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Q3 2020 Earnings Call
Dec 04, 2020, 10:00 a.m. ET


  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:


Good morning, ladies and gentlemen, and welcome to Afya's third-quarter 2020 earnings conference call. [Operator instructions] As a reminder, this call will be recorded. I would now like to introduce your host for today's conference, Renata Couto, Afya's head of IR. You may begin.

Renata Couto -- Head of Investor Relations

Good morning, everyone. Thank you for joining us for Afya's third-quarter 2020 conference call. With me on the call today is our CEO, Virgilio Gibbon; and Luis Andre Blanco, our CFO. During today's presentation, our executives will make forward-looking statements.

Forward-looking statements generally relate to future events or future financial or operating performance and involve known and unknown risks, uncertainties, and other factors that may cause our actual results to differ materially from those contemplated by these forward-looking statements. Forward-looking statements in this presentation include, but are not limited to statements related to our business and financial performance, expectations and guidance for future periods, our expectations regarding our strategic products initiatives, and the related benefits and our expectations regarding the market, as well as, the potential impact from COVID-19. These risks include those more fully described in our filings with Securities and Exchange Commission. The forward-looking statements in this presentation are based on the information available to us as of the date hereof.

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You should not rely on them as predictions of future events and we disclaim any obligation to update any forward-looking statements except as required by law. In addition, management may reference non-IFRS financial measures on this call. The non-IFRS financial measures are not intended to be considered in the isolation or as a substitute for results prepared in accordance with IFRS. We have provided a reconciliation of this non-IFRS financial measures to the most directly comparable IFRS financial measures in this presentation.

Let me now turn the call over to Virgilio Gibbon, Afya's CEO, and starting with Slide 4.

Virgilio Gibbon -- Chief Executive Officer

Thank you, Renata, and thanks, everyone, for joining us today. I hope that you and your families are all doing well. Since our last earnings call, the overall business environment did not materially change. Our key priority remains the health and safety of our students, faculty, and employees.

Although there has been some disruptions from COVID-19, our teams devoted to leverage our online and virtual technology capabilities and adjust offerings for our students that allowed us to generate strong results this quarter. We once again saw organic revenue growth contribution from acquisitions, underlying margin expansion, and cash flow generation. Before we start with our financial and operational highlights, I'm proud to share with you that we have just refreshed our brand. We are the only complete medical education platform serving every stage of the doctor's career, providing solutions and methodologies for a personalized experience.

And when company awareness grows, its brand also does, so this is our new logo that reflects our DNA and will support gradually every service and local brands. Please take a few minutes to watch our brand manifesto. Moving to Page 5. We'll discuss our main highlights.

Starting with our top line. Third-quarter adjusted net revenue increased 52% year over year, mostly due to maturation of our medical school seats and consolidation of acquired companies. It's also important to highlight that the discounts granted by the state decrees and legal proceedings due to COVID-19 on site classes restrictions did not impact us materially and represent around 1% of our net rev in this third quarter. In 2020, profitability continues to run ahead of last year, as we not only grow the business, but we are capturing synergies from acquisitions to leverage net growth.

Adjusted EBITDA margin increased 340 basis points year over year and net income was up 47% to BRL 101 million. At the end of the quarter, we had approximately BRL 1.1 billion in cash and cash equivalents on our balance sheet and the cash conversion for nine months 2020 was 86%. Despite any short-term challenges posed by COVID-19, we remain confident in our strong cash flow and healthy balance sheets to manage through the current crisis and beyond. With respect to M&A, our team continues to successfully execute both on generating and closing new business, as well as, capturing synergies.

We are particularly pleased with our acquisitions in the digital health service with PEBMED, which is quickly followed up with iClinic and MedPhone. At the same time, we continue to grow our medical seats, acquiring two companies during the quarter and another one subsequent to quarter end. With these acquisitions, we are now at 85% of our IPO three-year target of adding 1,000 medical seats. On a separate topic, I'm very pleased to share that we were the winners in the education sector in the Epoca Negocios 360 survey.

This award, which has been held annually for seven years is one of the most significant in the communications industry and recognizes companies that are market leaders across six different categories, including financials, corporate governance and sustainability, vision and human resources. Besides that, we also have won the Golden Tombstone in the equity category. This award is evaluated by IBEF Sao Paulo and recognizes equity operations in aspects such as complexity of the transactions, innovation, price, and others and Afya's award was due to our successful IPO in 2019. Moving next to a discussion of our recent digital acquisitions on Page No.

