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Healthcare is emerging

发布时间:2018-04-04
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Industry Outlook:

Healthcare is emerging as one of the fast-growing service sectors in India. Today the total value of the sector is more than $34 billion. This translates to $34 per capita, or roughly 6% of GDP. By 2012, India's healthcare sector is projected to grow to nearly $40 billion. The private sector accounts for more than 80% of total healthcare spending in India. Unless there is a decline in the combined federal and state government deficit, which currently stands at roughly 9%, the opportunity for significantly higher public health spending will be limited. Given this scenario, the private sector healthcare companies offer a preferred destination for investors. Future consultants have analyzed the performance of leading listed companies in the sector, such Fortis Healthcare, Indraprastha Medical Corp, Fortis Malar Hospital and Kovai Medical Centre & Hospital. The companies, while showing steady rise in the topline, have also seen a gradual improvement in their operating margins, even though most of them being in an expansion mode setting up critical care or super specialty healthcare centers. The government is also treating healthcare as a priority sector. In the last Union Budget, the government had provided five1-year tax holiday for setting up new private healthcare facilities in tier-2 and tier-3 cities. The increased penetration of medical insurance is also helping the growth of the private sector in healthcare. The insured population can avail of the high-priced better quality treatment provided by the players in the sector given the growth potential of the sector; it is beneficial for long-term investors to have exposure in it.

Growing Indian Population and Economy: One driver of growth in the healthcare sector is India's booming population, currently over 1 billion and increasing at a 2% annual rate. By 2030, India is expected to surpass China as the world's most populous nation. In addition, life expectancy is rapidly approaching the levels of the western world. By 2025, an estimated 189 million Indians will be at least 60 years of age—triple the number in 2004. The growing elderly population will place an enormous burden on India's healthcare infrastructure. The Indian economy, estimated at roughly $1 trillion, is growing in tandem with the population. Goldman Sachs predicts that the Indian economy will expand by at least 5% annually for the next 45 years, and that it will be the only emerging economy to maintain such a robust pace of growth.

Expanding middle class: India's thriving economy is driving urbanization and creating an expanding middle class, with more disposable income to spend on healthcare. While per capita income was $620 in 2005, over 150 million Indians have annual incomes of more than $1,000, and many who work in the business services sector earn as much as $20,000 a year. Thanks to rising income, today at least 50 million Indians can afford to buy Western medicines—a market only 20% smaller than that of the UK. If the economy continues to grow faster than the economies of the developed world, and the literacy rate keeps rising, much of western and southern India will be middle class by 2020.

Rise of disease: Another factor driving the growth of India's healthcare sector is a rise in both infectious and chronic degenerative diseases. As Indians live more affluent lives and adopt unhealthy western diets that are high in fat and sugar, the country is experiencing a rise in lifestyle diseases such as hypertension, cancer, and diabetes, which is reaching epidemic proportions. Over the next 5-10 years, lifestyle diseases are expected to grow at a faster rate than infectious diseases in India, and to result in an increase in cost per treatment.

Deteriorating infrastructure: India's healthcare infrastructure has not kept pace with the economy's growth. The physical infrastructure is woefully inadequate to meet today's healthcare demands, much less tomorrows. Of the 15,393 hospitals in India in 2002, roughly two-thirds were public. In addition, at least 11 Indian states do not have laboratories for testing drugs, and more than half of existing laboratories are not properly equipped or staffed. The total healthcare financing by the public sector is dwarfed by private sector spending.

The healthcare divide: When it comes to healthcare, there are two India's: the country with that provides high-quality medical care to middle-class Indians and medical tourists, and the India in which the majority of the population lives—a country whose residents have limited or no access to quality care. Today only 25% of the Indian population has access to Western (allopathic) medicine, which is practiced mainly in urban areas, where two-thirds of India's hospitals and health centers are located.

Lack of insurance: A widespread lack of health insurance compounds the healthcare challenges that India faces. Only 11% of the population has any form of health insurance coverage. For the small percentage of Indians who do have some insurance, the main provider is the government-run General Insurance Company (GIC), along with its four subsidiaries, The New India Assurance Company, Oriental Fire and Insurance Co., National Insurance Co., and The United India Insurance Co. GIC is able to obtain funds for underwriting from other countries, although foreigners are not allowed to own insurance companies. Only 1% of the population was covered by private health insurance in 2004-05. Because so little insurance is available to the population of India, out of- pocket payments for medical care amounted to 98.4% of total health expenditures by households, as of the most recent (2001-02) census. Clearly there is an urgent need to expand the health insurance net in India. The widespread availability of health insurance would help to drive demand for services and provide additional revenue to improve the quality of care.

