The healthcare market in India is large and growing rapidly, and it is one of the largest sectors in India (both in terms of revenue and employment) with an estimated size of US $ 90 billion in 2014. It is also among the fastest growing industries, expected to reach US $ 160 billion by 2017 growing at a CAGR of 15 per cent. Key growth drivers in the sector include changing lifestyles, increasing affordability, rising health insurance penetration, ageing population, medical tourism amongst others. The healthcare delivery segment is the largest and comprises 75 per cent of the overall sector while pharmaceuticals, medical devices and diagnostics account for 14 per cent, 8 per cent and 3 per cent of the market respectively.

However, healthcare infrastructure is under penetrated and lagging behind peers, and the infrastructure of healthcare is inadequate on all fronts, when compared to developed nations, or even developing peers. In spite of the significant investments in the sector, there are serious deficiencies in the Indian healthcare system.

• Leading healthcare indicators continue to lag (outcome indicators such as IMR and life expectancy fall behind LMIC average and will fall short of the 2015 targets set in the millennium development goals. Additionally the non-communicable disease burden has grown substantially)  
• Healthcare spend is one of the lowest  (India’s healthcare spending as per cent of GDP is one of the lowest amongst peers)
• Out of pocket spending continues to be high (health insurance penetration has been low)   
• Infrastructure gaps remain substantial (total bed density remains significantly lower than the WHO guidelines)  
• Health workforce remains inadequate and underutilized (total number of doctors and nurses in the country lags the WHO benchmark)
• Public-Private collaborations has not yet achieved scale (several partnerships have been initiated but very few have been able to scale up successfully)

The situation is further complicated by inequity in healthcare access across states and demographic segments within the population. There is no doubt that government spending on healthcare has to increase as also the bottlenecks have to be addressed to ensure accessibility and affordability for all. The government has introduced many landmark measures (like NRHM, RSBY, universal health coverage, foreign direct investment in medical devices under automatic route) and needs to continuously provide greater thrust and lead this journey over the next many years to transform India’s healthcare scenario.

Immense opportunity
The healthcare market offers significant opportunity for private sector players. The huge demand and current inadequate infrastructure presents private sector companies with immense opportunities. To capture these opportunities, private sector players are building specific capabilities, developing new business models and actively collaborating with the government.
Over the past decade the private sector has grown across the value chain:  

• Pharmaceutical companies continue to expand operations globally (through a combination of M&A, alliances etc). Currently many Indian pharmaceutical companies like Sun Pharma, Lupin, Dr. Reddy's and Cipla would feature amongst leading generic companies worldwide.
• Healthcare delivery has seen the emergence of corporate chains. (Historically, Apollo and Fortis were the leading chains. Currently, many more corporate chains have been established like Manipal, CARE, Global Hospital, Narayana Hrudayalaya, Global Hospital etc).
• Innovative business models are being rolled out - single specialty chains, low cost hospitals, home health companies (emergence of asset light innovative models has been a recent phenomenon in the Indian healthcare which are building scale -  Vasan, HCG, Axiss Dental etc)    
• Diagnostic companies are expanding operations pan India (Dr. Lal Path Labs, Metropolis, SRL have been the bigger players)  
• Medical devices are seeing the introduction of innovative products (Perfint Healthcare & Forus Health  - both have introduced innovative products in the market)

The industry has witnessed significant entrepreneurial activity and the healthcare ecosystem has been expanding over the past decade. The expansions have been backed by significant investor interest:
a) Attractive macro-outlook for the Indian healthcare landscape
b) Companies are addressing typical challenges in an innovative manner and
c) Ability to build a large and profitable business model
Despite the rapid growth prospects of a consolidation appear bright. Currently, the healthcare industry continues to be highly fragmented across the value chain:
The top 5 pharmaceutical companies have a combined domestic market share of ~ 10 per cent  

• Hospitals, with facilities of fewer than 30 beds, are estimated to account for more than 70% of private sector beds  
• Top 5 hospitals aggregate  less than US $ 2 billion in revenues
• Only a handful of companies in the hospital and medical device companies are listed on the stock exchanges
• Only a handful of companies in the diagnostic side have pan India presence
• Large chunk of medical devices are still imported in India
• In addition, the following factors could also trigger a wave of consolidation:
• Regulatory intervention (new product introductions, pricing, US FDA implications etc) in the pharmaceutical industry could impact profitability of companies. Companies with largely domestic operations and not-so-deep pockets could be targets for consolidation.  
• Many companies in pursuit of growth have not been able to effectively scale up their operations and could be target candidates
• A number of assets today, are being majority-controlled by financial investors
• Given the attractive growth scenario, many global companies are not evaluating further M&A options
• The healthcare sector is already witnessing M&A transactions - most prominent in the pharmaceutical sector.
• The pharmaceutical sector has recently witnessed two landmark transactions - such as acquisition of Ranbaxy by Sun Pharmaceutical and the merger of Shasun Pharmaceuticals and Strides Arcolab. Sun Pharmaceutical has emerged as the 5th largest player in global generic drugs and Strides is now positioned as an integrated generic drugs player.     
• In the healthcare delivery segment, Manipal Hospitals marked their entry into North India with acquisition of Jaipur’s 280-bed SK Soni Hospital, Apollo Hospitals announced acquisition of Nova Specialty Hospitals, a chain of Short Stay Surgery Centers, Davita acquired Express clinics and Narayana Hrudayalaya acquired West Bank Hospital in Kolkatta. Healthcare delivery is witnessing increased M&A momentum.   
• On the medical devices side, we have seen global companies acquiring Indian entities. Arkray Inc. of Japan acquired IVD business of Span Diagnostics, Smith & Nephew acquired Sushrut Surgicals.

The healthcare market in India offers attractive opportunities for private sector companies to build profitable and scalable businesses across the value chain. Over the past few years, the healthcare delivery and medical devices segment has witnessed significant entrepreneurial activity, which has led to the introduction of many innovative healthcare models. Despite this, because of the huge demand and current infrastructure gaps, we believe that consolidation (especially in the healthcare delivery segment) is imminent, and would lead to the emergence of many large healthcare players. The signs of consolidation are already apparent and going forward, transaction activity is expected to get accentuated. Global healthcare players are also closely evaluating strategic options to build their businesses in India.

(Author is partner of Aurum Equity Partners)