revised accounting standards. Given that we currently report and expect to continue to report under IFRS we have irrevocably elected not to avail ourselves of any extended transition period provided for by IFRS and, as a result, we will adopt new or revised accounting standards on the relevant dates on which adoption of such standards is required by the International Accounting Standards Board. We have taken advantage of reduced reporting requirements in this prospectus. Accordingly, the information contained herein may be different than the information you receive from other public companies. References to an “emerging growth company” in this prospectus shall have the meaning associated with that term in the JOBS Act.



 

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THE OFFERING

The following is a brief summary of the terms of this offering and should be read together with the more detailed information and financial data and statements contained elsewhere in this prospectus. For a more complete description of our ADSs and common stock, see “Description of Our Share Capital” and “Description of American Depositary Shares” in this prospectus.

 

Issuer

Auna S.A.A.

 

Securities Offered

            ADSs, representing                of our class A shares.

 

Offering Price

We expect the offering price will be between US$        and US$        per ADS.

 

Option to Purchase Additional ADSs

We have granted the underwriters an option for a period of 30 days from the date of this prospectus to purchase up to                  additional ADSs at the initial public offering price, representing                class A shares, less underwriting discounts and commissions.

 

ADSs

Each ADS represents                class A shares held by Citibank, N.A., the depositary. The ADSs may be evidenced by American depositary receipts, or ADRs, issued under a deposit agreement among us, Citibank, N.A., as depositary, and the holders and beneficial owners of the ADSs issued thereunder (the “deposit agreement”).

 

Use of Proceeds

We estimate that the net proceeds from this offering will be approximately US$        , or approximately US$        if the underwriters exercise their option to purchase additional ADSs in full. These amounts assume an initial public offering price of US$        per ADS (the midpoint of the price range set forth on the cover page of this prospectus), after deducting the estimated underwriting discounts and commissions and offering expenses. We intend to use the net proceeds from this offering for general corporate purposes, including acquisitions, expansion of our existing facilities, other capital expenditures and the repayment of indebtedness from time to time. See “Use of Proceeds.”

 

Lock-Up Agreements

We, our directors and officers and our existing shareholders have agreed, subject to limited exceptions, not to sell any shares of our common stock or ADSs for a period of 180 days after the date of this prospectus without the prior approval of Morgan Stanley & Co. LLC and Goldman Sachs & Co. LLC. See “Underwriting.”

 

Share Capital Immediately Prior to and Following the Offering

Our share capital is divided into class A shares of common stock and class B shares of common stock.

 

 

Immediately prior to the offering, we had                class A shares and 1,000 class B shares issued and outstanding. After giving effect to the offering, we will have                class A shares and 1,000 class B shares outstanding. Following the completion of the offering, Enfoca



 

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will own approximately     % of our class B shares and     % of our class A shares, representing approximately     % of the combined voting power of our outstanding common stock assuming no exercise of the underwriters’ option to purchase additional ADSs. The remaining     % of the class B shares will be owned by Mr. Pinillos Casabonne and certain of our minority shareholders. All class B shares will be held in trust under the Trust Agreement, pursuant to which the trustee will vote all class B shares held in trust as directed by Enfoca irrespective of Enfoca’s aggregate ownership of our common stock at any given time. See “Description of Our Share Capital—Trust Agreement.”

 

No Preemptive Rights Offer

Because all of our existing shareholders have agreed to waive their preemptive rights under Peruvian law in connection with this offering, there will not be a preemptive rights offer for our              shares in connection with this offering. See “Description of Our Share Capital—Preemptive and Accretion Rights.”

 

Voting Rights

Each share of our common stock is entitled to one vote. Each class B share of our common stock is entitled to vote on any matter submitted to a vote of the shareholders. Each class A share of our common stock is entitled to vote (together with the class B shares) only on the following matters submitted to a vote of the shareholders: (i) approval of corporate management and financial statements; (ii) approval of capital increases or reductions (other than as described below); (iii) appointment, or delegation to our board of directors of the appointment, of our independent auditors; and (iv) application of profits. The class A shares will not have voting rights on any other matter subject to shareholders’ approval.

 

  Therefore, the class A shares will not vote on, among other matters, the election and removal of directors and fixing of directors’ compensation; our issuance of debt securities; amendments to our by-laws (other than in connection with capital increases or reductions); the sale, in a single transaction, of assets with a value exceeding 50% of the our share capital; the merger, spin-off, division, reorganization, transformation or dissolution of the Company; and special investigations and audits.

 

  In September 2020, our shareholders delegated to our board of directors the authority to approve one or more capital increases of up to S/236,546,679, which delegation will remain in place for five (5) years thereafter and will allow our board of directors to determine the timing, amount, and conditions of each such capital increase, without requiring further shareholders’ approval. This approval also included an express advanced waiver of any preemptive rights that would apply in connection with any such capital increases. This delegation may only be revoked by a vote of the class B shares.

Subject to Peruvian law and the terms of the deposit agreement, a holder of ADSs will generally have the right to instruct the depositary



 

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how to vote the class A shares represented by its ADSs. See “Description of Our Share Capital” and “Description of American Depositary Shares.”

 

  Subject to the terms of the Trust Agreement, Enfoca will generally have the right to instruct the trustee how to vote the class B shares held in trust. See “Description of Our Share Capital—Trust Agreement.”

 

Conversion

Each class B share will convert automatically into one class A share upon any transfer, except for transfers of class B shares by Enfoca, our chief executive officer and certain of our minority shareholders to a trust established pursuant to the Trust Agreement or in case of transfers of class B shares in favor of Enfoca or of Luis Felipe Pinillos Casabonne, as appropriate.

 

  For so long as either Enfoca and Luis Felipe Pinillos Casabonne hold in the aggregate 10% or more of the outstanding amount of class A shares, we will have a dual class structure. However, if, on any given date, the class A shares held directly or indirectly by Enfoca and Mr. Pinillos Casabonne represent in the aggregate less than 10% of the outstanding amount of class A shares on a combined basis, then on the date of the call for the next annual shareholders meeting following such event, all the class A shares and all the class B shares will automatically convert into one class of common shares with full and equal economic and political rights as provided under Peruvian law on a one-to-one basis. See “Description of Our Share Capital—Conversion.”

 

Dividends

Our dividend policy has historically been to distribute up to S/10 million per year of our net profit obtained from the preceding year. Following this offering, we intend to retain all available funds and future earnings, if any, to fund the expansion of our business, and we do not anticipate paying any cash dividends in the foreseeable future. Our dividend policy notwithstanding, under Peruvian law, shareholders representing 20% of our class A shares and class B shares have the right to compel us to distribute at least 50% of the net profit of the previous fiscal year. See “Dividend Policy.”

 

  Each share of our common stock represents the same economic interest, except that, as provided in our by-laws, the class A shares benefit from the right to receive a preferred dividend consisting of 100% of any dividends distributed until we have distributed US$1 billion in the aggregate in cash dividends (or its equivalent in soles).

Subject to the terms of the deposit agreement, holders of our ADSs will be entitled to receive dividends, if any, paid on the class A shares represented by the ADSs. Cash dividends on our class A shares will be paid in soles and will be converted by the depositary into U.S. dollars and paid in U.S. dollars to the holders of ADSs, net of fees, expenses and any taxes. Under Peruvian law, dividends are subject to a withholding tax of 5% if paid to non-Peruvian holders. See “Dividends” and “Description of American Depositary Shares.”



 

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Depositary

Citibank, N.A.

 

Listing

We intend to apply to list our ADSs on the NYSE under the symbol “AUNA.”

 

  We intend to apply to list our class A shares on the BVL under the symbol “    .”

 

Risk Factors

See “Risk Factors” and the other information included in this prospectus for a discussion of factors you should consider before deciding to invest in our ADSs.

Unless otherwise indicated, all information contained in this prospectus assumes:

 

   

no exercise of the option granted to the underwriters to purchase up to             additional ADSs; and

 

   

            ADSs will be sold at US$        per ADS, which is the midpoint of the range set forth on the cover page of this prospectus.



 

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SUMMARY FINANCIAL AND OTHER INFORMATION

The following information is only a summary and should be read together with “Presentation of Financial and Other Information,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements and the consolidated financial statements of Grupo Las Américas, including the notes thereto, included elsewhere in this prospectus.

The summary statement of income and other comprehensive income and statement of financial position data as of June 30, 2020 and for the six months ended June 30, 2020 and 2019 are derived from our unaudited condensed consolidated interim financial statements included elsewhere in this prospectus. The summary statement of income and other comprehensive income and statement of financial position as of and for the years ended December 31, 2019, 2018 and 2017 of the Company are derived from the audited consolidated financial statements included elsewhere in this prospectus. Due to our acquisition of Grupo Las Américas at the end of 2018, our results of operations for the year ended December 31, 2019 are not directly comparable to the year ended December 31, 2018, and, because we owned Grupo Las Américas (which comprises our Healthcare Services in Colombia segment) for five days in 2018, our results of operations for the year ended December 31, 2018 are not directly comparable to our results of operations for the year ended December 31, 2017.

We maintain our books and records in soles and prepare our consolidated financial statements in accordance with IFRS.

The following table sets forth our summary unaudited condensed consolidated interim financial data as of June 30, 2020 and for the six months ended June 30, 2020 and 2019 and our summary consolidated financial data as of and for the years ended December 31, 2019, 2018 and 2017.

 

     Six months ended June 30,     Year ended December 31,  
     2020     2020     2019     2019     2019     2018     2017  
     (in millions
of US$)(1)
    (in millions of soles)     (in millions
of US$)(1)
    (in millions of soles)  

Statement of Income and Other Comprehensive Income Data:

              

Revenue

              

Premiums earned

   $ 78.1     S/ 276.9     S/ 252.9     $ 147.4     S/ 522.3     S/ 467.6     S/ 405.5  

Health care services revenue

     78.1       276.6       326.4       185.9       658.9       229.6       194.7  

Sales of medicines

     21.5       76.2       98.2       56.8       201.3       164.0       122.6  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total revenue from contracts with customers

     177.7       629.7       677.5       390.1       1,382.6       861.2       722.8  

Cost of sales and services

     (111.7     (395.7     (417.9     (238.3     (844.5     (497.8     (422.2
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

     66.0       234.0       259.6       151.8       538.0       363.4       300.6  

Selling expenses

     (18.6     (65.9     (64.7     (37.4     (132.5     (120.7     (102.9

Administrative expenses

     (34.8     (123.5     (114.9     (66.7     (236.5     (154.4     (129.4

Loss for impairment of trade receivables

     (1.9     (6.6     (3.0     (1.7     (6.0     (2.8     (11.8

Other expenses

     —         —         —         (0.4     (1.4     —         —    

Other income

     0.8       2.8       3.2       1.6       5.5       5.3       2.6  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating profit

     11.5       40.9       80.2       47.2       167.1       90.8       59.0  

Finance income

     1.0       3.5       8.5       0.4       1.5       0.6       1.1  

Finance costs

     (21.7     (77.0     (27.8     (15.8     (56.1     (38.2     (24.8
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net finance cost

     (20.7     (73.4     (19.4     (15.4     (54.5     (37.5     (23.7

Share of profit of equity-accounted investees

     0.1       0.2       1.1       0.7       2.4       1.0       0.4  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

(Loss) profit before tax

     (9.1     (32.4     61.9       32.5       115.1       54.2       35.7  

Income tax expense

     2.7       9.4       (24.8     (11.6     (41.2     (17.5     (15.1
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

(Loss) profit for the period

   $ (6.5   S/ (22.9   S/ 37.1     $ 20.8     S/ 73.9     S/ 36.6     S/ 20.7  


 

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(1)

Calculated based on an exchange rate of S/3.5437 to US$1.00 as of June 30, 2020.

 

     As of June 30,      As of December 31,  
     2020      2020      2019      2019      2018      2017  
     (in millions
of US$)(1)
     (in millions
of
soles)
     (in millions
of US$)(1)
     (in millions of soles)  

Statement of Financial Position Data:

                 

Cash and cash equivalents

   $ 21.1      S/ 74.7      $ 10.2      S/ 36.1      S/ 110.9      S/ 32.5  

Total assets

     544.6        1,930.0        533.7        1,891.3        1,740.1        697.2  

Total liabilities

     400.0        1,417.5        370.4        1,312.5        1,206.8        443.8  

Total equity

     144.6        512.5        163.3        578.8        533.3        253.4  

 

  (1)

Calculated based on an exchange rate of S/3.5437 to US$1.00 as of June 30, 2020.

 

     As of June 30,      Year ended December 31,  
     2020     2020      2019      2019      2018      2017  
     (in millions
of US$)(1)
    (in millions
of
soles)
     (in millions
of US$)(1)
     (in millions of soles)  

Segment Financial Data:

                

Revenue

                

Oncosalud Peru:

   $   88.8     S/   314.8      $   167.0      S/   591.9      S/   530.6      S/   456.8  

Healthcare Services in Peru:

   $ 55.1     S/ 195.2      $ 132.6      S/ 469.9      S/ 405.3      S/ 327.6  

Healthcare Services in Colombia(2):

   $ 46.4     S/ 164.4      $ 115.5      S/ 409.4      S/ 4.8      S/ —    

Operating profit

                

Oncosalud Peru:

   $ 17.7     S/ 62.6      $ 30.1      S/ 106.8      S/ 78.4      S/ 75.9  

Healthcare Services in Peru:

   $ (7.7   S/ (27.4    $ 6.3      S/ 22.3      S/ 16.4      S/ (12.8

Healthcare Services in Colombia(2):

   $ 2.0     S/ 7.1      $ 12.0      S/ 42.5      S/ (0.6    S/ —    

Profit (loss) before tax

                

Oncosalud Peru:

   $ 13.8     S/ 49.1      $ 27.4      S/ 97.0      S/ 60.2      S/ 56.3  

Healthcare Services in Peru:

   $ (9.0   S/ (32.1    $ 4.3      S/ 15.1      S/ 11.9      S/ (20.3

Healthcare Services in Colombia(2):

   $ (12.3   S/ (43.8    $ 3.2      S/ 11.4      S/ (7.4    S/ —    

 

(1)

Calculated based on an exchange rate of S/3.5437 to US$1.00 as of June 30, 2020.

(2)

We acquired Grupo Las Américas, which constitutes our Healthcare Services in Colombia segment, on December 27, 2018. As a result, we only had five days of results of operations for our Healthcare Services in Colombia segment in 2018 and none in 2017.



 

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Key Performance Indicators

 

    Six months ended June 30,     Year ended December 31,  
    2020     2020     2019     2019     2019     2018     2017  
    (in millions
of US$)(1)
   

(in millions of soles)

    (in millions
of US$)(1)
    (in millions of soles)  

EBITDA(2)

  $   20.3     S/     72.0     S/   108.7     $   63.9     S/     226.3     S/   123.8     S/     89.5  

Segment EBITDA(3)

             

Oncosalud Peru:

  $ 20.6     S/ 72.9     S/ 56.6     $ 34.3     S/ 121.5     S/ 91.0     S/ 87.9  

Healthcare Services in Peru:

  $ (4.8   S/ (16.9   S/ 20.5     $ 12.4     S/ 43.9     S/ 31.9     S/ 2.0  

Healthcare Services in Colombia:

  $ 3.8     S/ 13.3     S/ 27.8     $ 16.5     S/ 58.4     S/ (0.5     —    

Adjusted EBITDA(4)

  $ 21.0     S/ 74.7     S/ 111.5     $ 66.1     S/ 234.4     S/ 131.5     S/ 90.7  

 

     Six months ended June 30,     Year ended December 31,  
     2020     2019     2019     2018     2017  

Oncology Services:

          

Number of plan members(5)(6)

     888,708       900,429       922,945       896,838       881,083  

Average monthly revenue per plan member(7)

   S/ 51.2     S/ 47.0     S/ 48.1     S/ 44.0     S/ 39.5  

Number of preventive check-ups

     21,715       44,550       104,898       92,364       78,685  

Number of patients treated(8)

     10,080       11,421       14,230       12,646       11,659  

Medical loss ratio(9)

     41.1     53.9     51.9     52.4     54.1

% of cost of services related to preventive check-ups

     2.8     8.5     9.1     7.3     9.7

% of cost of services related to treatment provided by Oncosalud network facilities

     67.6     66.9     66.2     67.7     67.5

% of cost of services related to treatment provided by Auna Peru network facilities

     26.1     21.5     21.8     21.7     19.0

% of cost of services related to treatment provided outside our networks

     3.5     3.0     3.0     3.2     3.7

Healthcare Services:

          

Number of beds(5)

          

In Peru:

     284       284       284       282       279  

In Colombia(10):

     305       305       305       —         —    

Number of patients treated(11)

          

In Peru:

     95,550       126,558       198,664       175,605       149,265  

In Colombia(10):

     124,288       152,812       246,864       —         —    

Average revenue per patient

          

In Peru:

   S/ 2,043     S/ 1,821     S/ 2,365     S/ 2,307     S/ 2,196  

In Colombia(10):

   S/ 1,323     S/ 1,339     S/ 1,659     S/ —       S/ —    

Total number of outpatient consultations

          

In Peru:

     165,498       275,150       541,934       459,407       350,487  

In Colombia(10):

     23,080       26,217       54,044       —         —    

Total number of emergency treatments

          

In Peru:

     39,682       53,603       113,519       98,359       81,708  

In Colombia(10):

     29,648       30,559       62,743       —         —    

Total number of days hospitalized(12)

          

In Peru:

     24,567       30,275       58,046       56,314       46,686  

In Colombia(10):

     35,117       44,873       88,783       —         —    

 

(1)

Calculated based on an exchange rate of S/3.5437 to US$1.00 as of June 30, 2020.



 

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Table of Contents
(2)

EBITDA is a non-GAAP financial measure. See “Presentation of Financial and Other Information—Non-GAAP Financial Measures.” The following table shows a reconciliation of EBITDA to profit for the period for each of the periods presented.

 

     Six months ended June 30,      Year ended December 31,  
     2020     2020     2019      2019      2019      2018      2017  
     (in millions
of US$)(1)
    (in millions of soles)      (in millions
of US$)(1)
     (in millions of soles)  

(Loss) profit for the year period

   $ (6.5   S/ (22.9   S/ 37.1      $   20.8      S/ 73.9      S/ 36.6      S/ 20.7  

Income tax expense

     (2.7     (9.4     24.8        11.6        41.2        17.5        15.1  

Net finance cost

     20.7       73.4       19.4        15.4        54.5        37.5        23.7  

Depreciation and amortization

     8.7       30.9       27.4        16.0        56.7        32.0        30.0  
  

 

 

   

 

 

   

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

EBITDA

   $ 20.3     S/   72.0     S/   108.7      $ 63.9      S/   226.3      S/   123.8      S/   89.5  


 

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Table of Contents
(3)

Segment EBITDA is a non-GAAP financial measure. See “Presentation of Financial and Other Information—Non-GAAP Financial Measures.” The following table shows a reconciliation of profit before tax to Segment EBITDA for each of our segments as well as Grupo Las Americas’ net earnings to EBITDA for the period from January 1, 2018 to December 26, 2018.

 

     Six months ended June 30, 2020  
     Oncosalud
Peru
     Healthcare
Services in
Peru
     Healthcare
Services in
Colombia
     Total
Reportable
Segments(a)
 
     (in millions of soles)  

(Loss) profit before tax

   S/ 49.1      S/ (32.1      S/  (43.8    S/ (26.7

Net finance cost(b)

     13.4        4.6        51.2        69.2  

Depreciation and amortization

     10.5        10.5        5.8        26.8  
  

 

 

    

 

 

    

 

 

    

 

 

 

Segment EBITDA

   S/     72.9      S/   (16.9      S/  13.3      S/   69.2  

 

     Six months ended June 30, 2019  
     Oncosalud
Peru
     Healthcare
Services in
Peru
     Healthcare
Services in
Colombia
     Total
Reportable
Segments(a)
 
     (in millions of soles)  

Profit before tax

   S/ 41.7      S/ 9.1      S/ 11.7      S/ 62.5  

Net finance cost(b)

     7.0        2.5        9.6        19.1  

Depreciation and amortization

     7.8        8.9        6.6        23.3  
  

 

 

    

 

 

    

 

 

    

 

 

 

Segment EBITDA

   S/     56.6      S/   20.5      S/   27.8      S/   104.9  

 

     Year ended December 31, 2019  
     Oncosalud
Peru
     Healthcare
Services in
Peru
     Healthcare
Services in
Colombia
     Total
Reportable
Segments(a)
 
     (in millions of soles)  

Profit before tax

   S/ 97.0      S/   15.1      S/   11.4      S/ 123.5  

Net finance cost(b)

     10.8        7.3        32.4        50.5  

Depreciation and amortization

     13.7        21.5        14.5        49.7  
  

 

 

    

 

 

    

 

 

    

 

 

 

Segment EBITDA

   S/     121.5      S/ 43.9      S/ 58.4      S/   223.7  

 

     Year ended December 31, 2018  
     Oncosalud
Peru
     Healthcare
Services in
Peru
     Healthcare
Services in
Colombia
     Total
Reportable
Segments(a)
 
     (in millions of soles)  

Profit before tax

   S/ 60.2      S/ 11.9        S/  (7.4    S/ 64.7  

Net finance cost(b)

     19.1        4.4        6.8        30.3  

Depreciation and amortization

     11.6        15.5        0.1        27.2  
  

 

 

    

 

 

    

 

 

    

 

 

 

Segment EBITDA

   S/   91.0      S/   31.9        S/  (0.5    S/   122.2  

 

     Year ended December 31, 2017  
     Oncosalud
Peru
     Healthcare
Services in
Peru
     Total
Reportable
Segments(a)
 
     (in millions of soles)  

Profit before tax

   S/   56.3      S/   (20.3    S/ 36.0  

Net finance cost(b)

     20.1        7.5        27.6  

Depreciation and amortization

     11.5        14.8        26.3  
  

 

 

    

 

 

    

 

 

 

Segment EBITDA

   S/ 87.9      S/ 2.0      S/   90.0  


 

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Table of Contents

 

  (a)

Does not include the elimination of intra-group balances and transactions.

  (b)

Represents exchange difference, net, and interest expense, net.

Reconciliation of EBITDA for Grupo Las Américas

 

     Period from January 1, 2018 to December 26,
2018
 
     (in millions of soles)(a)      (in millions of COP)  

Net earnings from ordinary activities

   S/   17.0        COP 18,158.4  

Taxes

     9.9        10,574.7  

Net financial expense

     9.6        10,199.5  

Depreciation

     8.9        9,482.9  

Amortization

     0.7        787.6  
  

 

 

    

 

 

 

EBITDA

   S/ 46.1        COP 49,203.0  

 

  (a)

Calculated based an exchange rate of COP1,067.26575 to S/1.00 as of June 30, 2020.

 

(4)

Adjusted EBITDA is a non-GAAP financial measure. See “Presentation of Financial and Other Information—Non-GAAP Financial Measures.” The following table shows a reconciliation of Adjusted EBITDA to profit for the period for each of the periods presented.

 

     Six months ended June 30,      Year ended December 31,  
     2020     2020     2019      2019      2019      2018      2017  
     (in millions
of US$)(1)
    (in millions of soles)      (in millions
of US$)(1)
     (in millions of soles)  

(Loss) profit for the period

   $ (6.5   S/ (22.9   S/   37.1      $ 20.9      S/ 73.9      S/ 36.6      S/   20.7  

Income tax expense

     (2.7     (9.4     24.8        11.6        41.2        17.5        15.1  

Net finance cost

     20.7       73.4       19.4        15.4        54.5        37.5        23.7  

Depreciation and amortization

     8.7       30.9       27.4        16.0        56.7        32.0        30.0  

Pre-operating expenses(a)

     0.3       0.9       0.7        0.5        1.8        0.7        1.2  

Business development expenses(b)

     0.5       1.8       0.9        0.3        1.2        7.0        —    

Retention bonus for doctors(c)

     —         —         1.2        1.0        3.7        —          —    

Change in fair value of assets held for sale(d)

     0.01       0.04       —          0.1        0.5        —          —    

Loss on sale of investments in associates(e)

     —         —         —          0.3        0.9        —          —    
  

 

 

   

 

 

   

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Adjusted EBITDA

   $   21.0     S/   74.7     S/   111.5      $   66.1      S/  234.4      S/   131.5      S/ 90.7  

 

  (a)

Pre-operating expenses consist of legal and administrative expenses incurred in connection with projects under construction, such as the new hospital in Chiclayo, costs relating to the Torre Trecca PPP and legal and administrative expenses incurred in connection with the acquisition of land banks for future projects.

  (b)

Business development expenses consist of expenses incurred in connection with projects for the expansion into new markets, including through greenfield projects and M&A activity. In 2018 and 2019 these expenses were related to the acquisition of Grupo Las Américas, including legal fees.

  (c)

One time retention bonus for doctors employed by Grupo Las Américas to secure their continued employment by Auna during the first year of operations after the acquisition of Grupo Las Américas.

  (d)

Change in fair value of assets held for sale consists of the change in fair value of certain land held for sale by Grupo Las Américas at the time of its acquisition by Auna.



 

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Table of Contents
  (e)

Loss on sale of investments in associates consists of losses incurred in connection with the sale of our stake in Hospital en Casa S.A., a company in which we acquired a minority stake through the acquisition of Grupo Las Américas.

 

(5)

As of year-end.

(6)

Includes active plan members as well as plan members that have not paid monthly fees due on their plans for up to three months, during which time their plans remain active. Once such three month period has passed, their plans are terminated and they are not included in our total number of plan members. As of June 30, 2020, we had 849,471 active members and 39,237 inactive members.

(7)

Total revenue for the period corresponding to premiums earned in the Oncosalud Peru segment divided by the average number of plan members during the period, divided by the number of months in the period.

(8)

Number of individual plan members receiving treatment for cancer during the year, which may include multiple instances of treatment per plan member.

(9)

MLR is calculated as (i) claims for medical treatment generated by our prepaid oncology plans plus (ii) technical reserves relating to plan members treated pursuant to such plans, whether at our facilities or third-party facilities, divided by revenue generated by our prepaid oncology plans.

(10)

We acquired Grupo Las Américas on December 27, 2018. The information in this table for the year ended December 31, 2018, as it relates to Grupo Las Américas, is based on data provided to the Company by Grupo Las Américas. We believe it is reliable, but it does not form part of our consolidated operating history. We acquired Clínica Portoazul, which has added 150 beds to our Auna Colombia network, in September 2020 and as such, the information in this table does not include data for Clínica Portoazul.

(11)

Number of individual patients that received healthcare treatment during the year, which may include multiple instances of treatment per plan member.

(12)

Total number of days in which any of our beds had a hospitalized patient.



 

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RISK FACTORS

Investing in our ADSs involves a significant degree of risk. The material risks and uncertainties that management believes affect us are described below. Before investing in the ADSs, you should carefully consider the risks and uncertainties described below in addition to the other information contained in this prospectus. In general, investing in the securities of issuers in emerging market countries, such as Peru, involves a higher degree of risk than investing in the securities of issuers whose operations are located in the United States or other more developed countries. Any of the following risks, alone or together with risks and uncertainties that we do not know or currently deem immaterial, could have a material adverse effect on our business, financial condition, results of operations or prospects. As a result, the trading price of the ADSs could decline, and you could lose some or all of your investment. When determining whether to invest, you should consider all of the information in this prospectus, including our financial statements and the notes thereto. Further, the risk factors below include cautionary statements identifying important factors that could cause actual results to differ materially from those expressed in any forward-looking statements made by us or on our behalf. See “Forward-Looking Statements.”

Risks Related to Our Business

We depend substantially on our brands’ reputation among our plan members, patients, the medical community and our suppliers in the regions in which we operate, and any negative impact on those brands could have a material adverse effect on us.

We operate our business through several brands. Our principal brands are Auna, our primary brand, as well as Oncosalud, Clínica Delgado and Clínica Las Américas, all of which we believe are viewed positively and associated with high-quality healthcare services in the markets in which we operate. Our brands’ reputation is fundamental to driving demand for our healthcare services and prepaid plans and to our ability to attract and retain qualified medical personnel to work at our facilities. In addition, our brands’ reputation is key to our ability to negotiate favorable contracts with third parties, such as insurance providers and medical suppliers. Our ability to maintain our reputation is contingent on offering high-quality and efficient healthcare services. Accordingly, if we are unable to offer high-quality healthcare services and/or maintain our brands’ reputation among our plan members, patients and medical professionals, our business, financial condition and results of operations may be adversely affected.

In addition, there has been a marked increase in the use of social media platforms and other forms of internet-based communications that provide individuals and businesses with access to a broad audience of consumers and other interested persons. The availability of information on social media platforms, including reviews, is virtually immediate, as is its impact. Many social media platforms allow the publishing of the content posted by their subscribers and participants, often without filters or checks on the accuracy of such content. If we receive negative reviews on social media or other negative publicity, even if such reviews are inaccurate, our brands’ reputation could suffer, affecting demand for our healthcare services, or we may have more difficulty attracting and retaining qualified medical personnel to work at our facilities, any of which could affect our ability to offer high-quality healthcare services and could have a material adverse effect on our business, results of operations and financial condition.

Our operating results may be adversely affected if we are not able to estimate and control healthcare costs, or if we cannot increase our prices to offset cost or expenditure increases, at our hospitals and clinics and with respect to our oncology plans.

Our operating results depend in large part on our ability to estimate and control the future costs involved in providing healthcare services at our hospitals and clinics. According to data published by the Instituto Nacional de Estadística e Informática (“INEI”) in Peru and the Departamento Administrativo Nacional de Estadística in Colombia, healthcare costs increased in Peru and Colombia by 2.2% and 2.8%, respectively, during 2019.

