Mumbai: OrbiMed Advisors Llc, a US-based private equity (PE) fund, is in advanced talks to buy a significant minority stake in diagnostic chain Suraksha Diagnostic Pvt. Ltd, according to two people aware of the plans.

The proposed round of funding—the company’s second—will see existing investor Lighthouse Advisors India Pvt. Ltd selling its minority stake and the fresh issue of equity of 50 crore, said one of the two people. The round will raise around 150 crore. Kolkata-based Suraksha’s enterprise value is around 600 crore, the second person added. Neither wanted to be identified.

Mumbai-based o3 Capital is advising the diagnostic chain on the latest round of funding.

“Discussions are on, but nothing has been decided yet," Somnath Chatterjee, director at Suraksha, said. Spokespersons for Lighthouse Advisors, OrbiMed and o3 Capital declined to comment.

Suraksha is the largest diagnostic chain in eastern India and owns about 25 centres across West Bengal, Bihar and Delhi and the National Capital Region.

It raised around 50 crore from Lighthouse Advisors in February 2013.

Suraksha started the fund-raising process around four to five months ago, the first person said, adding that “talks are expected to close in a month".

New York-based health care-focused fund OrbiMed has over $16 billion in assets under management. OrbiMed raised its latest venture capital fund worth $950 million in December. The company has investments in Indian firms such as Kerala Institute of Medical Sciences (KIMS), Bharat Serums and Vaccines Ltd, Surya Children’s Medicare Pvt. Ltd and Haryana-based Asian Institute of Medical Sciences.

OrbiMed has already started the process of exiting its investment in KIMS and has hired Rothschild to run the sell mandate. Another PE firm, Ascent Capital, and OrbiMed Advisors together hold about 40% stake in KIMS.

OrbiMed’s interest in Suraksha comes amidst a buzz of activity in the diagnostic centre and pathology lab space. PE investors in SRL Diagnostics, the country’s largest diagnostic chain owned by brothers Malvinder and Shivinder Singh, have been in discussions to sell their 34% stake. These investors include International Finance Corporation, NYLIM Jacob Ballas and Avigo Capital Partners.

“Pure play path(ology) lab businesses have a very attractive unit economics and returns profile and that has attracted financial investors to the segment. The highly successful IPOs (initial public offerings) of Dr Lal PathLabs and Thyrocare have increased investor interest in the sector," said Mayank Rastogi, partner, PE and transaction advisory services, at EY.

The fact that both Dr Lal PathLabs and Thyrocare provided profitable exits to their investors hasn’t gone unnoticed.

PE funds WestBridge Capital and TA Associates sold part of their stake in Dr Lal PathLabs during the IPO while CX Partners sold close to a 20% stake in Thyrocare Technologies during the listing.

Shares of Dr Lal PathLabs listed at a 31% premium at 720 apiece in December. The 480 crore IPO of Thyrocare was oversubscribed 75 times and the shares listed last month at 665 on NSE, a 49% premium to the issue price of 446.

The highly fragmented domestic diagnostic market in India has an estimated size of 37,700 crore. The business is expected to grow at a compounded annual growth rate of 16-17% to reach 60,100 crore by 2017-18, according to Crisil. Standalone diagnostic centres hold about 48% of the market, according to Crisil, even though this position in the market may not translate into pricing power.

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