By Emily Frost – firstname.lastname@example.org
India’s healthcare and pharmaceutical sectors have witnessed significant growth in terms of revenue as well as the bottom line over a period of two decades. The healthcare-delivery sector comprises large and midsize hospitals, medical research and clinical trials, equipment and devices, telemedicine and outsourcing, health tourism and medical insurance. The pharma sector comprises producers and distributors of pharmaceuticals, drugs and other medical products. These two sectors have been growing at a rapid pace due to the large population growth of the country and sustained growth in overseas demand. A rapid rise in income levels of the middle class and growing health consciousness have led to the high potential of these sectors.
Indian healthcare providers are classified as public sector (government controlled) and private sector. The government-delivered healthcare is limited to a few key metro cities and some rural areas. Private-sector companies provide their services with a focus on major metropolitan cities, Tier I and 2 cities, as well as large townships with growing urban amenities.
World-class health education: the core advantage
India’s pharmaceutical and healthcare sectors have the core advantage of the country’s world-class medical-education system, producing a large pool of well-trained professionals, such as specialist doctors and nurses as well as medical technicians. Hence the cost advantage to local companies is quite substantial in healthcare services. Many rich countries in the world do not have this advantage.
The current outlook for India’s healthcare and pharmaceutical sectors continues to be attractive and promising, as analysts feel that decent growth in earnings should continue in both sectors. The pharmaceutical sector in particular would be taking advantage of strong growth in demand for domestic formulations, while the generic businesses in Europe and US are also likely to grow due to the expiration of large numbers of patents.
In developed markets such as that of the US, Indian companies that have strong product pipelines and diversified remedies compete with good margins. In Europe, these companies may face pressure on margins, in spite of growth in volumes, generated by the health reforms being ushered in by the governments, under pressure from the EU. The reforms in the health sector would produce greater demand for generics in Europe.
Even some emerging market countries, with high population growth rates and growing healthcare outlays, offer high-margin business opportunities for the Indian generic segment. In the CRAMS (contract research and manufacturing services) segment, Indian companies are focusing on offering contracting services across the entire value chain, encompassing complete research-development, trial stage to final, and full commercial-scale manufacturing. With many major drugs going off-patent every year in the US, global pharmaceutical majors are looking for cost-effective outsourcing in a big way, and India’s CRAM players have greater competence and capacity to offer developmental facilities to outsiders, including development trials as well as high-volume commercial manufacturing.
However, the pharmaceutical sector is also facing risks and uncertainties locally, due to impending implementation of policy changes on pricing as well as the probability of greater competition in the chronic-diseases segment. Likely the strengthening of the rupee in the long-term is also a cause for uncertainty.
Healthcare market size
According to market analysts, the healthcare-delivery market size is around 360,000 million rupees (around 60 billion USD). The total healthcare-service delivery system includes super-speciality hospitals, corporate hospitals and diagnostic centres, nursing centres, general hospitals and pharmaceuticals. India’s population is growing at approximately 1.4 percent per annum (on a base of the 1.25 billion population of 2013) and adds around 16.5 million persons in a year, resulting in huge additional demands on hospitals and other healthcare-system components. The additional number of hospital beds needed in private hospitals is estimated to be approximately 2 million to bring up the level of bed availability to three per thousand (WHO’s recommended figure). Present capacity is around 1.2 million beds. Achieving this goal would need a huge additional investment. Steady growth in urban populations due to migrations adds to the growing demand for the services of private hospitals in urban areas. The rural-to-total-population ratio is gradually declining from 72 percent a decade ago to around 50 percent in most states, particularly southern and western states.
Even medical tourism in India is growing at around 18 percent per year, with the booming business of Kerala Ayurveda healthcare centres and corporate super-speciality hospitals in major metros. Despite India’s weak competitive ability to attract global tourists, many observers appear to be bullish about the growth prospects of medical tourism in the country.
Four segments of prospective medical tourists have been identified:
- Indian diaspora (more than 25 million strong) could use the top-class medical facilities while on a home visit or a vacation in India.
- Patients from the UK and Canada, wishing to escape the long waiting times of the NHSs (national health services) of their respective countries and preferring urgent treatment, could be Indian medical tourists enjoying considerable cost advantages.
- American citizens below the age of 65 and not covered by any medical insurance could avail themselves of the low-cost opportunities in India.