 

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Table of Contents

The main factors affecting healthcare costs and expenditures, and our ability to offset increases in those include:

 

   

increased cost of medical supplies, including pharmaceuticals, whether due to demand, inflation or otherwise;

 

   

the cost of acquiring new equipment and technologies, or upgrading existing equipment and technologies, needed to provide our services;

 

   

annual renegotiations of contracts with insurance providers and their ability to pay for our healthcare services; and

 

   

periodic renegotiations of contracts with doctors and medical support personnel as well as other medical services providers and suppliers.

Many of these factors are outside of our control. In addition, certain aspects of our growth strategy may also result in increased operating expenditures, such as opening new facilities or hiring additional personnel, which may not be offset by an increase in our revenue, resulting in diminished operating margins.

In addition, with respect to our oncology plans, differences between predicted and actual healthcare costs as a percentage of revenues attributable to our oncology plans can result in significant changes in our results of operations. Costs at our oncology business vary by the number of patients that are diagnosed in any given period as well as the stage of diagnosis (i.e., Stage I versus Stage IV) and type of cancer diagnosed. Later-stage diagnoses typically involve more costly treatment regimens, and certain types of cancer may be more likely to require newer, more expensive treatment options, which may also impact our costs. We adjust our plan pricing on an annual basis to reflect current cost projections and this adjusted pricing is automatically applied to any plans that are automatically renewed for another year. However, because our oncology plans are prepaid for one-year terms, any increase in costs in excess of our cost projections within a given period cannot be recovered in that plan period by increasing pricing.

If any of the above events occur and we are unable to rapidly adapt in proportion to the increase in costs for the provision of healthcare services, our business, financial condition and results of operations may be adversely affected.

Our business has been and continues to be negatively impacted by the COVID-19 pandemic.

Since December 2019, a novel strain of coronavirus (COVID-19) has spread around the world, including in Peru and Colombia. The Peruvian government closed its international borders and ordered a national lockdown on March 16, 2020 that lasted until June 30, 2020. In connection with the lockdown, all non-essential businesses were ordered to close. On July 1, 2020, the national lockdown was lifted and non-essential businesses gradually reopened; however, as a result of a subsequent increase in COVID-19 cases, lockdowns were ordered in certain cities, including Arequipa, in which we have facilities. Furthermore, as of the date of this prospectus, Peru’s borders remain closed indefinitely and Peru continues to be one of the countries with the highest mortality rates from COVID-19. Similarly, the Colombian government closed its borders and ordered a national lockdown on March 25, 2020 until August 31, 2020. However, at the end of August 2020, it announced a selective quarantine phase from September 1, 2020 until at least September 30, 2020. The lockdowns in Peru and Colombia effectively restricted nearly all economic activity in both countries, significantly impacting both the financial and operating performance of our business.

Our hospitals in Peru and Colombia are essential businesses and remain open for limited services. As a result of the pandemic, we were ordered to cancel all elective, non-emergency procedures and outpatient consultations in Peru and Colombia, restricting our services to emergency care only for the duration of the lockdowns. As a result, revenue from our Healthcare Services in Peru and Healthcare Services in Colombia segments decreased 15.3% and 19.6%, respectively, for the six months ended June 30, 2020 compared to the six months ended June 30, 2019. We

 

27


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have also seen a significant increase in the cost of sales and services in recent months due to an increase in the purchase of gloves, masks and other personal protective equipment for all medical and administrative personnel who are in direct patient contact. At the same time, we have seen an increase in the prices of personal protective equipment, which has been in short supply around the world. In addition, we have experienced staffing shortages at our hospitals and clinics as medical personnel, working on the front lines, have contracted COVID-19 at high rates. We have covered these shortages by hiring temporary personnel and granting special bonuses to medical personnel caring for patients with COVID-19, which has increased our labor-related costs. As a result of increased costs, gross profit in our Healthcare Services in Peru and Healthcare Services in Colombia segments decreased 58.5% and 35.9%, respectively, for the six months ended June 30, 2020 compared to the six months ended June 30, 2019.

In addition, in June 2020, the Peruvian government reached an agreement with certain private clinics, including Clínica Bellavista, Clínica Miraflores and Clínica Vallesur, whereby private clinics agreed to treat uninsured patients for COVID-19 for a flat fee, regardless of length of stay. Pursuant to the agreement, private clinics are being reimbursed by SIS and EsSalud. Although this has not caused a material impact on our results of operations as of the date of this prospectus, there can be no guarantee that the Peruvian government will not fail to reimburse us for such services or pressure private clinics, including our clinic, to provide services to uninsured patients on less favorable terms if the pandemic continues.

Moreover, the healthcare systems in several countries, including Peru and Colombia, have been overwhelmed with hospitals lacking the supply and personnel to treat the influx of COVID-19 patients and there have been several reports in the media containing misinformation about COVID-19 testing and COVID-19 treatment. As a result, we have seen public trust in healthcare facilities decline more broadly. Although such conditions have not been present in our facilities as of the date of this prospectus, if such conditions occur in our facilities and we have difficulty treating the influx of patients, we may face claims for damages and experience reputational damage and loss of public trust in the quality of our healthcare services.

The COVID-19 pandemic has also led to disruption of regional and global economic activity, and to volatility and a downturn in the financial markets, which is expected to continue at least in the near term. In our Oncosalud segment, we have seen a decline in sales of our prepaid oncology plans as much of our sales force is working from home and certain of our other sales channels are shut down completely as of the date of this prospectus. The disruption has also led to a significant increase in unemployment and as a result, we have seen an increase in the number of plan members cancelling their plans, which led to a 1.3% decrease in our number of plan members from 900,429 in June 2019 to 888,708 in June 2020. Plan members cancelling plans were primarily younger members who are at less risk of developing cancer. Because plan prices increase by age, this demographic trend had a positive impact on our segment revenue during the first half of the year and acted as an offset to other declines. We cannot predict whether the changes in the demographics of our plan members and Peruvian government policies in response to COVID-19 will continue to have a similar offsetting impact going forward. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Impact of COVID-19” for more detail.

To date, we have taken certain measures in the second and third quarters of 2020 to bolster our capital position as a result of the economic uncertainty. For example, four of our subsidiaries, Medic Ser S.A.C. (“Medic Ser”), Oncocenter Perú S.A.C. (“Oncocenter”), Oncosalud S.A.C. and GSP Servicios Generales S.A.C. (“GSP Servicios Generales”), each applied for and received a loan of S/10 million and Clínica Vallesur S.A. applied for and received a loan of S/7.5 million, in each case under a loan relief program offered by the Peruvian government in response to the COVID-19 pandemic. In addition, our subsidiaries Grupo Las Américas and Instituto de Cancerologia S.A.S. applied for and received loans of COP12,837.0 million and COP4,069.0 million, respectively, under a loan relief program offered by the Colombian government in response to the COVID-19 pandemic. The loans our Peruvian subsidiaries received contain certain restrictions on their ability to pay dividends. See “Risk Factors—Risks Related to Our Business—We are a holding company and all of our operations are conducted through our subsidiaries. Our ability to pay dividends to you will depend on the ability of our subsidiaries to pay dividends and make other distributions to us.”

 

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Table of Contents

While we continue to pursue our capital expenditure projects, certain of our ongoing construction projects have been paused until economic activity fully resumes in the applicable region. In addition, we have shifted some of our capital expenditure budget to purchase additional resources to adequately address the pandemic, such as additional ventilators and temporary isolation units. Although we expect to be in a position to resume our construction projects in the near future, our cost of capital may increase, which could in turn negatively affect our ability to fund these projects in the future.

The extent to which the COVID-19 pandemic impacts our business, results of operations, liquidity and financial condition will depend on the duration and severity of the pandemic and the level of continued disruption to regional and global economic activity, which are impossible to predict at this time. Future developments with respect to COVID-19 are highly uncertain and new information may emerge concerning the severity of the COVID-19 pandemic and the actions necessary to mitigate or contain its impact. While such actions may be relaxed or rolled back if and when COVID-19 abates, the actions may be reinstated as the pandemic continues to evolve. The scope and timing of any such reinstatements is difficult to predict and may continue to materially affect our financial and operating performance in the future.

Any future pandemic, epidemic or outbreak of a contagious disease in the markets in which we operate or that otherwise impacts our facilities could adversely impact our business.

The operation of a hospital involves the treatment of patients with a variety of infectious diseases. Previously healthy or uninfected people may contract serious communicable diseases in connection with their stay or visit at hospitals. In addition, these germs or infections could also infect employees and thus significantly reduce the treatment and care capacity at the medical facilities involved in the short-, medium- and long-term.

Any future pandemic, epidemic, outbreak of a contagious disease or other public health crisis could similarly disrupt our operations, diminish the public trust in our healthcare services, especially if we fail to accurately or timely diagnose any future contagious diseases and adversely affect our business, financial condition and results of operations. In addition, the introduction of new laws and regulations, or changes to existing ones, as a response to COVID-19 or a future pandemic, epidemic or public health crisis is difficult to predict and could materially affect our business. Our facilities could also be affected by the withdrawal of licenses, permits or authorizations as a result of a pandemic, epidemic or outbreak. Although we have disaster plans in place and operate pursuant to infectious disease protocols, the potential impact of a pandemic, epidemic or outbreak of a contagious disease with respect to our markets or our facilities is difficult to predict and could adversely impact our business.

We have identified material weaknesses in our internal control over financial reporting. If we are unable to remediate these material weaknesses or otherwise fail to maintain an effective system of internal controls, we may not be able to prevent or detect a material misstatement of our financial statements, and may not be able to accurately or timely report our financial condition or results of operations, which may adversely affect our business and the price of our ADSs.

We have identified material weaknesses in our internal control over financial reporting. A company’s internal control over financial reporting is a process designed by, or under the supervision of, a company’s principal executive and principal financial officers, or persons performing similar functions, and effected by a company’s board of directors, management and other personnel to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements in accordance with IFRS. A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the annual or interim financial statements will not be prevented or detected on a timely basis.

As an emerging growth company, we currently are not required to comply with the Sarbanes-Oxley Act. As a result, neither our management nor an independent registered public accounting firm has performed an

 

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evaluation of our internal control over financial reporting in accordance with the provisions of the Sarbanes-Oxley Act. Had we or our independent registered public accounting firm performed an evaluation of our internal control over financial reporting in accordance with the provisions of the Sarbanes-Oxley Act, additional material weaknesses may have been identified. The report on the effectiveness of our internal control over financial reporting pursuant to Section 404(b) of the Sarbanes-Oxley Act of 2002 will not be required until our annual report on Form 20-F following the date on which we cease to qualify as an “emerging growth company,” which may be up to five full fiscal years following the date of this offering.

The material weaknesses identified in our internal controls relate to (i) the adequacy of our information technology (“IT”) security management, including segregation of duties and access and privileged users, (ii) the comprehensiveness of our accounting policies and procedures manuals and (iii) the formalization of controls in key areas of the accounting process, including relating to the documentation and implementation of IFRS reporting requirements. If these weaknesses are not remediated, they could result in material misstatements in our annual or interim financial statements.

We have taken steps to remediate the aforementioned weaknesses, including: (i) designating a working group to develop a remediation plan focused on the internal control of the areas related to the material weaknesses, (ii) hiring financial reporting and internal control professionals with IFRS and PCAOB experience and (iii) conducting trainings for our personnel with respect to IFRS and PCAOB requirements. These remediation steps will be monitored by the audit and risk committee and senior management.

We cannot assure you that the measures we have taken to date, and actions we may take in the future, will be sufficient to remediate the control deficiencies that led to these material weaknesses in our internal control over financial reporting or that they will prevent or avoid potential future material weaknesses.

Our revenues and results of operations are affected by our relationships with third-party payers, and any change to, or deterioration in, these relationships could have a material adverse effect on us, such as, for example, due to limitations on reimbursement and, in some cases, reduced levels of reimbursement for healthcare services as a result of changes in the SGSSS in recent years.

During the first six months of 2020, in our healthcare services business in Peru and Colombia, 79% of payments came from third-party insurance providers, including the Peruvian and Colombian governments, and 21% were paid out-of-pocket by our patients. In Peru, our accounts receivable are typically collected in an average of 80 days whereas in Colombia, these are typically collected in 150 days. An increase in this timing can significantly impact our ability to convert recognized revenue into payments, lengthening our cash conversion cycle. In addition, certain of our principal third-party payers also run their own hospital networks and therefore compete with us. See “—We face competition in a fragmented market like Peru and Colombia, from our current competitors and from future competitors that might enter the sector.”

In Peru, a facility must be included on an insurance provider’s approved list of healthcare facilities for an individual to be reimbursed for the services they receive at that facility. We negotiate with private insurance providers to ensure that we are on their list of approved facilities and to agree on the prices at which we are reimbursed for services provided to their plan members. As a large hospital network with one of the premier hospitals in Lima and leading hospitals in several other key cities, we have historically been able to renegotiate contracts at favorable rates with insurance providers on an annual basis. However, we expect continued third-party efforts to aggressively manage reimbursement levels and control costs. Moreover, our negotiating position could decline in the future if our brands’ reputation suffers. See “—We depend substantially on our brands’ reputation among our plan members, patients, the medical community and our suppliers in the regions in which we operate.”

In Colombia, approximately 95% of the population receives healthcare insurance through the government’s social security system, the SGSSS. Funds contributed to the SGSSS are administered by a government trust and

 

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distributed to private healthcare coverage providers, or EPSs. Changes in the SGSSS in recent years have resulted in limitations on reimbursement and, in some cases, reduced levels of reimbursement for healthcare services. Moreover, payments from SGSSS funds are subject to statutory and regulatory changes, administrative rulings, interpretations and determinations, requirements for utilization review, and funding restrictions, all of which could materially increase or decrease program payments, as well as negatively affect the cost of providing service to patients and the timing of payments to facilities. We are unable to predict the effect of recent and future policy changes on our operations, and any such changes could have a material adverse effect on us.

In addition, like in Peru, EPSs in Colombia provide plan members with an approved list of facilities and plan members can choose which of those facilities to go to, although under certain circumstances, a plan member can challenge that decision and request to go elsewhere in the EPS’ network. If we do not maintain our reputation among EPSs and/or patients as one of the leading healthcare providers in Medellín and Barranquilla, EPSs may choose to send their plan members to, or patients may choose to go to, other facilities, which could have a material adverse effect on our business, financial condition and results of operations.

We face competition in a fragmented market like Peru and in Colombia, from our current competitors and other competitors that might enter the sector.

The healthcare industry in Peru and Colombia is competitive. In Peru, we face competition from other privately-operated hospitals, clinics and healthcare networks for the provision of healthcare services, many of which are operated by our principal third-party payers. While our Auna Peru network is currently one of the few private healthcare networks in the country with broad geographic reach, and the market is generally fragmented, it is possible that healthcare services providers operating other private hospitals and clinics will consolidate and further integrate their operations across facilities, which could cause us to lose market share. For example, Rímac Seguros y Reaseguros S.A. (“Rímac”) and El Pacífico-Peruano Suiza Compañia de Seguros y Reaseguros S.A. (“Pacífico”), two of the main insurance providers in Peru that are also significant third-party payers for Auna services, own and operate their own hospital networks that compete with us. Moreover, our flagship hospital, Clínica Delgado, faces competition from other high-complexity hospitals and clinics in Lima, such as Clínica Ricardo Palma, Clínica San Pablo and Clínica Sanna San Borja, which is operated by Pacífico. If demand for Clínica Delgado’s services decline, demand for services at our network overall may decline and/or our negotiating position with insurance providers and other third parties could suffer, any of which could have a material adverse effect on our business, financial condition and results of operations.

Currently, the quality of public sector medical services in Peru, principally provided by EsSalud and Seguro Integral de Salud (“SIS”), is widely considered deficient and over capacity, with long scheduling times, short appointments with doctors and a shortage of facilities, and we do not currently face substantial competition from government providers in Peru. We may face competition from government providers in the future if the Peruvian government allocates additional financial resources to EsSalud and/or SIS and/or they are able to improve their infrastructure and increase their capacity and the quality of care they provide.

At Oncosalud, our vertically integrated oncology plan provider, we also face competition from companies that offer healthcare plans covering oncology services, including traditional insurance providers and other companies offering prepaid plans. While we offer specialized and vertically integrated services that we believe provide us with a competitive advantage, our competitors may enhance the quality of their offerings in the future. Our competitors Rímac and Pacífico are the two main insurance providers in Peru, both of which have substantial financial resources. If any of our competitors, including Rímac and Pacífico, is able to offer more comprehensive or less expensive oncology services, we may lose market share in Peru, which could have a material adverse effect on our business, financial condition and results of operations.

Unlike in Peru where the market is more fragmented, there are several existing large hospital systems in Colombia and the gap between the quality of services provided by state-owned facilities and privately-owned facilities is much smaller. As a result, our Auna Colombia network faces competition in Colombia from both

 

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public and private healthcare services providers. Moreover, although healthcare coverage providers in Colombia typically dictate which facility a patient can go to for services, patients can, and frequently do, challenge these decisions, which fosters competition among healthcare providers in the market.

In Medellín, where a majority of our Colombian operations are currently located, we face competition from other hospital networks with premium facilities, including San Vicente de Paul, Pablo Tobón Uribe and El Rosario. In Barranquilla, where Clínica Portoazul is located, we also face competition from other hospital networks, including Clínica Iberoamericana (Grupo Keralty/Sanitas), Clínica del Caribe, Organización Clínica General del Norte y Bonnadona. Certain of our competitors may have greater financial resources, be better equipped and offer a broader range of healthcare services than we do. If we are unable to maintain or grow our competitive position in Colombia, our business, financial condition and results of operations may be adversely affected.

Our performance depends on our ability to recruit and retain quality medical professionals, and we face a great deal of competition for these professionals, which may increase our labor costs and negatively impact our results of operations.

We believe we have a unique, patient-centric culture that is important to our mission of transforming healthcare in the countries in which we operate. The success and competitive advantage of our hospitals and clinics depends in large part on the number, quality and experience of the physicians and other medical professionals at our facilities, as well as their ability to fit into our culture and our ability to maintain good relations with those professionals. The majority of our physicians in Peru and Colombia are hired on a fee-for-service basis. As a result, and because these arrangements are non-exclusive, there is significant competition between us and our competitors to ensure that the best qualified and most renowned physicians are treating patients at our hospitals. If we are unable to provide high-quality treatment for our patients, ethical and professional standards, adequate support personnel, technologically advanced equipment and facilities and research opportunities that meet their professional needs and goals, our physicians may choose to practice at other facilities. We may not be able to compete with other healthcare providers on some or all of these factors.

Physicians may also refuse to enter into new contracts with us, demand higher payments or perform treatments or procedures that result in higher medical expenses without generating corresponding revenue. In addition, a small number of physicians within each of our facilities generate a disproportionate share of our inpatient revenues and admissions, in particular physicians specializing in oncology, cardiology, trauma, neurology and general surgery. The loss of one or more of these physicians, even if temporary, could reduce patient demand for our services and cause a material reduction in our revenues. In addition, it could take significant time to find a replacement for any of our top physicians given the difficulty and cost associated with recruiting and retaining physicians, which may in turn adversely affect our ability to recruit and retain other doctors.

Our medical support staff, in particular our nurses, are also critical to our success and competitive advantage. Our medical support staff is on the front lines of a patient’s experience at our hospitals and clinics, and we depend on their efforts, abilities, and experience to maintain our reputation as a high-quality provider of healthcare services. In recruiting and retaining qualified hospital management, nurses and other medical personnel, such as pharmacists and lab technicians, we compete with other healthcare providers, including government hospitals.

Historically, there has been a shortage of qualified nurses and other medical support personnel in Peru and Colombia, which has been a significant operating issue for us and other healthcare providers. This shortage may require us to enhance wages and benefits to recruit, train and retain nurses and other medical support personnel or require us to hire expensive temporary personnel. Moreover, our failure to recruit and retain enough qualified nurses and other medical support personnel could result in loss of customer goodwill and a negative impact on our reputation.

 

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We cannot predict the degree to which we will be affected by the future availability or cost of attracting and retaining talented medical support staff. If our general labor and related expenses increase, we may not be able to raise the rates we charge for our services correspondingly. Our failure to either recruit and retain qualified hospital management, nurses and other medical support personnel or control our labor costs could harm our business, financial condition and results of operations.

Any acquisitions, partnerships or joint ventures that we make or enter into could disrupt our business and harm our financial condition.

Acquisitions, partnerships and joint ventures are an integral part of our inorganic growth strategy. We evaluate, and expect in the future to evaluate, potential strategic acquisitions of, and partnerships or joint ventures with, other hospital networks and complementary businesses. However, we may not be successful in identifying acquisition, partnership and joint venture targets or we may use estimates and judgments to evaluate the operations and future revenues of a target that turn out to be inaccurate.

In addition, we may not be able to successfully finance or integrate any hospitals or other businesses that we acquire or with which we form a partnership or joint venture, and we may not achieve the anticipated benefits of such project. Furthermore, the integration of any acquisition, partnership or joint venture may divert management’s time and resources from our core business and disrupt our operations. As a result of any of the foregoing, we may spend valuable management time and money on projects that do not increase our number of patients or revenue. Acquisitions also involve special risks, including the potential assumption of unanticipated liabilities and contingencies. Even if such liabilities are assumed by the sellers, we may have difficulties enforcing our rights, contractual or otherwise. Moreover, our competitors may be willing or able to pay more than us for acquisitions, which may cause us to lose certain acquisitions that we would otherwise desire to complete. We cannot ensure that any acquisition, partnership or joint venture we make will not have a material adverse effect on our business, financial condition and results of operations.

In addition, the acquisition of a healthcare provider may require approval of the relevant antitrust regulator, such as the Superintendencia de Industria y Comercio (the “SIC”) in Colombia. In Peru, entities administering public health insurance funds (Instituciones Administradoras de Fondos de Aseguramiento en Salud Públicas or “IAFASs”), such as Oncosalud, must provide written notice to SUSALUD of any transfer of shares within 10 business days from such transfer. In addition, newly enacted legislation in Peru expected to become effective in March 2021 establishes a merger control regime that will require us to comply with antitrust clearance for certain acquisitions. If the relevant regulator delays or withholds its approval for acquisitions in Peru, Colombia or elsewhere, we may not be able to implement our business strategy on a timely basis or grow our operations in the timeframe that we expect, which may have a material adverse effect on our business, financial condition and results of operations.

We may not be able to successfully integrate our acquired facilities or obtain the expected benefits from such acquisitions.

Our strategic growth plan, particularly in Colombia, depends on the acquisition and integration of existing medical care facilities into our network. We may not be able to successfully and efficiently integrate the operations of the facilities we acquire, including their personnel, financial systems, distribution or operating procedures. In 2018, we completed the acquisition of Grupo Las Américas in Medellín, Colombia and in 2020, we completed the acquisition of Clínica Portoazul in Barranquilla, Colombia. The integration process for both acquisitions is ongoing. We may also be unable to retain physicians and other medical support staff, in particular if the acquired facilities are in other countries with different cultures, and our relationship with current and new professionals, including physicians, may be impaired. If we are not able to manage our expanded operations and the corresponding integrations effectively, our business, financial condition and results of operations could be materially adversely affected.

 

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Our operation of Torre Trecca, and any additional public-private partnerships we may enter in the future, may subject us to additional risks and uncertainties.

In 2010, we entered into an agreement for our first PPP with EsSalud to rebuild Torre Trecca, an outpatient facility (which is currently not in use) providing healthcare services to patients covered through EsSalud, as a high-rise treatment center, and begin operating it on behalf of EsSalud. There are substantial risks and uncertainties associated with this agreement, and any additional PPPs that we may enter into in the future. For example, we signed our initial agreement with EsSalud in 2010, but have not been able to begin the partnership because approval of certain project milestones and amendments to the relevant concession agreement, which are necessary to make the project viable, remain pending with EsSalud and other government bodies. Once we receive approval of the applicable milestones, we expect it to take 18 to 24 months to rebuild and redevelop the Torre Trecca facility, which is currently not in use, and begin operations. If the relevant Peruvian governmental authorities delay or withhold their approval of the applicable project milestones and amendments to the concession agreement required to start operation of the Torre Trecca PPP, the concession agreement may be terminated. Even if we receive approval to begin operating the PPP, we have not previously operated a PPP, and we may underestimate the level of resources or expertise necessary to make the Torre Trecca partnership, or any future PPPs, successful or to otherwise realize expected benefits. Moreover, given the nature of PPPs, we expect this business, as well as any future PPPs, to generate lower margins than our current business segments have historically generated. In addition, the quality of medical services provided by EsSalud is widely considered deficient and over capacity, and our association with EsSalud and any complaints of the quality of government health services may adversely affect our reputation. We may face similar reputational risks with other PPPs in the future. Our failure to successfully manage these risks could have a material adverse effect on our business, results of operations, financial condition and prospects.

Our organic growth plan includes the construction of additional hospitals and clinics as well as expansion of our existing facilities.

Our organic growth plan includes building additional hospitals and clinics, in particular in Peru. We are identifying suitable locations in Peru and Colombia for future facilities by considering a number of factors, including regional market size, existing competition and potential strategic partners. There are uncertainties regarding how successfully we can identify the suitable market and obtain required government approvals in a timely manner. We are currently constructing hospitals in Piura and Chiclayo as well as Clínica del Sur in Colombia. In addition, we consider the expansion of our existing facilities to be an important part of our organic growth plan and we are currently working on expanding Clínica Delgado and Clínica Vallesur in Arequipa, Peru.

While we believe our Auna Model provides an effective framework for building and expanding our facilities, our current and future construction projects are and will be subject to a number of risks, including:

 

   

engineering problems, including defective plans and specifications;

 

   

delays in obtaining or inability to obtain necessary permits, licenses and approvals;

 

   

disputes with, defaults by, or delays caused by contractors and subcontractors and other counterparties;

 

   

environmental, health and safety issues, including site accidents and the spread of viruses;

 

   

fires, earthquakes, adverse weather events and other natural disasters;

 

   

geological, construction, excavation, regulatory and equipment problems; and

 

   

other unanticipated circumstances or cost increases.

The occurrence of any of these developments or construction risks could increase the total costs, delay or prevent the construction or opening or otherwise affect the design and features of any existing or future construction projects that we might undertake.

 

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Furthermore, planning, designing and constructing new facilities is time-consuming and complex. In addition to diverting management’s time and resources from our core business, there are typically several years of significant capital expenditures before a facility becomes operational and generates income. If we cannot successfully implement our organic growth strategy and convert new and expanded facilities to profitability on a timely basis, our business, financial condition and results of operations may be adversely affected.

We may not be able to continue growing our business at historical rates.

Our revenue has experienced substantial growth since 2008 and our strategy is to continue to grow our operations, through organic and inorganic growth. However, we may not be able to continue to grow at a rate consistent with our recent performance or to continue growing at all in the future due to factors beyond our control. For example, we expect gross domestic product (“GDP”) growth to slow in Peru and Colombia in 2020 as compared to prior years, in particular as a result of the COVID-19 pandemic, which could affect healthcare spending in these countries. Our growth could also be impacted by changes in laws or regulations or delays in construction or acquisition of new facilities, any of which could make the execution of our strategic growth plan more difficult. In addition, as we grow our business, we will need to expand our internal controls and administrative and IT systems, among other functions, and hire additional personnel to continue effectively operating our business. The market for qualified personnel that are able to fill management and key operational roles is highly competitive in Peru and Colombia due to the limited number of professionals that have the requisite training and experience, and we may be unable to hire sufficient qualified personnel to support our growth. Demand for qualified personnel may also increase as a result of the COVID-19 pandemic. Any inability to adequately scale our operations to meet the increased size of our business may have a material adverse effect on our ability to continue growing our business and/or on our financial condition or results of operations.

If we are unable to provide high-quality, advanced care for a broad array of medical needs, demand for our healthcare services may decrease.

Demand for our healthcare services is driven in large part by our ability to offer high-quality, advanced care for a broad array of medical needs, which is in turn contingent on our having state-of-the-art medical equipment at our facilities, as well as our ability to access high-quality medicines. The technology used in medical equipment and related devices is constantly evolving and, as a result, manufacturers and distributors continue to offer new and upgraded products to healthcare providers. Moreover, new and improved medicines are constantly being introduced to the market. To compete effectively, and to attract doctors and recruit and retain medical staff, we must continually assess our equipment needs and invest in upgrades when significant technological advances occur in order to continue providing access to advanced treatment, and we must ensure that we have access to high-quality, cutting-edge medicines for any given treatment. Such technological equipment costs represent significant capital expenditures. If our facilities do not stay current with technological advances in the healthcare industry and/or we do not offer access to high-quality, cutting-edge medicines, patients may seek treatment from other providers or insurance providers may send their patients to alternate facilities, which could result in decreased demand for our services and have an adverse effect on our business, financial condition and results of operations.

If we fail to successfully develop and commercialize new products and services under Oncosalud, our operating results may be materially and adversely affected.

The future growth of our Oncosalud business depends on our ability to develop and introduce new products and services, including plans that are financially accessible to a larger segment of the population and plans that cover additional medical specialties. Our ability to successfully roll out new and innovative products and services depends on a number of factors, including significant investments in research and development, efficient management of resources and an effective sales effort. Our research and development efforts may not yield the benefits we expect to achieve in a timely manner, or at all. To the extent that we are unable to execute our strategy for Oncosalud of introducing new and innovative products, diversifying our product portfolio and

 

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satisfying consumers’ changing preferences, we may not be able to grow our plan member base and our results of operations may be adversely affected. Even if we are able to add new products and services under Oncosalud, these may not lead to our anticipated results, potentially reducing our return on investment.

We rely on a limited number of suppliers of medical equipment, medicines and other supplies needed to provide our medical services.