6. Even during these challenging times, we remain committed to deliver innovation to our students, faculty, and other healthcare professionals. COVID did not slow down implementation of our strategic initiatives. In fact, we have accelerated our digital investments.

We are expanding our digital offers and we began this digital journey with the acquisition of PEBMED, which we discussed on the last quarter call. As a reminder, PEBMED provides tools and content for healthcare professions through the WhiteBook and Nursebook apps and through the PEBMED news portal. It's also the market leader in clinical decision software and is an extremely popular app, ranking the top 10 Brazilian apps by consumer spend and NPS of 85. The business model consists of both paid subscription and free content, providing an additional source of revenue for us.

We followed this with the acquisition of iClinic, a leading practice management software for physicians in Brazil, which includes electronic medical records, clinical management system, telemedicine, and a complete marketplace that connects doctors and patients with schedule consultations. We currently have close to 12,000 monthly subscribers with monthly average per user of 107 [Inaudible]. With this acquisition, we have strengthened our position into the digital health service segment, complementing our end-to-end offering to the healthcare professions, and providing another revenue source. And subsequent to quarter end, we announced the acquisition of MedPhone, the No.

2 medical app in Brazil behind WhiteBook, a PEBMED company. MedPhone has 175,000 registered users and close to 60,000 monthly active users, a 4.9 score in app store with more than 9,100 reviews. The integration of MedPhone's clinical decision software with PEBMED will generate synergies and allow us to offer both products from the same platform. Importantly, the founders of these acquired companies will join Afya and will be an integral part of the digital team driving our growth in the health tech services.

These have been key acquisitions for us as they accelerate our digital efforts to improve the user experience and efficiency of both healthcare students and other healthcare professionals. There are approximately 500,000 doctors in Brazil and close to half of them are currently using our digital products and services. Our goal is to improve even more penetration to support the largest majority of physicians in Brazil with our digital health service platform. Now on Page No.

7. We'll discuss our overall strategic positioning. As we look to the future, we see the opportunity to maintain a long-term relationship with physicians from the time they enter into our school as undergraduate through the residency prep, specialization studies, and then through their entire career. We believe the investments in our medical programs and new digital health products will provide growth and revenue impact for many years, as well as, strengthening our relationship with medical students and other healthcare professionals.

Importantly, our digital investments are already paying off by opening new business revenue opportunities for us. We will also continue to consider acquisition targets. And as shown on the bar chart on the right, we have been adding medical seats, 851 seats in just 15 months while also increasing our geographic footprint. This increase in medical seats drives a predictable revenue stream and maximize cash flow predictability as well.

We are also looking to further grow our digital assets through disciplined acquisitions of business, complementary to, as well as, further broadening this business. Importantly, our balance sheet remains healthy with positive cash flow generation that provide us with the results to continue to grow the business both organically and through M&A. Turning up and before turning the call over to Luis, our accompaniments 2020 as we continue to navigate through an unprecedented environment, are proof of the strength and resilience of our business model and the exceptional work of our passionate team. We are focused on creating shareholder value by delivering our financial targets, investing in growth, driving top-line momentum, and implementing our strategic priorities.

I will now turn the call over to Luis for a further discussion of our financial results and second-half 2020 guidance. Thank you.

Luis Andre Blanco -- Chief Financial Officer

Thank you, Virgilio, and good morning, everyone. Moving to Page 9. Similar to past calls, my discussion this morning will focus on the main and most significant P&L items. There is additional info in the earnings press release that you can refer to for further more information.

I'm pleased that we delivered another good quarter across all key metrics. Let me highlight a few. Both medical seats and students saw a significant increase during the quarter. With respect to the number of medical seats, we added 294 seats year over year for a total of 1,516 seats.

