A juggling act

Will the failure of Wockhardt Hospital's IPO deter investors in the pharma industry? Not likely, as many players from other industry verticals, as well as private equity investors continue to add pharma and healthcare projects to their portfolios. Viveka Roychowdhury analyses this juggling act

The familiar adage that "Health is wealth" today has many interpretations. While the conventional one is that if you are healthy, wealth will follow, the stock market looks at the healthcare sector as a wealth creator for investors. This sector covers a wide array of segments from hospitals, pharmaceuticals, biotechnology, life sciences to diagnostics and medical devices.

We don't have to look far for reasons. Ranjit Kapadia, Head Research (PCG), Prabhudas Lilladher, quotes studies from Ernst & Young and India Brand Equity Foundation (IBEF) according to which healthcare spending in India is expected to rise by 12 percent per annum through 2005-09 and reach $60.9 billion or 5.5 percent of GDP by 2012. For 2003, the per capita expenditure on health in India was a meagre $82, as compared to $597 for Brazil and $278 for China. As Kapadia points out, this indicates a tremendous opportunity for the healthcare industry in India.

The healthcare business opportunity in India has many drivers. Mentioning some of these, Kapadia says the rise in healthcare spending in India is due to rising disposable incomes, availability of better healthcare services and facilities, upsurge of medical tourism in India, and increase in healthcare insurance sector. He adds that big corporates have also recognised healthcare as a corporate responsibility and have enhanced their spending to meet healthcare requirements of employees and their families.

As an important segment of the healthcare sector, the pharmaceutical segment is also poised for expansion. Kapadia points out that domestic pharma market is growing at 13-14 percent, which is more than twice global growth rates. Moreover, with pricing pressure in US market and the move by governments in various developed countries to curtail healthcare expenditure, the global market is likely to continue to show relatively lower growth rates. These projected growth figures have attracted corporate players from diverse verticals, while existing players diversify their own portfolios.

"Domestic pharma market is growing at 13-14 percent, which is more than two times global growth rates" - Ranjit Kapadia Head Research (PCG) Prabhudas Lilladher

"The metrics are changing because the value chain is starting from the patient" - Dr Raja B Smarta Managing Director Interlink Marketing Consultancy

Early birds

"Investors need to keep in mind that it is a healthcare venture, which is for the common man and is one of the basic needs of citizens, so they need to be rational in-terms of ROI" - Sandeep Sinha Industry Manager Healthcare Practice, Frost & Sullivan

Sandeep Sinha, Industry Manager, Healthcare Practice, Frost & Sullivan, observes that the first signs of interest in the hospital segment were shown almost five to six years ago, by 'early birds' like the promoter families of Fortis Healthcare, Wockhardt and Max. The high cost of treatment in developed countries, long waiting periods for treatment and increase in cost of health for large organisations, especially in US and UK, further bolstered growth figures.

Soon, other players from sectors as diverse as construction and petrochemicals added healthcare to their portfolios. For example, players in realty, like the Hinduja and Hiranandani Groups had the land and resources to construct townships, where they needed to provide amenities and services like schools and healthcare facilities to attract customers. The foray into hospitals started from here and these Groups identified the healthcare industry as one with vast future potential.

Another example of this trend is when the Reliance Group, which enjoys global leadership in its traditional businesses of polyester, polymers, fuels and chemicals, added bio-polymers to its polymer play. K V Subramaniam, President and CEO, Reliance Life Sciences explains, "We recognised in the year 2000 that, in the future, biotechnology-based products, such as biopolymers, biofuels, and biochemicals could undermine Reliance's position in its traditional businesses. When we did a detailed analysis, it struck us that, while the threat from industrial biotechnology was more in the medium to long term, there were opportunities in the medical biotechnology and plant biotechnology domains. This is how Reliance came to be engaged with the life sciences initiative and Reliance Life Sciences came into being in the year 2001."

Thus these players have leveraged the skills and capabilities honed in their traditional businesses in their healthcare forays. For instance, the real strength of the Reliance Group is to harness technologies, and they have chosen tech-intensive segments of the life sciences business, like stem cells, therapeutic proteins, molecular diagnostics, genetics, plant tissue culture, plant metabolic engineering, biopolymers, biofuels and biochemicals and clinical research services as their domain area in the healthcare arena.

Some of the promoters of pharma majors also have entered other areas of the larger healthcare sector. For instance, the promoters of Ranbaxy Laboratories have a chain of super specialty and multispecialty hospitals through Fortis Healthcare and laboratories under the SRL Ranbaxy banner. Similarly Wockhardt has Wockhardt Hospitals and in the diagnostic centres/pathology labs segment, Wellspring Pathlabs and Diagnostics Center is part of Nicholas Piramal India (NPIL). These pharma companies are pursuing aggressive expansion plans here as well. Industry observers point out that this is a partial migration to cash-flow generating businesses, to offset R&D investments.