A substantial portion of the medical equipment, medicines and other supplies used in our hospitals and clinics is highly complex and produced by a limited number of suppliers. For example, we purchased 70% and 50% of our medicines and 44% and 16% of other medical supplies in Peru and Colombia, respectively, from our 10 largest suppliers in the first six months of 2020 via purchase orders, and whose commercial terms are renegotiated annually. In addition, in many instances, there are only a small number of suppliers that provide a particular type of medicine or other supplies, which increases their bargaining power. Any interruption in the supply of medical equipment, medicines or other supplies from these suppliers, including as a result of the failure by any of these suppliers to obtain required third-party consents and licenses for production or import/clearance, may compromise our ability to provide effective and adequate services in our hospitals and clinics, which could have a material adverse effect on our business and on the market value of the ADSs.

We are subject to extensive legislation and regulations in Peru and Colombia.

We are subject to extensive legislation and regulations in Peru and Colombia, including in relation to the provision of healthcare services and prepaid healthcare plans, environmental protection, health surveillance and workplace safety and management of waste by a variety of national, regional and local governmental authorities, and we are supervised by a number of governmental bodies and agencies. The regular functioning of hospitals and clinics depends, among other things, on obtaining and maintaining valid registrations, licenses, authorizations, grants and permits for installation and operations, including for the sale of medicines and the operation of medical equipment, as well as for the collection, deposit or storage of products; utilization of equipment; import of merchandise and biological materials; handling, treatment, transport and disposal of contaminant wastes, radioactive materials and controlled chemical products; and use of water resources (including installing wells to supply water and disposing of wastewater in accordance with applicable laws and regulations). Moreover, as a provider of prepaid healthcare plans in Peru, we are subject to various economic and financial related regulations, including minimum capital requirements, investment requirements and limitations on asset allocations and indebtedness, among others. We are subject to government inquires, inspections and auditors from time to time. For example, in August and September 2020, the Peruvian National Institute for the Defense of Competition and the Protection of Intellectual Property (Instituto Nacional de Defensa de la Competencia y de la Protección de la Propiedad Intelectual) (“INDECOPI”) began inquiries in order to assess if private clinics, such as us, have been involved in horizontal collusion in connection with the prices of medicines and sanitary equipment. We are fully cooperating with these inquiries. We are unable to predict the effect of the conclusion of such inquiries on our operations, and if any such consequences of those inquiries could have a material effect on us. If we fail to comply with applicable laws and regulations, if such laws or regulations change in a manner adverse to us or if we cannot maintain, renew or secure required registrations, permits, licenses or other necessary regulatory approvals, we may be unable to operate our business, suffer administrative penalties, civil liability and criminal charges and fines, have our registration or operating license suspended or revoked, or incur additional liabilities from third-party claims, any of which may also have a negative impact on our brand and reputation. For example, in 2017, the competent environmental authority of Medellín’s Metropolitan Area (Área Metropolitana del Valle de Aburrá) (“AMVA”) alleged that Grupo Las Américas, along with other healthcare facilities, needed to comply with certain newly implemented requirements for processing and disposing wastewater. Grupo Las Américas has implemented the necessary procedures and we believe is currently in compliance with such requirements based on a third party report. If Grupo Las Américas or other facilities in our Auna Colombia network fail to comply with regulations related to the processing of wastewater in the future, AMVA may initiate administrative proceedings and ultimately, issue sanctions against us. See “Industry—Regulation of the Colombian Healthcare Sector—Environmental Regulations.” No assurance can be

 

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given that any investigations, proceedings or penalties will not occur and will not materially and adversely affect our businesses and results of operations and financial conditions with respect to our recently acquired businesses or any of our other businesses.

Furthermore, we contract with third parties to assist in the collection, treatment, transport and disposal of biohazardous materials. Any failure by these third parties to comply with applicable laws and regulations in the regions in which we operate could also subject us to significant administrative fines, civil liability or criminal charges.

We cannot ensure that the Peruvian and Colombian legislation and regulations applicable to our industry will not become more severe or subject us to greater costs in the future, or that the Peruvian and Colombian authorities or regulatory agencies will not adopt more restrictive or more rigorous interpretations of existing laws and regulations, including with respect to obtaining and renewing the licenses, permits and registrations, or the environmental, solvency, minimum capital, health surveillance and workplace safety laws and regulations to which we are subject. For instance, in December 2019, the Peruvian government began requiring that all pharmacies carry generic versions of medicines appearing on a list published by MINSA, which currently includes 34 medicines, with the goal of giving patients the option to purchase lower cost alternatives of common medicines at every pharmacy. In addition, around the same time, an emergency decree established that uninsured Peruvians will be able to access the SIS regardless of their socioeconomic classification. We are unable to predict the effect of recent and future policy changes on our operations, and any such changes could have a material adverse effect on us.

Moreover, we cannot ensure that the fees, charges and contributions owed to the competent authorities and to professional trade associations, such as El Colegio Médico del Perú and El Colegio Médico Colombiano, will not be increased as a result of new legislative or regulatory measures. Any one of these factors may involve the incurrence of unforeseen additional costs by us and/or capital expenditures, thereby adversely affecting our business and operating results.

We may be unable to obtain the registrations, authorizations, licenses and permits for the establishment and operation of our hospitals and clinics.

The establishment and operation of our hospitals and clinics depend on a number of registrations, authorizations, licenses and permits that we have to obtain and maintain in force from national, regional and local government agencies in both Peru and Colombia. Moreover, our hospitals are subject to the inspection of health surveillance agencies in the regions in which we operate, which may conduct periodic audits of our facilities to ensure compliance with applicable standards.

Furthermore, we may also need to obtain authorizations, licenses and permits to offer new types of healthcare services at our facilities, which may cause a delay in offering new services to our patients.

Any failure to obtain or renew required registrations, authorizations, licenses or permits may prevent us from opening and operating new hospitals and clinics or force us to close our hospitals and clinics currently in operation. We may also be subject to fines and other penalties and suffer damage to our reputation. Any of the foregoing could have a material adverse effect on our business, financial condition and results of operations.

We may be subject to liabilities from claims brought against our healthcare professionals or our facilities, including medical malpractice lawsuits.

We and our healthcare professionals are subject to medical malpractice lawsuits, product liability lawsuits and other legal actions in the ordinary course of business. Some of these actions may involve large claims, as well as significant defense costs and potential reputational damage. We cannot predict the outcome of these lawsuits or the effect that findings in such lawsuits may have on us. In an effort to resolve one or more of these

 

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matters, we may choose to negotiate a settlement, which may have negative implications. Amounts we pay to settle any of these matters may be material. All professional and general liability insurance we purchase is subject to policy limitations. We believe that, based on our past experience, our insurance coverage is adequate considering the claims arising from the operations of our hospitals, clinics and oncology plans. While we continuously monitor our coverage, our ultimate liability for professional and general liability claims could change materially from our current estimates. If such policy limitations are partially or fully exhausted in the future, or payments of claims exceed our estimates or are not covered by our insurance, it could have a material adverse effect on our business, financial condition and results of operations. See “—Our insurance policies may be insufficient to cover potential losses.”

We are subject to litigation and other legal, labor, administrative and regulatory proceedings.

We are regularly party to litigation and other legal proceedings relating to claims resulting from our operations in the normal course of business. These matters have included or could in the future include matters related to Oncosalud’s healthcare benefits coverage and other payment claims (including disputes with plan members, physicians, other healthcare professionals and members of its salesforce), tort claims (including claims related to the delivery of healthcare services, such as claims of medical malpractice by medical professionals employed by us or physicians with whom we have a contractual relationship), labor claims (including disputes with employees, former employees and independent contractors) and administrative and regulatory claims (including retroactive tax claims or challenges arising out of our failure or alleged failure to comply with applicable laws and regulations). In addition, we have certain ongoing lawsuits, which include claims against Grupo Las Américas, relating to events that took place prior to our acquisition of Grupo Las Américas. Pursuant to the share purchase agreement we entered into in connection with the acquisition, the sellers contributed an amount in cash to an escrow account to cover these claims. At this time, the amounts held in escrow cover what we believe is our potential exposure pursuant to these ongoing proceedings. However, if additional claims are asserted against us as a result of our acquisition of Grupo Las Américas and one or more of these claims results in an adverse decision against us, these amounts may not be sufficient to cover our exposure. In addition, the interpretation and enforcement of certain provisions of our existing or any future agreements (including those related to force majeure clauses in the context of pandemics) may result in disputes among us and our patients or third parties. Litigation and other legal proceedings are subject to inherent uncertainties, and unfavorable rulings may occur. We cannot assure you that the legal, labor, administrative and regulatory proceedings in which we are or may become involved will not materially and adversely affect our ability to conduct our business in the manner that we expect, or otherwise adversely affect our business, financial condition and results of operations. See “Business—Legal Proceedings.”

Our insurance policies may be insufficient to cover potential losses.

We maintain insurance coverage in accordance with normal market practice in order to cover losses arising in connection with our hospital networks and oncology plans. Certain risks are not covered by insurers in the market (such as war, acts of God and force majeure, the interruption of certain activities and human error, including in relation to medical errors). Furthermore, natural disasters, adverse meteorological conditions and other events may cause physical damage and loss of life, business interruption, equipment damage, pollution and environmental damage, among others. We cannot ensure that our insurance policies will be suitable and/or sufficient in all circumstances or against all risks. The occurrence of a significant loss for which we are not insured, in full or in part, may require us to expend significant amounts. Furthermore, we cannot assure you that we will be able to maintain insurance coverage at reasonable commercial rates or on acceptable terms, or to contract insurance policies with the same or similar insurance companies. Any of the aforementioned developments may adversely impact us, our business, financial condition and results of operations.

 

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We are subject to certain privacy laws and any failure to adhere to these requirements could expose us to civil and criminal penalties, and damage our reputation.

Our business operations and current and future arrangements with medical professionals, third-party payers, plan members and patients expose us to various laws and regulations protecting the privacy and security of health information and personal data, including personal data protection laws in Peru and Colombia. We have made significant investments in technology to adopt and utilize electronic health records and to become meaningful users of health IT, and as a result, we are in possession of a significant amount of protected health information and other data subject to these privacy laws. We may be required to expend significant capital and other resources to ensure ongoing compliance with applicable privacy and data security laws. If our operations are found to be in violation of any of these privacy laws or if we are found to have used private information incorrectly, we may be subject to administrative fines and penalties, civil liability and criminal charges and could result in harm to our reputation. See “Industry—Regulation of the Peruvian Healthcare Sector” and “Industry—Regulation of the Colombian Healthcare Sector.”

A failure of our IT systems could adversely impact our business.

We rely extensively on our IT systems to manage clinical and financial data, communicate with our patients, payers, suppliers and other third parties and summarize and analyze operating results. In addition, we are subject to various laws and regulations protecting the privacy and security of health information and personal data, including personal data protection laws. A failure of our IT systems may be caused by, among other things, defects in design or manufacture of hardware, software or applications we develop or procure from third parties, human error, cyber security incidents, damage from natural disasters, power loss, telecommunications failure, unauthorized entry or other events beyond our control. In certain circumstances we may rely on third-party vendors to process, store and transmit large amounts of data for our business whose operations are subject to similar risks. Our IT systems also depend on the timely maintenance, upgrade and replacement of networks, equipment and software, as well as preemptive expenses to mitigate the risks of failures.

Any failure of our IT systems could materially disrupt our business activities. For example, because we are reliant on our IT systems to manage clinical information and patient data, a material disruption of our IT systems could negatively impact our ability to treat our patients for the duration of the disruption and result in injury and loss of lives, which could subject us to significant litigation or other losses and have a material adverse impact on our reputation, business, financial condition and result of operations.

A failure of our IT systems could also expose us to various security threats and vulnerabilities that may result in the theft, destruction, loss or misappropriation of protected health information or other data subject to privacy laws in Peru or Colombia or loss of proprietary business information. Breaches of our security measures and the unauthorized dissemination of sensitive personal information, proprietary information or confidential information could expose us, our customers or other third parties to a risk of loss or misuse of this information, including exposing our customers to the risk of financial or medical identity theft, result in litigation and potential liability, such as regulatory penalties, for us, damage our brand and reputation or otherwise harm our business. The failure of our IT systems, including the costs to eliminate or address security threats and vulnerabilities before or after a system failure, could have a material adverse effect on our business, financial condition and results of operations.

We may not have sufficient funds to settle current liabilities and as a result we may continue to have negative working capital from time to time.

Our board of directors has the ultimate responsibility for liquidity risk management. It has established an appropriate framework allowing our management to handle financing requirements for the short-, medium- and long-term. As of June 30, 2020, we had working capital of S/(217.4) million (US$(61.3) million). Our management believes that our available cash and cash equivalents and cash flows expected to be generated from

 

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operations and borrowings available to us under our revolving credit lines, will be adequate to satisfy our capital expenditure and liquidity needs for the foreseeable future. However, we may require additional capital in the form of additional debt or equity to meet our long-term objectives relating to the expansion of our business. As a result, we may continue to have negative working capital from time to time. It may be difficult for us to obtain additional financing in the future, on acceptable terms or at all, given that all of our assets are currently collateralized. If we are unable to access the capital markets to finance our operations in the future, this could adversely affect our ability to obtain additional capital to grow our business and have an adverse effect on our business, financial condition and results of operations.

Any loss of members of our senior management team could have an adverse effect on us.

Our success depends in large part on performance of our senior management. If any members of our senior management leave the Company, we may not be able to replace them with equally qualified professionals. Competition for qualified personnel in the Peruvian and Colombian healthcare industries is strong given the limited number of professionals with appropriate training and/or proven experience in this area. Furthermore, we may be delayed or unsuccessful in hiring, training and integrating new members of our senior management. The loss of any member of our senior management and/or any difficulties encountered in replacing them may adversely affect our business and prospects. See also “—We may not be able to continue growing our business at historical rates.”

Our performance depends on favorable labor relations with our employees. Any deterioration in these relations or increased labor costs may adversely affect our business.

Our employees are not unionized and have not entered into collective bargaining agreements. However, nothing prevents them from doing so in the future. Conflicts with our employees and organized labor actions could result in increased legal and other associated costs and divert management attention. In addition, requirements to increase employee salaries and/or benefits as a result of future collective bargaining agreements, governmental regulations or policies or otherwise could cause us to suffer a material adverse effect on our financial condition and results of operations.

Any significant increase in labor costs, deterioration in relations with employees, or work stoppages at any of our hospital units, whether due to union activities, employee turnover, labor inspections or other factors, may adversely affect our operating results and financial condition.

We are a holding company and all of our operations are conducted through our subsidiaries. Our ability to pay dividends to you will depend on the ability of our subsidiaries to pay dividends and make other distributions to us.

As a holding company, all of our operations are conducted through our subsidiaries. Accordingly, our ability to pay dividends to you will depend upon our receipt of dividends and other distributions from our subsidiaries. There are various restrictions in Peru and Colombia that may limit our subsidiaries’ ability to pay dividends or make other payments to us, such as their obligations to maintain minimum regulatory capital, reserves and minimum liquidity. For example, both our Peruvian and Colombian subsidiaries must maintain mandatory legal reserves, and certain of our Peruvian subsidiaries must maintain minimum capital requirements in their capacity as providers of healthcare coverage plans and our Colombian subsidiaries must maintain certain capital allocations, in each case reducing their net income and the cash available to pay dividends to us. Moreover, our subsidiaries in countries other than Peru, such as our Colombian subsidiaries, may be subject to exchange controls in the future that prevent them from making distributions to us.

Furthermore, we have certain existing indebtedness, and may incur additional indebtedness or enter into other arrangements in the future, that contain terms that restrict or prohibit our subsidiaries from paying dividends, making other distributions and making loans to us. For example, four of our subsidiaries, Medic Ser,

 

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Oncocenter, Oncosalud S.A.C. and GSP Servicios Generales, each applied for and received a loan of S/10 million and Clínica Vallesur S.A. applied for and received a loan of S/7.5 million, in each case under a loan relief program offered by the Peruvian government in response to the COVID-19 pandemic. Such loans restrict these subsidiaries’ ability to pay dividends to us during the term of each loan, which may be up to 36 months. The restrictions on these subsidiaries’ ability to pay dividends to us have not to date had a material impact on our liquidity or our ability to pay dividends to our shareholders because several of our key operating subsidiaries remain able to pay dividends to us. However, we cannot assure you that we will not need to take out additional loans under these programs in the future, or that the agreements governing our existing or future indebtedness will permit them to provide us with sufficient dividends or distributions or permit us to loan money or enter into other similar arrangements to fund dividend payments.

To the extent our subsidiaries do not have funds available or are otherwise restricted from paying dividends to us, our ability to pay dividends to our shareholders will be adversely affected.

Our financial results may be impacted by changes to IFRS accounting standards.

We report our financial condition and results of operations in accordance with IFRS. Changes to IFRS may cause our future reported financial condition and results of operations to differ from current expectations, or historical results to differ from those previously reported due to the adoption of new accounting standards on a retrospective basis. We monitor potential accounting changes and, when possible, we determine their potential impact and disclose significant future changes in our financial statements that we expect as a result of those changes. For further information, see note 3 to our audited consolidated financial statements included elsewhere in this prospectus.

Risks Relating to Peru and Colombia

Economic, social and political developments in Peru, including political instability, inflation and unemployment, could have a material adverse effect on our businesses and our results of operations may be negatively affected by recent political instability in Peru.

We derived 73.9% of our revenues from operations in Peru in the first six months of 2020. As such, our results of operations are substantially dependent on the ability of patients in Peru to pay for services at our hospitals and clinics and our oncology plans. Our business, financial condition and results of operations could be affected by changes in economic and other policies of the Peruvian government (which has exercised and continues to exercise substantial influence over many aspects of the private sector) and by other economic and political developments in Peru, including devaluation, currency exchange controls, inflation, economic downturns, corruption scandals, social unrest and terrorism.

In the past, Peru has experienced political instability that has included a succession of regimes with differing economic policies and programs. Peru has been widely considered a stable democracy in recent years. However, on September 30, 2019, President Martin Vizcarra took executive action to dissolve the Peruvian Congress and called for a new election of congressional members. In response to the dissolution of the Congress, former members of the legislative body voted to suspend President Vizcarra for twelve months and appointed Vice President Mercedes Araoz as interim president to temporarily replace Mr. Vizcarra. Vice President Araoz resigned from her position as interim president the following day. On January 14, 2020, the Peruvian Constitutional Court ruled on the constitutional action questioning President Vizcarra’s closing of Congress, declaring the executive action to be constitutionally and legally valid, thus dismissing the former president of the legislative body’s claim of unconstitutionality. In addition, on January 26, 2020, congressional elections were held to form the new Congress. The new Congress is fragmented and will likely be replaced in the next general election in April 2021. Furthermore, President Vizcarra replaced over half of his Cabinet members on July 15, 2020 in response to his rapidly declining popularity due to the harsh economic impact of the COVID-19 pandemic on Peru and the lengthy lockdown imposed by the Peruvian government. On August 5, 2020, Congress

 

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rejected a vote of confidence for the newly appointed Cabinet chief forcing President Vizcarra to appoint a new Cabinet within 48 hours. On August 6, 2020, President Vizcarra appointed a new Cabinet, led by former Minister of Defense Walter Martos as Prime Minister and which includes most of the members of the former Cabinet. President Vizcarra has been known for continuing to pursue business-friendly and open-market economic policies. However, Congress has been discussing certain initiatives which may adversely impact the Peruvian economy should they be approved, such as authorizing the withdrawal of funds from pension funds and implementing a limit on interest rates that may be charged by financial institutions. In addition, Peru will hold a general election in April 2021 to elect a new President and Congress, which increases the uncertainty surrounding the Peruvian economy. In the past, governments have imposed controls on prices, exchange rates, local and foreign investment and international trade, restricted the ability of companies to dismiss employees, expropriated private sector assets and prohibited the remittance of profits to foreign investors. We cannot be certain whether the Peruvian government will continue to pursue business-friendly and open-market economic policies that stimulate economic growth and stability.

Until the recent political crisis, Peru has experienced a period of relative economic and political stability since the early 2000s. Peru’s GDP growth rates, low inflation, and external surplus reflect, in part, the strength of the fundamentals of Peru’s economy. However, a deterioration of the global economy, including as a result of the global coronavirus outbreak, or a sharp decrease in commodity prices may adversely affect Peru’s economy. In addition, an economic contraction or weak economic growth in Peru’s trading partners may have an adverse effect on Peru’s economy. Despite Peru’s ongoing economic growth and stabilization, the social and political tensions and high levels of poverty and unemployment continue. Future government policies to preempt or respond to social unrest could include, among other things, expropriation, nationalization, suspension of the enforcement of creditors’ rights and new taxation policies. There can be no assurance that Peru will not face political, economic or social problems in the future or that these problems will not adversely affect our business, financial condition and results of operations.

A deterioration of political stability as a result of the current political crisis or otherwise and any resulting effects on the Peruvian economy could affect our patients’ ability to afford our healthcare services, our ability to expand and grow consistently with our strategic plans or otherwise negatively affect our business, financial condition and results of operations.

Economic, social and political developments in Colombia, including political and economic instability, violence, inflation and unemployment, could have a material adverse effect on our businesses, financial condition and results of operations.

In the first six months of 2020, we derived 26.1% of our revenues from operations in Colombia. As such, our results of operations are substantially dependent on the ability of patients in Colombia to pay for services at our hospitals and clinics. Decreases in the economic growth rate, periods of negative growth, increases in inflation, changes in law, regulation, policy, or future judicial rulings and interpretations of policies involving exchange controls and other matters such as (but not limited to) currency depreciation, inflation, interest rates, taxation, banking laws and regulations and other political or economic developments in or affecting Colombia may affect the overall business environment and may, in turn, impact our financial condition and results of operations.

Colombia’s central government fiscal deficit and growing public debt could adversely affect the Colombian economy. The Colombian fiscal deficit was 2.5% of GDP in 2019, 3.1% of GDP in 2018 and 3.6% of GDP in 2017. According to projections published in August 2020 by the Ministry of Finance and Public Credit, the Colombian government expects a fiscal deficit of 8.2% of GDP for the year 2020. In the first six months of 2020, the Colombian economy has deteriorated as a result of the COVID-19 pandemic and the collapse in oil prices in April 2020. If the Colombian economy continues to deteriorate as a result of these or other factors, our business, results of operations and financial condition could be adversely affected. The Colombian government frequently intervenes in Colombia’s economy and from time to time makes significant changes in monetary, fiscal and

 

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regulatory policy. In addition, Colombia held presidential elections in May 2018 with runoffs in June 2018. Iván Duque Márquez was elected president and took office in August 2018. In November 2019, a national protest movement erupted demanding that the Colombian government invest in social measures and turn away from fostering big business, among other demands. We cannot predict what policies will be adopted by the Colombian government and whether those policies would have a negative impact on the Colombian economy or our business and financial performance. Our business and results of operations or financial condition may be adversely affected by changes in government or fiscal policies, and other political, diplomatic, social and economic developments that may affect Colombia.

Furthermore, Colombia has suffered from periods of widespread criminal violence over the past four decades, primarily due to the activities of guerrilla groups such as the Revolutionary Armed Forces of Colombia (Fuerzas Armadas Revolucionarias de Colombia) (the “FARC”), paramilitary groups and drug cartels. In regions of the country with limited governmental presence, these groups have exerted influence over the local population and funded their activities by protecting and rendering services to drug traffickers. Despite efforts by the Colombian government, drug-related crime, guerrilla paramilitary activity and criminal bands subsists in Colombia, and allegations have surfaced regarding members of the Colombian Congress and other government officials having ties to guerilla and paramilitary groups. In November 2016, former President Juan Manuel Santos signed a peace deal with the FARC, and FARC guerillas began a process of disarming, which was completed in February 2017. Although the Colombian Congress has approved certain regulations to implement the peace deal, opposing members of Congress have expressed their intention to make amendments to the peace deal and regulations implementing the peace deal. In addition, in August 2019, the former second in command FARC leader, Iván Márquez, announced his return to arms. The former leader of the FARC criticized Márquez’s position and reiterated the FARC’s commitment to peace. It is unclear what effect the objections of members of Congress, or the subsequent announcement of rearmament, will have on the implementation of the peace deal. If the peace deal is only partially implemented, or not implemented at all, violence associated with the FARC may escalate. In addition, although the Colombian government and the National Liberation Army (“ELN”) were in talks since February 2017 to end a five-decade war, the Colombian government suspended the negotiations in January 2019 after a series of rebel attacks, including a car bombing at a police academy in Bogotá resulting in 21 people dead and many injured. The continuation or escalation in the violence associated with the FARC or the ELN may have a negative impact on the Colombian economy or on us, which may affect our patients, employees, assets and projects in the region, as well as our ability to acquire new assets, which could have a material adverse effect on our business, financial condition and results of operations.

Our operations could be adversely affected by adverse climate conditions and other natural disasters.

Peru and Colombia are affected by El Niño, an oceanic and atmospheric phenomenon that causes a warming of temperatures in the Pacific Ocean, resulting in heavy rains off the coast of Peru and Colombia and various other effects in other parts of the world. The effects of El Niño, which typically occurs every two to seven years, include flooding and the destruction of fish populations and agriculture, and it accordingly can have a negative impact on the Peruvian and Colombian economies. For example, in early 2017, El Niño adversely affected agricultural production, transportation services, tourism and commercial activity in Peru, caused widespread damage to infrastructure and displaced people and resulted in a 1.5% drop in GDP growth in 2017 relative to 2016 figures. The Peruvian government estimated that El Niño caused US$3.1 billion in damages in affected regions. Although El Niño did not have a material adverse effect on our business, we were forced to temporarily close certain facilities in the northern part of Peru.

Peru is also located in an area that experiences seismic activity and occasionally is affected by earthquakes. For example, on May 26, 2019, an earthquake of 8.0 magnitude struck a remote part of the Amazon in Peru, resulting in collapsed buildings, certain power failures and two reported deaths. This was the strongest earthquake in Peru since 2007, when an earthquake with a magnitude of 7.9 on the Richter scale struck the central coast of Peru, severely damaging the region south of Lima. Although none of our hospitals and clinics in Peru and Colombia have been materially affected by natural disaster to date, a major earthquake, volcanic

 

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eruption or other natural disaster caused by El Niño or otherwise could damage the infrastructure necessary to their operations.

Our insurance may not be adequate to cover the damages our infrastructure experiences and the occurrence of an earthquake in particular and any other natural disasters in general could adversely affect our business, results of operations and financial condition. See “—Our insurance policies may be insufficient to cover potential losses.”

In addition, natural disasters, accidents and other similar events, including power loss, may discontinue the normal operations of our hospitals. Any such event could adversely affect our ability to provide services to patients and result in loss of lives and injury. Any of these events and other factors beyond our control could have an adverse effect on the overall business sentiment and environment, our reputation and materially and adversely impact our business, financial conditions and results of operations.

Our operations are highly concentrated in Lima and Medellín.

For the six months ended June 30, 2020, 67.1% and 26.1% of our revenues were derived from operations in Lima and Medellín, respectively. As such, our results of operations are particularly dependent on economic conditions in these cities and the ability of patients in these cities to afford our healthcare services or purchase our oncology plans, as applicable. In addition, any earthquakes or other natural disasters, or any other disruptive occurrences such as political or social unrest, sustained power failures, or outbreaks of epidemics or pandemics, such as the novel coronavirus outbreak, that have a negative impact on our infrastructure in these cities could have a disproportionate impact on our ability to provide healthcare services to our patients. As a result, if Lima or Medellín experience a decline in economic conditions or a serious natural disaster, it could have a material adverse effect on our business, financial condition and results of operations.

Corruption and ongoing high-profile corruption investigations may hinder the growth of the Peruvian or Colombian economy and have a negative impact on our business and results of operations.

Peruvian and Colombian authorities are currently conducting several high-profile corruption investigations relating to the activities of certain Brazilian companies and their regional partners in the construction and infrastructure sectors, which have resulted in suspension or delay of important infrastructure projects, which were otherwise operational or permitted. These investigations have resulted in political turmoil in both Peru and Colombia. For example, in 2018 Peru suffered its worst institutional crisis since 2000 due to, among other factors, the resignation of former President Pedro Pablo Kuczynski, several corruption scandals involving other previous presidents, political candidates, prominent members of the judicial system and the district attorney’s office (each of whom is currently facing prosecution).

Similarly, on January 12, 2017, the Colombian Fiscalía General de la Nación initiated a corruption investigation into the activities of Odebrecht and its local partners. While the investigation is ongoing, to date, five individuals have been convicted, including two former public officials. These investigations involve Corficolombiana, a subsidiary of Grupo Aval, one of Colombia’s largest financial institutions and its former CEO José Elias Melo. On September 14, 2018, the SIC initiated a corruption investigation in Colombia into Corficolombiana’s actions in relation to the adjudication of the Ruta del Sol II highway concession. Meanwhile, on December 6, 2018, the Administrative Tribunal of Cundinamarca imposed on Episol (a Corficolombiana subsidiary) and others a fine of COP8.0 billion (US$212.8 million) to be paid jointly and severally for the damages caused to popular rights (access to public services, free competition, public morality) as a result of the alleged corruption acts involving the Ruta del Sol II agreement. This decision was appealed and will be decided by the Council of State.

Nevertheless, the potential outcome of such investigations, or any other potential high profile corruption proceeding, on the relevant companies, projects involved or Peruvian or Colombian government officials is

 

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uncertain. We cannot predict how long these or other corruption investigations may continue or whether new allegations against Peruvian or Colombian government officials or other companies with operations in Peru or Colombia will arise in the future. We cannot predict how these or future corruption scandals or investigations may affect the Peruvian or Colombian economy and indirectly have a material adverse effect on our business, financial condition and results of operations.

The political and economic conditions in Venezuela could have an adverse impact on the Peruvian and Colombian economies.

