Driven by strong fundamentals, conducive government policies, increasing affordability and growing health awareness, the Indian life sciences and healthcare sector is expected to grow manifold during 2017-2022. The domestic healthcare landscape comprises three broad segments - hospitals, diagnostics and medical devices. The life sciences segment comprises pharmaceuticals and allied businesses. Both life sciences and healthcare segments have witnessed considerable activity in 2016, with around 116 M&A and PE deals.
The Indian pharmaceutical market stood at around $39.5 billion in FY2015-16 and is expected to grow at a rapid pace. Accelerated consolidation is underway in the US generics markets, leading to an increase in the volume of outbound deals. Select transactions include Lupin (acquirer) - Gavis (US) (target), Sun Pharma - Insite Inc (US), and Cipla - Quality Control (Uganda). Given the expanding scope of price control and tightening regulations around FDC, scale of operations has become important in the domestic branded formulations market. While large pharma companies are aggressively acquiring assets in the regulated markets, mid-sized Indian companies have emerged as acquisition targets for both domestic and international players. Domestic consolidations include Sun - Ranbaxy and Torrent Pharma - Elder Pharma.
The interest of Indian drug companies in the biosimilars segment has been growing as drugs worth $90 billion are expected to go off patent in Europe and the US in next 10 years. Select developments include Cipla’s investment of Rs 600 crore in a biosimilar manufacturing plant in South Africa; Intas’ investment worth Rs 200 crore towards research and trials of biosimilars. Year 2016 saw numerous inbound and outbound transactions in which Indian companies were involved – 20 outbound M&A deals forming 45% of all pharma M&A deals. Domestic pharma segment also witnessed around 25 M&A deals (including inbound) in 2016. Private equity players will continue to express interest in acquiring a stake in profitable pharma companies especially in the ones present in complex and niche therapeutic areas of oncology, anti-retrovirals etc.
The hospital segment is expected to grow at a CAGR of 15% and reach a market size of around $145 billion by FY2021-22. Private healthcare players are reaching out as the demand for quality healthcare is fast catching up in non-metro cities due to rising income levels, awareness and insurance penetration. Select transactions include Apollo - AHL (Guwahati) and Medanta - Indore hospital. Due to shorter payback periods (relatively lesser capex requirement) single specialty services such as IVF, mother and child care, grooming clinics have started seeing a lot of investor interest. Select transactions include TPG - Motherhood and HCG IPO.
Deploying an asset-light model is the recent trend in super specialty healthcare leading to lease, O&M contracts and franchise arrangements. Select transactions in super-specialty hospitals include IHHR - Global Hospitals, Abraaj - Care and Narayana Healthcare IPO. Adoption of balanced growth approaches such as franchising and multi-brand strategy, along with investment in consumer awareness and trust, have acted as key levers in the rapid growth of wellness industry in India. Select transactions include JeanClaude Biguine - Trica Hair Clinic and RoundGlass Partners - Xcode Life Sciences. Hospitals segment witnessed around 15 M&A deals in 2016 and have also garnered significant PE interest with around 19 PE deals taking place in 2016 itself attracting a total investment of around $515 million. The presence of large listed hospital chains trading at rich valuations signals the scope of return on PE investments in smaller unlisted healthcare companies. On the other hand, even the large listed hospital chains have marquee PE investors changing hands every few years thereby earning a decent return on investment.
Diagnostic chains are seeing a lot of interest from PE and institutional investors due to their highly scalable business model offering superior RoCEs. Large chains are continuously scouting for acquisition of regional chains. Online services such as booking appointments online for preventive healthcare checkup, booking a path/lab test, obtaining reports online are further shaping this segment. Select transactions include Carlyle - Metropolis, Thyrocare IPO and Dr Lal PathLabs IPO.
The Government’s focus on the ‘Make in India’ campaign will cause a shift in the medical devices’ industry’s structure, conduct and performance in favour of Indian companies. With the release of Medical Devices Rules 2017, the government has paved the way for uninhibited growth in the medical devices segment, which is currently at a nascent stage. Earlier, rules for clinical trials of medical devices in India were similar to that of drugs which resulted in inefficiencies in the development process of indigenous medical devices. Recently notified rules will bring forth a new classification scheme; also, licensing and accreditation norms will be eased and clinical trials will be streamlined.
Companies in the Indian medical devices space are operating in a high-growth industry which is growing at a CAGR of over 20%. Indian stent manufacturers would be placed at an advantage and thus grow faster due to the recent price cap of Rs 29,600 and Rs 7,260 kept on drug-eluting stents and bare metal stents, respectively. At present, only a few companies in the space have crossed the revenue threshold of Rs 200 crore, thereby showcasing the scope of development and growth.
The Indian life sciences and healthcare industry is hailed as a sunrise sector for M&A with a tremendous potential. With the rise in per capita spending on healthcare and growing awareness and availability of health insurance solutions, this industry is destined to thrive.
Sources: CRISIL Research, Venture Intelligence, YES Securities analysis
Disclaimer: Yes Bank was book running lead manager to HealthCare Global Enterprises Ltd’s IPO in 2016 and adviser to Apollo Hospitals Enterprise Ltd on the acquisition of a 51% stake in Assam Hospitals in 2015.
Vikas Dawra is senior president and global head, investment banking, YES Securities. Views are personal.
Like this column? Sign up for our daily newsletter to get our top reports.