The global healthcare industry was valued at US $ 8.5 trillion in 2010 and is projected to grow to US $ 13.7 trillion by 2020. As per a report published by the Federation of Indian Chambers of Commerce and Industry (FICCI) and KPMG, the Indian healthcare domain, which was pegged at US$ 73.92 billion in 2011, is expanding at a compounded annual growth rate (CAGR) of 16 per cent and is likely to be valued at US $ 280 billion by 2020. In terms of revenue contribution and employment generation capacity, the domestic healthcare segment is one of the largest contributors to the Indian economy and accounts for around 4 per cent of its Gross Domestic Product (GDP). Hospitals continue to dominate the domestic healthcare sector with revenue contribution of 34 per cent and diagnostic facilities and pharmacy contributing around 20 per cent to the government coffers. Medical Insurance, Pharmacy, Diagnostics and Healthcare IT are growing at a compounded annual growth rate of 25-35 per cent with the fastest growth clocked by Healthcare IT. The present cumulative healthcare spend of India calculated as part of GDP is 4.2 per cent, with the public sector contributing 1 per cent, one of the lowest globally.
Given the potential and expected growth, all segments of healthcare - pharmaceuticals, hospitals, pharmacy, diagnostics, healthcare IT and insurance - are abuzz with deal activities in the recent past and the pro-investment policies by the Government have given a fillip to the momentum.
With the government giving the go-ahead to increase foreign direct investment (FDI) by 74 per cent in existing pharmaceutical companies, merger and acquisition (M&A) and private equity (PE) investments in the sector are set to receive a huge boost. The stage has been set for large-scale merger and acquisition activity in the pharmaceutical sector with Fosun Pharmaceuticals, China gaining a majority share in domestic firm Gland Pharma for US $ 1.3 billion in July, making it the largest inbound deal since mid-2014. There is also an emerging trend among large cash-rich pharma manufacturers to acquire niche product portfolios for exposure to regulated markets such as the US and Germany. A prime example of this is Dr Reddy’s Labs signing a deal with Israeli drug maker Teva for the acquisition of a portfolio of eight abbreviated new drug applications (ANDAs) in the US for an all-cash deal of US $ 350 million, giving the domestic pharmaceutical firm an inorganic expansion opportunity to tap a highly structured and regulated market. One of the world’s largest generic drug companies, Sun Pharmaceutical Industries has entered into a deal with Novartis AG to purchase 14 prescription brand products in a cash deal of US $ 293 million, through a subsidiary. With this deal, Sun Pharmaceutical hopes to expand its operational base in Japan, having a pharmaceutical market worth US $ 73 billion and accounting for more than 7 per cent of the overall global US $ 1 trillion pharmaceuticals market.
Merger and acquisition deals are also redefining the manner in which pharmaceutical companies are seeking acquisitions of local brands for strengthening their presence in therapeutic segments and plugging the gaps in their extant product portfolios. Zydus Healthcare Limited, a wholly owned subsidiary of Ahmedabad-based Cadila Healthcare has acquired gastroenterology brand Actibile from Albert David, a Kothari Group Company. In a similar instance, Strides Arcolab entered into an agreement with Johnson & Johnson to acquire seven of its dermatology, antiemetic, and pain management brands. In a different transaction, the company also stated that it will be buying a majority stake in the domestic brands of Shriram Group subsidiary Medispan, with a portfolio comprising probiotic, anti-infective, gastrointestinal and probiotic drugs.
Pharmaceutical companies are also largely entering into big ticket merger and acquisition deals to strengthen their product portfolios through advanced manufacturing facilities and improving operational efficiencies through vertical integration. With a view towards strengthening their backward integration process and catering to a niche global customer market, Ahmedabad-based Torrent Pharmaceuticals Ltd, a flagship company of Torrent Group, has acquired the active pharmaceutical ingredients (API) manufacturing unit of Glochem Industries Ltd, having the necessary approvals from the US Food and Drug Administration (FDA) and European regulatory authorities. This acquisition has added 3 API facilities into Torrent’s product line for the regulated markets along with five formulation manufacturing units already operational. With this addition, the vertical integration of its Abbreviated New Drug Application (ANDA) filings will be easily facilitated in days to come. Companies are also taking the merger and acquisition route to divest non-core businesses and focus on core business activities to enhance customer value and strengthen their bottom lines. Intas Pharmaceuticals Ltd has acquired the biotech unit of RPG Life Sciences Ltd, a subsidiary of Harsh Goenka-led RPG Group, for Rs.25 crore. With this divestment, RPG Group has exited the biotech business and will use the funds raised from the unit sale to expand its formulations business which comprises a sizeable chunk of its revenue stream.
Technological advancements in patient care standards and the need for expanding operations on a national and global scale have prompted healthcare players, especially in the mother and child segment, to seek fresh liquidity injection. A significant stake has been acquired by TPG Growth, the mid-market and growth-equity investment platform of leveraged-buyout group TPG, in Rhea Healthcare Pvt Ltd for Rs.220 crore. The healthcare player operates a chain of mother and child care hospitals under the brand Motherhood. In a somber investment climate when investors are turning off fund taps for companies, the domestic health sector, given its infinite growth potential, is emerging as the preferred investment favorite of funds. The investment of TPG in Motherhood is the fund’s one of several investment initiatives in India and the South Asian region. A majority stake has also been acquired by TPG in Cancer Treatment Services International (CTSI), an India and South Asia-centered cancer treatment provider.