Venezuela, under the rule of President Nicolas Maduro, has suffered economic collapse and mass emigration since 2015. In connection with this mass emigration, approximately 1.7 million Venezuelans had entered Colombia and approximately 860,000 had entered Peru as of the end of 2019. The influx of migrants to Colombia and Peru has put strains on both countries and threatens to increase political and economic instability and social conflict in the region. Any negative impact from the migrant crisis on the political and economic stability of Colombia or Peru could have a material adverse effect on our business, financial condition and results of operations.

Developments and the perception of risk in other countries, especially emerging market countries, may adversely affect the market price of many Latin American securities, including our ADSs.

The market value of securities issued by companies with operations in the Andean region, including Peru and Colombia, may be affected to varying degrees by economic, political and market conditions in other countries, including other Latin American and emerging market countries. Although macroeconomic conditions in such Latin American and other emerging market countries may differ significantly from macroeconomic conditions in Peru and Colombia, investors’ reactions to developments in these other countries may have an adverse effect on the market values of our securities. For example, in recent months, political and social unrest in Latin American countries, including Ecuador, Chile, Bolivia and Colombia has sparked political demonstrations and, in some instances, violence. In October 2019, presidential elections were held in Bolivia, Uruguay and Argentina, which resulted in controversial outcomes in Bolivia and Uruguay, including violent protests and claims of fraudulent elections in Bolivia and a runoff election in Uruguay, and the transition of the political party in power in Argentina. As a result of this political turmoil, investors have viewed investments in Latin American with heightened caution in recent months and further turmoil could have an adverse effect on the market price of the ADSs. Similarly, economic problems in emerging market countries outside of Latin America (such as the Asian financial crisis of 1997, the Russian financial crisis of 1998 and the Turkish and South African crises of 2018), have also caused investors to view investments in emerging markets more generally with heightened caution. Crises in world financial markets, such as those of 2008, could affect investors’ views of securities issued by companies that operate in emerging markets. Crises in other emerging market countries may hamper investor enthusiasm for securities of Peruvian issuers, including the ADSs, which could adversely affect the market price of our ADSs. This could also make it more difficult for us and our subsidiaries to access the capital markets and finance our operations in the future on acceptable terms, or at all.

Increased inflation in Peru or Colombia could have an adverse effect on the Peruvian and Colombian economies generally and, therefore, on our business, financial condition and results of operations.

In the past, Peru and Colombia both have suffered through periods of high inflation and hyperinflation, which has materially undermined their economies and their respective governments’ ability to create conditions that support economic growth. High inflation and hyperinflation have the effect of making our services more expensive for our patients and decreasing their ability to afford our services. Any such impact on the Peruvian or Colombian economy from inflation may have a material adverse effect on our business, financial condition and results of operations.

 

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Variations in foreign exchange rates may adversely affect our financial condition and results of operations.

The Peruvian and Colombian currencies have fluctuated against the U.S. dollar, each other and other foreign currencies over the last four decades. For the six-month period ending June 30, 2020, we generated 73.9% of our revenues in Peruvian soles and 26.1% of our revenues in Colombian pesos. Our consolidated statement of income and other comprehensive income is presented in Peruvian soles and is impacted by the translation of income and expenses of transactions in Colombian pesos to Peruvian soles. The Colombian peso has been volatile in recent years, which in turn creates volatility in our results of operations. In particular, the Colombian peso experienced significant depreciation against both the U.S. dollar and the Peruvian sol in March and April 2020 as a result of the collapse in energy markets. Fluctuations in the exchange rates of the Colombian peso to the Peruvian sol could impair the comparability of our results from period to period and depreciation in such exchange rate could have a material adverse effect on our results of operations and financial condition.

We are also exposed to the foreign exchange rate risk associated with our U.S. dollar-denominated debt. Although we have entered into hedging arrangements with respect to all of our U.S. dollar-denominated debt, we recognize gains and losses from this debt and the related hedging instruments resulting from exchange rate differences between Peruvian soles, Colombian pesos and U.S. dollars in profit or loss. For more information see Note 26 to our audited consolidated financial statements.

Depreciation of the Colombian peso against the Peruvian sol or the Peruvian sol or Colombian peso against the U.S. dollar and/or other currencies may therefore adversely affect our business, financial condition and results of operations.

Changes in tax laws in Peru or Colombia may increase our tax liabilities and, as a result, have a material and adverse effect on us.

The Peruvian government regularly implements changes to its tax regulations and interpretations. Potential changes may include modifications in the taxable events, the taxable bases or the tax rates, or the enactment of temporary taxes that, in some cases, could become permanent taxes. These changes could, if enacted, indirectly affect us. For instance, the Peruvian government has recently introduced several changes related, among others, to thin capitalization rules, indirect transfer of shares and the concept of permanent establishment.

On May 7, 2019, the Peruvian government approved regulations establishing substantive and procedural provisions for the application of the General Anti-Avoidance Rule (“GAAR”), lifting the suspension in place since 2014. Subsequent guidance published by the Superintendencia Nacional de Aduanas y de Administracion Tributaria (“SUNAT”) clarified that the GAAR may be applied to transactions occurring on or after July 19, 2012, the date that GAAR became effective, including during the time in which its application was suspended. GAAR gives SUNAT the power to reclassify certain transactions that are exclusively performed in a manner solely driven by tax reasons, resulting in tax savings or advantages that otherwise would not have been available. As a result, GAAR may have an impact on our taxable base.

In addition, through the enactment of Urgent Decree No. 005-2019, the Peruvian government modified and extended the application of the tax exemption on capital gains derived from the sale of securities through the BVL until December 31, 2022.

We are currently unable to estimate the impact that such reforms may have on our business. The effects of any tax reform that could be proposed in the future and any other changes that could result from the enactment of additional reform or changes in interpretation have not been, and cannot be, quantified. Any changes to the Peruvian tax regime may increase our and our subsidiaries’ tax liabilities or overall compliance costs, which could have a material adverse impact on our business, financial condition and results of operations.

The Colombian government also regularly implements changes to its tax regulations and interpretations. Colombia has gone through four tax reforms in the last six years, but the Colombian government continues to

 

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face serious budgetary constraints and pressure from rating agencies that could lead to future tax reforms, with potential adverse consequences on our financial results. On December 27, 2019, a tax reform was implemented by means of Law 2010 of 2019 intended to strengthen the mechanisms to prevent tax evasion and introduced other substantial changes to the then-existing tax legal framework. As a result, payments made to foreign entities are subject to an income tax withholding rate of 20%, however, this general rate does not apply to foreign indebtedness exceeding one year, in which case the applicable income tax withholding is 15%. Dividends paid by our subsidiaries to us out of profits that were previously subject to corporate income tax are subject to a withholding tax of 10% (increased from 7.5% in 2019 and 5% in 2018) and dividends paid out of profits that were not previously subject to corporate income tax are now subject to a withholding tax of 32% for 2020, 31% for 2021 and 30% for 2022, plus the foregoing 10%, which applies to any amount remaining after the 32%, 31% or 30% withholding is applied, in accordance with the applicable taxable year.

We cannot assure you that Peruvian or Colombian tax laws will not change or may be interpreted differently by authorities, and any change could result in the imposition of significant additional taxes or increase our current tax liabilities. Differing interpretations could result in future tax litigation and associated costs. Moreover, the Peruvian and Colombian governments have significant fiscal deficits that may result in future tax increases. Additional tax regulations could be implemented requiring additional tax payments, negatively affecting our business, financial condition and results of operations.

Risks Relating to the Offering and Our ADSs

The market price of our ADSs may fluctuate significantly, and you could lose all or part of your investment.

Volatility in the market price of our ADSs may prevent you from being able to sell your ADSs at or above the price you paid for them. The market price and liquidity of the market for our ADSs may be significantly affected by numerous factors, some of which are beyond our control and may not be directly related to our operating performance. These factors include, among others:

 

   

actual or anticipated changes in our results of operations, or failure to meet expectations of financial market analysts and investors;

 

   

investor perceptions of our prospects or our industry;

 

   

operating performance of companies comparable to us and increased competition in our industry;

 

   

new laws or regulations or new interpretations of laws and regulations applicable to our business;

 

   

general economic trends in Peru and Colombia, and Latin America in general;

 

   

catastrophic events, such as earthquakes and other natural disasters; and

 

   

developments and perceptions of risks in Peru, Colombia and other emerging markets.

Following the completion of the offering, Enfoca, our controlling shareholder, will own approximately     % of our class B shares and     % of our class A shares and certain of our officers and a majority of our directors may be employed by or otherwise affiliated with Enfoca, which could give rise to potential conflicts of interest.

As of June 30, 2020, Enfoca, our controlling shareholder held approximately 69.5% of our outstanding shares and voting power. Following the completion of this offering, our controlling shareholder will own approximately     % of our class B shares and     % of our class A shares, and as such, will continue to be our controlling shareholder following the completion of the offering. All class B shares will be held in trust under the Trust Agreement, pursuant to which the trustee will vote all class B shares held in trust as directed by Enfoca irrespective of Enfoca’s aggregate ownership of our common stock at any given time. See “Description of Our Share Capital—Trust Agreement.” As a holder of ADSs representing class A shares, you will only be entitled to vote on only certain matters submitted to a vote of the shareholders. As a result of its

 

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ownership of the majority of our class B shares and class A shares and its right to direct the voting of all or substantially all of the class B shares and a significant portion of the class A shares, Enfoca will have the power to, among other matters, elect all the members of the board of directors and decide upon major corporate transactions, such as a corporate reorganization or acquisitions and divestments of assets under the terms of the Ley General de Sociedades – Law N° 26887 (the “Peruvian Corporations Law”) and our by-laws. Enfoca will retain this control over significant corporate matters for as long as it, either by itself or together with Mr. Pinillos Casabonne, holds in the aggregate at least 10% of the outstanding class A shares. See “Description of Our Share Capital.” As a result, Enfoca may use its significant influence over our business without regard to the interests of other shareholders, including in ways that could have an impact on your investment in the ADSs.

In addition, certain of our officers and a majority of our directors may be employed by or otherwise affiliated with Enfoca. Although these directors and officers attempt to perform their duties within each company independently, such employment relationships and affiliations could give rise to potential conflicts of interest when a director or officer is faced with a decision that could have different implications for the two companies. These potential conflicts could arise, for example, over matters such as the desirability of changes to our business and operations, funding and capital matters, regulatory matters, matters arising with respect to agreements with Enfoca, board composition, employee retention or recruiting, labor, tax, employee benefit, indemnification and our dividend policy and declarations of dividends, among other matters.

Holders of ADSs may not be entitled to a jury trial with respect to claims arising under the deposit agreement, which could result in less favorable results to the plaintiff(s) in any such action.

The deposit agreement governing our ADSs provides that holders of ADSs, including purchasers in secondary transactions and holders of ADSs that withdraw their class A shares, waive the right to a jury trial of any claim they may have against us or the depositary arising out of or relating to our class A shares, the ADSs or the deposit agreement, including any claim under U.S. federal securities laws. If we or the depositary opposed a jury trial demand based on the waiver, the court would determine whether the waiver was enforceable based on the facts and circumstances of that case in accordance with the applicable state and federal law. To our knowledge, the enforceability of a contractual pre-dispute jury trial waiver in connection with claims arising under the federal securities laws has not been finally adjudicated by the United States Supreme Court. However, we believe that a contractual pre-dispute jury trial waiver provision is generally enforceable, including under the laws of the State of New York, which govern the deposit agreement, by a federal or state court in the City of New York, which has non-exclusive jurisdiction over matters arising under the deposit agreement. In determining whether to enforce a contractual pre-dispute jury trial waiver provision, courts will generally consider whether a party knowingly, intelligently and voluntarily waived the right to a jury trial. We believe that this is the case with respect to the deposit agreement and the ADSs. It is advisable that you consult legal counsel regarding the jury waiver provision before entering into the deposit agreement.

If you or any other holders or beneficial owners of ADSs bring a claim against us or the depositary in connection with matters arising under the deposit agreement or the ADSs, including claims under federal securities laws, you or such other holder or beneficial owner may not be entitled to a jury trial with respect to such claims, which may have the effect of limiting and discouraging lawsuits against us or the depositary. As a result of the jury waiver provision, it may also be more costly for you to bring a claim against us or the depositary, including a claim for a breach of the U.S. federal securities laws. Moreover, if a lawsuit is brought against us or the depositary under the deposit agreement, it may be heard only by a judge or justice of the applicable trial court, which would be conducted according to different civil procedures and may result in different outcomes than a trial by jury would have had, including results that could be less favorable to the plaintiff(s) in any such action.

Nevertheless, if this jury trial waiver provision is not permitted by applicable law, an action could proceed under the terms of the deposit agreement with a jury trial. No condition, stipulation or provision of the deposit agreement or ADSs serves as a waiver by any holder or beneficial owner of ADSs or by us or the depositary of

 

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compliance with any substantive provision of the U.S. federal securities laws and the rules and regulations promulgated thereunder.

You may not be able to sell ADSs you own or the class A shares underlying the ADSs at the time or the price you desire because an active or liquid market for these securities may not develop.

Prior to this offering, there has been no public market for our ADSs or for our class A shares underlying our ADSs. We intend to apply to list our ADSs on the NYSE and we intend to apply to list our class A shares on the BVL. We cannot predict whether an active, liquid public trading market for our ADSs will develop or be sustained. Active, liquid trading markets generally result in lower price volatility and respond more efficiently to orders from investors to purchase or sell securities. Liquidity of a securities market is often a function of the volume of the underlying shares that are publicly held by unrelated parties. We expect     % of our class A shares to be held by unrelated parties following this offering. In addition, although ADS holders will be entitled to withdraw class A shares underlying our ADSs from the depositary at any time, the BVL is generally a less liquid trading market than major world equity securities markets.

Substantial sales of ADSs or class A shares after this offering could cause the price of our ADSs or class A shares to decrease.

Our existing shareholders will hold a large number of our common shares after this offering. We and our existing shareholders will agree with Morgan Stanley & Co. LLC and Goldman Sachs & Co. LLC not to offer, sell, contract to sell or otherwise dispose of or hedge any class A shares, class B shares or ADSs, without the prior written consent of Morgan Stanley & Co. LLC and Goldman Sachs & Co. LLC, during the 180 days following the date of this prospectus, subject to certain exceptions. After this 180-day period expires, these securities will be eligible for sale. The market price of our ADSs could decline significantly if we or our existing shareholders sell securities of our company or the market perceives that we or our existing shareholders intend to do so.

The disparity in the voting rights among the classes of our shares may have a potential adverse effect on the value of the ADSs, and may limit or preclude your ability to influence corporate matters.

The class A shares underlying the ADSs are only entitled to vote (together with the class B shares) on the following matters submitted to a vote of the shareholders: approval of financial statements; approval of capital increases or reductions (other than as described below); appointment, or delegation to our board of directors of the appointment, of our independent auditors; and payment of dividends. The class A shares will not have voting rights on any other matter subject to shareholders’ approval.

As a result of the foregoing, the class A shares, including any ADSs representing the class A shares, will not be entitled to vote on, among other matters, the election and removal of directors and setting of directors’ compensation; our issuance of debt securities; amendments to our by-laws (other than in connection with capital increases or reductions); the sale, in a single transaction, of assets with a value exceeding 50% of our share capital; the merger, spin-off, division, reorganization, transformation or dissolution of the Company; and special investigations and audits.

In September 2020, our shareholders delegated to our board of directors the authority to approve one or more capital increases of up to S/236,546,679, which delegation will remain in place for five years thereafter and will allow our board of directors to determine the timing, amount, and conditions of each such capital increase, without requiring further shareholders’ approval. This approval also included an express advanced waiver of any preemptive rights that would apply in connection with any such capital increases. This delegation may only be revoked by a vote of the class B shares.

Because of the difference in voting rights between our class B and class A shares, the holders of our class B shares will control significant matters submitted to our shareholders following this offering. The different voting

 

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rights of our class A shares and class B shares will remain in effect until Enfoca and Mr. Pinillos Casabonne own in the aggregate less than 10% of the outstanding amount of class A shares. This will limit or preclude your ability to influence corporate matters for the foreseeable future, which may have an adverse impact on the value of the ADSs.

Holders of ADSs may be unable to exercise voting rights with respect to our class A shares underlying the ADSs at our shareholders’ meetings.

As a holder of ADSs representing class A shares being held by the depositary on your behalf, you may exercise voting rights with respect to the class A shares represented by the ADSs only in accordance with the deposit agreement relating to the ADSs. Holders of our class A shares will receive notice of shareholders’ meetings through publication of a notice in an official gazette in Peru, a Peruvian newspaper of general circulation, the daily bulletin of the BVL and through the website of the SMV, and will be able to exercise their voting rights by either attending the meeting in person or voting by proxy. ADS holders will not receive notice directly from us. Instead, pursuant to the deposit agreement, we will notify the depositary, who will mail to holders of ADSs the notice of the meeting and a statement as to the manner in which voting instructions may be given. To exercise your voting rights, you must instruct the depositary how to exercise the voting rights for the class A shares which underlie your ADSs. Due to these additional procedural steps involving the depositary, the ADS holders may not be able to exercise such voting rights on time.

Holders of ADSs also may not receive voting materials in time to instruct the depositary to vote the class A shares underlying their ADSs. In addition, the depositary and its agents are not responsible for failing to carry out voting instructions of the holders of ADSs or for the manner of carrying out such instructions, unless such failure can be attributed to negligence or bad faith on the part of the depositary or its agents. Accordingly, you may not be able to exercise voting rights, and you will have little, if any, recourse if the underlying class A shares are not voted at all or as requested.

Holders of ADSs may be unable to exercise preemptive or accretion rights with respect to the class A shares underlying their ADSs.

Under the Peruvian Corporations Law, if we issue new class A shares as part of a capital increase, our shareholders will generally have the right to subscribe to a proportional number of common shares of the class held by them to maintain their existing ownership percentage, which is known as preemptive rights. In addition, shareholders are entitled to the right to subscribe for the unsubscribed common shares of the class held by them or, if expressly provided for in our by-laws or approved by our shareholders, other classes that remain unsubscribed at the end of a preemptive rights offering, on a pro rata basis, which is known as accretion rights. See “Description of our Share Capital—Preemptive and Accretion Rights.” You may not be able to exercise the preemptive or accretion rights relating to class A shares underlying your ADSs unless a registration statement under the Securities Act is effective with respect to those rights or an exemption from the registration requirements of the Securities Act is available. We are not obligated to file a registration statement with respect to the class A shares relating to these preemptive and accretion rights, and we cannot assure you that we will file any such registration statement. Unless we file a registration statement or an exemption from registration is available, you may receive only the net proceeds from the sale of your preemptive and accretion rights by the depositary or, if the preemptive and accretion rights cannot be sold, they will be allowed to lapse. As a result, U.S. holders of our ADSs may suffer dilution of their interest in our company upon future capital increases.

We are entitled to amend the deposit agreement and to change the rights of ADS holders under the terms of such agreement, without the prior consent of the ADS holders.

We are entitled to amend the deposit agreement and to change the rights of the ADS holders under the terms of such agreement, without the prior consent of the ADS holders. Any change related to an increase in deposits or

 

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charges for book-entry securities services or any modification that might hinder the rights of the ADS holders will be effective 30 days after the ADS holders have received notice of such change or modification and such holders will have no right to any compensation whatsoever.

We are an “emerging growth company,” and the reduced reporting requirements applicable to emerging growth companies may make our ADSs less attractive to investors.

We are an “emerging growth company” as defined in the JOBS Act. For as long as we continue to be an emerging growth company, we may take advantage of exemptions from various reporting requirements that are applicable to other public companies that are not emerging growth companies, including, but not limited to, not being required to comply with the auditor attestation requirements of Section 404 of Sarbanes-Oxley, reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements and exemptions from the requirements of holding a nonbinding advisory vote on executive compensation and shareholder approval of any golden parachute payments not previously approved. We could be an emerging growth company for up to five years, although we could lose that status sooner if our gross revenues exceed US$1.07 billion, if we issue more than US$1.0 billion in nonconvertible debt in a three-year period or if the fair value of our common shares held by non-affiliates exceeds US$700 million as of any June 30 before that time, in which case we would no longer be an emerging growth company as of the following December 31. We cannot predict whether investors will find our ADSs less attractive because we may rely on these exemptions, or if we choose to rely on additional exemptions in the future. If some investors find our ADSs less attractive as a result, there may be a less active trading market for our ADSs and the market price of our ADSs may be more volatile.

Our by-laws provide that the courts of Peru will be the exclusive forum for the resolution of all shareholder complaints other than complaints asserting a cause of action arising under federal or state securities laws of the United States, and that the United States District Court for the Southern District of New York will be the exclusive forum for the resolution of any shareholder complaint asserting a cause of action arising under federal or state securities laws of the United States.

Our by-laws provide that the courts of Peru will be the exclusive forum for resolving all shareholder complaints other than shareholder complaints asserting a cause of action arising under federal or state securities laws of the United States, and that the United States District Court for the Southern District of New York will be the exclusive forum for resolving any shareholder complaint asserting a cause of action arising under federal or state securities laws of the United States, including applicable claims arising out of this offering. These choice of forum provisions may limit a shareholder’s ability to bring a claim in a judicial forum that it finds favorable for disputes with us or our directors, officers or other employees, which may discourage such lawsuits. Section 22 of the Securities Act creates concurrent jurisdiction for federal and state courts over all suits brought to enforce any duty or liability created by the Securities Act or the rules and regulations thereunder. Accordingly, there is uncertainty as to whether a court would enforce such provision with respect to suits brought to enforce any duty or liability created by the Securities Act or the rules and regulations thereunder. Additionally, our shareholders cannot waive compliance with the federal securities laws and the rules and regulations thereunder. If a court were to find either choice of forum provision contained in our by-laws to be inapplicable or unenforceable in an action, we may incur additional costs associated with resolving such action in other jurisdictions, which could adversely affect our results of operations and financial condition.

Peru has different corporate disclosure and accounting standards than those you may be familiar with in the United States.

Financial reporting and securities disclosure requirements in Peru differ in certain significant respects from those required in the United States. There are also material differences among IFRS and U.S. GAAP. Accordingly, the information about us available to you will not be the same as the information available to holders of shares issued by a U.S. company. In addition, the Peruvian Securities Market Law, which governs open or publicly listed companies, such as us, imposes disclosure requirements that may be more limited than

 

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those in the U.S. in certain important aspects. Although Peruvian law imposes restrictions on insider trading and price manipulation, applicable Peruvian laws are different from those in the United States, and the Peruvian securities markets may not be as highly regulated and supervised as the U.S. securities markets.

Our status as a foreign private issuer allows us to follow alternate standards to the corporate governance standards of the NYSE, which may limit the protections afforded to investors.

We are a “foreign private issuer” within the meaning of the rules under the Securities Act. Under NYSE rules, a foreign private issuer may elect to comply with the practices of its home country and not to comply with certain corporate governance requirements applicable to U.S. companies with securities listed on the exchange. We currently follow certain Peruvian practices concerning corporate governance (which are not mandatory under Peruvian regulations) and intend to continue to do so. Accordingly, holders of our ADSs may not have the same protections afforded to shareholders of companies that are subject to all NYSE corporate governance requirements.

For example, NYSE listing standards provide that the board of directors of a U.S.-listed company must have a majority of independent directors at the time the company ceases to be a “controlled company.” Under Peruvian corporate governance practices, a Peruvian company is not required to have a majority of independent members on its board of directors.

The listing standards for NYSE also require that U.S.-listed companies, at the time they cease to be “controlled companies,” have a nominating/corporate governance committee and a compensation committee (in addition to an audit committee). Each of these committees must consist solely of independent directors and must have a written charter that addresses certain matters specified in the listing standards. Under Peruvian law, a Peruvian company may, but is not required to, form special governance committees, which may be composed partially or entirely of non-independent directors.

In addition, NYSE rules require the independent non-executive directors of U.S.-listed companies to meet on a regular basis without management being present. There is no similar requirement under Peruvian law.

The NYSE listing standards also require U.S.-listed companies to adopt and disclose corporate governance guidelines. In July 2002, the SMV and a committee comprised of regulatory agencies and associations prepared and published a list of suggested non-mandatory corporate governance guidelines called the “Principles of Corporate Governance for Peruvian Companies.” Although we have implemented a number of these measures, we are not required to comply with the corporate governance guidelines by law or regulation.

As a foreign private issuer, we are exempt from certain provisions applicable to U.S. domestic public companies.

As a foreign private issuer under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), we are exempt from certain provisions of the securities rules and regulations in the United States that are applicable to U.S. domestic issuers, including the requirements to prepare and issue quarterly reports on Form 10-Q or to file current reports on Form 8-K upon the occurrence of specified significant events, the proxy rules applicable to domestic U.S. registrants under Section 14 of the Exchange Act or the insider reporting and short-swing profit rules applicable to domestic U.S. registrants under Section 16 of the Exchange Act. The information we are required to file with or furnish to the SEC will be less extensive and less timely compared to that required to be filed with the SEC by U.S. domestic issuers. As a result, holders of our ADSs may not be afforded the same protections or information that would be made available to our shareholders if we were a U.S. company.

 

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Minority shareholders in Peru are not afforded equivalent protections as minority shareholders in other jurisdictions, such as the United States, and investors may face difficulties in commencing judicial and arbitration proceedings against our company or the controlling shareholder.

Our company and the controlling shareholder are organized and existing under the laws of Peru, and a majority of our directors and all of our officers reside in Peru or Colombia. Accordingly, investors may face difficulties in serving process on our company, our directors and officers or the controlling shareholder in other jurisdictions, and in enforcing decisions granted by courts located in other jurisdictions against our company, our directors and officers or the controlling shareholder that are based on securities laws of jurisdictions other than Peru.

In Peru, there are no proceedings to file class action suits or shareholder derivative actions with respect to issues arising between minority shareholders and an issuer, its controlling shareholders or directors and officers. Furthermore, the procedural requirements to file actions by shareholders differ from those of other jurisdictions, such as in the United States. As a result, it may be more difficult for our minority shareholders to enforce their rights against us, our directors, officers or controlling shareholder as compared to the shareholders of a U.S. company. The deposit agreement provides that the depositary has no obligation to commence or become involved in any judicial proceedings and any other legal actions relating to the ADSs or the deposit agreement, either on behalf of the ADS holders or on behalf of any other person.

Judgments of Peruvian courts with respect to our class A shares will be payable only in soles.

If proceedings are brought in the courts of Peru seeking to enforce our obligations in respect of the class A shares, we will have the right to discharge our obligations in soles. Under Peruvian law, an obligation in Peru to pay amounts denominated in a currency other than soles and except where there is express agreement to the contrary, may be satisfied in Peruvian currency at the exchange rate published by the SBS. The then-prevailing exchange rate may not afford non-Peruvian investors with full compensation for any claim arising out of or related to our obligations under the ADSs.

You will experience immediate and substantial dilution in the book value of the class A shares and ADSs you purchase in this offering.

Because the initial offering price of the ADSs being sold in this offering will be substantially higher than our net tangible book value per common share, you will experience immediate and substantial dilution in the book value of the class A shares underlying your ADSs. Net tangible book value represents the amount of our tangible assets on an adjusted basis, minus our total liabilities on an adjusted basis. As a result, at the assumed initial public offering price of US$                per ADS (based on the midpoint of the price range set forth on the cover page of this prospectus), we currently expect that you will incur immediate dilution of US$                per ADS if you purchase in this offering (assuming no exercise of the underwriters’ option to purchase additional ADSs).

Our newly issued class A shares from this offering will initially be represented by certificados provisionales and you will not be able to cancel your ADSs and withdraw the deposited class A shares until the definitive class A shares are issued.

In accordance with Peruvian law, our class A shares underlying the ADSs will be represented by preliminary stock certificates (certificados provisionales) until the capital increase allowing for the issuance of such class A shares is recorded in the Corporations Public Registry. We cannot assure you that the Corporations Public Registry will not delay the recording of our capital increase. Once the capital increase has been recorded, we will issue definitive stock certificates in exchange for the preliminary stock certificates. Only after the capital increase has been recorded with the Corporations Public Registry, and we have issued definitive stock certificates in exchange for the preliminary stock certificates, will you be able to cancel your ADSs and withdraw the deposited class A shares.

 

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Our ADSs may not be a suitable investment for all investors, as an investment in ADSs presents risks and the possibility of financial losses.

The investment in our ADSs is subject to risks. Investors who wish to invest in ADSs are thus subject to asset losses, including loss of the entire value of their investment, as well as other risks, including those related to the class A shares, the Company, the industry in which we operate, our shareholders and the general macroeconomic environment in Peru and Colombia, among other risks. Each potential investor in ADSs must therefore determine the suitability of that investment in light of its own circumstances. In particular, each potential investor should:

 

   

have sufficient knowledge and experience to make a meaningful evaluation of the ADSs, the merits and risks of investing in ADSs and the information contained in this prospectus or any applicable supplement;

 

   

have access to, and knowledge of, appropriate analytical tools to evaluate, in the context of its particular financial situation, an investment in ADSs and the impact the shares will have on its overall investment portfolio;

 

   

have sufficient financial resources and liquidity to bear all of the risks of an investment in the ADSs; and

 

   

understand thoroughly the terms of ADSs and be familiar with the behavior of any relevant indices and financial markets; and be able to evaluate (either alone or with the help of a financial adviser) possible scenarios for economic, interest rate and other factors that may affect its investment and its ability to bear the applicable risks.

 

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USE OF PROCEEDS

We estimate that the net proceeds to us from this offering will be approximately US$        million, or US$        million if the underwriters exercise their option to purchase additional ADSs in full. These amounts assume an initial public offering price of US$        per ADS (the midpoint of the price range set forth on the cover page of this prospectus), after deducting the estimated underwriting discounts and commissions and offering expenses payable by us.