The Way Ahead:

Given the current state of India's healthcare system, its challenges and its growth prospects, Future consultants has identified a number of market opportunities for foreign companies that want to participate in the sector.

Apollo Hospitals Enterprises Limited's (Apollo Hospitals) has an established track record, strong brand equity and large footprint within the country's healthcare industry. Over the years, Apollo has created a healthcare powerhouse that has significant presence in every sphere of healthcare across the nation. Its integrated business model, scale, national footprint and presence across multiple disease and delivery segments will help it capitalize on the growing need for healthcare services. The healthy cash flows from its existing hospitals and pharmacy operations, its conservative capital structure and limited capital expenditure plans provide significant comfort to Apollo Hospital's ratings. The ratings also reflect the Indian healthcare sector's growth prospects given greater healthcare awareness and higher income levels and the impetus provided by the opening up of the health insurance sector. Apollo Hospitals' ability to continuously reinvest so as to keep its facilities state-of-the-art as well as to improve the already high quality of its medical services would be critical for maintaining its brand equity in the face of the growing competition. The consultancy division's performance, which is the key growth driver for Apollo Hospitals in the medium term, and its ability to contribute to the bottom line would be critical for improving Apollo Hospitals' financial risk profile.

Aggressive Expansion Plans Across Spectrum:

Currently, India has a capacity of ~ 1.05 million beds. To meet projected demand and maintain bed-to-population ratio at 1.9:1000, India will need to expand its bed capacity by 632,000 to 1.68 million by 2016, translating to Rs 165,300 crore worth of investment. Privately-operated healthcare services account for over half of all in-patient hospital visits and 82% of all outpatient visits. Healthcare providers with a capacity for a fast ramp-up of bed base and having a geographical spread in metros, tier-I and tier-II cities, where incidence of lifestyle-related diseases is high, would benefit the most from the increased demand for healthcare services. Apollo, with its well diversified services focus on tertiary care in cardiac ailments along with multi-speciality, would stand to benefit from the demand supply mismatch scenario.

Brownfield Expansion

To strengthen its position even further, Apollo should undertaken bed ramp-up activity where they can increase the bed count in their existing hospitals. Such expansions are very economical as majority, around 70%, of the expenditure incurred in setting up a green-field hospital goes in for the land and medical equipments, which in such case are already present. Brownfield expansion gives the hospital additional capacity within a short time span too.

Green-Field Expansion

Apollo Hospitals should plans to increase their spread to reach more and more patients and thereby firm up their market position as leader in healthcare services in India. Apollo Hospitals add multi-specialty hospital in different 1 and 2 tiers cities.

Inorganic Expansion

The hospital business is very capital-intensive with major investments required in infrastructure and medical appliances. Management contract of hospitals is one way of expanding brand reach without blocking funds in assets. Apollo should continue to expand in this sector and increase its managed bed capacity. Such addition in the managed bed category every year would be revenue accretive going forward.

Consultancy

Apollo Hospitals should expand on consultancy services which comprising of pre-commissioning consultancy services which includes feasibility study, strategic planning, infrastructure consultation, human resource recruitment and training and medical equipment consulting. Apollo should also expand into post-commissioning consultancy services including management contracts, franchising and technical consultation. These services will allow Apollo to capitalize on the learning and experience they have in the healthcare delivery and also tap the opportunities to spread inorganically while remaining asset light.

Pharmacy:

Going forward, the increased demand in the tertiary care segment is expected to remain in the favour of Apollo. We believe Apollo will be booking a CAGR of 16% in top line between FY07-09 on the back of expansions in hospital bed base from 3.750 to 4,500 and increase in pharmacy outlets from 420 in FY07 to 850 by FY09. During FY07-10, Apollo is expected to witness a 20% CAGR growth in net sales (Rs 1187 crore in FY08, Rs 1278 crore in FY09, and Rs 1655 crore in FY10).

New Ventures:

Invest In The Indian Clinical Trial Market:

In the last 10 years, India has emerged as an important global trial destination for major pharma companies and contract research organizations (CROs), owing to its large patient pool, low cost of recruitment, developed hospital infrastructure and genetic diversity. According to Center Watch survey, India's current clinical trial market stands at US$30 million, and it is expected to hit US$250 million by 2010, with an annual patient enrolment at 50,000-60,000. This figure can be further translated to 2,500- 3,000 investigators from 500-600 hospitals across the country. Through its wide network of hospital and trained clinical and nursing stall, Apollo Hospitals enterprise can collaborate with major pharma companies and become host for major clinical trials.

