The Indian healthcare sector is expected to expand at an exponential pace and is widely anticipated to clock revenues of around US$ 280 billion by 2020. Pro-industry government policies, robust market fundamentals, boost to healthcare R&D initiatives and rising awareness for new-age healthcare products and services have emerged as key triggers anticipated to drive the growth contours of the Indian healthcare sector on a higher level. It has been observed that while on one hand, global and domestic investors are likely to eye mid-sized Indian companies as favourable acquisition assets, companies in the regulated domain are anticipated to be acquired by large pharmaceutical companies. Key companies in the sector, which are traversing a higher growth curve, still need to build their pipelines and develop competencies to deliver topline growth. Continuing expansion initiatives by the companies will remain the chief driver for merger and acquisition (M&A) activities for pipelines and marketed products in 2018. Apart from drug makers, augmented activity has also been witnessed from health insurance players and healthcare service providers. In a strategic move indicating broader consolidation between health insurers and companies overseeing drug benefits of patients, global health insurance service company Cigna Corporation (Cigna) has agreed to buy pharmacy benefit management organization Express Scripts Holding Co in a cash and stock transaction valued at US$ 54 billion.

Over a period of time, Indian healthcare has braved its fair share of policy and market challenges which have exerted a significant impact on its capabilities to leverage the benefits of M&A activities. Large-scale growth remained comparatively muted for the Indian healthcare sector over the last two years. The expansion activities of the domestic players were largely impeded on account of stringent government price controls and policy initiatives such as ban on fixed-dose combination (FDC) drugs. The Indian industry was also impacted by government policy measures such as  the implementation of the Goods and Services Tax (GST) and the demonetization of high-value currency notes. Margins of generic drug manufacturers in India have been largely affected on account of continuing headwinds in the US, the largest pharma market in the world. Key issues like downward revision of prices and policy initiatives regarding quality compliance are proving to be hindrances in accessing the market proficiencies of the US pharma sector.

The fundamentals are in place to steer merger and acquisition activities on an elevated growth pathway. The sector is currently riding a wave of confidence, debt is freely available for large-scale funding of ambitious merger and acquisition programmes and sector players are overwhelmingly conducive to leveraging a positive market sentiment. Regulatory pressure is largely building in terms of development and approval as well as on the pricing and cost containment fronts. While big pharmaceutical companies have the capabilities to access large funds for combating these forces, smaller firms and the biotechnology sector remain largely restrained in their abilities to arrange funds with the situation highly exacerbated by significantly constricted credit lines. In this backdrop, pharmaceutical and biotechnology companies are treading the mergers and acquisitions route as an effective alternative to bolster their pipelines and improve efficiencies.

Global healthcare markets were roiled in January 2018 when Amazon announced a partnership with J P Morgan Chase and Berkshire Hathaway to form a company for the delivery of advanced healthcare facilities to their employees. Amazon has also reportedly announced plans to widely expand its medical supplies business and consolidate a dominant market position as a major vendor for healthcare service providers. While the recent developments have largely been indicative of Amazon’s intentions to disrupt conventional healthcare paradigms, the company remains far from displaying a proven capability to transform its aims into reality.  Keen to capture a significant chunk of the global healthcare pie, technology companies the world over have started allocating significant budgets for market expansion and have already begun to establish their presence in the global healthcare space which is clocking impressive growth rates and promises attractive return on investment (RoI).

Alibaba and Tencent of China have invested in tools that make use of artificial intelligence (AI) to aid in diagnostics and augment its accuracies. In early 2018, Apple announced the integration of electronic health records (EHR) into its Health app and have launched a pilot involving medical institutions. Samsung BioLogics has developed pharmaceutical contract manufacturing facilities. Present sector trends allude to the fact that as compared to other industries, healthcare has been slow to embrace digitalization. However, conventional trends are fast changing as market participants have recognized the enormous potential of empowering techniques and tools such as advanced analytics, machine learning, smart devices and autonomous robotics.  

With increasing awareness of changes in the sector, the profile of the modern-day healthcare consumer has undergone a noticeable change over the years. Technological innovations and advanced clinical practices in the sector mean that the modern healthcare consumer has access to multifold choices. Following years of contending with restricted healthcare delivery mechanisms and the limitations associated with them, consumers today can pick among a variety of delivery models such as telemedicine, home-health, concierge care and online self-help.    

Companies and investors are also changing their asset evaluation methods when it comes to valuing healthcare-heavy assets like hospitals. There is a greater understanding and recognition among hospitals for the overwhelming need to revamp their delivery models to meet the evolving demand of the consumer. Healthcare players are also aware of the need to trim costs to sustain profitability in the face of new competition.

Healthcare investors are also undertaking a long-term analysis into the investment potential of biopharma and medical companies that are broadening their portfolio and are engaged in developing personalized treatments to face emerging market competition.

Given the inordinate length of the current global economic expansion, healthcare companies and investors will continue to recognize the healthcare industry as a counter cyclical and recession resistant sector. Investor focus is expected to be strongly concentrated on core areas including contract services and retail health that have historically generated strong returns. Valuations are likely to negotiate a higher curve to sustain competition from corporate acquirers given the ongoing demand for quality healthcare assets.