The principal purposes of this offering are to increase our capitalization and financial flexibility, create a public market for our common stock, and facilitate our future access to the capital markets. As of the date of this prospectus, we cannot specify with certainty all of the particular uses for the net proceeds to us from this offering. We currently intend to use the net proceeds from this offering for general corporate purposes, including acquisitions, expansion of our existing facilities, other capital expenditures and the repayment of indebtedness from time to time.

We routinely evaluate acquisition and investment opportunities that are aligned with our strategic goals, so we may also acquire, or invest in, businesses or assets that are complementary to our core business. However, we do not have agreements or commitments to enter into any acquisitions at this time. We also routinely evaluate opportunities to expand existing facilities as an important part of our growth plan. We cannot assure you that we will find opportunities that we consider to be favorable to us, whether we will be able to take advantage of such opportunities should they arise, or the timing of and funds required by such opportunities. In addition, we expect to finance these opportunities with a combination of cash on hand, net proceeds from this offering, new borrowings and/or financial contributions from partners, depending on a variety of commercial considerations at such time. Accordingly, we will have significant flexibility in applying the net proceeds from this offering. As a result, our actual use of proceeds from this offering could vary significantly from the currently expected use.

Each US$1.00 increase (decrease) in the assumed initial public offering price of  US$        per ADS, the midpoint of the price range set forth on the cover page of this prospectus, would increase (decrease) the net proceeds to us from this offering by approximately US$        million, assuming the number of ADSs offered by us, as set forth on the cover page of this prospectus, remains the same, and after deducting underwriting discounts and commissions payable by us. Each increase (decrease) of 1.0 million shares in the number of ADSs sold by us in this offering, as set forth on the cover page of this prospectus, would increase (decrease) the net proceeds to us from this offering by approximately US$        million, assuming the assumed initial public offering price of  US$        per ADS, the midpoint of the price range set forth on the cover page of this prospectus, remains the same, and after deducting underwriting discounts and commissions payable by us. The information discussed above is illustrative only and will adjust based on the actual initial public offering price and other terms of this offering determined at pricing.

 

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DIVIDENDS

Dividend Policy

Our dividend policy has historically been to distribute up to S/10 million per year of our net profit obtained from the preceding year. Following this offering, we intend to retain all available funds and future earnings, if any, to fund the expansion of our business, and we do not anticipate paying any cash dividends in the foreseeable future. Any future determination regarding the declaration and payment of dividends, if any, will be at the discretion of our board of directors and will be subject to approval by holders of our class A shares and class B shares voting together at our annual shareholders’ meeting. Any determination by our board of directors to recommend for approval the declaration and payment of dividends will depend on then-existing conditions, including our financial condition, operating results, contractual restrictions, capital requirements, business prospects and other factors our board of directors may deem relevant. Our dividend policy notwithstanding, under Peruvian law, shareholders representing 20% of our outstanding common shares have the right to compel us to distribute at least 50% of the net profit of the previous fiscal year.

Each share of our common stock represents the same economic interest, except that, as provided in our by-laws, the class A shares benefit from the right to receive a preferred dividend consisting of 100% of any dividends distributed until we have distributed US$1 billion (or its equivalent in soles) in the aggregate in cash dividends.

Under the Peruvian Corporations Law, companies may distribute up to 100% of their profit (after payment of income tax) subject to a mandatory 10% legal reserve requirement until the legal reserve equals 20% of shareholders’ equity and provided that no accumulated losses exist. According to Article 40 of the Peruvian Corporations Law, in order to distribute dividends, profits must be determined based on the individual financial statements of the company.

In order to allow for the settlement of securities, under the rules of the SMV, investors who purchase shares of a listed company will have the right to receive the dividend payment, provided that such transaction has been executed by the corresponding cutoff date (fecha de corte). Holders of shares are not entitled to interest on accrued dividends. In addition, under Article 232 of the Peruvian Corporations Law, the right to collect dividends declared by a company expires three years after the original dividend payment date (unless, like us, it is a publicly held company, in which case the right to collect dividends declared by the company would expire ten years after the original dividend payment date).

Subject to the terms of the deposit agreement, holders of our ADSs will be entitled to receive dividends, if any, paid on the class A shares represented by the ADSs. Cash dividends on our class A shares will be paid in soles and will be converted by the depositary into U.S. dollars and paid in U.S. dollars to the holders of ADSs, net of fees, expenses and any taxes. Under Peruvian law, dividends are subject to a withholding tax of 5% if paid to non-Peruvian holders. See “Description of American Depositary Shares.”

Because we are a holding company and all of our business is conducted through our subsidiaries, we pay, and we expect to continue paying, dividends, if any, from funds we receive from our subsidiaries. Accordingly, our ability to pay dividends to shareholders is dependent on the earnings of, and dividends and other distributions from, our subsidiaries. The ability of our subsidiaries to make distributions to us may be restricted by law or by the terms of our existing or future indebtedness. For example, four of our subsidiaries, Medic Ser, Oncocenter, Oncosalud S.A.C. and GSP Servicios Generales, each applied for and received a loan of S/10 million and Clínica Vallesur S.A. applied for and received a loan of S/7.5 million, in each case under a loan relief program offered by the Peruvian government in response to the COVID-19 pandemic. Such loans restrict these subsidiaries’ ability to pay dividends to us during the term of each loan, which are up to 36 months. Although the restrictions on these subsidiaries’ ability to pay dividends to us have not to date had a material impact on our liquidity or capital resources, we cannot assure you that our subsidiaries will not need to take out similar loans in the future, or that the agreements governing our existing or future indebtedness will permit our subsidiaries to provide us with

 

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sufficient dividends or distributions or permit us to loan money or enter into other similar arrangements to fund dividend payments. See “Risk Factors—Risks Related to Our Business—We are a holding company and all of our operations are conducted through our subsidiaries. Our ability to pay dividends to you will depend on the ability of our subsidiaries to pay dividends and make other distributions to us.”

In 2019 and for the first six months of 2020, we paid dividends to our shareholders of S/10 million (or US$2.8 million) and S/5.0 million (or US$1.4 million), respectively. These amounts were approved at our annual shareholders’ meetings during each year.

 

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CAPITALIZATION

The following table sets forth our capitalization as of June 30, 2020:

 

   

on an actual basis; and

 

   

as adjusted to give effect to net proceeds amounting to US$         (S/            ) for the sale of our ADSs in the offering, which reflects the sale of             ADSs at an assumed initial public offering price of US$         per ADS (the midpoint of the price range set forth on the cover page of this prospectus), after deducting estimated underwriting discounts and commissions and offering expenses payable by us.

The as adjusted information in the table below assumes no exercise of the underwriters’ option to purchase additional ADSs.

The table below should be read in conjunction with “Presentation of Financial and Other Information,” “Selected Financial and Other Information,” “Management’s Discussion and Analysis of Financial Conditions and Results of Operations” and our consolidated financial statements included in this prospectus.

 

     As of June 30, 2020  
     Actual      As Adjusted  
     (in millions
of US$)(1)
     (in millions
of S/)
     (in millions
of US$)(1)
     (in millions
of S/)
 

Loans and borrowings (current portion)(2)

   $ 75.3      S/ 267.0      $                    S/               

Loans and borrowings (non-current portion)(2)

     141.0        499.7        
  

 

 

    

 

 

    

 

 

    

 

 

 

Total loans and borrowings

     216.3        766.7        

Total equity

     144.6        512.5        

Total capitalization

   $  361.0      S/  1,279.2      $        S/               
  

 

 

    

 

 

    

 

 

    

 

 

 

 

(1)

Calculated based on an exchange rate of S/3.5437 to US$1.00 as of June 30, 2020.

(2)

As of June 30, 2020, we had S/527.0 million (US$148.7 million) guaranteed secured loans and borrowings and S/239.6 million (US$67.6 million) guaranteed unsecured loans and borrowings.

 

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DILUTION

Purchasers of our ADSs in this offering will experience immediate and substantial dilution to the extent of any difference between the initial public offering price per ADS and the net tangible book value per ADS upon the completion of the offering.

Net tangible book value represents the amount of our total assets, less our total liabilities and excluding goodwill. Net book value per class A share is determined by dividing our net book value by the number of our outstanding class A shares.

As of June 30, 2020, our net tangible book value was S/             million, or S/             per class A share (equivalent to US$         per ADS). Based upon an assumed initial public offering price of US$        per ADS (the midpoint of the price range set forth on the cover page of this prospectus), our net tangible book value would increase to S/             per class A share or US$         per ADS, and the immediate dilution to purchasers of our ADSs in the offering will be S/             per class A share or US$         per ADS or     % following the offering. The following table illustrates this dilution per class A share and per ADS, assuming no exercise of the underwriters’ option to purchase additional ADSs:

 

     As of June 30, 2020  
     Per ADS      Per class A share  

Assumed initial public offering price

   US$                    S/               

Net tangible book value

     

Dilution to new investors

     

If the underwriters exercise their option to purchase additional ADSs in full, our net tangible book value following the offering would increase to S/             per class A share or US$         per ADS and the immediate dilution to purchasers of ADSs in the offering would be S/             per class A share or US$         per ADS.

 

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SELECTED FINANCIAL AND OTHER INFORMATION

The selected statement of income and other comprehensive income and statement of financial position data as of June 30, 2020 and for the six months ended June 30, 2020 and 2019 are derived from our unaudited condensed consolidated interim financial statements included elsewhere in this prospectus. The summary statement of income and other comprehensive income and statement of financial position as of and for the years ended December 31, 2019, 2018 and 2017 of the Company are derived from our audited consolidated financial statements included elsewhere in this prospectus. Due to our acquisition of Grupo Las Américas on December 26, 2018, our results of operations for the year ended December 31, 2019 are not directly comparable to the year ended December 31, 2018, and, because we owned Grupo Las Américas for five days in 2018, our results of operations for the year ended December 31, 2018 are not directly comparable to our results of operations for the year ended December 31, 2017.

We maintain our books and records in soles and prepare our consolidated financial statements in accordance with IFRS.

This financial information should be read in conjunction with “Presentation of Financial and Other Information,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements, including the notes thereto, included elsewhere in this prospectus.

 

    Six months ended June 30,     Year ended December 31,  
    2020     2020     2019     2019     2019     2018     2017  
    (in millions
of US$)(1)
    (in millions of soles)     (in millions
of US$)(1)
    (in millions of soles)  

Statement of Income and Other Comprehensive Income Data:

             

Revenue

             

Premiums earned

  $ 78.1     S/ 276.9     S/ 252.9     $ 147.4     S/ 522.3     S/ 467.6     S/ 405.5  

Health care services revenue

    78.1       276.6       326.4       185.9       658.9       229.6       194.7  

Sales of medicines

    21.5       76.2       98.2       56.8       201.3       164.0       122.6  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total revenue from contracts with customers

    177.7       629.7       677.5       390.1       1,382.6       861.2       722.8  

Cost of sales and services

    (111.7     (395.7     (417.9     (238.3     (844.5     (497.8     (422.2
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

    66.0       234.0       259.6       151.8       538.0       363.4       300.6  

Selling expenses

    (18.6     (65.9     (64.7     (37.4     (132.5     (120.7     (102.9

Administrative expenses

    (34.8     (123.5     (114.9     (66.7     (236.5     (154.4     (129.4

Loss for impairment of trade receivables

    (1.9     (6.6     (3.0     (1.7     (6.0     (2.8     (11.8

Other expenses

          (0.4     (1.4     —         —    

Other income

    0.8       2.8       3.2       1.6       5.5       5.3       2.6  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating profit

    11.5       40.9       80.2       47.2       167.1       90.8       59.0  

Finance income

    1.0       3.5       8.5       0.4       1.5       0.6       1.1  

Finance costs

    (21.7     (77.0     (27.8     (15.8     (56.1     (38.2     (24.8
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net finance cost

    (20.7     (73.4     (19.4     (15.4     (54.5     (37.5     (23.7

Share of profit of equity-accounted investees

    0.1       0.2       1.1       0.7       2.4       1.0       0.4  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

(Loss) profit before tax

    (9.1     (32.4     61.9       32.5       115.1       54.2       35.7  

Income tax expense

    2.7       9.4       (24.8     (11.6     (41.2     (17.5     (15.1
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

(Loss) profit for the year

  $ (6.5   S/ (22.9   S/ 37.1     $ 20.8     S/ 73.9     S/ 36.6     S/ 20.7  

 

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(1)

Calculated based on an exchange rate of S/3.5437 to US$1.00 as of June 30, 2020.

 

     As of June 30,      As of December 31,  
     2020      2020      2019      2019      2018      2017  
     (in millions
of US$)(1)
     (in millions
of 
soles)
     (in millions
of US$)(1)
     (in millions of soles)  

Statement of Financial Position Data:

                 

Cash and cash equivalents

   $ 21.1      S/ 74.7      $ 10.2      S/ 36.1      S/ 110.9      S/ 32.5  

Total assets

     544.6        1,930.0        533.7        1,891.3        1,740.1        697.2  

Total liabilities

     400.0        1,417.5        370.4        1,312.5        1,206.8        443.8  

Total equity

     144.6        512.5        163.3        578.8        533.3        253.4  

 

(1)

Calculated based on an exchange rate of S/3.5437 to US$1.00 as of June 30, 2020.

 

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion of our financial condition and results of operations should be read in conjunction with our audited consolidated financial statements as of and for the years ended December 31, 2019, 2018 and 2017 and the notes thereto, and our unaudited condensed consolidated interim financial statements as of June 30, 2020 and for the six months ended June 30, 2020 and 2019, included elsewhere in this prospectus, as well as the information presented under “Presentation of Financial and Other Information” and “Selected Financial and Other Information.”

The following discussion contains forward-looking statements that involve risks and uncertainties. Our actual results may differ materially from those discussed in the forward-looking statements as a result of various factors, including those set forth in “Forward-Looking Statements” and “Risk Factors.”

Overview

We are one of the largest and most recognized players in the Peruvian healthcare industry and have a growing presence in Colombia. With more than 30 years of experience in the healthcare industry, we provide oncology healthcare plans in Peru and operate hospitals and clinics in Peru and Colombia that provide high-quality medical services at all levels of complexity. Our mission is to transform healthcare in the countries in which we operate by providing excellent patient outcomes and positive, streamlined patient and plan member experiences at an affordable cost. We believe we are well positioned to fulfill this mission due to our patient-centric culture, scale, innovative use of technology, unique vertically integrated oncology platform in Peru and high degree of horizontal integration in our Peruvian and Colombian healthcare networks, all of which allow us to scale nationally and regionally with cost efficiencies and further advance our strategic development.

Our business was founded in Peru in 1989 as Oncosalud, a healthcare coverage provider selling prepaid plans covering a full range of services for the prevention, detection and treatment of cancer for a modest monthly payment that varies based on plan type and age of plan members and was on average S/51.2 (US$14.4) per month for the six months ended June 30, 2020. Our prepaid oncology plans addressed an unmet need in the healthcare coverage market in Peru at the time and quickly began to grow. Starting in 1997, we began to build our own network of Oncosalud facilities to primarily treat our plan members but also patients of private payers, including patients covered by private insurance. Clínica Oncosalud, our flagship hospital in this network, has a Diamond accreditation from ACI. Oncosalud had over 922,000 members as of December 31, 2019, which was more than each of the private insurance and EPS systems in Peru as of that date, and 888,000 members as of June 30, 2020. Measured by number of plan members, we had a market share of 30% of all private healthcare plans in Peru in 2019 and had the largest market share of any single private healthcare plan, according to data from SUSALUD. Oncosalud currently operates two specialized oncology hospitals and three oncology clinics.

In 2011, we took our experience at Oncosalud as a provider of first-class patient outcomes at an affordable cost and began to apply it to the provision of a full range of healthcare services via a broader network of facilities in Peru. Through the development and acquisition of facilities since that time, we have built a network of hospitals and clinics located in all of the major cities in the country, with premium clinical capabilities and a wide range of medical specialties and subspecialties. Today, with our Auna Peru network, we own and operate five hospitals and two clinics as well as numerous other facilities providing complementary services, such as pharmaceutical, diagnostic imaging and clinical laboratory services. We are a provider to essentially all of the private payers in the Peruvian healthcare sector, including traditional private insurers, EPS providers and prepaid plan operators. Our Auna Peru network is horizontally integrated, meaning that patients can access all of their treatment, diagnostic imaging, laboratory and pharmaceutical needs at one of our facilities instead of having to go to different providers for each service. We treated more than 198,000 and 95,000 patients during 2019 and the first six months of 2020, respectively, at facilities in our Auna Peru network, which had a total of 284 beds as of June 30, 2020.

 

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In 2018, we leveraged our experience and success in providing integrated patient experiences and outstanding outcomes in Peru and expanded into Colombia with our acquisition of Grupo Las Américas, one of Colombia’s leading healthcare providers located in the country’s second largest city, Medellín. In 2020, we began the process of rebranding Grupo Las Américas as our Auna Colombia network and expect to complete such process during the first quarter of 2021. In addition, in September 2020, we further expanded our Auna Colombia network with our acquisition of Clínica Portoazul, a premium high complexity private hospital located in the country’s fourth largest city, Barranquilla, which we are currently in the process of integrating into our network. Our Auna Colombia network provides healthcare services to patients covered by a range of payers in Colombia, including both public and private insurers, and currently consists of two hospitals and five clinics in Medellín and one hospital in Barranquilla, as well as a range of facilities providing complementary services. Similar to our Auna Peru network, our Auna Colombia network is also horizontally integrated, which enables us to be a one-stop shop for all of our patients’ needs and provide them with a seamless patient experience. In our Auna Colombia network, we also have premium medical facilities, employ some of the leading medical professionals in the country and are able to achieve high quality patient outcomes. The flagship hospital in our Auna Colombia network, Clínica Las Américas, is the leading private hospital in Medellín and was ranked the 8th best hospital in Colombia in América Economía’s 2019 Best Hospitals Ranking. We also own the IDC in Medellín, one of the country’s largest and leading private oncology hospitals and the only institution in Colombia that is a sister institution of MD Anderson, one of the leading cancer care providers in the United States. We currently have more than 450 beds and have treated more than 246,000 and 124,000 patients during 2019 and the first six months of 2020, respectively, in the Auna Colombia network.

In all of our networks, we seek to focus proactively on our plan members’ and patients’ health, rather than simply providing services when prescribed to treat disease or other medical conditions. We do this by focusing on healthy lifestyle habits and promoting regular medical check-ups to help ensure our plan members and patients remain healthy and disease is detected early. We believe this emphasis on health allows us to build life-long relationships with our plan members and patients and save lives by detecting and treating disease early on.

Segment Reporting

Operating segments are components of a company about which separate financial information is available that is regularly evaluated by the chief operating decision maker(s) in deciding how to allocate resources and assess performance. We have determined that our reportable segments are: (i) Oncosalud Peru, (ii) Healthcare Services in Peru and (iii) Healthcare Services in Colombia. Our Oncosalud Peru segment consists of our prepaid oncology plans and oncology services provided at our Oncosalud facilities in Peru, including services provided under our prepaid plans and third-party healthcare plans and paid for out-of-pocket by our patients. Our Healthcare Services in Peru segment consists of healthcare services provided at any of our facilities in Peru other than those in the Oncosalud network. Oncosalud Peru is a payer to Healthcare Services in Peru, as are other third-party payers, for oncology services provided to it by our Healthcare Services in Peru segment, and the cost of such services are reflected as a cost to our Oncosalud Peru segment and a revenue to our Healthcare Services in Peru segment in our segment reporting. Our Healthcare Services in Colombia segment consists of healthcare services provided at any of our facilities in Colombia. The accounting policies we follow for these segments are the same as those for the Company on a consolidated basis.

Factors Affecting Our Results of Operations

We believe that the most significant factors affecting our results of operations include:

 

   

Utilization and Mix of Healthcare Services. One of the most important factors affecting our financial condition and results is the rate of utilization of the healthcare services provided to our patients, including the number of outpatient consultations, emergency services, surgeries and hospitalizations that we provide in a period, as well as our ability to adequately cross-sell complementary services such as pharmaceutical, diagnostic imaging and clinical laboratory services. Our utilization rates are

 

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dependent on the number of plans for which our facilities are considered in network. As the number of plans for which we are in network increases, so does our patient universe and consequently our utilization rates. As our utilization rates increase, so does our revenue and our margins because it allows us to increase our economies of scale, as our asset base is largely a fixed cost. Likewise, as utilization rates decrease, so do our margins, and because a portion of our costs are essentially fixed, higher utilization rates drive higher margins in our business. The mix of healthcare services provided in a period also impacts our revenue, as we derive higher revenue from high complexity procedures, such as complex surgeries, than low complexity procedures.

 

   

Growth of Oncosalud Membership and Balanced Age Demographic. Increasing the total number of Oncosalud plan members is vital for the continued growth of our business. As we increase our plan member population, the rate of cancer incidence among our plan members generally stays steady or increases at a stable pace. Through new plan members, we obtain additional resources to treat our plan members that are diagnosed with cancer and are able to spread the costs of treatment across a larger population, while also increasing our profitability. In addition, we seek to maintain a balanced age demographic in our member population. Younger patients pay lower plan rates, which tends to lower our average revenue per plan member, but their likelihood of being diagnosed with cancer is significantly lower, which reduces our expected average medical cost per plan member in any given period. Additionally, expected lifetime revenue is greater for younger plan members. The average age of our plan members as of June 30, 2020 was 34. Keeping a balanced mix of younger and older patients helps us manage our revenue and costs.

 

   

Medical Inflation. Our financial condition and results are driven by our ability to control the costs of providing healthcare services, including oncology services, and appropriately price oncology plans in our Oncosalud Peru segment and negotiate reimbursement levels in our other segments. Our strong reputation in the market also depends on our having access to the newest technologies and medicines to diagnose and treat our patients, all of which can be expensive, and therefore places upward pressure on our costs. Moreover, we face significant competition for qualified medical personnel in both Peru and Colombia, which may require us to increase salaries and other benefits provided to our personnel. If we are unable to continue providing high quality care while managing these cost increases in our Oncosalud Peru segment, our operating profit could decline or we may be required to pass these cost increases onto our plan members via the pricing of our oncology plans, which could make our plans less attractive and also impact our profitability. We continually focus on balancing the pressures of medical inflation with the benefits of providing the best quality healthcare services at affordable prices in order to continue to build the strength of our brands, which helps us grow our revenues and manage our costs.

 

   

Acquisition of Grupo Las Américas. We acquired 97.3% of the shares of Grupo Las Américas on December 27, 2018, which has been consolidated into our results of operations from the date of acquisition. We acquired an additional 2.5% of the share capital of Grupo Las Américas in January 2020. The main asset of Grupo Las Américas is Clínica Las Américas. The acquisition was recorded using the purchase method of accounting, which recognizes assets and liabilities at their estimated fair values at the date of purchase, including identifiable intangibles not recorded in the financial statements of each acquired entity, pursuant to IFRS 3 Business Combinations. In connection with our acquisition of Grupo Las Américas, we identified S/172.8 million (US$48.8 million) of goodwill. Because we only owned Grupo Las Américas for five days in 2018, our results of operations for the year ended December 31, 2019 are not directly comparable to the year ended December 31, 2018, and our results of operations for the year ended December 31, 2018 are not directly comparable to our results of operations for the year ended December 31, 2017. In order to facilitate a more useful comparison of our results of operations period-to-period, we isolate the effect of the acquisition of Grupo Las Américas in certain explanations below.

 

   

Expansion of Our Network. Our ability to expand our network of healthcare facilities is one of the most important factors affecting our results of operation and financial condition. Historically, our

 

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business growth has been primarily driven by planning and building new hospitals or expanding existing hospitals and by acquiring new hospitals from third parties, and we expect these activities to continue to be key drivers for our future growth. Each additional facility that we develop or acquire increases the number of patient cases treated in our network and contributes to our continued revenue growth. However, building new hospitals requires several years of capital expenditures and ramp up of operations prior to a facility becoming profitable, and it takes time and resources to integrate new hospitals acquired from third parties into our existing networks.

 

   

Foreign Exchange Rates. Our functional currency is the Peruvian sol and we present our consolidated financial information in Peruvian soles. However, we generated 26.1% of our revenue in the first six months of 2020 in Colombian pesos. In addition, a significant portion of our debt is U.S. dollar-denominated. Although we have entered into hedging arrangements with respect to all of our U.S. dollar-denominated debt and we also hedge our exposure to the Colombian peso, we recognize gains and losses from this debt and the related hedging instruments resulting from exchange rate differences between Peruvian soles, Colombian pesos and U.S. dollars in profit or loss.

Impact of COVID-19

Since December 2019, a novel strain of coronavirus (COVID-19) has spread around the world, including in Peru and Colombia. The Peruvian government closed its international borders and ordered a national lockdown on March 16, 2020 that lasted until June 30, 2020. In connection with the lockdown, all non-essential businesses were ordered to close. On July 1, 2020, the national lockdown was lifted and non-essential businesses gradually reopened; however, as a result of a subsequent increase in COVID-19 cases, lockdowns were ordered in certain cities, including Arequipa, in which we have facilities. Furthermore, international borders in Peru remain closed indefinitely. Similarly, the Colombian government closed its borders and ordered a national lockdown on March 25, 2020 until August 31, 2020. However, at the end of August 2020, it announced a selective quarantine phase from September 1, 2020 until at least September 30, 2020. The lockdowns in Peru and Colombia effectively restricted nearly all economic activity in both countries, significantly impacting both the financial and operating performance of our business.

Our hospitals in Peru and Colombia are essential businesses and remain open for limited services. As a result of the pandemic, we were ordered to cancel all elective, non-emergency procedures and outpatient consultations in Peru and Colombia, restricting our services to emergency care only for the duration of the lockdowns. As a result, revenue from our Healthcare Services in Peru and Healthcare Services in Colombia segments decreased 15.3% and 19.6%, respectively, for the six months ended June 30, 2020 compared to the six months ended June 30, 2019. We have also seen a significant increase in the cost of sales and services in recent months due to an increase in the purchase of personal protective equipment for all medical and administrative personnel who are in direct patient contact. At the same time, we have seen an increase in the prices of personal protective equipment, which have been in short supply around the world. In addition, we have experienced staffing shortages at our hospitals and clinics as medical personnel, working on the front lines, have contracted COVID-19 at high rates. We have covered these shortages with hiring temporary personnel and granting special bonuses to medical personnel caring for patients with COVID-19, which has increased our labor-related costs. As a result of increased costs, gross profit in our Healthcare Services in Peru and Healthcare Services in Colombia segments decreased 58.5% and 35.9%, respectively, for the six months ended June 30, 2020 compared to the six months ended June 30, 2019.

In response to the pandemic, we implemented a number of measures at our facilities in April and May 2020. In both our Peruvian and Colombian networks, we designated specific facilities as COVID-19 treatment centers and rapidly increased intensive care unit capacity. This allowed certain of our facilities, such as Clínica Delgado and Clínica Oncosalud, to remain COVID-19 free and we were able to resume elective services at those facilities in May. In other facilities, we modified our floor plans, segregated certain floors or wings to be dedicated to COVID-19 treatment and invested in special hospital tents to ensure patients with COVID-19 could be

 

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adequately segregated from those without COVID-19. In addition, we invested in launching several services, such as the home delivery of medicines, a telemedicine platform and video consultations with patients who think they may have COVID-19. These responsive actions allowed us to re-commence non-essential procedures and provide additional services in a timely manner, which, along with revenues generated from the treatment of COVID-19 patients, resulted in our revenues post second-quarter end improving as compared to the comparable period in 2019, based on internal management data.

The COVID-19 pandemic has also led to disruption of regional and global economic activity, and to volatility and a downturn in the financial markets, which is expected to continue at least in the near term. In our Oncosalud segment, we have seen a decline in sales of our prepaid oncology plans as much of our sales force is working from home and certain of our other sales channels are shut down completely. The disruption has also led to a significant increase in unemployment and as a result, we have seen an increase in the number of plan members cancelling their plans, which led to a 1.3% decrease in our number of plan members from 900,429 in June 2019 to 888,708 in June 2020. Despite the decrease in plan members, our Oncosalud Peru segment’s revenue and gross profit increased 9.7% and 18.1%, respectively, for the six months ended June 30, 2020 compared to the same period in 2019. The increase in revenue was due to an increase in plan prices to account for increased medical costs. The increase in gross profit for our Oncosalud Peru segment was due to a decrease in services provided to plan members as part of the Peruvian government’s restrictions on outpatient consultations, including preventive check-ups, which tend to be more costly services. See “Risk Factors—Risks Related to Our Business—Our business has been and continues to be negatively impacted by the COVID-19 pandemic.”

To date, we have taken certain measures in the second and third quarters of 2020 to bolster our capital position as a result of the economic uncertainty. For example, four of our subsidiaries, Medic Ser, Oncocenter, Oncosalud S.A.C. and GSP Servicios Generales, each applied for and received a loan of S/10 million and Clínica Vallesur S.A. applied for and received a loan of S/7.5 million, in each case under a loan relief program offered by the Peruvian government in response to the COVID-19 pandemic. In addition, our subsidiaries Grupo Las Américas and Instituto de Cancerologia S.A.S., each applied for and received loans of COP12,837.0 million and COP4,069.0 million, respectively, under a loan relief program offered by the Colombian government in response to the COVID-19 pandemic. The loans our Peruvian subsidiaries received contain certain restrictions on their ability to pay dividends. See “Risk Factors—Risks Related to Our Business—We are a holding company and all of our operations are conducted through our subsidiaries. Our ability to pay dividends to you will depend on the ability of our subsidiaries to pay dividends and make other distributions to us.”

While we continue to pursue our capital expenditure projects, certain of our ongoing construction projects have been paused while economic activity fully resumes. In addition, we have shifted some of our capital expenditure budget to purchase additional resources to adequately address the pandemic, such as additional ventilators and temporary isolation units.