Reflecting the seat maturation process and acquisitions, the total number of students in the third-quarter 2020 was 9,567 students, an increase of 50% over the same period of the prior year. Adjusted net revenue for the quarter, which includes the impact of the state decrees and individual and collective legal proceedings related to this [Inaudible] COVID-19 on site classes restrictions was up 52% year on year to BRL 313 million, partially benefiting for recognition of revenue that has been deferred earlier on the year when practical classes were unable to take place. This deferred revenue amounted to BRL 14.4 million in the quarter. Excluding the acquisition of UniRedentor, SaoLucas, and PEBMED, net revenue grew by 16% year over year reaching BRL 239 million.

The increase was primarily driven by organic revenue growth, mainly due to the maturation of medical school seats, and increase in the average ticket. The strong top-line growth combined with cost efficiency and synergies from acquisitions was reflected in adjusted EBITDA increasing 63% to BRL 149 million and margin expanding 340 basis points. Adjusted EBITDA also benefited from the inclusion of the deferred revenue I just mentioned. Excluding the consolidation of UniRedentor, SaoLucas, and PEBMED, adjusted EBITDA increased 32% year over year to BRL 121 million, a margin increase of 620 basis points to 50.4%.

Adjusted net income increased 47% from the third-quarter 2019, reflecting the revenue contribution, synergies captured, and margin expansion from the consolidation of acquisitions. Earnings per share increased 48% from BRL 0.54 in the third-quarter 2019 to BRL 0.80 in the third-quarter 2020. Moving on to Page 10 for a discussion of key operating metrics by business unit. We delivered solid growth across both business units.

Growth in key operating metrics as shown on this slide, is being driven by a combination of organic growth and acquisitions. Starting with BU1, our average monthly medical tuition fees at the nine months were BRL 8,053, which was 17% above the same period in 2019. This reflects the combination of new students enrolling with a higher tuition rate combined with students graduating with a lower tuition. As a reminder, this does not include UniRedentor and SaoLucas.

As shown in the middle chart, 78% of our combined tuition fees are derived from medical schools, up from 69% in the same period of the prior year. The combination of 50% increase in the number of students and a 17% increase in the average ticket, resulted in net tuition fees of 41% when compared with the same period of the prior year. With respect to BU2, we have 130,000 active paying users at the quarter end, which included 95,000 from PEBMED. Excluding PEBMED for the nine-month period, we saw a 40% increase in active paying students.

We saw the largest increase of 132% in the specialization due to the acquisitions of UniRedentor. Now turning to Page 11 for a discussion about different tractions we are gaining from our digital assets. All these recently acquired businesses are also helping to elevate our brand, as well as, deepening our connections with students and physicians. We have focused our efforts over the last year on continuing to enhance the student experience.

We're closely monitoring their behavior and targets, personalized approach to keep them engaged. The digital investments that we have made enable us to [Inaudible] and ensure that we are supporting our students as well the broader healthcare industry with what is so important to them, quickly and timely access to important medical information. This is more critical now than ever and is also a key leverage for both member of acquisitions and retention. And so on the charts on this page, we are seeing positive gains from our move to digital engagement.

In the third quarter, combined monthly active users across our Medcel and PEBMED platform, we are close to 180,000 users. On the chart on the right, you can see the trend in the current consumptions. Content that users are consuming included podcasts, learning assets, as well as, structured medical webinars. We are also seeing a positive traction here with a 9% increase when compared to the first quarter of 2020 when we began our push into digital assets.

The higher performance in the second quarter is partially reflective of our opening up of our digital assets for free at the start of the pandemic to our students and healthcare professions temporarily inflating up the number of users. In summary, we keep looking for ways to modify and enhance our business units to elevate our service offerings. And as we further build our additional capabilities, we will have strong foundations of products offering to support our long-term growth objectives to empower the physician. Moving on to a deeper analysis of revenue and EBITDA on Slide 12.

As shown on this page, we have provided the net revenue and adjusted EBITDA from our historical third-quarter 2019 revenues to the reported third-quarter 2020. For the nine-month period, adjusted net revenue increased 62.3% to BRL 860 million. Excluding UniRedentor, SaoLucas, and PEBMED, adjusted net revenue grew 35% through September through BRL 750 million with a contribution of BRL 93 million from acquisitions and BRL 90 million from organic growth, which is comprised of the maturation of medical school seats and increase in the average ticket. UniRedentor contributed revenue of BRL 64 million in the nine-month period, while SaoLucas' contribution was BRL 73 million, and PEBMED was close to BRL 7 million.

