f o r    m a n a g i n g    t o m o r r o w
MARCH 11, 2007
 Cover Story
 BT Special
 Back of the Book

The centre is looking at removing the distinction between FDI and FII investments. This will impact sectors like asset reconstruction, real estate and aviation, where separate ceilings apply to FDI and FII investment. However, allowing FDI through the FII route in the realty sector could result in prices shooting through the roof. The Asian financial crisis of the '90s is still fresh in mind, and a method should be devised to moderate possible volatility in key sectors.

S&P And After
For the first time in 14 years, international credit rating agency, Standard and Poor's (S&P), has raised India's credit rating to investment grade. S&P is the last of the three major international rating agencies to do so. Moody's Investors Service did it in January 2004 and Fitch Ratings in August 2006. The upgrade is likely to spur the flow of foreign investment into power, steel and other industries, which receive less than a tenth of the funds going China's way.
More Net Specials

Business Today,  February 25, 2007

In Need of Care
With just 1.1 beds for every thousand people, India has one of the most underserved healthcare markets in the world. Raising the ratio even modestly to 1.85 by 2012 will
need an estimated $70 billion investment from the private sector. A Special report on the healthcare industry.
State of the art: Care Hospital's Dr Ramaswamy Ravikumar (seated) and his team, with Da Vinci robot
Public Health, Private Opportunity

With the government expenditure on healthcare declining, it is private sector investment that will drive the sector's transformation.

When Hidayatullah, a 23-year-old shopkeeper from Karimnagar in Andhra Pradesh, visited a doctor following shortness of breath and palpitations, creating medical history possibly wasn't on his mind. Yet, that's exactly what he ended up doing, when doctors at Hyderabad-based Care Hospital decided to perform India's first robotic surgery for mitral valve replacement on him. With just a five centimetre-long incision on his chest and eight days of recuperation, Hidayatullah was back at work.

Bleeding-edge technology is just one sign of the transformation underway in the Indian healthcare industry. With the economy growing and Indians becoming more affluent, healthcare providers are beginning to step up their own investments. The market potential, to put it mildly, is mind-boggling. There are just 1.1 beds for every 1,000 Indians, compared to 4.3 in other Asian countries such as China, Korea and Thailand. As India's population ages and more people get afflicted with lifestyle-related diseases (such as heart and nervous problems, and diabetes), the demand for quality healthcare will explode.

The government alone won't be able to cope with the demand; private sector investment will be needed. In fact, it will be needed more than ever. For two reasons: One, the government's investment in the sector is declining relative to the growth in GDP. Currently, it stands at 0.9 per cent of the GDP. Two, the quality of public healthcare is abysmal, which drives the rich and the poor alike to private care. According to a World Bank study, nearly 8 out of every 10 poor patients prefer private clinics, although the average cost of private treatment is higher at Rs 193.50 compared to Rs 121.50 of the public system.

The major healthcare chains are on an expansion spree.
APOLLO HOSPITALS: Has 41 hospitals offering 7,228 beds. By 2010, it expects to have 12,000 beds

FORTIS HEALTHCARE: Has 12 hospitals with 1,900 beds and has plans of going up to 40 hospitals and 8,000 beds by 2010

WOCKHARDT HOSPITALS: It plans to double the number of hospitals to 14 by 2008 and take the cumulative bed capacity to 3,000 from 1,500 at the moment

CARE HOSPITAL: Has eight hospitals with 1,000 beds and plans to add 5,000 beds in the next five years (1,000 each year or six to seven hospitals each year), taking the total number of hospitals to close to 40 in five years

MAX HEALTHCARE: Has seven hospitals with 800 beds and by 2010, will have 11 hospitals and 1,500 beds

Not surprisingly, then, the private sector is expected to drive the healthcare revolution in the country. A recent FICCI-Ernst & Young report on the sector projects that of the 1 million hospital beds expected to be added by 2012 (under a best-case scenario), 896,000 will come from the private sector. The investment required: $69.7 billion, or Rs 3,06,680 crore. By that time, private sector healthcare revenues are expected to touch $35.9 billion (Rs 1,57,960 crore) from $15.51 billion (Rs 68,244 crore) at present. Says Prathap C. Reddy, Chairman of Chennai-headquartered Apollo Hospitals, which was the first to set up a corporate hospital in the country back in 1983: "Earlier, we were centralised in Chennai. Now, we are going to places where people need us. We have only nine hospitals in super metros, and the rest are in smaller cities and towns."