Despite the COVID-19 pandemic, during 2020, we remain committed to continuing to grow our networks and our plan members and patients base as we expand into new markets and continue strengthening our position in existing markets. In Oncosalud, we launched a pilot for a new lower-cost plan covering the most common and treatable cancers, which is expected to be within the economic reach of a larger segment of Peru’s population. We also introduced a pilot for a prepaid plan covering general healthcare services as well as a plan covering a range of potentially catastrophic diseases and conditions. These pilots are currently being managed through our Oncosalud Peru segment and we expect to officially roll out both of these plans in 2020. We are also expanding our installed capacity in our Oncosalud network. For example, we launched a new facility at Oncosalud San Borja in the fourth quarter of 2019 that offers full hospital capabilities and began offering overnight stays in the second quarter of 2020. In light of the COVID-19 pandemic, our new facility at Oncosalud San Borja is currently being operated to treat COVID-19 patients.

 

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Components of Our Results of Operations

Total Revenue from Contracts with Customers

Total revenue from contracts with customers. We generate revenue from (i) premiums earned on our oncologic healthcare plans, which we also refer to as our oncology plans, in our Oncosalud Peru segment,(ii) the sale of healthcare services, which occurs in all of our segments, and (iii) the sale of medicines, which also occurs in all of our segments.

Oncology plans. We sell prepaid oncology plans in Peru to plan members for one-year terms, which are automatically renewed and adjusted for price increases at the end of the term, unless terminated by either party. Most of our plan members make payments pursuant to these plans on a monthly basis, while a smaller percentage of them make payments on an annual basis. The premiums we receive from the sales of oncology plans are recognized as revenue proportionally during the period in which a patient is entitled to healthcare services under his or her plan. Premiums related to the unexpired contractual coverage period under an oncology plan are recognized in the accompanying balance sheet as unearned premiums reserve.

Healthcare services. The revenue we generate from the sale of healthcare services is recognized as services are rendered to our patients and includes amounts related to the services provided as well as the products and supplies used in providing such services. The price of healthcare services is determined by the rates set forth in reimbursement arrangements that we have with individual healthcare providers for patients that have healthcare coverage or by reference to our standard rates for patients that do not have healthcare coverage and are generally paying out-of-pocket.

Sales of medicines. The revenue we generate from the sale of medicines is recognized when medicines are provided to our customers and in cases when our patients are hospitalized, when medicines are administered to them.

Cost of Sales and Services and Gross Profit

Cost of sales and services. Our cost of sales and services is primarily comprised of costs incurred in providing healthcare services, including the cost of medicines; personnel expenses for medical staff; medical consultation fees; surgery fees; depreciation of medical equipment; depreciation of buildings and facilities; amortization of software; cost of services provided by third parties, primarily lease payments to third parties for certain of our facilities, service and repair costs at our facilities, custodial and cleaning services and utilities; cost of room services for inpatients; cost of clinical laboratories; and technical reserves for healthcare services.

Gross profit. Our gross profit is the difference between the revenue generated by the sale of our oncology plans, healthcare services and medicines and the cost of sales and services.

Operating Expenses, Loss for Impairment of Trade Receivables, Other Expenses and Other Income

Selling expenses. Our selling expenses include personnel expenses for our dedicated sales and marketing team; cost of services provided by third parties, primarily sales commissions paid to brokers, call centers and other third parties that assist with our sales efforts, as well as advertising costs; and other management charges, such as office rental for our sales team, advisory fees for market studies and sales team recruiting fees.

Administrative expenses. Administrative expenses consist primarily of costs incurred at the administrative level at each of our facilities, including personnel expenses for administrative staff; cost of services provided by third parties, primarily advisory and consulting fees and lease payments to third parties for office space; depreciation, primarily of buildings and facilities; amortization of intangibles, such as IT and software; various other administrative expenses, such as insurance; and tax expenses. We also allocate a portion of administrative expenses at the corporate level to each of our operating segments. For example, in 2018, we completed Project Galeno, an efficiency evaluation of our pharmacy management protocols in Peru. This project benefited both the Oncosalud Peru segment and the Healthcare Services in Peru segment, and as such, we allocated a portion of the expenses relating to that project to each segment.

 

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Loss for impairment of trade receivables. Loss for impairment of trade receivables consists of the estimate for impairment of trade receivables. This estimate generally consists of provisions for services to patients who, after a certain period of time and in accordance with our impairment policy, do not pay for those services provided, either by themselves or through insurance companies. We calculate the estimate for impairment of trade receivables using an expected loss model whereby we estimate expected losses on our trade receivables based on our historical experience of impairment and other circumstances known at the time of assessment in accordance with IFRS 9. We record a gain for impairment of trade receivables for any recovery we make in excess of our estimated losses on trade receivables. The amount of the provision made for impairment of trade receivables is written off from the balance account when there is no expectation of cash recovery.

Other expenses. Other expenses consists of the change in fair value of assets held for sale and the loss on sale of investments in associates related to the sale of our stake in Hospital en Casa S.A. in December 2019.

Other income. Other income consists of (i) rental income from property owned and rented by us for investment purposes, (ii) the parking fees we charge those who park in the parking lots at our facilities and (iii) the increase in fair value of our investment properties.

Finance Income and Finance Cost

Finance income and finance cost consist of interest income, interest expense, net gain (loss) on financial assets, foreign currency gain (loss) on financial assets and financial liabilities and the reclassification of net gains (losses) on instruments used to hedge interest rate and foreign currency exchange rate risk previously recognized in other comprehensive income.

Income Tax Expense

Income tax expense consists of taxes on income generated during the period. Our effective tax rate in 2019 was 35.8%.

Results of Operations

We have derived the information included in the following discussion from our consolidated financial statements included elsewhere in this prospectus. You should read this discussion along with such financial statements.

 

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Six Months Ended June 30, 2020 Compared to Six Months Ended June 30, 2019

The following table summarizes our results of operations for the six months ended June 30, 2020 and 2019:

 

     Six Months Ended
June 30,
     % Change  
     2020      2019      2020 vs. 2019  
     (in millions of soles)         

Revenue

        

Premiums earned

     S/  276.9        S/  252.9        9.5

Health care services revenue

     276.6        326.4        (15.3 )% 

Sales of medicines

     76.2        98.2        (22.4 )% 
  

 

 

    

 

 

    

Total Revenue from contracts with customers

     629.7        677.5        (7.1 )% 

Cost of sales and services

     (395.7      (417.9      (5.3 )% 
  

 

 

    

 

 

    

Gross profit

     234.0        259.6        (9.9 )% 

Selling expenses

     (65.9      (64.7      1.9

Administrative expenses

     (123.5      (114.9      7.5

Loss for impairment of trade receivables

     (6.6      (3.0      120.0

Other expenses

        

Other income

     2.8        3.2        (12.5 )% 
  

 

 

    

 

 

    

Operating profit

     40.9        80.2        49.0

Finance income

     3.5        8.5        (58.8 )% 

Finance costs

     (77.0      (27.8      (177.0 )% 
  

 

 

    

 

 

    

Net finance cost

     (73.4      (19.4      278.4

Share of profit of equity-accounted investees

     0.2        1.1        81.8
  

 

 

    

 

 

    

(Loss) profit before tax

     (32.4      61.9        (152.3 )% 

Income tax (expense) benefit

     9.4        (24.8      (138.1 )% 
  

 

 

    

 

 

    

(Loss) profit for the period

     S/  (22.9      S/  37.1        (161.7 )% 

Revenue

 

     Six Months Ended June 30,      % Change  
     2020      2019      2020 vs. 2019  
     (in millions of soles)         

Total revenue from contracts with customers

        

Oncosalud Peru

     S/314.8        S/286.9        9.7

Healthcare Services in Peru

     195.2        230.5        (15.3 )% 

Healthcare Services in Colombia

     164.4        204.6        (19.6 )% 

Holding and Eliminations

     (44.7      (44.5      (0.6 )% 
  

 

 

    

 

 

    

Total

     S/  629.7        S/  677.5        (7.1 )% 
  

 

 

    

 

 

    

Our total revenue from contracts with customers was S/629.7 million for the six months ended June 30, 2020, representing a decrease of S/47.8 million, or 7.1%, from S/677.5 million for the six months ended June 30, 2019. This decrease was primarily driven by the decrease in services provided in our Healthcare Services in Peru and Healthcare Services in Colombia segments due to government restrictions on our operations in response to COVID-19.

Revenue from our Oncosalud Peru segment was S/314.8 million for the six months ended June 30, 2020, representing an increase of S/27.9 million, or 9.7%, from S/286.9 million for the six months ended June 30, 2019. This increase was primarily driven by a 9.0% increase in the average revenue per plan member, which contributed S/22.9 million to the increase and was due to an increase in plan prices to account for an increase in

 

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medical costs and an increase in the average age of our plan members, as well as a 0.8% net increase in the average number of Oncosalud plan members, which contributed S/2.0 million to the increase.

Revenue from our Healthcare Services in Peru segment was S/195.2 million for the six months ended June 30, 2020, representing a decrease of S/35.2 million, or 15.3%, from S/230.5 million for the six months ended June 30, 2019. This decrease was primarily driven by a 24.5% decrease in the number of patients treated, which contributed S/56.5 million to the decrease and was primarily due to government restrictions on non-critical services in response to COVID-19. This decrease was partially offset by a 12.2% increase in average revenue per patient, which increased segment revenue by S/21.2 million and was due to an increase in high complexity and critical procedures in the mix of healthcare services provided during the period.

Revenue from our Healthcare Services in Colombia segment was S/164.4 million for the six months ended June 30, 2020, representing a decrease of S/40.2 million, or 19.6%, from S/204.6 million for the six months ended June 30, 2019. This decrease was primarily driven by an 18.7% decrease in the number of patients treated, which contributed S/34.3 million to the decrease and was primarily due to government restrictions on non-critical services in response to COVID-19, and depreciation of the Colombian peso against the Peruvian sol, partially offset by a 9.4% increase in average revenue per patient, which increased revenue by S/14.1 million.

Cost of sales and services

 

     Six Months Ended June 30,      % Change  
     2020      2019      2020 vs. 2019  
     (in millions of soles)         

Cost of sales and services

        

Oncosalud Peru

     S/  (141.1      S/  (139.9      (0.9 )% 

Healthcare Services in Peru

     (172.6      (175.9      1.9

Healthcare Services in Colombia

     (128.4      (148.4      13.5

Holding and Eliminations

     46.4        46.3        0.2
  

 

 

    

 

 

    

Total

     S/  (395.7      S/  (417.9      5.3
  

 

 

    

 

 

    

Our total cost of sales and services was S/395.7 million for the six months ended June 30, 2020, representing a decrease of S/22.2 million, or 5.3%, from S/417.9 million for the six months ended June 30, 2019. The decrease was primarily attributable to a decrease in the number of patients treated in all segments as a result of government restrictions on non-critical services in response to COVID-19.

Cost of sales and services in our Oncosalud Peru segment was S/141.1 million for the six months ended June 30, 2020, representing an increase of S/1.2 million, or 0.9%, from S/139.9 million for the six months ended June 30, 2019. This increase was primarily attributable to an increase in the average cost of treatment per patient due to the inclusion of new treatments for cancer and an increase in the cost and use of personal protective equipment as a result of the COVID-19 pandemic, which increased cost of sales and services by S/17.6 million, partially offset by a decrease in the number of patients treated, which decreased cost of sales and services by S/16.4 million.

Cost of sales and services in our Healthcare Services in Peru segment was S/172.6 million for the six months ended June 30, 2020, representing a decrease of S/3.3 million, or 1.9%, from S/175.9 million for the six months ended June 30, 2019. The decrease was primarily attributable to a 24.5% decrease in the number of patients treated, partially offset by (i) an S/11.8 million, or 25.8%, increase in medical staff costs in connection with the hiring of additional medical staff in response to the COVID-19 pandemic and the granting of special bonuses to personnel caring for COVID-19 patients and (ii) the increase in the cost and use of personal protective equipment that increased cost of sales and services by S/5.6 million.

Cost of sales and services in our Healthcare Services in Colombia segment was S/128.4 million for the six months ended June 30, 2020, representing a decrease of S/20.0 million, or 13.5%, from S/148.4 million for the

 

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six months ended June 30, 2019. The decrease was primarily attributable to an 18.7% decrease in the number of patients treated and the depreciation of the Colombian peso against the Peruvian sol, partially offset by a 2.7% or S/1.2 million increase in medical staff costs in connection with the hiring of additional medical staff.

Gross profit and gross margin

For the foregoing reasons, our gross profit was S/234.0 million for the six months ended June 30, 2020, representing a decrease of S/25.6 million, or 9.9%, from S/259.6 million for the six months ended June 30, 2019. Our gross margin for the six months ended June 30, 2020 was 37.2%. By segment, our gross margin was 55.2% in Oncosalud Peru, 11.6% in Healthcare Services in Peru and 21.9% in Healthcare Services in Colombia. Overall, our gross margin decreased by 1.1 percentage points for the six months ended June 30, 2020, from 38.3% for the six months ended June 30, 2019.

Selling expenses

Our total selling expenses were S/65.9 million in the six months ended June 30, 2020, representing an increase of S/1.2 million, or 1.9%, from S/64.7 million in the six months ended June 30, 2019.

Selling expenses in our Oncosalud Peru segment were S/61.2 million in the six months ended June 30, 2020, representing an increase of S/2.0 million, or 3.4%, from S/59.2 million in the six months ended June 30, 2019. The increase in selling expenses was primarily a result of an increase in the number of salespeople, which led to an increase in sales staff cost of S/1.8 million, and expenses related to advertising services of S/1.0 million, partially offset by lower expenses for sales related events of S/0.6 million, compared to the same period in 2019.

Selling expenses in our Healthcare Services in Peru segment were S/3.5 million in the six months ended June 30, 2020, representing a decrease of S/0.7 million, or 16.7%, from S/4.2 million in the six months ended June 30, 2019. The decrease in selling expenses was primarily due to a decrease in advertising expenses of S/0.3 million and a decrease of credit card collection fees of S/0.2 million.

Selling expenses in our Healthcare Services in Colombia segment were S/0.8 million in the six months ended June 30, 2020, representing a decrease of S/0.8 million, or 50.0% from S/1.6 million in the six months ended June 30, 2019. The decrease was primarily due to a decrease in personnel expenses of S/0.5 million.

Administrative expenses

Our total administrative expenses were S/123.5 million in the six months ended June 30, 2020, representing an increase of S/8.6 million, or 7.5%, from S/114.9 million in the six months ended June 30, 2019.

Administrative expenses for our Oncosalud Peru segment were S/50.8 million in the six months ended June 30, 2020, representing an increase of S/8.4 million, or 19.8%, from S/42.4 million for the six months ended June 30, 2019. The increase was primarily attributable to (i) S/2.2 million in additional corporate-level expenses, primarily for innovation advisory services and a corporate reorganization through which we created regional management teams for Peru and Colombia, (ii) an increase of S/1.2 million due to the hiring of additional personnel for our technical, risk and product teams and (iii) S/0.8 million for donations to MINSA’s COVID-19 relief efforts.

Administrative expenses for our Healthcare Services in Peru segment were S/43.8 million in the six months ended June 30, 2020, representing an increase of S/4.3 million, or 10.6%, from S/39.6 million for the six months ended June 30, 2019. The increase was primarily attributable to a S/4.9 million in additional expenses for external IT and innovation advisory services at the corporate level, and a corporate reorganization through which we created regional management teams for Peru and Colombia.

 

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Administrative expenses for our Healthcare Services in Colombia segment were S/29.3 million in the six months ended June 30, 2020, representing a decrease of S/3.5 million, or 19.7%, from S/32.8 million in the six months ended June 30, 2019. The decrease was primarily attributable to the depreciation of the Colombian peso against the Peruvian sol, partially offset by an increase in administrative expenses at the corporate level in connection with a corporate reorganization through which we created regional management teams for Peru and Colombia.

Loss for impairment of trade receivables

The total loss for impairment of trade receivables was S/6.6 million in the six months ended June 30, 2020, representing an increase of S/3.6 million, or 120.0%, from S/3.0 million in the six months ended June 30, 2019.

The loss for impairment of trade receivables was S/2.1 million in the six months ended June 30, 2020 in our Oncosalud Peru segment, representing an increase of S/2.0 million from S/0.1 million in the six months ended June 30, 2019. The increase in the loss for impairment of trade receivables in our Oncosalud Peru segment was primarily due to an increase in provisions for individual clients as a result of treating COVID-19 patients without insurance coverage as required by government regulations on mandatory emergency care and other mandates put in place in response to the pandemic.

The loss for impairment of trade receivables was S/4.0 million in the six months ended June 30, 2020 in our Healthcare Services in Peru segment, representing an increase of S/3.2 million, or 400.0%, from S/0.8 million in the six months ended June 30, 2019. The increase in the loss for impairment of trade receivables in our Healthcare Services in Peru segment was primarily due to an increase in provisions for individual clients as compared to the six months ended June 30, 2019 as a result of treating COVID-19 patients without insurance coverage as required by government regulations on mandatory emergency care and other mandates put in place in response to the pandemic.

The loss for impairment of trade receivables was S/0.4 million in the six months ended June 30, 2020 in our Healthcare Services in Colombia segment, representing a decrease of S/2.3 million, or 82.6%, from S/2.7 million in the six months ended June 30, 2019. The decrease in the loss for impairment of trade receivables in our Healthcare Services in Colombia segment was primarily related to higher provisions for contracts with two EPS clients in 2019. We reduced our volume with these clients in 2020 and did not have similarly large provisions for particular clients in 2020, leading to the decrease as compared to 2019.

Operating profit

 

     Six Months Ended June 30,      % Change  
     2020      2019      2020 vs. 2019  
     (in millions of soles)         

Operating profit

        

Oncosalud Peru

     S/  62.6        S/  48.4        29.3

Healthcare Services in Peru

     (27.4      11.6        336.2

Healthcare Services in Colombia

     7.1        20.5        (65.3 )% 

Holding and Eliminations

     (1.4      (0.3      366.7
  

 

 

    

 

 

    

Total

     S/  40.9        S/  80.2        (49.1 )% 
  

 

 

    

 

 

    

For the foregoing reasons, our operating profit was S/40.9 million for the six months ended June 30, 2020, representing a decrease of S/39.4 million, or 49.1%, from S/80.2 million for the six months ended June 30, 2019.

Finance income and finance cost

Finance income was S/3.5 million in the six months ended June 30, 2020, representing a decrease of S/4.9 million from S/8.5 million in the six months ended June 30, 2019. This decrease was primarily due to a S/7.2 million decrease in gains for exchange difference due to the depreciation of the Colombian peso against the U.S. dollar, affecting certain of our outstanding indebtedness kept in U.S. dollars.

 

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Finance cost was S/77.0 million in the six months ended June 30, 2020, representing an increase of S/49.2 million, or 177.0%, from S/27.8 million in the six months ended June 30, 2019. This increase was primarily attributable to S/53.5 million in losses as a result of exchange differences due to the depreciation of the Colombian peso against the U.S. dollar, affecting certain of our outstanding indebtedness kept in U.S. dollars, partially offset by decreases to LIBOR used to calculate the interest rate under this indebtedness.

Income tax expense

We had an income tax benefit of S/9.4 million for the six months ended June 30, 2020, representing a decrease of S/34.2 million, or 138.1%, from an income tax expense of S/24.8 million for the six months ended June 30, 2019. The decrease was primarily attributable to the decrease in profit before tax as a result of the impact of the COVID-19 pandemic on our operations as described above. In addition, our effective tax rate decreased from 35.8% for the six months ended June 30, 2019 to 29.9% for the six months ended June 30, 2020, mainly due to a decrease of non-deductible expenses of 4.75% and a reduction in the nominal tax rate in Colombia of 1%.

(Loss) profit for the period

For the foregoing reasons, loss for the period was S/22.9 million for the six months ended June 30, 2020, representing a decrease of S/60.1 million, or 161.7%, from a profit of S/37.1 million for the six months ended June 30, 2019.

Year Ended December 31, 2019 Compared to Year Ended December 31, 2018

The following table summarizes our results of operations for the year ended December 31, 2019 and 2018:

 

     Year Ended
December 31,
     % Change  
     2019      2018      2019 vs. 2018  
     (in millions of soles)         

Revenue

        

Premiums earned

   S/ 522.3      S/ 467.6        11.7

Health care services revenue

     658.9        229.6        187.0

Sales of medicines

     201.3        164.0        22.7
  

 

 

    

 

 

    

Total Revenue from contracts with customers

     1,382.6        861.2        60.5

Cost of sales and services

     (844.5      (497.8      69.7
  

 

 

    

 

 

    

Gross profit

     538.0        363.4        48.0

Selling expenses

     (132.5      (120.7      9.8

Administrative expenses

     (236.5      (154.4      53.1

Loss for impairment of trade receivables

     (6.0      (2.8      111.9

Other expenses

     (1.4      —          N/A  

Other income

     5.5        5.3        3.7
  

 

 

    

 

 

    

Operating profit

     167.1        90.8        84.1

Finance income

     1.5        0.6        143.2

Finance costs

     (56.1      (38.2      46.8
  

 

 

    

 

 

    

Net finance cost

     (54.5      (37.5      45.2

Share of profit of equity-accounted investees

     2.4        1.0        154.0
  

 

 

    

 

 

    

Profit before tax

     115.1        54.2        112.4

Income tax expense

     (41.2      (17.5      134.8
  

 

 

    

 

 

    

Profit for the year

   S/ 73.9      S/ 36.6        101.6

 

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Revenue

 

     Year Ended December 31,      % Change  
     2019      2018      2019 vs. 2018  
     (in millions of soles)         

Total revenue from contracts with customers

        

Oncosalud Peru

   S/ 591.9      S/ 530.6        11.6

Healthcare Services in Peru

     469.9        405.3        15.9

Healthcare Services in Colombia

     409.4        4.8        N.M.

Holding and Eliminations

     (88.7      (79.4      11.7
  

 

 

    

 

 

    

Total

     S/  1,382.6        S/  861.2        60.5
  

 

 

    

 

 

    

 

*

Not meaningful.

Our total revenue from contracts with customers was S/1,382.6 million in 2019, representing an increase of S/521.3 million, or 60.5%, from S/861.2 million in 2018. This increase was primarily driven by the acquisition of Grupo Las Américas in Colombia in 2018, which accounted for S/409.4 million, or 29.6%, of our revenue in 2019. Our Oncosalud Peru and Healthcare Services in Peru segments accounted for 42.8% and 34.0%, respectively, of our revenue in 2019.

Revenue from our Oncosalud Peru segment was S/591.9 million in 2019, representing an increase of S/61.3 million, or 11.6%, from S/530.6 million in 2018. This increase was primarily driven by a 8.7% increase in the average revenue per plan member, which contributed S/44.8 million to the increase and was due to an increase in plan prices to account for an increase in medical costs and an increase in the average age of our plan members, as well as a 2.4% net increase in the average number of Oncosalud plan members, which contributed S/13.7 million to the increase.

Revenue from our Healthcare Services in Peru segment was S/469.9 million in 2019, representing an increase of S/64.6 million, or 15.9%, from S/405.3 million in 2018. This increase was primarily driven by a 13.1% increase in the number of patients treated, which contributed S/53.2 million to the increase and was due to an increase in our utilization rates, and a 2.5% increase in average revenue per patient in 2019, which contributed S/11.5 million to the increase and was due to an increase in the number of high complexity procedures and an increase in the price of medicines sold to our patients.

Revenue from our Healthcare Services in Colombia segment was S/409.4 million in 2019 compared to S/4.8 million in 2018.

Cost of sales and services

 

     Year Ended December 31,      % Change  
     2019      2018      2019 vs. 2018  
     (in millions of soles)         

Cost of sales and services

        

Oncosalud Peru

   S/   (274.3    S/   (258.6      6.1

Healthcare Services in Peru

     (357.9      (313.5      14.1

Healthcare Services in Colombia

     (298.0      (3.5      N.M.

Holding and Eliminations

     85.7        77.9        10.0
  

 

 

    

 

 

    

Total

   S/ (844.5    S/ (497.8      69.7
  

 

 

    

 

 

    

 

*

Not meaningful.

 

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Our total cost of sales and services was S/844.5 million in 2019, representing an increase of S/346.7 million, or 69.7%, from S/497.8 million in 2018. The increase was primarily attributable to the acquisition of Grupo Las Américas in Colombia in 2018, which accounted for S/298.0 million, or 35.3%, of our cost of services in the year 2019. Our Oncosalud Peru and Healthcare Services in Peru segments accounted for 32.5% and 42.4%, respectively, of our cost of sales and services in 2019.

Cost of sales and services in our Oncosalud Peru segment was S/274.3 million in 2019, representing an increase of S/15.7 million, or 6.1%, from S/258.6 million in 2018. This increase was primarily attributable to an increase in the number of patients treated, which increased cost of sales and services by S/32.4 million, partially offset by a decrease of the average cost of treatment per patient due to Project Galeno benefits, which decreased cost of sales and services by S/16.7 million.

Cost of sales and services in our Healthcare Services in Peru segment was S/357.9 million in 2019, representing an increase of S/44.4 million, or 14.2%, from S/313.5 million in 2018. The increase was primarily attributable to (i) a 16.6% increase in the cost of medicines and medical consultation fees driven by the increase in revenue in the segment, which increased cost of sales and services by S/31.0 million, and (ii) a 17.2% increase in medical staff costs in connection with the hiring of additional physicians and nurses to meet expanded capacity at our facilities, which increased cost of sales and services by S/14.0 million.

Cost of sales and services in our Healthcare Services in Colombia segment was S/298.0 million in 2019, compared to S/3.5 million in 2018.

Gross profit and gross margin

For the foregoing reasons, our gross profit was S/538.0 million in 2019, representing an increase of S/174.6 million, or 48.0%, from S/363.4 million in 2018.

Our gross margin for the year was 38.9%. By segment, our gross margin was 53.7% in Oncosalud Peru, 23.7% in Healthcare Services in Peru and 27.2% in Healthcare Services in Colombia. Overall, our gross margin decreased by 3.3 percentage points in 2019, from 42.3% in 2018, mainly as a result of the acquisition of Grupo Las Américas, which added several facilities to our operations and as a result increased our fixed costs on an aggregate basis.

Selling expenses

Our total selling expenses were S/132.5 million in 2019, representing an increase of S/11.8 million, or 9.8%, from S/120.7 million in 2018.

Selling expenses in our Oncosalud Peru segment were S/119.1 million in 2019, representing an increase of S/5.2 million, or 4.5%, from S/113.9 million in 2018. The increase in selling expenses was primarily a result of an increase in the number of salespeople, which led to an increase in sales staff cost of S/5.0 million, and an increase in credit card collection fees of S/1.5 million, partially offset by lower expenses related to advisory services for commercial services and product related studies of S/0.9 million, compared to 2018.

Selling expenses in our Healthcare Services in Peru segment were S/8.7 million in 2019, representing an increase of S/0.2 million, or 2.0%, from S/8.5 million in 2018. The increase in selling expenses was primarily due to an increase of credit card collection fees of S/0.6 million.

Selling expenses in our Healthcare Services in Colombia segment were S/3.3 million in 2019 compared to S/0.03 million in 2018.

 

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Administrative expenses

Administrative expenses for our Oncosalud Peru segment were S/92.2 million in 2019, representing an increase of S/7.1 million, or 8.3%, from S/85.1 million in 2018. The increase was primarily attributable to (i) an increase of S/4.2 million due to the hiring of additional personnel for our technical, risk and product teams and (ii) S/4.3 million in additional expenses for external IT and innovation advisory services at the corporate level.

Administrative expenses for our Healthcare Services in Peru segment were S/82.2 million in 2019, representing an increase of S/13.1 million, or 19.0%, from S/69.1 million in 2018. The increase was primarily attributable to a S/3.4 million increase in administrative expenses related to the hiring of additional administrative personnel at our facilities and S/9.9 million in additional expenses for external IT and innovation advisory services at the corporate level.

Administrative expenses for our Healthcare Services in Colombia segment were S/63.5 million in 2019, compared to S/2.0 million in 2018.

Loss for impairment of trade receivables

The total loss for impairment of trade receivables was S/6.0 million in the year ended December 31, 2019, representing an increase of S/3.2 million, or 111.9%, from S/2.8 million in the year ended December 31, 2018. The increase was primarily attributable to the acquisition of Grupo Las Américas in Colombia in 2018, which accounted for S/3.0 million, or 49.4%, of our loss for impairment of trade receivables in 2019 and was primarily related to contracts with certain insurance providers. Our Oncosalud Peru and Healthcare Services in Peru segments accounted for 15.5% and 33.4%, respectively, of our loss for impairment of trade receivables in 2019.

The loss for impairment of trade receivables was S/0.9 million in the year ended December 31, 2019 in our Oncosalud Peru segment, representing an increase of 0.3 million, or 59.0%, from S/0.6 million in the year ended December 31, 2018. The increase in the loss for impairment of trade receivables in our Oncosalud Peru segment was primarily due to treatments provided at certain Oncosalud facilities to individuals that are not members of Oncosalud and tend to take longer to pay amounts due in connection with their treatments.

The loss for impairment of trade receivables was S/2.0 million in the year ended December 31, 2019 in our Healthcare Services in Peru segment, representing a decrease of S/0.04 million, or 2.0%, from S/2.0 million in the year ended December 31, 2018. The decrease in the loss for impairment of trade receivables in our Healthcare Services in Peru segment was primarily due to a decrease in provisions for individual clients as compared to 2018 as a result of improvements in our cash collection processes for these clients.

Operating profit

 

     Year Ended
December 31,
     % Change  
     2019      2018      2019 vs. 2018  
     (in millions of soles)         

Operating profit

        

Oncosalud Peru

   S/   106.8      S/   78.4        36.2

Healthcare Services in Peru

     22.3        16.4        36.0

Healthcare Services in Colombia

     42.5        (0.6      N.M.