- Citizens of neighboring countries such as Bangladesh, Mauritius, Pakistan, and those in the Middle East and Africa, would naturally visit India for treatment as the best option for healthcare.
The cost advantages of Indian hospitals are indicated in the following tabulation:
|Sl||Cost Elements of Heart Surgery||Cost in India (in USD)||Cost in US (in USD)|
|c||Cost of room and equipment||1,320||5,280|
|e||Total costProfit margin (10 percent of sales)||5,400600||24,0006,000|
|f||Price charged to customers||6,000||30,000|
|g||Savings to India medical tourists from US||24,000 (excluding air- travel costs)|
Comparable charges (approximate) of heart surgeries in various countries: India 6,000 USD, Singapore 7,800 USD, Malaysia 9,000 USD, UK 26,000 USD and US 30,000 USD.
India’s equipment-related costs are lower because the utilization factor is higher by around 200 percent as compared to the US and UK.
Indian hospitals along with diagnostic clinics have attracted FDI (foreign direct investment) worth more than 2.7 billion USD between 2000 and 2014. Some notable investors include: Telemasek Holdings Private Ltd, Mylan Inc, Sanofi-Synthelabo (India) Ltd and CDC, the financial institution of the UK.
Telemedicine is a fast-emerging segment of this sector in India. In 2012, the telemedicine market in India was valued at 7.5 million USD and is expected to grow by 20 percent per annum to 18.7 million USD by 2017-18.
India’s competitive advantage in the pharmaceutical sector also lies in the increased success rate of Indian companies in getting Abbreviated New Drug Application (ANDA) approvals. India also offers vast opportunities in R&D (research and development) through its well-developed labs.
The Indian healthcare industry operates in both the private and public sectors. The public-sector healthcare system consists of facilities run by the central and state governments. These facilities are meant to be provided free of cost or at subsidized rates to lower-income families in rural and urban areas. However, the private sector is passing through a rapid growth phase due to the fast-growing economy. As the country’s middle class continues to grow vigorously, this industry’s growth is bound to accelerate. India’s ever-growing middle class is now able to afford and willing to purchase quality healthcare. Today 40 to 50 percent of Indians are able to afford Western medicine, and more than 200 million have annual incomes of more than 1,000 USD per month. Average income levels in rural areas, too, are going up, and better roads are connecting rural populations to urban centers for accessing quality healthcare facilities. Private-sector pharmaceutical and healthcare companies are doing well. The tabulation below shows the financial indicators of some private companies listed on the Bombay Stock Exchange (BSE):
|Sl No||Company||Equity in crore rupees||Net profit (FY14) and EPS (PE in brackets)||H1 net profit (FY15) and EPS||Q3 net profit (FY15) and EPS||Current market price and face value in rupees (as on 07-04-2015)|
|01||Dr Reddy’s Laboratories||85.1||1,933 crore rupees, EPS 113 (33.08)||1,036 crore rupees, EPS 60.59||71.59 crore rupees, EPS 4.18||3,738(FV 5 )|
|02||Cipla||160.58||1,388 crore rupees, EPS 17.27 (41.63)||668 crore rupees, EPS 8.30||298.95 crore rupees, EPS 3.71||719(FV 2)|
|03||Lupin Ltd||89.84||2,323 crore rupees, EPS 51.62 (39.02)||1,476 crore rupees, EPS 32.74||513 crore rupees, EPS 11.38||2,014(FV 2)|
|04||Fortis Healthcare||462.9||23.9 crore rupees, EPS 0.53 (340)||-17.5 crore rupees||-9.95crore rupees||172(FV 10)|
|05||Apollo Hospitals||69.56||330.72 crore rupees, EPS 23 (59.36)||174 crore rupees, EPS 12.52||95.1 crore rupees, EPS 6.83||1369(FV 5 )|
|06||Poly Medicure||10.94||23.72 crore rupees, EPS||17.42 crore||11.9 crore||641|
|07||Kovai Medical Center and||10.94||23.72 crore rupees, EPS||17.42 crore||11.9 crore||641|
|Hospital||21.68(29.57)||rupees, EPS 15.9||rupees, EPS 10.90||(FV 10)|
The healthcare-delivery sector has been gradually improving its profitability. Net-profit margins (NPMs) were around 4 percent in the industry. The Apollo Hospitals Enterprises has been improving NPMs from 7.5 percent to 9 percent. Its return on net worth has been stable at approximately 10.5 to 11 percent. As many hospitals have huge debts, the gradual lowering of bank rates by RBI (Reserve Bank of India) should definitely benefit the industry.