Apollo Hospital's Dr Reddy is looking to tie up with VCs to operate and manage a major hospital chain in the UK Fortis Healthcare, where Shivinder Mohan Singh is the CEO, plans to increase its number of hospitals from 12 to 40 by 2010

The Pieces Come Together

It has been almost a quarter century since corporate hospital chains first appeared in India, but their growth had been limited, simply because the boom in the domestic economy and the global investor's interest in India are recent. Now, however, all the pieces needed to create a robust healthcare industry seem to be coming together. Start with consumers. According to the FICCI-E&Y study, a middle-level manager with a family of four spent an average of Rs 1,935 on healthcare in the late 80s. At last count (2001-02), such a family spent between Rs 7,650 and Rs 11,475 on medical care.

Medical outsourcing is an emerging market.
It's not just medical tourists who are coming India's way, but tests and consulting work too. A thyroid profile in the US costs $50 (Rs 2,200), but could be analysed by Indian companies for as little as $6 (Rs 264). Outsourced pathology, under which this and other hormonal tests come, promises to be another area of opportunity for the knowledge process outsourcing (KPO) services provider in healthcare. Teleradiology, which involves reading CT scans and MRIs of patients, is another emerging opportunity. "There's a critical shortage of trained radiologists during the graveyard shift (in the US) and it is estimated that around 20 per cent of vacancies remain unfilled," says Dr Arjun Kalyanpur, a Yale-trained doctor, who started Teleradiology Solutions with his doctor wife Sunita Maheshwari in 2002 and now has a dozen radiologists working with him in Bangalore. Adds Sangita Reddy, Executive Director (Operations), Apollo Hospitals Group: "Medical outsourcing occupies a high priority at Apollo." The group already has Apollo Health Street, a healthcare KPO, that offers services, including medical coding, billing, claims creation, payment posting and account receivables follow up. "We manage high domain and complex processes like medical coding, which are clearly KPO in nature," says Reddy, who's the Managing Director of Apollo Health Street. Certification is an issue in areas like pathology and radiology, since US regulations do not allow non-US certified agencies to read reports of American patients. Just the same, medical outsourcing opportunity for India is expected to double to Rs 33,000 crore by 2012. At least, that's the hope.
Global investors are betting on the Indian healthcare market.
George Soros' Quantum and Blue Ridge funds bought around 7 per cent stake in Fortis Healthcare for $33 million (Rs 145.2 crore) in 2006

IDFC Private Equity put in $20 million into Manipal Health Systems in 2006

IDFC Private Equity also invested $10 million in Bangalore-based HealthCare Global Enterprises in 2006

ICICI Venture's India Advantage Fund-I paid $8 million to acquire around 18 per cent stake in Metropolis Health Services, India's leading corporate diagnostics chain, in 2006

Until recently, corporate hospitals were also hamstrung by a lack of finance. But now global investors, in the form of private equity investors, are willing to put money behind them. George Soros' Quantum and Blue Ridge funds, for example, have invested in Fortis Healthcare, a chain set up by the promoters of Ranbaxy. Manipal Health Systems received $20 million (Rs 88 crore) from IDFC Private Equity Fund (see Private Equity and Healthcare), and Warburg Pincus picked up 23 per cent stake in Max Healthcare. "The entry of Warburg two years ago was a sign of confidence in the Max Healthcare model," says Mukesh Shivdasani, Max's Executive Director (Operations). The growth apart, what interests PE investors in healthcare is the fact that it is an industry with no down cycle-there are no years when people don't fall sick. "Hospitals will grow as long as they earn the trust of their patients," says Shivdasani.

Wockhardt Hospitals, where Vishal Bali is CEO, plans to expand at a cost of Rs 400-500 crore over next four years
Medical equipment suppliers, too, are willing to offer sweeter deals to lock in with the big players. According to an Ernst & Young estimate, the medical equipment industry is worth Rs 9,790 crore in revenues and is growing at 15 per cent a year. By 2012, it could touch Rs 22,000 crore in revenues. Most of the medical devices (65 per cent) are still imported, but local manufacturing could take off when the market expands. GE Medical Systems already manufactures in India in partnership with Wipro and there is Siemens that is currently celebrating its 50 years of presence in the country. Siemens has an x-ray manufacturing facility in Goa, where it may soon make ultrasound equipment as well. Says D. Ragavan, Executive Vice President (Medical Solutions division), Siemens: "Like in the electronics industry, there will be a trend towards price erosion. What will also happen is that for a similar price band, there will be equipment with more functions available. In other words, one can only expect to see more value for money."