Luckily, there was also a BRL 4 million benefit from the nonrecurrence discount granted due to COVID-19. On the right side of the page, we show nine-months 2020 adjusted EBITDA. During the period, adjusted EBITDA increased 77% year over year to BRL 480 with 390 basis points expansion in the margins due in part to a BRL 50 million contribution for UniRedentor, SaoLucas, and PEBMED and BRL 4 million contribution of mandatory discounts granted due to COVID-19. Excluding the contribution of these acquisitions, adjusted EBITDA advanced 54% to BRL 356 million with BRL 48 million contributed from acquisitions and BRL 75 million from organic growth.

The adjusted EBITDA margins excluding these three companies expanded 1,020 basis points. Moving next to a discussion of our cash flows on Slide 13. Cash and cash equivalents of BRL 1.1 billion at the quarter end were 3% higher than the period and in the second quarter, reflecting the strong cash generation that we had in the quarter. The majority of this fund is invested in low-risk Brazilian reals denominated instruments.

Total debt was BRL 599 million at the quarter end 2020, up from BRL 535 million at the end of second-quarter 2020 and BRL 361 million at year-end 2019. The increase reflected the acquisition payables. Cash generation remained strong in the nine-month period, increasing 39% to BRL 325 million, which resulted in a cash conversion of 86%, compared to the 109% in the same period of 2019. The decrease in cash conversion rate year over year is mainly due to the consolidation of Medcel business, our student renegotiations of overdue monthly installments due to COVID-19, and we saw a decrease in advances from our students.

Turning next for a discussion about pro forma cash and debt on Slide 14. On this slide, we have upgraded our cash positions at the end of the third quarter to arrive at the pro forma level. This bridge takes in account the cash outflows for the five announced acquisitions since the second-quarter end, coupled with an increase in the bank debt to support our growth initiatives. All of these options have resulted in a pro forma cash position of BRL 656 million, compared with BRL 1.1 billion at the end of September.

By contrast, our pro forma gross debt has increased to BRL 1.3 billion from BRL 599 million at the end of September. The increase reflected the increase of the bank debt that I just mentioned, coupled with the debt we had summoned with the acquisition of Ciencias Medicas. Turning next for a discussion about guidance on Slide 15. We are reaffirming our second-half 2020 guidance based on the solid performance in the third quarter.

Our guidance takes in account the successfully concluded medical students intake for the second half of 2020. As a reminder, the world is still in the middle of a pandemic. Economics are slowly opening up and our guidance takes in account the best information available at this point of time. Two key metrics for the second-half 2020 guidance are as follows.

The second half net revenue is between BRL 600 million and BRL 640 million. Second-half 2020 adjusted EBITDA margins ranging between 45.5% and 47%. Our guidance includes the impact of the adoption of IFRS 16, UniRedentor starting from February 2020, SaoLucas from May 2020, and PEBMED from the late July and exclude other acquisitions that may be concluded after the issuance of this guidance. Additionally included in the revenue outlook is the revenue recognition for some medical classes that could not be held during the first half and were pushed out to the second-half 2020 upon the resumption of classes.

This amounts to BRL 40 million. Before opening the call to questions, let me finish by saying that we are pleased with our performance in the third quarter with the context of this challenging environment. I would like to thank you, every one of our employees emphatically for their continued hard work and resilience during these unusual times. We remain confident that our strategic investments are established as a solid foundation, creating further differentiation and positioning us from continued strong financial results that will drive long-term shareholder value creation.

This ends our prepared remarks. We are now ready to take your questions. Operator, please open the lines for questions.

Questions & Answers:


[Operator instructions] Our first question comes from Marcelo Santos of J.P. Morgan. You may proceed with your question.

Marcelo Santos -- J.P. Morgan -- Analyst

Hi, good morning. Thanks for taking my questions. I have two. The first is if you could provide some update on the intake for the medical unit in 2021.

If we're being able to fill the seats and kind of ticket outlook you could discuss. And the second is about PEBMED integration and cross-sell initiatives. If you could provide us an update on how this is going and if you're ready -- about to launch some initiatives that could perhaps put together Medcel courses that matter. Anything in that sense would be very helpful.

Thank you.