Initial Public Offerings (IPOs) are fast emerging as the preferred mode of raising funds for healthcare players for expanding their operational footprints. With a shortage of specialized players in the sector, investor interest in the sector has been piqued with attractive returns on investments. Investors are flocking in huge numbers to invest in healthcare initial public offerings, and a prime example of this is the overwhelming response to the initial public offerings of HealthCare Global Enterprises Ltd (HCG), which operates a chain of cancer-care centers. The oversubscription of the initial public offerings of Thyrocare Technologies Ltd, a Pan-Indian healthcare and diagnostics chain, alludes to the fact that the diagnostics sector is fast emerging as the favourite investment pick for retail and institutional investors, looking for long-term investment potential. Data from stock exchanges stated that while retail and HNI investors bid 8.45 times and 225.3 times their earmarked quota of shares, institutional investors applied for 73 times their reserved shares, in the Rs.480 crore initial public offerings. The initial public share offering of private health care service provider Narayana Hrudayalaya was oversubscribed around eight times on the exchanges.
As part of its endeavour in garnering funds for expanding its footprint on a global basis, Chennai-based healthcare firm Dr Agarwals Healthcare Ltd (AHCL) has attracted an investment of around Rs 305.7 crore from Hong Kong-based private equity firm ADV Partners (ADV). With a major part of the funds planned to be utilized for expanding Dr Agarwal’s Eye Hospital Ltd, it is BSE-listed eye care hospital chain, this is touted to be one of the largest private equity investment in the eye care sector in the country. For establishing a core brand image in the domestic maternity and infant care healthcare domain in India and to become a dominant player in the sector, Bengaluru-based infant and mother care chain Cloudnine has raised Rs. 400 crore from India Value Fund Advisors (IVFA) for a minority stake to the fund house. Apart from investing in technology, the investment sum will be used for setting up hospitals across western parts of the country. In its second India deal in the health sector, healthcare-focused private equity firm Quadria Capital invested Rs.265 crore in Hyderabad-based Asian Institute of Gastroenterology.
Domestic hospital chains are in a consolidation mode with global private equity investors making a beeline for the sector. Dubai-based private equity firm Abraaj Group acquired over 76 per cent stake in Quality Care India, the parent of Care Hospitals. The majority stake acquisition in Care Hospitals, a major domestic healthcare network player, has been touted as the largest acquisition transaction in the healthcare delivery sectors in the country. Investor zeal in the healthcare domain remained in high pitch mode with IHH Healthcare, Asia’s largest hospital network taking a majority stake in Global Hospitals for Rs.1,284 crore and a 51 per cent stake in Continental Hospital, Hyderabad for Rs.300 crore. With acquisition of organizational assets and leveraging of competitive capacities setting the tone for consolidation activity, the trend is largely seen as situation specific with several healthcare chains and their promoters in a position to raise funds for expanding existing operations and sourcing funds for setting up greenfield ventures.
The domestic medical devices segment is witnessing heightened activity with local players adding scale to existing manufacturing capabilities through incorporation of new technical and operating skills, investment in new-age research and development (R&D) and emphasis on developing indigenous technologies and processes. There is an increasing need for cross border transactions for access to technological skills and elevate the operating standards of the segment to global levels. As part of augmenting its dental solutions business, Mysore-based Skanray Technologies, a global healthcare technology firm with specialization in high frequency X-ray imaging systems, surgery, critical and respiratory care systems acquired Mectron Dental India Pvt Ltd, the India arm of Italian company Mectron Dental SPA Italy. The newly acquired entity has been rechristened as Skanray Mectron Dental Technologies Pvt Ltd. With the aim of entering the highly unexplored health markets of Africa and the Middle East, Indian Trivitron Healthcare has acquired a 60 per cent stake in Turkey-based in vitro diagnostic drive (IVD) devices manufacturer Bome Sanayi Urunleri Dis. Tic. Ltd, in a deal valued at 5 million euros. Through this acquisition, Trivitron gains access to Bome’s expertise for operating low-cost new born screening programmes. With the Turkish acquisition, Trivitron hopes to gain the first-mover advantage for running new born screening initiatives in India, characterized by an unorganized format.
With the emergence of e-health or m-health platforms spanning the spectrum of healthcare services, digital access to information and advanced technological tools can play a huge role in plugging the gap between doctors and patients. Current start-up deal activity in the health start-up space is chiefly centered on providing services like primary care, genetic testing, drug supply chain and emergence of e-pharmacies.
Rational analysis of health players, sound business fundamentals rather than market rhetoric driving investment decisions and devising an effective exit strategy is the sine qua non for ensuring a well-helmed and sound business portfolio.
(Author is Associate Director at Equirus Capital)