Healthcare remains an underpenetrated segment. The government spends less than 2 percent of GDP on healthcare, while individuals spend around 3.25 percent of GDP, making up the total healthcare spending of 5.25 percent. Low per-capita medical spending (5.25 percent of GDP in India as compared to 17.6 percent of GDP spent in the US) indicates the substantial potential for imminent growth. The large and growing population, increasing incidences of lifestyle diseases, huge growth in affordability, expanding health-insurance coverage and awareness of the advantages of medical-insurance coverage are the main drivers of the high growth projections of this industry. The ability of healthcare companies to raise capital in the primary market has proved the investor confidence in these sectors.
Current state of pharmaceutical and healthcare stocks
During the past few weeks, Indian stock markets were volatile due to rupee exchange-rate concerns and lack of discernible earnings growth in the near term. Domestic financial institutions wanted to show profit for the financial year ending in March, and even pharmaceutical and healthcare stocks did not show an uptrend. But the BSE Healthcare Index had already gained more than 35 percent on a year-on-year basis. Even during the first half of FY 2015-16, the markets remain volatile, as stronger earnings growth may take a little longer to impact them. However, pharmaceutical stocks could see a significant upside of around 25-35 percent in two years based on strong earnings growth due to improved prospects in the US markets and likely accelerated growth in Indian markets. The numbers reported by pharmaceutical majors in India are seen improving continuously on a year-on-year basis. Hence, the growth momentum would be maintained for a longer term. Major developments to watch:
- Synergistic impact of the merger of Sun Pharmaceutical with Ranbaxy,
- Dr Reddy’s Laboratories strengthening its complex products,
- Lupin’s first-to file products,
- Major product launches of Cadila Healthcare, and
- US approvals and other developments for Glenmark Pharmaceuticals.
Since most major pharma stocks gained more than 40 percent last year, occasional bouts of profit booking cannot be ruled out. Such opportunities could be used to accumulate pharmaceutical stocks at lower prices.
Rupee volatility concerns
If the market turns bearish on the pharmaceutical sector once in a while it is due to the projected volatility in the rupee. As and when the reforms agenda of the new government gives a big boost, a huge fund flow from FIIs (foreign institutional investors) could suddenly strengthen the rupee and weaken exporters such as those in the pharmaceutical and information technology (IT) sectors. On the other hand, a rate hike by the US Federal Reserve could weaken the rupee for the medium term.
Indian generic producers are now focussing on differentiated generics, instead of selling plain vanilla generic products, thus improving their competitive advantage in US markets. The research capability of Indian companies has enabled them to file a higher number of Abbreviated New Drug Applications (ANDAs) compared to global competitors. As approvals are received, the generic producers will benefit from the permissions to produce and sell new products. Hundreds of USFDA approvals already existing for Indian pharmaceutical-production facilities also improve the prospects of Indian companies in US markets. At present, the Indian pharmaceutical sector has less than 10 percent of the market share in the US and approximately 2.5 percent in emerging-market countries. Companies set to show significant growth abroad are: Dr Reddy’s Laboratories, Torrent Pharmaceuticals, Sun Pharmaceutical, Ranbaxy as well as Lupin.
Indian healthcare-delivery industry (some leading companies):
|sl||Company||EPS (12 months trailing) and PE in brackets||Current market price in rupees (as on 07-04-2015) and face value|
|01||Kovai Medical Center and Hospital||33.27 ( 19.9)||665 (FV 10)|
|02||Apollo Hospitals Enterprises||25.2 (55.27)||1,393 (FV 5)|
|03||Poly Medicure||13.67 (37.6)||514 (FV 10)|
|04||Dr Agarwal’s Eye Hospital||8.17 (18.24)||149 (FV 10)|
|05||Regency Hospital||3.89 (15.42)||60 (FV 10)|
While Apollo Hospitals Enterprises and Kovai Medical Center and Hospital are considered good long-term buys, there is buying interest in Regency Hospital, too, as it is rumoured to be a turnaround candidate. While the industry PE (price-earnings) ratio is around 70, some stocks are available in PE ratios of 15–20, which could be watched by investors with some risk appetite, noting any marked improvements in profit margins.