Virgilio Gibbon -- Chief Executive Officer

Hi, Marcelo. Thank you for your question. I'll take the first question here, then Julio will help me with the second answer here. So the intake for our medical seats for 2021 it's in very good trend.

We are not expecting any kind of surprise and keeping the same trend to have 100% of occupancy of all seats, including the maturation and the new institutions acquired in 2020. So there will be no surprise on the intake side and also renewal for the following semester. On PEBMED, integration and cross-sell opportunities, Julio?

Julio de Angeli -- Vice President, Continuing Education and Innovation

Hey, Marcelo. Hello, everyone. I hope everyone is healthy and fine there. In regards to PEBMED, we started not integrating the company yet, Marcelo, but we started with all the activities in terms of offering products to the different audiences.

So Medcel has been promoting PEBMED and the other way around as well. So we just finalized, especially now the Black Friday period, which is important in terms of subscriptions for both business and enrollments. So we don't have yet concluded, but we've been doing integrated activities, commercial activities at this point. So far, I mean, PEBMED is now at a very, very different level.

I mean, it's been growing, it's above 100,000, subscribers at this point, and Medcel has been doing quite well as well in the intake, where we started in September. So it's been growing above market levels as well. But so far, answering your questions, we are doing more of the commercial activities at this point. We have a couple of projects to be launched, especially with initiatives where we're going to add educational components to the offer.

And we are about actually to launch a specific marketplace where students will be able to have bundle offers from the different services and this is yet to come.

Marcelo Santos -- J.P. Morgan -- Analyst

Perfect. Thank you very much.


Thank you. Our next question comes from Susana Salaru with Itau. You may proceed with your question.

Susana Salaru -- Itau BBA -- Analyst

Hi, guys, good morning. Thank you for taking our questions. We have two. First is related to the MedPhone and the WhiteBook.

Are you guys going to maintain both lines? Or are you planning to unify and have a new combined product? That will be our first question. And the second question is related to the Medcel student base, which is -- which didn't evolve comparing to the previous quarter. What should we expect going forward? And if you are seeing a scenario that is different from what you had in your business plan for Medcel? That's it, guys. Thank you.

Julio de Angeli -- Vice President, Continuing Education and Innovation

Hey, Susana, Julio here. So in regards to the first question, so far with MedPhone, I mean, we still want to keep the application up and running. And at this point, we are trying actually to convert the users from MedPhone to WhiteBook subscribers, so that's what we are doing now. In terms of the future, what -- the plan is actually we still need to keep both those applications just up and running and -- but the focus is to grow WhiteBook's user base.

The other one about Medcel, again, answering your question, the student base actually declined a bit, but it's mostly because of the -- the cause is we had to deal with the pandemic. But the intake, as I mentioned on the previous answer to Marcelo, the intake, which is the most important for Q4 and for next year is doing well again, above the market growth level.

Susana Salaru -- Itau BBA -- Analyst

Well, thank you, Julio. Just a follow-up on the Medcel student base. The cross-selling for the students -- for the last year students and the students that are before the last year students, is this happening? Or you are just -- the majority of the sales are happening just for the students that are graduating?

Julio de Angeli -- Vice President, Continuing Education and Innovation

Yeah. Well, the majority of the students, they are actually -- let me explain how this works. So the intake actually during this period of the year, September to December, most of them, the majority of them are still in the school. So they're still graduating, so they're finishing fifth year or the sixth year and the intake with doctors actually that are already physicians that are already graduated is higher after January, so January to March, April.

So, so far now, it's more of students that are -- and this hasn't changed a lot. But what we see is that the market is growing and we're growing in the same pace, but more -- at this moment of the intake, it's more of the students that are still not graduated and it's just following the same pattern as other years.

Susana Salaru -- Itau BBA -- Analyst

Perfect. Thank you, Julio. Thank you.


Our next question comes from Fred Mendes with Bradesco. You may proceed with your question.

Fred Mendes -- Bradesco -- Analyst

Hello, and good morning, everyone. Thanks for the call. I have two questions as well. The first one regarding the discounts that you recognized in this quarter.

Just wondering if this is something that you already recognized. The mandatory discounts, right, that's something that you already recognized everything? Or should we expect to see more of these discounts as we move forward? This would be my first question. And then on the second question, I know as the state of the total revenue is not as much, but we saw a significant decrease in the number of students not related to healthcare course. So just wondering what can you expect from this business as we move forward? Thank you.

