BackPrivate healthcare: the road ahead
A few themes that are likely to play out in the private healthcare sector over the next few years
Premium(A file photo of a laboratory at Moolchand Healthcare. Leading hospitals are forming alliances with single speciality chains such as pathology and radiology chains, IVF centres, eye clinics, physiotherapy centres, cancer chains, etc., to effectively deliver services and jointly unlock more value. )
The $65 billion Indian healthcare market is growing 15-20% per year and is expected to reach $100 billion by 2015. The market is significantly under-penetrated as India has only 0.9 bed per thousand people versus a global average of 3 beds per thousand.
Wide disparities exist in the quality and availability of healthcare between the major metros versus smaller cities, semi-urban and rural areas. While the quality of and access to healthcare services requires improvement nationwide, semi-urban and rural areas are often ill-equipped to provide even the most basic healthcare services. The service delivery challenge is further compounded by the high price sensitivity of these markets. In addition, given extremely low price points, disproportionately high real estate costs, limited regulation and some systemic inefficiency, there is a preponderance of nursing homes and stand-alone clinics.
In India, public healthcare spend is disproportionately small at 25% of total healthcare spend, in contrast to the global norm of 60%. Recent efforts of the government to drive quality through accreditations (national accreditation board for hospitals and healthcare providers, national accreditation board for testing and calibration laboratories) and delivery standards are likely to create further impetus for improved quality and enhanced consumer trust in the medium term.
Given this background, the private healthcare sector faces interesting and exciting times ahead. We believe a few themes are likely to play out over the next few years.
Private equity will further reshape industry
Private equity firms have played an important role over the past 5-6 years in scaling up companies in established segments such as hospitals, and diagnostics chains. As a result, we have seen the emergence of national and regional chains. In addition, venture capitalists have incubated new models and have helped establish successful and profitable new healthcare businesses in cancer care and eye care.
On the whole, private equity investors have made good to excellent returns in this sector. As a result, increasingly larger amounts of capital will continue to be deployed behind established ideas like national and regional hospital chains, pathology chains and eye care chains. This funding will be towards new firms as well as further funding of market leaders. In addition, there will be continued focus on funding potential new businesses of tomorrow like daycare, dental, dialysis, and in-vitro fertilization.
The support of private equity and entry of global companies have brought in exceptional changes in the form of new and revolutionary ideas as well as global standards and best practices. These will continue to reshape the sector but these global analogies need to be adapted to India as demonstrated in the packaged consumer goods and food and beverages industries.
Acceleration in consolidation and M&A
The Indian healthcare services space continues to be enormously fragmented across all key segments including hospitals and diagnostics. Scale is increasingly critical across the network to capture procurement efficiencies, drive operating efficiencies through proprietary operating systems, attract and retain talented professionals. In addition, large networks are able to invest behind their brands and also attract scarce high quality clinical talent.
Smaller stand-alone companies are facing significant challenges as access to growth capital and talent is limited while competitive intensity is increasing and operating margins are being compressed due to increasing costs, which they are not able to offset through scale or brand. Smaller firms are likely to be increasingly disadvantaged over time.
On the other hand, market leaders are disproportionately investing in organic growth to capture the demand-supply gap and also increasingly focusing on mergers and acquisitions.
This story is playing out in some variant across all healthcare service segments. The key ingredients seem to be in place for roll-ups across different segments and it is likely that in the next five years we will see a clear set of consolidators and potential sub-scale targets.
Emergence of new single-specialty businesses
In the past few years, there have been success stories of single-specialty chains in diagnostics and eyecare, which have demonstrated the attractiveness of these spaces versus the hospital provider space in terms of simplicity of business model, rapid scalability, relatively low-capital intensity, shorter breakevens and extremely attractive operating economics.
A number of new formats have been funded and business models are being validated in multiple areas including birthing centres, dialysis centres, daycare centres, dental centres, aesthetic centres, and in-vitro fertilization centres.
Critical to success in the new models will be to have the appropriate business model. For example, IVF firms are developing different models ranging from 2,000 sq. ft to 20,000 sq. ft units and are also engaging with IVF specialists in different ways (ranging from using good clinicians who are relatively unknown). It is unclear at this point, which model will ultimately prevail. Similar issues are being faced across most of these specialty businesses of tomorrow.
Some of the other challenges these models will need to work through will be customization of global models to India, value proposition to customers, value proposition to clinicians (addressing trade-offs relating to practice at hospitals versus specialty centres), availability of clinicians (a real challenge for outpatient dialysis centres), and real estate issues (challenge for birthing centres in metros given real estate costs).
However, we can safely bet that five years from now there will be at least 2-3 new healthcare businesses with established market leading companies.
Smaller cities are an emerging opportunity
In the early 2000s, low spending power in small cities limited entry of corporate healthcare firms into these markets. However, given India’s growth over the past decade, the disposable income in these cities have increased manifold and people have a propensity to spend on quality healthcare services.
Significant land price escalation in key metros has increasingly made new projects in these cities less viable. In addition, the entry of many corporate players in these markets has led to the increased competitive intensity and longer gestation periods.
Hence, large healthcare chains find these markets attractive given the latent demand-supply gap, the relatively low cost of land, and lower competitive intensity for quality and higher end services. In addition, larger players are aggressively scaling their networks by venturing into multiple untapped markets simultaneously.
As a result, small cities are likely to see exponential growth over the next five years.
Increasing collaboration across companies
Increasingly, key firms in the sector will collaborate at various levels to compete effectively. A bias to do everything will increasingly shift towards companies focusing on areas of their core competency and relative advantage. In addition, they will increasingly try to maximize returns on their existing assets by partnering to deliver existing services more effectively or to introduce new services.
We are already witnessing this change. Leading hospitals are forming alliances with single speciality chains such as pathology and radiology chains, IVF centres, eye clinics, physiotherapy centres, cancer chains, etc., to effectively deliver services and jointly unlock more value. In addition, daycare firms have partnered with hospital groups for select markets as equity partners.
It is likely that over time we will see companies within and across segments collaborate to reduce shared services or jointly co-invest in service delivery or high capex service offerings, as is common in more evolved global markets.
Vibhu Talwar, managing director and promotor of Moolchand Healthcare, which runs a chain of hospitals and clinics.
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