2017 is likely to be an action-packed year for investors in the Indian healthcare industry, notwithstanding the headwinds from the government’s demonetisation move and weak global cues emanating from Brexit and Donald Trump’s surprise victory in the US elections last year.
Experts and industry observers feel the industry will continue to be dominated by strategic deals in the pharmaceuticals space and private equity (PE) investments in the delivery segment. Besides, investor appetite for companies looking to tap the primary market is expected to remain buoyant.
The sector also awaits crucial government policies to boost medical devices firms and online medical startups even as a raft of single-specialty themes gear up for their next level of growth and seek fresh funds.
“At the end of the day, healthcare is not a discretionary spend. As people’s incomes grow, they will spend more and more of their incremental income to improve their health,” said Tarun Khanna, partner at CX Partners, a sector-agnostic PE firm that also invests in healthcare.
Here’s a snapshot of how the healthcare sector is likely to shape up during the year:
Healthcare firms to ride IPO wave
2016 will clearly go down as a year that witnessed a wave of successful initial public offerings (IPOs) and listings by healthcare companies, and investors are optimistic that this trend will continue this year.
“The healthcare sector will be amongst the key sectors that will continue to hold investor interest in 2017,” said Vishal Bali, senior healthcare adviser for TPG Growth in India.
CX Partners’ Khanna also said that he does not see any impediments to companies’ IPO plans this year, despite the demonetisation move and global headwinds.
Two companies—eye care chain New Delhi Centre for Sight and multi-specialty hospital chain Aster DM Healthcare—have received approvals for their IPOs from market regulator Securities and Exchange Board of India (SEBI). While New Delhi Centre for Sight’s IPO validity expires in February, Aster DM Healthcare has the entire year to hit the primary market. Apart from these companies, Hyderabad-based Krishna Institute of Medical Sciences Ltd (KIMS Hospitals) and medical devices company Sutures India are reportedly planning to launch their IPOs.
2016 saw IPOs by a bevy of healthcare firms, such as multi-specialty hospital chain Narayana Hrudayalaya, diagnostics firm Thyrocare Technologies and oncology chain Healthcare Global Enterprises (HCG), which reflects the diversified representation of healthcare in equity markets. Drugmaker Laurus Labs also joined a strong list of pharmaceutical companies listed on the stock exchanges.
These companies followed the listings of Biocon arm Syngene International, diagnostics chain Dr Lal PathLabs and drugmaker Alkem Laboratories in 2015, all of which rode the primary market euphoria after the BJP-led government came to power in 2014.
Consolidation in pharma, but hospitals have to wait
The healthcare delivery space saw a lot of interest from PE firms in 2016 whereas pharma was, as usual, dominated by strategic deals. That trend is likely to continue this year, Amit Varma, managing partner at healthcare-focussed fund Quadria Capital, said.
Aster DM, KIMS Hospitals and Sutures India are planning IPOs this year
Last year, the top five deals in the overall healthcare space were strategic in nature, including Temasek-backed Intas Pharmaceuticals’ acquisition of Teva Pharmaceuticals’ assets and operations of Actavis Generics in the UK and Ireland. This marked the second-biggest overseas acquisition by an Indian pharmaceutical company ever.
CK Partners’ Khanna said the pharmaceuticals sector could see consolidation with more strategic deals happening this year.
“At one point in time, companies that are third, fourth or fifth in one segment of the pharmaceuticals space aim to be number one or two. Therefore, they tend to sell assets that are not really non-core but assets where they are not market leaders, and use the cash from the sale to fortify their position where they are strong to be the top player. So we will see a lot of M&As happening,” he explained.
In 2016, India’s top drugmaker Sun Pharma made a string of acquisitions, including buying 14 brands from rival Novartis in Japan. It also sold assets in the US.
The hospitals space will, however, take some more time to see consolidation.
“Hospitals is a much bigger business and you need someone with deep pockets to cut a cheque; (it is) not that there aren’t takers for it. Also, who(ever) buys it must have a 10-20 strategic vision for it,” said Khanna.
Single-specialty to gain ground
The past few years have seen the emergence of single-specialty companies focussing on eye care, dental care, mother- and child-care, orthopaedics and oncology chains, among others. 2016 itself saw a significant investment in mother- and child-care firm Motherhood and oncology firm Cancer Treatment Services International by TPG Growth.
“On the healthcare services front, there are still a fair number of opportunities in the single specialty domain,” said Chandrasekar Kandasamy, managing partner, Stakeboat Capital, a venture fund floated by serial healthcare entrepreneur GSK Velu last year.
He added that while companies operating in these segments will continue to raise follow-on funding as and when they grow, opportunities exist in dermatology, In Vitro Fertilization (IVF), cosmetology, urology, diabetes etc where single-specialty businesses can be built. These can, thus, be attractive for investors.
Kandasamy also said that emerging areas like stem cell therapy and genomics may also catch investor interest.
Govt policy on medical devices
The medical devices sector will be watching out for the possible creation of a separate ministry, which was hinted at by the government in 2015. The policy will delink the sector from the pharmaceuticals industry and will likely pave the way for greater investment and R&D in the segment.
Stakeboat’s Kandasamy noted that given that imports still form 75-80% of the total consumption of medical devices, equipment and consumables in India, such products with attractive price-performance ratio targeting emerging markets will be a huge opportunity.
Apart from the policy on medical devices, the industry will also watch out for guidelines on online pharmacy firms that have been receiving funds despite regulatory uncertainty.
The Delhi High Court’s order that overturned the ban on more than 300 fixed dose combination (FDC) drugs late in 2016, which impacted companies such as Pfizer and Sun Pharma, could also see a challenge from the government.
Startup funding may fall
Startup funding volume is expected to decline this year as only differentiated models will find takers in the market, said Quadria’s Varma, who, along with the private equity firm’s co-founder Abrar Mir, floated healthtech fund Healthquad last year.
But TPG’s Bali, who is also chairman of home healthcare firm Medwell Ventures, feels the year could see more innovation in the startup space: “In 2017, leveraging technology, particularly the growing force of mobile connectivity, will create a higher impact.”
3D printing and its contribution to healthcare will show more momentum during the year and the power of artificial intelligence (AI) for more targeted disease treatment is a trend to watch out for, Bali added.
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