Holding and Eliminations

     (4.4      (3.4      N.M.
  

 

 

    

 

 

    

Total

     S/  167.1        S/  90.8        84.1
  

 

 

    

 

 

    

 

*

Not meaningful.

 

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For the foregoing reasons, our operating profit was S/167.1 million in 2019, representing an increase of S/76.4 million, or 84.1%, from S/90.8 million in 2018.

Finance income and finance cost

Finance income was S/1.5 million in 2019, representing an increase of S/0.9 million from S/0.6 million in 2018. This increase was primarily due to S/0.9 million of finance income from our investment in short-term deposits of excess cash we received from shareholders to partially fund our acquisition of Grupo Las Américas.

Finance cost was S/56.1 million in 2019, representing an increase of S/17.9 million, or 46.8%, from S/38.2 million in 2018. This increase was primarily attributable to an increase in indebtedness of (i) S/368.6 million to finance the acquisition of Grupo Las Américas and (ii) S/100.1 million in the form of additional working capital credit lines, partially offset by a decrease in the average interest rate payable on such indebtedness due to the refinancing of our loan with Scotiabank Perú S.A.A. (“Scotiabank”) in December 2018.

Income tax expense

Income tax expense was S/41.2 million in 2019, representing an increase of S/23.6 million, or 135.4%, from S/17.5 million in 2018. The increase was primarily attributable to the increase in profit before tax as a result of the acquisition of Grupo Las Américas and an increase in profit before tax due to growth of operating profit in our Oncosalud Peru and Healthcare Services in Peru segments. In addition, our effective tax rate increased from 32.4% in 2018 to 35.8% in 2019, mainly due to an increase of non-deductible expenses from S/1.7 million in 2018 to S/7.1 million in 2019, which resulted in an increase of our effective tax rate of 3.4%.

Profit for the year

For the foregoing reasons, profit for the year was S/73.9 million in 2019, representing an increase of S/37.2 million, or 101.9%, from S/36.6 million in 2018.

 

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Year Ended December 31, 2018 Compared to Year Ended December 31, 2017

The following table summarizes our results of operations for the years ended December 31, 2018 and 2017:

 

     Year Ended
December 31,
     % Change  
     2018      2017      2018 vs. 2017  
     (in millions of soles)         

Revenue

        

Premiums earned

   S/ 467.6      S/ 405.5        15.3

Health care services revenue

     229.6        194.7        17.9

Sales of medicines

     164.0        122.6        33.8
  

 

 

    

 

 

    

Total revenue from contracts with customers

     861.2        722.8        19.2

Cost of sales and services

     (497.8      (422.2      17.9
  

 

 

    

 

 

    

Gross profit

     363.4        300.6        20.9

Selling expenses

     (120.7      (102.9      17.4

Administrative expenses

     (154.4      (129.4      19.3

Loss for impairment of trade receivables

     (1.8      (11.8      (76.3 )% 

Other income

     5.3        2.6        103.8
  

 

 

    

 

 

    

Operating profit

     90.8        59.0        53.8

Finance income

     0.6        1.1        (45.5 )% 

Finance costs

     (38.2      (24.8      54.0

Net finance cost

     (37.5      (23.7      58.2

Share of profit of equity-accounted investees

     1.0        0.4        150.0
  

 

 

    

 

 

    

Profit before tax

     54.2        35.7        51.6

Income tax expense

     (17.5      (15.1      15.9
  

 

 

    

 

 

    

Profit for the year

   S/ 36.6      S/ 20.7        76.8

We acquired Grupo Las Américas, which constitutes our Healthcare Services in Colombia segment, on December 27, 2018. As a result, we only had five days of results of operations for our Healthcare Services in Colombia segment in 2018 and none in 2017.

Revenue

 

     Year Ended
December 31,
     % Change  
     2018      2017      2018 vs. 2017  
     (in millions of soles)         

Total revenue from contracts with customers

        

Oncosalud Peru

   S/  530.6      S/  456.8        16.2

Healthcare Services in Peru

     405.3        327.6        23.7

Healthcare Services in Colombia

     4.8        —          N.A.  

Holding and Eliminations

     (79.4      (61.6      28.8
  

 

 

    

 

 

    

Total

   S/  861.2      S/  722.8        19.2
  

 

 

    

 

 

    

Our total revenue from contracts with customers was S/861.2 million in 2018, representing an increase of S/138.4 million, or 19.2%, from S/722.8 million in 2017. This increase was primarily driven by:

 

   

An increase in revenue in our Oncosalud Peru segment of S/73.8 million, or 16.2%, from S/456.8 million in 2017 to S/530.6 million in 2018, primarily driven by a 13.2% increase in the average revenue per plan member, which contributed S/54.8 million to the increase and was due to an increase

 

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in plan prices to account for an increase in medical costs and an increase in the average age of our plan members, and a 1.8% net increase in the number of Oncosalud plan members, which contributed S/7.3 million to the increase.

 

   

An increase in revenue in our Healthcare Services in Peru segment of S/77.7 million, or 23.7%, from S/327.6 million in 2017 to S/405.3 million in 2018, primarily driven by an increase in revenue due to a 17.6% increase in the number of patients treated in 2018, which contributed S/57.8 million to the increase and was due to an increase in our utilization rates, and a 5.1% increase in average revenue per patient in 2018, which contributed S/16.6 million to the increase and was due to an increase in high complexity procedures and an increase in the price of medicines sold to our patients.

Cost of sales and services

 

     Year Ended
December 31,
     % Change  
     2018      2017      2018 vs. 2017  
     (in millions of soles)         

Cost of sales and services

        

Oncosalud Peru

   S/  (258.6    S/  (222.0      16.5

Healthcare Services in Peru

     (313.5      (264.9      18.4

Healthcare Services in Colombia

     (3.5      —          N.A.  

Holding and Eliminations

     77.9        64.6        20.5
  

 

 

    

 

 

    

Total

   S/  (497.8    S/  (422.2      17.9
  

 

 

    

 

 

    

Our total cost of sales and services was S/497.8 million in 2018, representing an increase of S/75.6 million, or 17.9%, from S/422.2 million in 2017. The increase was primarily attributable to:

 

   

An increase in cost of sales and services in our Oncosalud Peru segment of S/36.6 million, or 16.5%, from S/222.0 million in 2017 to S/258.6 million in 2018. This increase was primarily attributable to an increase in the number of patients treated, which increased costs by S/18.8 million, and an increase of the average cost of treatment per patient due to the inclusion of new treatments for cancer, which increased costs by S/17.8 million; and

 

   

An increase in cost of sales and services in our Healthcare Services in Peru segment of S/48.7 million, or 18.4%, from S/264.9 million in 2017 to S/313.5 million in 2018, primarily attributable to (i) an increase in the cost of medicines and medical consultation fees related to the increase in revenue generated in the segment, which increased costs by S/34.9 million, and (ii) a 10.5% increase in medical staff costs in connection with the hiring of additional physicians and nurses to meet expanded capacity at our facilities, which increased costs by S/7.8 million.

Gross profit and gross margin

For the foregoing reasons, our total gross profit increased by S/62.9 million or 20.9%, from S/300.6 million in 2017 to S/363.4 million in 2018. In addition, our gross margin increased by 0.7 percentage points, from 41.6% in 2017 to 42.3% in 2018.

Selling expenses

Our total selling expenses were S/120.7 million in 2018, representing an increase of S/17.9 million, or 17.4%, from S/102.9 million in 2017.

Selling expenses in our Oncosalud Peru segment were S/113.9 million in 2018, representing an increase of S/16.3 million, or 16.7%, from S/97.6 million in 2017. The increase in selling expenses was primarily a result of

 

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an increase in sales of our plans, which led to an increase in commissions paid to salespeople of S/6.2 million, an increase in salaries of S/5.5 million due to an increase in the number of salespeople, and an increase in credit card collection fees of S/2.0 million.

Selling expenses in our Healthcare Services in Peru segment were S/8.5 million in 2018, representing an increase of S/1.7 million, or 23.2%, from S/6.9 million in 2017. The increase in selling expenses was primarily due to an increase in credit card collection fees of S/0.6 million as a result of increased revenue and an increase in expenses related to advertising services of S/1.0 million.

Administrative expenses

Our total administrative expenses were S/154.4 million in 2018, representing an increase of S/25.0 million, or 19.3%, from S/129.4 million in 2017.

Administrative expenses in our Oncosalud Peru segment were S/85.1 million in 2018, representing an increase of S/19.3 million, or 29.3%, from S/65.8 million in 2017. The increase was primarily attributable to (i) S/3.0 million of advisory fees that we paid to a third party in connection with Project Galeno, (ii) S/6.9 million of legal fees for the acquisition of Grupo Las Américas, and (iii) S/4.2 million due to the hiring of additional personnel for our benefits, technical and general management teams.

Administrative expenses in our Healthcare Services in Peru segment were S/69.1 million in 2018, representing an increase of S/8.7 million, or 14.3%, from S/60.4 million in 2017. The increase was primarily attributable to S/2.7 million of advisory fees that we paid to a third party in connection with Project Galeno and S/2.8 million in additional expenses for external IT advisory services at the corporate level.

Loss for impairment of trade receivables

The total loss for impairment of trade receivables was S/2.8 million in the year ended December 31, 2018, representing a decrease of S/9.0 million, or 76.1%, from S/11.8 million in the year ended December 31, 2017. The decrease was primarily attributable to lower impairment losses of trade receivables relating to a contract with SIS, which was recognized in 2017.

Operating profit

 

     Year Ended
December 31,
     % Change  
     2018      2017      2018 v. 2017  
     (in millions of soles)         

Operating profit

        

Oncosalud Peru

   S/ 78.4      S/ 75.9        3.2

Healthcare Services in Peru

     16.4        (12.8      (228.1 )% 

Healthcare Services in Colombia

     (0.6      —          N/A  

Holding and Eliminations

     (3.4      (4.1      (17.1 )% 
  

 

 

    

 

 

    

Total

     S/  90.8        S/  59.0        53.8
  

 

 

    

 

 

    

For the foregoing reasons, our operating profit was S/90.8 million in 2018, representing an increase of S/31.7 million, or 53.8%, from S/59.0 million in 2017.

Finance income and finance cost

Finance income was S/0.6 million in 2018, representing a decrease of S/0.5 million, or 45.5%, from S/1.1 million in 2017.

 

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Finance cost was S/38.2 million in 2018, representing an increase of S/13.4 million, or 54.0%, from S/24.8 million in 2017. This increase was primarily attributable to the entry into derivative financial instruments in December 2018 to hedge the indebtedness we incurred in connection with the acquisition of Grupo Las Américas, which led to an increase in finance costs related to the hedging arrangements for such indebtedness, as well as finance costs related to the refinancing of debt with Scotiabank in December 2018. This was partially offset by a decrease in the average interest rate payable on such indebtedness due to more favorable rates negotiated for new finance leases entered into during the year as compared to the rates on our finance leases in place in 2017.

Income tax expense

Income tax expense was S/17.5 million in 2018, representing an increase of S/2.4 million, or 15.9%, from S/15.1 million in 2017. The increase was primarily attributable to the increase in profit before tax due to growth of operating profit in our Oncosalud Peru and Healthcare Services in Peru segments. In addition, there was a decrease of our effective tax rate from 42.2% in 2017 to 32.4% in 2018, mainly as a result of (i) a decrease in estimates of taxable income for prior years from S/2.2 million in 2017 to S/(0.7) million in 2018, which resulted in a decrease of our effective tax rate of 6.3%, and (ii) a decrease of non-deductible expenses from S/2.5 million in 2017 to S/1.7 million in 2018, which reduced our effective tax rate by 4.0%.

Profit for the year

As a result of the foregoing, profit for the year was S/36.6 million in 2018, representing an increase of S/16.0 million, or 77.4%, from S/20.7 million in 2017.

Liquidity and Capital Resources

Our financial condition and liquidity is, and will continue to be, influenced by a variety of factors, including (i) our ability to generate cash flows from our operations; (ii) the level of outstanding indebtedness and the interest payable on this indebtedness; and (iii) our capital expenditure requirements.

Overview

Our primary source of liquidity is our operating cash flow from premiums earned on oncology plans and the sale of healthcare services and medicines. Our oncology plans are prepaid plans pursuant to which plan members typically pay us a fixed amount per month over the course of a year. During the first six months of 2020, in our healthcare services business in Peru and Colombia, 79% of payments came from a limited number of third party insurance providers and 21% came out-of-pocket from our patients on an aggregate basis. In Peru, our accounts receivable are typically collected in an average of 80 days whereas in Colombia, these are typically collected in 150 days. Our principal liquidity needs include paying the cost of medicines, personnel expenses, cost of services provided by third parties, medical consultation fees and other selling and administrative expenses.

As of June 30, 2020, our cash and cash equivalents were S/74.7 million, and we had a working capital deficiency (defined as current assets less current liabilities) of S/217.4 million. Our working capital deficiency is not a result of insolvency, but rather a strategic management decision to reinvest in our business to further increase the scale of our networks and continue expanding into new markets. See “Risk Factors—Risks Related to Our Business—We may not have sufficient funds to settle current liabilities and as a result we may continue to have negative working capital in the near future.”

We believe that our available cash and cash equivalents and cash flows expected to be generated from operations and borrowings available to us under our revolving credit lines, will be adequate to satisfy our capital expenditure and liquidity needs for the foreseeable future. Our principal economic activities provide predictable cash flows, as they consist primarily of the sale of prepaid plans that have monthly prepayments agreed for

 

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one-year terms that are automatically renewed and the provision of healthcare services, for which we are reimbursed by third party healthcare providers that also have one-year terms and automatically renew each year, unless renegotiated. Given the predictability of these cash flows, we can operate with negative working capital.

Our ability to expand and grow our business in accordance with management’s current plans and to meet our long-term capital requirements will depend on many factors, including those mentioned above. To the extent we pursue one or more significant strategic acquisitions, we may be required to use our borrowings under the 2018 Credit Agreements (as defined below), incur additional debt or sell additional equity to finance those acquisitions.

Comparative Cash Flows

The following table sets forth our cash flows for the years indicated:

 

     As of June 30,      Year Ended December 31,  
     2020     2019      2019      2018      2017  
     (in millions of soles)  

Net cash from operating activities

   S/ 24.1     S/ 57.5      S/ 152.4      S/ 109.3      S/ 95.9  

Net cash used in investing activities

     (52.1     (50.2      (125.9      (580.0      (12.8

Net cash (used in) from financing activities

     68.5       (27.5      (99.5      552.6        (67.1
  

 

 

   

 

 

    

 

 

    

 

 

    

 

 

 

Net (decrease) increase in cash and cash equivalents

     40.5       (20.2      (73.0      81.9        16.1  
  

 

 

   

 

 

    

 

 

    

 

 

    

 

 

 

Cash and cash equivalents at beginning of period

     36.1       110.9        110.9        32.5        16.4  
  

 

 

   

 

 

    

 

 

    

 

 

    

 

 

 

Effect of movements in exchange rates on cash held

     (1.9     (1.1      (1.8      (3.5      —    
  

 

 

   

 

 

    

 

 

    

 

 

    

 

 

 

Cash and cash equivalents at end of period

   S/ 74.7     S/ 89.6      S/ 36.1      S/ 110.9      S/ 32.5  
  

 

 

   

 

 

    

 

 

    

 

 

    

 

 

 

Six Months Ended June 30, 2020 Compared to Six Months Ended June 30, 2019

Net cash provided by operating activities for the six months ended June 30, 2020 was S/24.1 million compared to S/57.5 million for the six months ended June 30, 2019, a decrease of S/33.4 million. This decrease was primarily the result of (i) a decrease of S/4.1 million in cash collected driven by the decrease in revenue in our Healthcare Services in Peru and Healthcare Services in Colombia segments, and (ii) a deterioration in our cash management, due to an increase in receivables days during the lockdown period and an increase in inventories purchases to ensure we had sufficient supplies to treat our patients during the pandemic, which led to a decrease in our cash conversion rate (i.e., the rate at which we convert our revenue to cash, which is calculated by dividing our net cash from operating activities by total revenue from the same period) from 8.5% to 3.8%, and resulted in a reduction of S/29.4 million of cash as compared to the six months ended June 30, 2019.

Net cash used in investing activities for the six months ended June 30, 2020 was S/(52.1) million, compared to S/(50.2) million for the six months ended June 30, 2019. The primary use of funds in the six months ended June 30, 2020 was S/36.4 million for infrastructure improvements at our facilities and medical equipment, including special treatment tents and medical equipment for COVID-19 patients, and S/8.5 million for software and other intangibles. The primary use of funds in the six months ended June 30, 2019 was S/44.1 million for infrastructure improvements at our facilities.

Net cash from financing activities for the six months ended June 30, 2020 was S/68.5 million, compared to net cash used in financing activities of S/(27.5) million for the six months ended June 30, 2019. Net cash from financing activities for the six months ended June 30, 2020 primarily reflected S/213.0 million of loans, which

 

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includes loans our subsidiaries received under loan relief programs offered by the Peruvian and Colombian governments in response to the COVID-19 pandemic, partially offset by the payment of financial obligations and interest of S/133.9 million and dividend payments of S/5.0 million. Net cash used in financing activities for the six months ended June 30, 2019 primarily reflected the payment of financial obligations and interest of S/128.0 million and dividend payments of S/5.0 million, partially offset by borrowings of S/114.6 million provided by our credit lines.

Year Ended December 31, 2019 Compared to Year Ended December 31, 2018

Net cash provided by operating activities for the year ended December 31, 2019 was S/152.4 million compared to S/109.3 million for the year ended December 31, 2018, an increase of S/43.1 million. This increase was primarily the result of (i) an increase in cash from operations of S/7.2 million from our Colombian operations, which we acquired at the end of 2018, (ii) an increase of S/14.2 million in cash collected from our Peruvian operations driven by the increase in revenue in our Oncosalud Peru and Healthcare Services in Peru segments, and (iii) an improvement in our cash management in our Oncosalud Peru and Healthcare Services in Peru segments, which led to an increase in our cash conversion rate (i.e., the rate at which we convert our revenue to cash, which is calculated by dividing our net cash from operating activities by total revenue from the same period) from 12.7% to 14.9%, and provided an additional S/21.7 million of cash as compared to 2018.

Net cash used in investing activities for the year ended December 31, 2019 was S/(125.9) million, compared to S/(580.0) million for the year ended December 31, 2018. The primary use of funds in 2019 was S/104.6 million for infrastructure improvements at our facilities and medical equipment and S/21.2 million for software and other intangibles. The primary use of funds in 2018 was S/533.7 million for the acquisition of Grupo Las Américas and S/39.0 million for infrastructure improvements at our facilities.

Net cash used in financing activities for the year ended December 31, 2019 was S/(99.5) million, compared to net cash from financing activities of S/552.6 million for the year ended December 31, 2018. Net cash used in financing activities for the year ended December 31, 2019 primarily reflected the payment of financial obligations and interest of S/278.1 million, payments to counterparties of S/9.9 million in connection with our hedging arrangements and dividend payments of S/10.0 million and S/12.8 million of advance payments used to finance the acquisition of additional shares amounting to 2.5% of the outstanding share capital of Grupo Las Américas from minority shareholders, partially offset by borrowings of S/215.9 million from additional debt instruments we entered into during the year. Net cash used in financing activities in 2018 primarily reflected the payment of financial obligations and interest of S/330.6 million and dividend payments of S/10.0 million, partially offset by borrowings of S/649.3 million provided by our credit lines.

Year Ended December 31, 2018 Compared to Year Ended December 31, 2017

Net cash provided by operating activities for the year ended December 31, 2018 was S/109.3 million compared to S/95.9 million for the year ended December 31, 2017, an increase of S/13.4 million. This increase was primarily the result of an increase of S/18.4 million in cash collected from our Peruvian operations driven by the increase in revenue in our Oncosalud Peru and Healthcare Services in Peru segments, partially offset by the decrease in our cash conversion rate from 13.3% to 12.7%, which reduced cash from operations by S/5.0 million as compared to 2017.

Net cash used in investing activities for the year ended December 31, 2018 was S/580.0 million, compared to S/12.8 million for the year ended December 31, 2017. The primary use of funds in 2018 was S/533.7 million for the acquisition of Grupo Las Américas and S/39.0 million for infrastructure improvements at our facilities. The primary use of funds in 2017 was S/5.3 million for medical equipment and S/7.4 million for IT upgrades.

Net cash from financing activities for the year ended December 31, 2018 was S/552.6 million compared to net cash used in financing activities of S/67.1 million for the year ended December 31, 2017. Net cash from

 

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financing activities for the year ended December 31, 2018 primarily reflected (i) borrowings of S/368.6 million and a capital contribution from our shareholders of S/242.1 million, which were used to finance the acquisition of Grupo Las Américas, and (ii) the refinancing of debt with Scotiabank, which increased our indebtedness by S/57.8 million. Net cash used in financing activities in 2017 primarily reflected the repayment of S/115.9 million of loans and borrowings, S/24.2 million of interest payments and S/2.0 million used to acquire an additional stake in Clínica Miraflores, partially offset by proceeds from borrowings of S/74.0 million.

Capital Expenditures

We define capital expenditures as the acquisition of intangible assets and property, furniture and equipment. Our capital expenditures for the six months ended June 30, 2020 were S/73.1 million, 47% of which was for infrastructure improvements at our facilities related to treatment of patients with COVID-19 and for the expansions of Clínica Chiclayo, Clínica Delgado, Clínica Vallesur and Clínica del Sur in Colombia, 17% of which was for medical equipment and the lease of health facilities and 9% of which was for software development. For the six months ended June 30, 2019, our capital expenditures were S/59.0 million, 40% of which was for the acquisition of land for the expansions of Clínica Delgado and Clínica Vallesur and for infrastructure improvements for our facilities, and 22% of which was for medical equipment and the lease of health and commercial facilities.

Our capital expenditures for the year ended December 31, 2019 were S/125.8 million, 73.7% of which was for infrastructure improvements at our facilities and the acquisition of landbanks for the expansions of Clínica Chiclayo, Clínica Delgado and Clínica Vallesur as well as for new construction projects and 16.2% of which was for medical equipment, furniture and fixtures. In 2018, our capital expenditures were S/46.3 million, 63.3% of which was for the acquisition of land for the expansions of Clínica Delgado and Clínica Vallesur and for infrastructure improvements for our facilities, and 20.1% of which was for medical equipment, furniture and fixture. In 2017, our capital expenditures were S/12.8 million, 43.4% of which was for medical equipment and 20.0% of which was for infrastructure improvements to our facilities, the acquisition of land in connection with various projects and IT upgrades.

For 2020, we have a capital expenditures budget of S/180 million, which we expect to use primarily for the expansion plan for our healthcare networks in Peru and Colombia, including the construction of a facility in Chiclayo and the expansion of Clínica Vallesur. We intend to finance these capital expenditures with a combination of cash from operations and additional indebtedness. We may also use the proceeds of this offering for our expansion plans. See “Use of Proceeds” for more information.

Contractual Obligations and Commitments

The following table presents information relating to our contractual obligations as of December 31, 2019:

 

     Total      Less than 1 year      1-2 years      3-5 years      More than 5 years  
     (in millions of soles)  

Loans and borrowings(1)

   S/ 745.1      S/ 206.8      S/ 97.2      S/ 417.2      S/ 23.9  

Lease liabilities

     245.8        37.6        30.1        70.8        107.2  

Derivative financial instruments

     15.5        4.0        4.8        6.7        —    
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   S/   1,006.4      S/   248.4      S/   132.1      S/   494.7      S/   131.1  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(1)

Includes interest.

Credit Agreements

Scotiabank Perú

On June 30, 2016, our subsidiary, Oncosalud S.A.C., entered into a credit agreement (the “2016 Credit Agreement”) with Scotiabank, pursuant to which we borrowed S/185 million (the “2016 Term Loan”). On

 

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December 26, 2018, it entered into an amendment to the 2016 Credit Agreement (as amended, the “First 2018 Credit Agreement”) with Scotiabank, pursuant to which it borrowed S/185 million (the “First 2018 Term Loan”). The proceeds of the First 2018 Term Loan were used to refinance the outstanding balance of S/127.2 million under the 2016 Term Loan and to finance short-term obligations. The First 2018 Term Loan is payable in quarterly installments that amortize 10% of the principal amount in 2019, 12% in each of the years between 2020 and 2022 and 54% in 2023 and accrues interest at an annual rate of 8.00%. The First 2018 Term Loan matures on December 26, 2023 and is guaranteed by Auna Colombia S.A.S. On December 28, 2018, Scotiabank assigned S/33.5 million of the First 2018 Term Loan to BD Capital Sociedad Administradora de Fondos de Inversión S.A.C. The First 2018 Credit Agreement is secured by a trust constituted of certain of our assets, including shares of Oncosalud S.A.C. and Grupo Las Américas as well as certain properties and rights owned by our subsidiaries, and guaranteed by certain of our subsidiaries, including Medic Ser, Oncocenter and Auna Colombia S.A.S.

On February 3, 2020, Oncosalud S.A.C. entered into a financing agreement (the “Chiclayo Hospital Financing Agreement”) with Scotiabank for S/70 million. The proceeds of the financing are being used to build a new hospital in Chiclayo (the “Chiclayo Hospital”). In addition, on July 21, 2020, Oncosalud S.A.C. entered into a financing agreement (the “Chiclayo Equipment Financing Agreement” and together with the Chiclayo Hospital Financing Agreement, the “Chiclayo Financing Agreements”) with Scotiabank for an amount up to S/21 million to acquire equipment that will be used in the Chiclayo Hospital. The Chiclayo Financing Agreements mature in 2027. Interest on the Chiclayo Financing Agreements is calculated using an annual effective rate of 6.30%. The Chiclayo Hospital Financing Agreement is secured by a surface right over the real estate property where the Chiclayo Hospital will be located and a mortgage over the Chiclayo Hospital. The Chiclayo Financing Agreements are secured by an assignment agreement (the “Chiclayo Assignment Agreement”) over the cash flows that Oncosalud S.A.C. will be entitled to receive from the operation of the Chiclayo Hospital.

Each of the Chiclayo Financing Agreements contain financial covenants requiring us to maintain a consolidated debt service ratio equal to or higher than 1.2 and a consolidated leverage ratio, defined as the ratio of our net consolidated debt to EBITDA, below or equal to 4.75x from the corresponding date of disbursement of the funds until December 31, 2020, 4.5x during 2021, 3.5x during 2022 and 2.5x from January 1, 2023 onwards. As of June 30, 2020, we were in compliance with the consolidated debt service and consolidated leverage ratios under the Chiclayo Financing Agreements. EBITDA as calculated for purposes of the Chiclayo Financing Agreements excludes certain expenses relating to Torre Trecca that are not excluded from EBITDA as defined under “—Non-GAAP Financial Measures.” In addition, the Chiclayo Assignment Agreement requires Oncosalud S.A.C. to maintain a minimum debt service ratio, defined as the ratio of assigned rights to long term debt plus financial expenses, of 1.0x during 2021 and 2022 and 1.2x during 2023 to 2027.

The Chiclayo Financing Agreements contain consent requirements for certain transactions, such as a merger, consolidation or internal reorganization, as well as certain restrictions, such as restrictions from transferring or encumbering assets located in the Chiclayo Hospital.

Citibank and Banco Santander

On December 21, 2018, our subsidiary, Auna Colombia S.A.S., entered into a credit agreement (the “Second 2018 Credit Agreement” and, together with the First 2018 Credit Agreement, the “2018 Credit Agreements”) with Banco Nacional de México, S.A., integrante del Grupo Financiero Banamex (“Citibank”) and Banco Santander S.A. (“Santander”). Each of Citibank and Santander made a US$55.0 million term loan to it under the Second 2018 Credit Agreement (the “Citibank Term Loan” and the “Santander Term Loan,” respectively). The proceeds of the Citibank Term Loan and the Santander Term Loan were used to finance a portion of the acquisition of Grupo Las Américas in December 2018. As of June 30, 2020, the aggregate principal amount outstanding under these loans was S/318.8 million (US$92.7 million), payable in quarterly installments that amortize 10% of the principal amount in 2019, 12% in each of the years between 2020 and 2022 and 54% in 2023. The Citibank Term Loan and the Santander Term Loan each mature on December 26, 2023. Interest on the Citibank Term Loan is calculated at LIBOR plus 1.30% until December 26, 2020 and LIBOR plus 1.40% thereafter until maturity. Interest on the Santander Term Loan is calculated at LIBOR plus 2.90%. Each of the

 

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Citibank Term Loan and the Santander Term Loan is secured by certain of our assets, including shares of Oncosalud S.A.C. and Grupo Las Américas as well as certain properties and rights owned by our subsidiaries, and guaranteed by certain of our subsidiaries, including Medic Ser, Oncocenter and Oncosalud S.A.C.

Each of the 2018 Credit Agreements contains financial covenants requiring us to maintain a consolidated debt service ratio equal to or higher than 1.2 and a consolidated leverage ratio, defined as the ratio of our net debt to EBITDA, below or equal to 4.75x during the first two years, 4.5x during the third year, 3.5x during the fourth year and 2.5x during the last year. EBITDA as calculated for purposes of the 2018 Credit Agreements excludes certain expenses relating to Torre Trecca that are not excluded from EBITDA as defined under “—Non-GAAP Financial Measures.” As of June 30, 2020, we were in compliance with the consolidated debt service and leverage ratios under the 2018 Credit Agreements.