Luis Andre Blanco -- Chief Financial Officer

Thanks, Fred, it's Luis speaking. Regarding the mandatory discounts that we had on the third quarter, it's all that we got on the third quarter, OK? It's related to state decrees that requires us to give the discounts at this period and reflects the discount that at the first instance the judge has ruled us to give this discount. So we have this BRL 3.9 million of discounts on the third quarter. Moving forward, we have some states laws that are still in place.

So we will see at the fourth quarter, some discounts. I think this number should be around 1% to 2% of our net revenues, OK, this -- this amount.

Virgilio Gibbon -- Chief Executive Officer

Hi, Fred. Just to add a point here. This is Virgilio. So that will not put in risk the guidance, we are very comfort to reach the guidance for the second semester.

On your second question about the nonmedical programs, we are closing many of them. That's one of the main reasons of the leverage in our operations, many of the programs from the institution acquired, they came with low margins of negative operational results, so we are closing these programs. And also we have seen the impact on COVID for the traditional on-campus undergrad program. So that's a combination of this, too.

We are closing. We are very disciplined in closing programs that is not sustained in the long term. We are not going to challenge the competition or if there's distance learning and lowering our price. So we are just keeping on track the program that is sustainable and make the difference on the region that we have the operation.

So it's expecting to dilute nonmedical programs on our penetration. Last year, if I'm not wrong, it's around 18% and this year it's around 14%. So also this is considered on our expectation for the entire year.

Fred Mendes -- Bradesco -- Analyst

Perfect. Very clear. Thank you, Virgilio. Thank you, Luis.


Thank you. Our next question comes from Mauricio Cepeda with Credit Suisse. You may proceed with your question.

Mauricio Cepeda -- Credit Suisse -- Analyst

Hello, guys. Thank you for the time, for the questions. I have two questions that are kind of specific. We noticed that the receivables for the quarter are still up versus last year.

We'd like to know if this is a new level? Or if it's something that is contingent to COVID only? And also, we saw that the cash flow this quarter specifically was a little bit lower than last year's. So if you could give a little bit of more qualitative insight on this. We saw that it was something related to tax payables and advances from customers. But if you could give some more, let's say, rationale for what's happening.

Thank you.

Luis Andre Blanco -- Chief Financial Officer

Hi, Mauricio, it's Luis speaking. About the receivable base that we got on the third quarter, yes, it was a little bit higher than the days that we had on the third quarter last year, but it's lower than the one that we have presented on the second quarter. What's the difference between the years of it? What we got, there are three main reasons. The first one is the advances that we got from our students.

If we compare this year with the 2019, the number of advances that we got from the students were lower, OK? So it's common that the students anticipate the payment of the semester to get a little bit of financial discounts on that. The second one is the installments that we -- the financial support that we provided to our students during this -- this pandemic. We have established the support through the installments to them instead of giving them discounts. So we were expecting a little bit of increase of our receivable days and that's the core.

But it's already moving down as we reduce our receivable days from the third quarter if you compare that to the second-quarter 2020. And the third reason, if you compare with the 2019, it was Medcel. Medcel was incorporated with Afya during the second quarter last year and the Medcel business is the one that you recognize the revenue first on and then you got the receivables. So last year, we had recognized the revenue before Medcel was incorporated into Afya and we continue to get this cash on the second quarter, the third quarter last year.

So this -- these are the three major factors giving more colors about this change on the receivables, OK?

Mauricio Cepeda -- Credit Suisse -- Analyst

Very clear. Thank you.


[Operator instructions] Our next question comes from Irma Sgarz with Goldman Sachs. You may proceed with your question.

Irma Sgarz -- Goldman Sachs -- Analyst

Yes. Hi, thank you for taking my question. One question, more technical, follow-up question. Your earlier remarks were very helpful.

And from what I understand from all the answers, you're quite sort of comfortable, if I may say so, in terms of how underlying dynamics are shaking out, all things considered. In terms of dropouts, anything that you feel sort of additional that one is worth mentioning here and how you expect that to evolve from here and the ability to -- for early dropouts to reposition? You're speaking to 100% occupancy, so I assume that's sort of baked into there. But anything additional that you feel worth mentioning would be helpful. And then just as you look sort of beyond the near-term and into the medium-term, just sort of from an M&A perspective, to the extent that you can speak to it.