Not all of the expansion will happen within the big hospitals or cities. In fact, Delhi-based consultancy Technopak says that most of the new facilities will come up in Tier-II cities and will be secondary care. (In healthcare, the big, super- and multi-speciality hospitals are considered tertiary facilities, clinics as primary and mid-way nursing homes/small 100-bed hospitals as secondary.) The reason for that is, says Technopak, the abysmal population-to-hospital bed ratio in such cities. Only critical surgeries or treatments will be referred to the tertiary hospitals. It is also likely that the secondary facilities will be hooked to the bigger hospitals electronically (think telemedicine), thereby minimising the cost of travel and waiting time for patients.

As the big players get bigger, the industry will want to consolidate. The smaller, stand-alone hospitals may not be able to compete with the larger players, who will not just have better negotiating powers with equipment suppliers, but also greater brand equity with the healthcare professionals and consumers. Says Habil Khorakiwala, Chairman, Wockhardt Hospitals: "Wockhardt has already announced that it will invest Rs 400-500 crore for its expansion plans in the next three-four years, both through organic and inorganic routes." Rather than buy, Apollo's Reddy plans to tie up with venture capitalists and, on his part, provide manpower support to operate and manage a major hospital chain in the UK.

Big corporates are getting into pharmacy retail.
Modern retail: Neighbourhood chemists, beware

The domestic drug retail industry is highly complex and fragmented. There are an estimated over 5 lakh retailers and about 1 lakh stockists/sub-stockists and distributors. The domestic pharma retail market is today valued at close to Rs 50,000 crore and could well double in the next five years. Modern retail formats, however, comprise a small part of this overall market. But that's about to change. A variety of big corporations have plans of setting up pharmacy chains. Fortis Healthworld, set up by promoters of India's biggest pharmaceutical company Ranbaxy, is talking of opening 1,000 drug stores at a cost of Rs 800 crore, and 200 of these are to be launched by 2008. "The idea is to gauge the response to our new-age drug retail outlets and then expand it to other cities," says Shivinder Mohan Singh, CEO & MD, Fortis Healthcare.

Fortis is not alone. Pharmacy retail is attracting some of the biggest names from corporate India. Reliance-Anil Dhirubhai Ambani Group and Kishore Biyani's Future Group, for instance. In early August last year, Pantaloon Retail, part of the Future Group, and Manipal Health Systems, signed a deal to jointly operate pharmacies (selling medical products) and provide medical services across the country under the 'Manipal Cure & Care' brand. The initial investment is pegged at Rs 10 crore. "Health, beauty and wellness capture close to 7 per cent of the consumer's total wallet spend, and that's huge," says Kishore Biyani, Future's Chairman. It's an assessment that will bring in more players.

Tip of the Iceberg

At present, less than 10 per cent of Indians have any sort of health insurance. Result: quality healthcare is out of reach of the vast majority. Insurers, understandably, are licking their chops. According to Technopak, healthcare insurance premium collected in 2005-06 jumped 35 per cent over the previous year. In addition, the firm finds community health insurance schemes slowly penetrating rural markets. There are more than 25 such schemes covering 8 million people all over India, and with the insurance regulator, IRDA, stipulating that 5 per cent of business of an insurance company must come from rural India, a slew of innovative schemes is likely to hit the markets.

There are some in the industry who believe that India is headed for the 'managed care model' of the US, wherein the care provider (the hospital) also provides medical insurance. Not everyone agrees, though. Executives at Apollo feel that it is not an appropriate model for India because it is very restrictive and does not provide a choice to the patient to get treated anywhere else. Instead, Apollo has chosen to partner with Germany's DKV Health Insurance Company to offer medical insurance to people at large.

As can be expected, different players will experiment with different models as they seek to grow and cater to a larger universe of consumers. That shouldn't matter-as long as healthcare gets better and more universal.