Banco de Bogotá, Banco de Occidente, Bancolombia, Banco Popular and Banco Coomeva

On February 20, 2018, Grupo Las Américas entered into the fourth amendment to the financing agreement dated January 29, 2010 (as amended, the “Financing Agreement”) with Banco de Bogotá S.A., Banco de Occidente S.A., Bancolombia S.A., Banco Popular S.A. and Banco Coomeva S.A. Pursuant to the Financing Agreement, Grupo Las Américas entered into a capital lease for the expansion of Clínica Las Américas in the amount of COP37.2 billion (S/37.7 million) (the “Clínica Las Américas Capital Lease”) and a term loan for an amount of approximately COP48.3 billion (S/48.9 million) (the “COP Term Loan”). As of June 30, 2020, the aggregate principal amount outstanding under the Clínica Las Américas Capital Lease is COP30.9 billion (S/29.1 million), payable in equal monthly installments. Interest on the Clínica Las Américas Capital Lease is calculated at Indicador Bancario de Referencia (Reference Banking Indicator) (“IBR”) plus 5.90% for the tranche provided by Banco de Occidente S.A. and Banco de Bogota S.A and Depósitos a Término Fijo (Fixed Term Deposits) (“DTF”) plus 5.30% for the tranche provided by Bancolombia S.A. The Clínica Las Américas Capital Lease matures on January 9, 2029. As of June 30, 2020, the aggregate principal amount outstanding under the COP Term Loan is COP37.7 billion (S/35.5 million), payable in monthly installments that amortize 16.7% in each year. Interest on the COP Term Loan is calculated at IBR plus 5.9% for the tranche provided by Banco de Bogota S.A., Banco Popular S.A. and Banco de Occidente S.A., IBR plus 5.25% for the tranche provided by Banco Coomeva S.A. and IBR plus 5.0% for the tranche provided by Bancolombia S.A. The COP Term Loan matures on January 9, 2029. Each of the Clínica Las Américas Capital Lease and the COP Term Loan is secured by certain of our assets, including Clínica Las Américas and certain trade receivables owned by Grupo Las Américas.

Credit Lines

We have access to available revolving credit lines of up to an aggregate of S/338.5 million with other recognized financial institutions that we use for short-term capital needs. Our revolving credit lines bear interest at varying fixed rates, ranging from 2.30% to 5.5%. As of June 30, 2020, we had drawn S/235.7 million, and had S/102.8 million of available borrowings, under our revolving credit lines, maturing between 2020 and 2021. We are subject to various covenants under our revolving credit lines, including reporting requirements, restrictions on incurring future debt and consent requirements for certain transactions, such as a merger, consolidation or internal reorganization, and were in compliance with these covenants as of June 30, 2020. Lenders may terminate our revolving credit lines under certain events, including nonpayment of our monetary obligations, acquiring debt that is senior to our obligations under our revolving credit lines, failing to maintain our corporate existence, certain changes to our corporate purpose and a change of control, whether directly or indirectly, among others.

Trends

Our Oncosalud membership base decreased 1.3% in the first six months of 2020 primarily as a result of younger members choosing not to renew their plans, which we believe was due to the economic hardship

 

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generated by the COVID-19 pandemic. However, due to the automatic increases in premiums upon renewal and the increase in average age of our plan members, the average revenue per plan member increased by 11.3%, which led to a 9.7% increase in revenue in the Oncosalud Peru segment compared to the first six months of 2019. In addition, the number of plan members treated during the first six months of 2020 decreased by 11.7% due to government restrictions on non-critical services in response to COVID-19, which led to a decrease in MLR to 41.1% in the first six months of 2020 from 53.9% in the first six months of 2019. In our Healthcare Services in Peru and Healthcare Services in Colombia segments, the number of patients treated during the first six months of 2020 decreased 24.5% and 18.7%, respectively, also due to government restrictions on non-critical services in response to COVID-19, compared to the first six months of 2019, which led to a 15.3% and 19.6% decrease in segment revenues, respectively, compared to the first six months of 2019.

In our Auna Peru network, we will continue to grow organically by expanding our network’s installed capacity. For example, we are currently expanding Clínica Vallesur, which we expect to add approximately 23 beds to our capacity by 2022, and are building new hospitals in Chiclayo and Piura, Peru which we expect to each have approximately 68 beds and to launch between 2021 and 2022 and 2023, respectively. We are also expanding Clínica Delgado by approximately 82 beds, which we expect to complete in 2023. We are also evaluating other opportunities to expand our Auna Peru network beyond these current projects. In Colombia, we plan to focus on expanding the range of services offered in our existing and new facilities and entering into potential strategic acquisitions. Throughout the remainder 2020, we expect to invest in the expansion of our existing facilities and the development of new facilities in Medellín. In the fourth quarter of 2019, we launched operations at Arkadia, a clinic in Medellín that is next to Clínica Las Américas and in the third quarter of 2020, we acquired Clínica Portoazul in Barranquilla.

In all of our networks, we expect to benefit from these expanded and new facilities as our greater capacity will allow us to treat additional patients and generate additional revenue. However, we also expect these expansion projects to temporarily increase our costs and we may need to temporarily close down some of our capacity while under construction.

In addition, we are awaiting approval of certain project milestones as well as negotiating certain amendments to the concession agreement relating to the Torre Trecca PPP, which we expect will require approximately 18 to 24 months to redevelop following approval before we can begin operations. This PPP will increase the patient population that we can address, provide us with additional synergies through increased scale and increase our revenues. However, given the nature of PPPs, we expect this business, as well as any other PPPs that we may enter into, to generate lower margins than our current business segments have historically.

Our pharmaceutical costs represented 40% and 40% of our cost of services in our Healthcare Services in Peru and Healthcare Services in Colombia segments and 35% and 38% of our cost of services in our Oncosalud Peru segment in the first six months of 2020 and full year ended December 31, 2019, respectively. During 2018, we completed an efficiency evaluation of our pharmacy management protocols, which we refer to as Project Galeno, with the help of an outside advisory firm. The outcome of this evaluation was several recommendations for improving the efficiency of our pharmacy management, such as streamlining the processes for approving new molecules, strengthening communication between the medical and administrative teams handling prescriptions, forming dedicated committees to analyze the cost effectiveness of new pharmaceuticals and related technologies and creating an enhanced directory of approved pharmaceuticals with quality ratings, among other recommendations. Following the implementation of all of these recommendations, which we expect to complete in 2020, we expect to more efficiently manage our pharmaceutical costs in our Healthcare Services in Peru and Oncosalud Peru segments while still maintaining our standard for high quality healthcare services.

We have also been impacted by the COVID-19 pandemic. See “—Impact of COVID-19” and “Risk Factors—Risks Related to Our Business—Our business has been and continues to be negatively impacted by the COVID-19 pandemic.”

 

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Off-Balance Sheet Arrangements

As of June 30, 2020, we did not have any off-balance sheet arrangements.

Quantitative and Qualitative Disclosures About Market Risks

In the ordinary course of our business activities, we are exposed to market risks that are beyond our control and which may have an adverse effect on the value of our financial assets and liabilities, future cash flows and profit. The market risks that we are exposed to include foreign currency risks and interest rate risks.

Our functional currency is Peruvian soles and we present our financial statements in Peruvian soles. However, certain of our liabilities (primarily bank loans) are denominated in U.S. dollars, which exposes us to exchange rate risk. As of June 30, 2020, 36% of our liabilities were denominated in U.S. dollars. To mitigate our U.S. dollar exposure, we use derivative financial instruments, such as call spreads, to hedge our exposure.

Interest rate risk is the risk that the fair value or future cash flows of our financial instruments may fluctuate as a result of changes in market interest rates. Our general policy is to hold financing at fixed rates, although certain of our borrowings accrue interest at floating rates. For instance, interest on the Citibank Term Loan currently accrues at LIBOR plus 1.30% and interest on the Santander Term Loan accrues interest at LIBOR plus 2.90%. We manage our exposure to interest rate fluctuations as a result of these term loans through a call spread with Banco Citibank N.A., which covers exchange rate variations from S/3.383 to S/3.733 per US$1.00. Any variations of the sol-to-U.S. dollar exchange rate outside of this range is reflected as a gain or loss in Exchange difference, net. Because the majority of our financing is at fixed rates and we have hedging arrangements in place for all of our borrowings held at floating rates, we do not consider interest rate risk material to our business.

Critical Accounting Policies

The discussion and analysis of our financial condition and results of operations is based upon our consolidated financial statements, which have been prepared in accordance with IFRS. The preparation of our financial statements requires us to make judgments, estimates and assumptions that affect the reported amounts of assets, liabilities, income and expenses and related disclosures of contingent assets and liabilities. On an ongoing basis, we evaluate our estimates and significant assumptions. We base these estimates on our historical experience and various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results experienced may vary materially and adversely from our estimates. Revisions to estimates are recognized prospectively. To the extent there are material differences between our estimates and the actual results, our future results of operations may be affected. We consider the accounting policies that govern revenue recognition, regulatory or technical reserves and income taxes to be the most critical in relation to our consolidated financial statements. These policies require the most complex and subjective estimates of management.

Business Combinations

We account for business combinations using the acquisition method when control is transferred to the Company. The consideration transferred in the acquisition is generally measured at fair value, as are the identifiable net assets acquired. Any goodwill that arises is tested annually for impairment. Any gain on a bargain purchase is recognized in profit or loss immediately. Transactions cost are expensed as incurred.

Subsidiaries are entities that we control. We control an entity when we are exposed to, or have rights to, variable returns from our involvement with the entity and have the ability to affect those returns through our power over the entity. The financial statements of subsidiaries are included in the consolidated financial statements from the date on which control commences until the date on which control ceases. We eliminate all transactions between subsidiaries upon consolidation in the consolidated financial statements.

 

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For each business combination, we elect whether to measure the non-controlling interests in the acquiree at fair value or at the proportionate share of the acquiree’s identifiable net assets as of the date of acquisition. Changes in our interest in a subsidiary that do not result in a loss of control are accounted for as equity transactions.

Goodwill

Goodwill arises from the acquisition of subsidiaries and represents the excess between the cost of an acquisition and the fair value of our interest in the net identifiable assets at the date of the acquisition. Goodwill arising from a business combination is allocated to each cash-generating unit (“CGU”) or group of CGUs that are expected to benefit from the synergies of the combination. Each CGU or group of CGUs to which goodwill is allocated represents the lowest level of cash-flow generating assets within the entity at which goodwill is monitored by management. Goodwill is tested for impairment at least annually and recorded at cost less accumulated impairment losses. The carrying amount of goodwill is compared to the recoverable amount, which is the greater of value in use and fair value less costs to sell. Any impairment is recognized immediately as an expense and cannot be reversed.

Revenue Recognition

We generate revenue primarily from premiums earned on oncology plans and the sale of healthcare services and medicines. On January 1, 2018, we adopted IFRS 15 as our revenue recognition standard for revenue related to the sale of healthcare services and medicines. Under IFRS 15, revenue we generate from the sale of healthcare services is recognized as such healthcare services are provided to our patients. Similarly, the revenue we generate from the sale of medicines is recognized when medicines are provided to our customers and, in cases when our patients are hospitalized, when medicines are administered to them. Prior to January 1, 2018, we used IAS 18 as our revenue recognition standard and our results of operations for periods prior to January 1, 2018 have not been restated to reflect our adoption of IFRS 15. There was no material impact on our consolidated financial statements as a result of the adoption of IFRS 15.

We rely on IFRS 4 as an exception to IFRS 15 as our revenue recognition standard for revenue related to the premiums earned on oncology plans. Under such method, the premiums earned on oncology plans are recognized as revenue proportionally during the period in which a patient is entitled to healthcare services under his or her plan. Premiums related to the unexpired contractual coverage period under an oncology plan are recognized in the accompanying balance sheet as unearned premiums reserve.

Technical Reserves for Healthcare Insurance Contracts

Our technical reserves for oncology plans are provisions set aside for obligations that may arise from healthcare services provided to plan members that have not been reported (“IBNR”) and unearned premium reserves. IBNR is an estimate of the amount of claims that may have occurred but not be reported in a period. We calculate IBNR based on historical claim rates from the last ten years and our management’s judgment.

Income Taxes

Current income taxes are provided on the basis of our financial reporting and the financial reporting of each of our subsidiaries, including adjustments in accordance with the regulations of the relevant tax jurisdiction. As such, we must make critical judgments in interpreting tax legislation in the jurisdictions in which we operate in order to determine our income tax expenses.

Deferred income taxes are accounted for using an asset and liability method. Under this method, deferred income taxes are recognized for the tax consequences of temporary differences by applying enacted statutory rates applicable to future years to differences between the financial statement carrying amounts and the tax bases

 

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of existing assets and liabilities. The tax base of an asset or liability is the amount attributed to that asset or liability for tax purpose.

Recent Accounting Pronouncements

The International Accounting Standards Board, or other regulatory bodies, periodically introduce modifications to the financial accounting and reporting standards under which we prepare our consolidated financial statements. Recently, a number of new accounting standards and amendments and interpretations to existing standards have been issued and are effective as of January 1, 2019, including IFRS 16—Leases, or IFRS 16, and IFRIC 23— Uncertainty over Income Tax Treatments, or IFRIC 23. In addition, IFRS 17—Insurance contracts, or IFRS 17 is scheduled to become effective on January 1, 2021. For more information on the potential impact of these new accounting requirements on our consolidated financial statements, see note 3 to our consolidated financial statements included elsewhere in this prospectus.

IFRIC 23—Uncertainty over Income Tax Treatments

This interpretation clarifies how to apply the recognition and measurement requirements of IAS 12 when there is uncertainty over income tax treatments. IFRIC 23 is effective for annual periods beginning on or after January 1, 2019. We adopted the new standard as of January 1, 2019. The adoption of IFRIC 23 did not have a significant impact on our consolidated financial statements.

IFRS 16—Leases

IFRS 16 was issued in January 2016. It introduces a lease accounting model within the consolidated statement of financial position. A lessee recognizes right-of-use assets representing its rights to use the underlying assets and lease liabilities representing its obligation to make lease payments. IFRS 16 is effective for annual periods beginning on or after January 1, 2019.

We have adopted the new standard as of January 1, 2019 and applied IFRS 16 using the cumulative effect approach, under which the cumulative effect of initial application is recognized as retained earnings as of January 1, 2019. Consequently, there is no obligation under this method to restate the financial information for the years ended on or before December 31, 2018.

With respect to all qualifying leases, as of January 1, 2019, we recognized right-of-use assets and corresponding lease liabilities. The impact of the initial application of IFRS 16 is summarized in the table below:

 

     As of January 1, 2019  
     (in millions of soles)  

Right-of-use assets—recognition on initial application of IFRS 16

   S/ 33.5  

Right-of-use assets reclassified from property, furniture and equipment

     183.1  

Right-of-use assets reclassified from intangible assets

     3.1  
  

 

 

 

Total right-of-use assets as of January 1, 2019

     219.7  

Lease liabilities—recognition on initial application of IFRS 16

     33.5  

Lease liabilities reclassified from loans and borrowings

     92.8  
  

 

 

 

Total lease liabilities as of January 1, 2019

     126.3  

Other accounts payable

     (4.3

Deferred tax assets

     1.3  

Retained earnings

     3.1  

Right-of-use assets and lease liabilities from qualifying leases for the six months ended June 30, 2020 were S/238.5 million and S/185.5 million, respectively.

 

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IFRS 17—Insurance Contracts

In May 2017, the International Accounting Standards Board issued IFRS 17, which provides a more uniform approach for measurement and presentation of all insurance contracts, including by requiring insurance liabilities to be measured at a current fulfilment value. The standard is effective for annual periods beginning on or after January 1, 2021, with early adoption permitted for entities applying IFRS 9 and IFRS 15 on or before the initial application date of IFRS 17.

We have not early adopted this standard. Our analysis of the expected effects of the application of IFRS 17 is still ongoing and, as of the date of this prospectus, such analysis has not yet been completed. Accordingly, we have not yet been able to reliably and reasonably quantify the full implications of its adoption.

Emerging Growth Company Status

We are an “emerging growth company,” as defined in the JOBS Act. Under the JOBS Act, emerging growth companies can delay adopting new or revised accounting standards issued subsequent to the enactment of the JOBS Act until such time as those standards apply to private companies. Given that we currently report and expect to continue to report under IFRS, we have irrevocably elected not to avail ourselves of any extended transition period provided for by IFRS and, as a result, we will adopt new or revised accounting standards on the relevant dates on which adoption of such standards is required by the International Accounting Standards Board.

We are in the process of evaluating the benefits of relying on other exemptions and reduced reporting requirements under the JOBS Act. Subject to certain conditions, as an emerging growth company, we may rely on certain of these exemptions, including without limitation, providing an auditor’s attestation report on our system of internal controls over financial reporting pursuant to Section 404(b) of the Sarbanes-Oxley Act. We would cease to be an emerging growth company upon the earliest of: (1) the last day of the fiscal year ending after the fifth anniversary of our initial public offering; (2) the last day of the fiscal year in which we have more than US$1.07 billion in annual revenue; (3) the date we qualify as a “large accelerated filer,” with at least US$700.0 million of equity securities held by non-affiliates; or (4) the issuance, in any three-year period, by our company of more than US$1.0 billion in non-convertible debt securities held by non-affiliates.

 

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INDUSTRY

We currently operate in the Peruvian and Colombian healthcare sectors. Peru and Colombia have some of the strongest macroeconomic fundamentals in the Latin American region, after having consistently implemented market and investor-friendly policies over the past two decades. According to industry sources, in 2019 Peru had a nominal GDP of US$234 billion and a population of 32.7 million, which was equivalent to a nominal GDP per capita of US$7,156. Similarly, in 2019, Colombia had a nominal GDP of US$314 billion and a population of 50.3 million, which was equivalent to a nominal GDP per capita of US$6,243.

Real GDP Growth (%)

 

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Source: EIU database.

The Peruvian and Colombian Healthcare Sectors from a Global Perspective

According to Fitch Solutions, total spending in local currency in the Peruvian public and private healthcare sector grew at a CAGR of 6.0% between 2015 and 2019 and is expected to reach US$13.7 billion in 2020 while in Colombia, total healthcare spending in local currency grew at a CAGR of 7.8% between 2015 and 2019 and is expected to reach US$23.2 billion in 2020. Growth in both markets has been driven mainly by favorable demographic factors, including an expanding middle class demanding more and higher quality healthcare services and an aging population requiring additional healthcare services.

The Peruvian and Colombian healthcare sectors remain significantly underpenetrated, as evidenced by the total healthcare expenditure as a percentage of GDP and healthcare expenditure per capita, shown in the charts below. Spending levels are not only significantly below developed markets, but are also below key regional reference markets, such as Brazil and Chile.

 

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2019 Healthcare Spending as a % of GDP

 

 

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Source: Fitch Solutions Colombia Pharmaceuticals and Healthcare Report Q3 2020, Fitch Solutions Peru Pharmaceuticals and Healthcare Report Q3 2020, Fitch Solutions U.S. Pharmaceuticals and Healthcare Report Q3 2020, Fitch Solutions Chile Pharmaceuticals and Healthcare Report Q4 2020, Fitch Solutions Mexico Pharmaceuticals and Healthcare Report Q4 2020, Fitch Solutions Europe Pharmaceuticals and Healthcare Report Q3 2020.

Peru Healthcare Expenditure (US$ Bn)

 

 

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Source: Fitch Solutions Peru Pharmaceuticals and Healthcare Report.

 

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Colombia Healthcare Expenditure (US$ Bn)

 

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Source: Fitch Solutions Colombia Pharmaceuticals and Healthcare Report.

2019 Healthcare Spending per Capita (US$)

 

 

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Source: Fitch Solutions Chile Pharmaceuticals and Healthcare Report Q1 2020, Brazil Pharmaceuticals and Healthcare Report Q1 2020, Mexico Pharmaceuticals and Healthcare Report Q2 2020, Colombia Pharmaceuticals and Healthcare Report Q1 2020 and Peru Pharmaceuticals and Healthcare Report Q1 2020.

Consistent with the relatively low levels of healthcare spending in Peru and Colombia, both countries possess clear gaps in hospital infrastructure, as beds per 1,000 people are significantly below the WHO recommended average of 3 beds.

 

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2019E Hospital Beds per 1,000 People

 

 

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Source: EIU U.S. Healthcare Industry Report 2Q 2020, EIU Chile Healthcare Industry Report 1Q 2020, EIU Brazil Healthcare Industry Report 2Q 2020, EIU Peru Healthcare Industry Report 1Q 2020, EIU Colombia Healthcare Industry Report 4Q 2019, EIU Mexico Healthcare Industry Report 1Q 2020, EIU database.

Moreover, as both countries’ economies continue to grow, fertility and mortality rates are expected to fall, which will increase life expectancy and invert the age pyramid. We expect this to lead to an increased demand for healthcare services and growth in healthcare spending in both countries. We expect penetration to increase and infrastructure gaps to decrease as a result of these positive demographic trends.

Population Pyramid Evolution (%)

 

Peru 2020E    Peru 2050E
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Colombia 2020E    Colombia 2050E
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Source: United Nations—World Population Prospects.

As these countries continue to grow and to expand GDP per capita, the middle classes in Peru and Colombia are also expected to continue to grow, which we believe will increase demand for more and higher quality healthcare services and will increase the percentage of the population that chooses to purchase healthcare services through the private healthcare systems in each country.

Middle Class* as a % of Total Population

 

 

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Source: EIU database.

 

*

Middle class defined as the percentage of households with nominal disposable income between US$15,000 and US$50,000 per year.

The Peruvian Healthcare Sector

Structure of the Peruvian Healthcare Sector

Healthcare coverage in Peru is provided through either public programs or private healthcare coverage providers, with the type of coverage that a person has dictating the facilities at which he or she can obtain healthcare services. According to SUSALUD, approximately 77.6% of Peru’s population was covered by some form of healthcare coverage as of December 2019. Moreover, 2.1% of the population was covered by more than one form of healthcare coverage as of December 2019.

 

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According to Fitch Solutions, the total spending in the Peruvian healthcare sector in December 2019, excluding pharmaceuticals, amounted to US$12.6 billion, with public sector spending amounting to US$8.3 billion (65.5% of the overall spending). Despite only covering 2.9% of the population, private sector spending amounted to US$4.4 billion, or 34.5% of the overall spending, in December 2019. It should be noted that Peru has no limitation on vertical integration.

Distribution between the Private and Public Sectors in Peru as of December 2019

 

 

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Source: Boletín Estadístico 2019, SUSALUD and Fitch Solutions Peru Pharmaceuticals and Healthcare Report Q1 2020.

 

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Excludes pharmaceuticals. Health expenditures data is as of the end of 2019.

The Peruvian healthcare sector is structured as follows:

 

 

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Source: EsSalud.

 

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The Peruvian government plays a major role in providing healthcare coverage. As of December 2019, approximately 75% of the population in Peru was estimated to be served by one of the main government-managed programs and the government’s objective is to reach universal healthcare coverage by 2021. The main government-managed programs available to the public are:

 

   

EsSalud: A social security regime, also known as the direct contribution regime, which offers coverage for employees, the self-employed, agricultural workers and their families. Employers’ participation in EsSalud is mandatory and EsSalud is financed via monthly contributions from employers amounting to 9% of workers’ aggregate monthly salaries. As of December 2019, 10.1 million people were covered by EsSalud. EsSalud operates hospitals, clinics and primary care facilities through 29 healthcare assistance units throughout Peru, and members of EsSalud can only obtain healthcare services at facilities that EsSalud operates. EsSalud has identified a number of problems in its provision of services, including delays in obtaining appointments, difficulties accessing surgeries and hospitalization due to shortages in available facilities, shortages of medicines and medical supplies, inadequate infrastructure and deficient hospital equipment.

 

   

SIS: A subsidized social security regime, also known as the indirect contribution regime, for the unemployed, informally-employed or persons that are otherwise below the poverty line. Coverage under this program has also been extended to expectant mothers, children under the age of five and newborns whose parents are uninsured. SIS is mostly financed via government resources and occasional donations from intergovernmental cooperation programs. It functions as the insurer of last resort for Peruvians who are not covered by EsSalud or private healthcare coverage and lack the means to pay for healthcare services out of pocket. As of December 2019, 19.7 million people were covered by SIS. Participants in SIS must obtain healthcare services at facilities operated by MINSA or by the health departments of provincial governments. Pursuant to Urgent Decree N° 017-2019 enacted by the Peruvian government in November 2019, SIS was authorized to cover all Peruvian residents who have no healthcare coverage, in order to ensure universal access to healthcare. The government has 120 days to finalize the implementation and funding for this expansion of public healthcare coverage. When implemented, Urgent Decree N° 017-2019 is expected to significantly reduce the percentage of Peru’s population that is currently uninsured. Because those newly insured through Urgent Decree N° 017-2019 will receive coverage through SIS, we do not expect this new law to have a significant impact on our business.

 

   

Armed Forces and National Police healthcare agencies: The Armed Forces and National Police have their own healthcare agencies that are funded by the Peruvian Ministry of Defense and the Ministry of the Interior. According to SUSALUD, 681,083 people were covered by these agencies as of December 2019, representing a combined 1.7% of Peru’s population. Members of these agencies must obtain healthcare services from facilities operated by the Armed Forces or the National Police, as applicable.

As of December 2019, approximately 2.9% of Peru’s population was served by private healthcare coverage providers. Private healthcare coverage providers in Peru can be divided into two main categories:

 

   

EPS Providers: Private health insurance companies acting as providers of EPS plans. EPS plans are healthcare plans funded by a portion of contributions to EsSalud, as described in more detail below. As of December 2019, there were five companies providing EPS plans with 840,979 active members.

 

   

Other Private Providers: Private health insurance companies that provide (i) various coverage plans that are mostly sold through large and medium-sized private sector employers and (ii) prepaid plans, which provide certain levels of either general coverage or coverage of specific diseases for a fixed periodic fee and may also be offered by employers or purchased directly by individuals. As of December 2019, there were more than 30 companies providing private healthcare coverage other than EPS plans with 2,252,888 active members.

People that receive coverage through EPSs or through other private providers may obtain healthcare services at for-profit private facilities, including facilities operated by such providers and facilities approved by

 

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such provider, such as our Auna facilities, which serve beneficiaries of most of the EPSs in Peru, as well as most other private healthcare plans.

In addition to for-profit facilities operated by private healthcare services providers such as Auna, there is also a non-profit sector, mostly comprised of non-governmental organizations, the Peruvian Red Cross, the Volunteer Firefighter Companies and healthcare providers affiliated with religious institutions. These providers typically serve underserved populations and are almost wholly financed via donations.

The following chart presents a breakdown of the population by type of coverage as of December 2019.

Breakdown of Population by Type of Coverage

 

 

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Source: Boletín Estadístico 2019, SUSALUD.

*

Private coverage includes EPS and persons with more than one type of coverage.

Private Healthcare Plan Market

Healthcare coverage providers, whether traditional insurance companies or prepaid plan providers, are considered IAFASs that are regulated by SUSALUD. There are four types of private healthcare plans provided by private IAFASs in Peru:

 

   

EPS Plans: Plans that provide additional or complementary services to those provided by EsSalud. EPS plans generally cover low complexity services through a network of private institutions. Employers may choose to provide EPS plans to their employees in addition to EsSalud coverage, in which case 2.25% out of the 9% of workers’ aggregate monthly salaries contributed to EsSalud is contributed to the chosen EPS, with the remaining 6.75% contributed to EsSalud. These plans are regulated by the SBS, Peru’s banking and insurance regulator. There are five providers of EPS plans: MAPFRE Perú S.A. (“Mapfre”) EPS, Rímac EPS, Pacífico EPS, La Positiva S.A. (“La Positiva”) EPS and Sanitas Perú S.A. (“Sanitas”) EPS, each of which also provides private healthcare plans.

 

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Breakdown of Members by EPS

 

 

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Source: Boletín Estadístico 2019, SUSALUD.

 

   

Private Insurance Plans: Private health insurance plans provided by traditional insurance providers. The main insurance providers in Peru are Rímac and Pacífico, which accounted for approximately 86% of the traditional private insurance market in Peru in December 2019. Other providers include La Positiva, Cardif and Mapfre. Traditional insurance plans may be purchased as additional protection on top of EPS and EsSalud coverage. These plans are regulated by the SBS and SUSALUD.

Breakdown of Members by Private Insurers

 

 

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Source: Boletín Estadístico 2019, SUSALUD.

 

   

Prepaid Plans: Plans offered by hospitals and other medical service providers that are meant to be integrated with a hospital’s healthcare services offering. As these plans are not considered insurance programs, they are only regulated by SUSALUD and not the SBS. The prepaid plans that we offer through Oncosalud are examples of prepaid plans. Other prepaid plan providers include Ricardo Palma, San Pablo and CSalud (operating through its Maison de Sante brand), which offer general coverage limited to their own networks of hospitals and clinics. Within the prepaid plans market, Oncosalud accounted for 87% of all prepaid plan members in Peru in December 2019.

 

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Prepaid Plans

 

 

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Source: Boletín Estadístico 2019, SUSALUD.

The number of Oncosalud plan members has grown at a double-digit rate over the past decade, growing at more than twice the rate of the EPS system, which is the next largest private healthcare plan type by number of plan members.

Oncosalud Plan Members (000s)

 

 

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Source: Boletín Estadístico 2019, SUSALUD.

 

   

Self-Insurance Plans: Plans offered primarily by institutions such as universities, large public institutions and labor unions, guilds and industry associations. These plans pool member resources and function very similarly to prepaid plans. These plans are also regulated by SUSALUD.

 

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Self-Insurance Plans

 

 

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Source: Boletín Estadístico 2019, SUSALUD.

Overall, the private healthcare coverage plan market breaks down as follows:

Private Healthcare Plan Market by Plan Type (000s Members)

 

 

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Source: Boletín Estadístico 2019, SUSALUD and Anuario Estadístico 2018, SUSALUD.

There is significant concentration in the private healthcare plan market, with the top 10 providers accounting for more than 95% of the market since 2014. Oncosalud has consistently maintained a strong position in the market, and as of December 2019, it held the highest share in the industry based