Many private investors have made substantial investments in the newly set-up private hospitals in Tier 1 and 2 cities and metropolitan cities such as Delhi, Pune, Mumbai, Hyderabad, Bangalore and Chennai. Funds have been generated through IPOs (initial public offerings) as well. Corporate hospitals have also invested in IT in order to optimize the use of interconnected, latest real-time information in healthcare. The private sector is now meeting almost 80 percent of the healthcare-delivery needs of the country. The emergence of corporate hospitals has led to increased professionalism in medical practices and use of hospital-management tools.
The healthcare market may be worth around 200 billion by 2021-22. Hospitals and diagnostic centres continue to attract sizeable FDI (foreign direct investment) year after year. Funding of this sector includes sizeable venture capital as well as private-equity deals. India is the first emerging-market country to have attracted multinationals in the pharmaceutical- and healthcare-delivery fields. There are more than 75 multinational entities in these two sectors, with this number growing every year.
Major players in the pharma-healthcare sectors are briefly explained below:
Apollo Hospitals Enterprises is the private healthcare-delivery pioneer and one of the largest healthcare conglomerates in the country. It offers: hospital chains in the super-specialty hospital category, a large pharmaceutical chain with huge coverage, family clinics, health insurance, telemedicine as well as nursing and medical education promoted through a separate foundation.
Max India Group is one of the largest healthcare companies with major hospitals in Uttarakhand, Delhi and Punjab. It operates in insurance, pharmaceutical packaging and contract clinical research.
Fortis Healthcare is a reputed, modern super-speciality hospital chain in many countries in the Asia-Pacific region. It is well known for: medical tourism, super-specialty diabetes and maternal clinics and speciality hospital chains, telemedicine and clinical-research labs.
Wockhardt Group specializes in healthcare delivery (hospitals) as well as the manufacture of pharmaceutical products such as formulations, nutritional supplements and vaccines. It is known for R&D labs in biotechnology as well as in drugs.
Sun Pharmaceutical is one of the top pharmaceutical producers. Its diversified product portfolio includes medicines in areas of chronic diseases such as diabetology, cardio-vascular, neurology and psychosomatic illnesses. It exports its products to different world markets.
Cipla is well known as the largest manufacturer of low-cost anti-AIDS drugs. It also produces anti-flu and anti-cancer drugs as well as nutritional supplements.
Opto Circuits India is a reputed health company in the business of specialized medical technology. It conducts research, develops technology, equipment and solutions such as vital cardiac monitors, cath labs, special ambulances, operation theatres.
Cadila Healthcare conducts research and produces a vast range of products, such as generic category drugs, natural herbals, diagnostic products as well as OTC (over the counter) remedies. It also makes cholesterol-free margarine and sugar-free artificial sweeteners for diabetic patients.
Multinational interest in Indian pharmaceuticals
The Indian pharmaceutical sector is keenly watched by multinational corporations (MNCs) because of the cost advantage India enjoys and the competence it has developed in producing generic drugs. The luxury of a large, growing consumer population is also in the minds of the multinational pharmaceutical majors.
As the pharmaceutical growth expectations dwindle in the US and other developed economies, India’s expectations of more than 12 percent growth on a sustainable basis appear to be too tempting from a multinational marketer’s point of view. The shifting disease profile in India, growing governmental healthcare budgets, improving health consciousness coupled with affordability and expanding health-insurance coverage are some of the factors driving the optimism of multinational pharmaceutical companies. On the contrary, the governments in the developed world are constrained to keeping healthcare benefits under tight control. India’s reputation in contract research, clinical trials and contract manufacturing also make the sector attractive for multinationals to participate and collaborate in. As GDP grows at 7 to 8.5 percent annually, consumer spending on healthcare, too, could more than double from the current level of around 5.5 percent of GDP to around 10-11 percent of GDP within five to seven years.
Global pharmaceutical majors are keenly looking for a greater stake in the generic business. If you have generics in your portfolio, you are better positioned to deal with policymakers in every country. Acquiring a stake in an Indian pharmaceutical company has advantages. Generic producers in India have developed proven competence in cost-efficient research and development methods and lean operational systems. As billions of dollars’ worth of patented medicines go off-patent every year, acquiring controlling stakes in a generic producer of India is now a well-known strategy for some MNCs. This has kept valuations high for the Indian pharmaceutical sector, with the NSE (National Stock Exchange of India) pharma-sector price-earnings (PE) ratio hovering in the 55-75 region, in spite of continued volatility in the Indian bourses.