Sort of what incremental are you looking for -- incremental new characteristics from a regional perspective or from a quality perspective or any other aspects of variables that you're taking into consideration as you look through at incremental sort of last bit of M&A targets? And third question is just a quick update on the approval process for the remaining Mais Medicos' two campuses. Any update there you can provide? Thank you.

Virgilio Gibbon -- Chief Executive Officer

Hi, Irma, this is Virgilio. I got your first and the third question about Mais Medicos. About the dropouts, before renewing all students for the second semester, we are expecting to see a higher dropout, but when we finished the reenrollment, we didn't see that. The renewal rates was the same pattern that we had previous year and we will start renewal on January because you have a very long second semester because of the COVID and we are not expecting as we -- any problem in the renew and keeping the 100% of occupancy of the students.

It's worth to mention that demand is keeping a very high level. So the candidates perceive it's very healthy and we are still in the beginning of the classes. But I think, it will be no surprised in terms of student pay for medical students in the first half of 2021. On other programs, ex medicine, will be tough.

We are seeing dropouts, lower intake, the competition of distance learning doesn't make any sense for us. So we will keep very discipline in closing programs that doesn't make sense in terms of sustainability for operations and improving our penetration of closing -- getting close to 90% of our BU1 revenues coming from medical program, OK? On the Mais Medicos side, we already had the first intake for Santa Ines. That was our first license authorized. And we are expecting a very short term, maybe in weeks to have the second approval for another institution on North region.

For the others, we still have five to get the final authorization and expect to be two by the end of first 2021 and the other three by the end of next year.

Luis Andre Blanco -- Chief Financial Officer

Irma, it's Luis. I'm going to take the questions regarding M&A. Talking about the M&A opportunities that we have on the BU1 first. We are very close to reach the 1,000 seat goals that we have established on the IPO.

We have a very fertile pipeline. We have some views that are in our hot pipeline. So we can get -- reach this 1,000 seat goals in the short term. Moving forward though on BU1, I think we're going to be more strategic on our movements.

We are -- we are keeping our disciplines on -- just focus the units that had more than 6% of their revenues on the maturation that comes from the medicine business -- from the medicine part of the business and we established our minimal IRR in those acquisitions. So we continue to see opportunities and we're going to keep our discipline on that. Regarding BU2, we -- first of all, it's important to remember that we are between signing and closing of iClinic. We're supposed to get the iClinic closing in the very, very beginning of January.

And we are discussing with the Bruno of PEBMED and with Julio, the opportunities that we have to keep going on the health tech business. We have this view that we have to repower the physicians. We want that the physicians have the access to the best tools for them to get the best outcome, to give them the best efficiency, to increase their productivities, and we want them to provide the tools that give them flexibility, mobility on their day-by-day business so they can focus on patients. We have mapped the market on this health tech, on these functionalities and we are working together to see the next movement, to plug them in this future environment that we are building to provide this to empower of the physicians.

So we are very excited for the opportunities that we have in the M&A in both business units.

Irma Sgarz -- Goldman Sachs -- Analyst

Very helpful. Thank you.


Thank you. I am not showing any further questions at this time. I would now like to turn the call back over to Virgilio for any closing remarks.

Virgilio Gibbon -- Chief Executive Officer

Thank you all for joining us today. We remain very confident that our strategic investment will establish a solid foundation of our company. We have a very good trend to end 2020 as expected in our guidance released. So I hope to see you all on our next quarter earnings call safe and sound.

So have a nice day for everyone. Bye-bye.


[Operator instructions]

Duration: 52 minutes

Call participants:

Renata Couto -- Head of Investor Relations

Virgilio Gibbon -- Chief Executive Officer

Luis Andre Blanco -- Chief Financial Officer

Marcelo Santos -- J.P. Morgan -- Analyst

Julio de Angeli -- Vice President, Continuing Education and Innovation

Susana Salaru -- Itau BBA -- Analyst

Fred Mendes -- Bradesco -- Analyst

Mauricio Cepeda -- Credit Suisse -- Analyst

Irma Sgarz -- Goldman Sachs -- Analyst

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