Corporate groups that had exited the healthcare sector are also re-looking their strategy. The Tata Group, after selling off its stake in Rallis, has re-invested in healthcare with their funding Advinus Therapeutics, Avesthagen, and Indigene.

Reversing the revenue model

Reviewing this trend, Dr Raja B Smarta Managing Director, Interlink Marketing Consultancy, points out that the revenue model seems to be reversing. He says, "Earlier the pharmaceutical company used to think in terms of their own clinical trails, alliances. Now, the metrics are changing because the value chain is starting from the patient."

For instance, the first thing the patient does is go to his general practitioner (GP). The patient, in most cases, is still spending his own money, because health insurance is not very common today in India. Thus you find insurance players like ICICI Prudential starting to offer health insurance products. From the GP, the patient goes to the hospital, so corporates are developing hospitals. Sinha foresees an investment of $3.5-4.5 billion in hospitals, which would include various projects like greenfield, brownfield, joint venture and hospitals under contract management.

Hospitals need diagnostics, so pharma players like NPIL are focusing on their diagnostics arms. At the recent launch of 'Resperate', a new blood pressure control device, NPIL officials announced that they aim to be amongst the top diagnostics players in India in the next two years. NPIL will use the in-licensing and acquisition route to expand their diagnostics product basket. Medical and surgery-related devices are the next stop for patients and so also for investors/healthcare entrepreneurs, followed by 'keep-well' products like nutraceuticals, etc.

Entry barriers

Companies who wish to juggle healthcare along with their other portfolios have an uphill task ahead. According to Kapadia, entry barriers for the hospital segment include high set up cost due to high cost of land and availability of trained doctors. "Except Apollo Hospitals and Indraprastha Hospitals, no major healthcare company has been able to attract investors," he points out.

Strategic investors too make their moves very carefully. Kapadia observes that the healthcare sector has not drawn major investments in the past. "The public issue of Fortis Healthcare failed to cheer investors as the stock has not given any appreciable return to the investors, unlike other sectors. Morerover, Wockhardt Hospitals' Initial Public Issue (IPO) was withdrawn due to poor response from investors, despite lowering the issue price. In the near future, the healthcare sector is unlikely to attract investors due to high project cost (due to high cost of land) resulting in long gestation periods. The other sectors give quick returns to the investors and hence, the funds are likely to flow in those sectors, "he avers.

However, Kapadia points out that while long gestation periods discourage retail investors, private equity (PE) funds are likely to invest in this sector as it has good potential. This observation is borne out by the entry of PE several players (domestic and international) in the last year. These deals include International Finance Corporation's investment in Max India and Apax Partners in Apollo Hospitals. ICICI Venture set up I-VEN Medicare, a separate holding company, to buy medium-sized hospitals and pharmacy chains. Their first investment was in Delhi-based RG Stone Urological Research Institute, followed by Pune-based Sahyadri Hospitals. In the pharma space, prominent deals include Fidelity International in Avesthagen, Chryscapital in Mankind Pharma, and Avenue Capital in Morepen Laboratories.

While healthcare is still not yet being considered as a healthy investment option for investors, corporate investors have their eye on future return on investments (ROI) and do not mind waiting for the returns. According to Sinha, "They are very sure about the growth, but are going slow and are waiting to be there once there is a boom in the healthcare market so that they can be one of the front runners." He also points out that investors need to keep in mind that it is a healthcare venture, which is for the common man and is one of the basic needs of citizens, so they need to be rational in-terms of ROI.

So while Wockhardt Hospital's IPO pullback maybe a setback, it is only a temporary speed breaker. As Smarta points out, "IPOs always look at the future value. Once intellectual property has been created, investors will follow." This is especially true of the pharma, biotech and life sciences segments.

Push for healthcare

While these investments meet the criteria as wealth creators, are they in line with the country's healthcare needs? Not really. Sinha says that these may meet only about 20-30 percent of the country's healthcare needs, as they are mainly focusing on tertiary care segment, and there is no major focus on rural or tier II and III cities. Moreover there is no focus on primary, secondary and rural care.

This situation can be remedied if the government steps in by way of policy changes. "The major cost of healthcare projects is the land cost, forming around 30 percent of the project cost," points out Kapadia. "The Government should give the land on long-lease for the setting up of hospitals and health centres. Moreover, there should be financial participation from the Government in terms of assured investments in these projects. These projects should be given infrastructure status so that they can raise loans at lower interest rates. Moreover, the import of hospital equipments should be exempted from the exempted from import duty to lower the project cost," he suggests.

However, as Smarta opines, there are no barriers once a company has an exploratory mindset. In the near future, industry observers predict that many investors who are in wait-and-watch mode will either exit or enter the hesalthcare sector.

As the juggling act continues, one hopes that the increasing number of players will bring down costs and improve access to healthcare facilities.

viveka.r@expressindia.com