Medical Tourism:

Outlook: According to a joint study by the Confederation of Indian Industry and McKinsey, Indian medical tourism is estimated at $350 million in 2006 and has the potential to grow into a $2 billion industry by 2012. India has the potential to attract one million medical tourists each year, which could contribute $5 billion to the economy, according to the Confederation of Indian Industries. In addition to receiving traditional medical treatments, a growing number of western tourists are traveling to India to pursue alternate medicines such as ayurveda, and the number of medical tourists visiting India expected to reach 100,000 by 2010. To encourage the growth of medical tourism, the government also is providing a variety of incentives, including lower import duties and higher depreciation rates on medical equipment, as well as expedited visas for overseas patients seeking medical care in India.

Strategy: To capitalize on medical tourism and build a sustained growth in the hospital industry, Apollo Hospitals Enterprise should build on an initiative of building hospital in key areas with high tourist influx or accommodate additional facilities in existing center. The facilities should include super specialties units, Facilities should integrate allopathic care with alternative treatments, including Unani, Ayurvedic and Homeopathic medicine, and provide telemedicine services as well.

Apollo Hospitals In To Medical Education:

India needs more doctors. According to the planning commission estimates India needs 600,000 doctors, a million nurses and more than 200,000 dentists. The only way this shortage can be met is by investing in medical education. The government is looking for private sector to partner in this effort. The state of the art medical colleges and teaching hospitals will than be able to attract bright students and dedicated faculty. They will form the backbone of a medical network that will extend its reach into the farthest nooks and corners of the country, making it possible for the citizens to access high quality healthcare nearer to their homes.

Apollo Group of Hospitals, the largest private healthcare provider in Asia, can foray into medical education. It can establish global medical institution. Apollo Group can endeavor to fill up the gap of quality medical practitioner. Apollo Group, which now runs 48 hospitals across seven countries, has 15 colleges of nursing and hospital management. With over 50 specialties and super-specialties, Apollo Hospitals' offers comprehensive solutions across the healthcare spectrum and has sound foundation to provide world class medical education.

Rising Penetration Of Health Insurance; An Opportunity

Outlook: According to a 2002 Planning Commission report, less than 10% of India'spopulation is covered under some form of health insurance. Mediclaim penetration was only 1.6%, although the number of people with health insurance is increasing. The number of people covered under health insurance plans has increased from 4 to 5 million in 2001 to over 12 million in 2006. According to CRIS-INFAC, approximately 30% of the in-patients in private hospitals had insurance cover in 2005. In recent years, there has been a liberalization of the Indian healthcare sector to allow for a much-needed private insurance market to emerge. Due to liberalization and a growing middle class with increased spending power, there has been an increase in the number of insurance policies issued in the country. In 2001-02, 7.5 million policies were sold. By 2003-4, the number of policies issued had increased by 37%, to 10.3 million. The Insurance Regulatory and Development Authority (IRDA) eliminated tariffs on general insurance, and this move is expected to drive additional growth of private insurance products. In the wake of liberalization, health insurance is projected to grow to $5.75 billion by 2010, according to a study by the New Delhi-based PHD Chamber of Commerce and Industry. Health insurance will make healthcare more affordable to larger segments of the populace, boosting healthcare expenditures per household and driving the demand for quality care.

Startegy: Pricing should be risk-adequate and at par with other players. Products should have much more value-added services in-built and will give true value for money. To begin with, the health insurance company should offer traditional products such as in-patient hospitalisation cover, critical illness cover, overseas travel & health cover and personal accident cover. Later, launch user-friendly products for both individuals and groups. It should aim to cover one million lives in the next two-three years.

Growth Of Telemedicine

Outlook: Only 25% of India's specialist physicians reside in semi-urban areas, and a mere 3 % live in rural areas. As a result, rural areas, with a population approaching 700 million, continue to be deprived of proper healthcare facilities. One solution is telemedicine—the remote diagnosis, monitoring and treatment of patients via videoconferencing or the Internet. Telemedicine is a fast-emerging trend in India, supported by exponential growth in the country's information and communications technology (ICT) sector, and plummeting telecom costs. The early successes of telemedicine pioneers have led to increased acceptance and proliferation of telemedicine. The government of India also is reducing import tariffs on infrastructure equipment.

Startegy: There is a growing movement within India to establish a health grid that connects medical institutions and practitioners throughout the country. This would allow super specialists to exchange case studies, compare experiences, and hold virtual conferences to discuss critical disease patterns and provide treatment. Eventually, telemedicine likely will be practiced in the majority of Indian hospitals, initially in a separate department, and eventually, integrated into medical specialties. Early expansion in this filed will give first mover advantage and help cover larger market.

Risks And Concern:

Execution Risk

While Apollo Hospitals' plans seem robust, timely execution would be a key variable. Any delay in the development of the upcoming hospitals would shift the revenue estimates downwards thereby affect the profitability. We believe growth will be propelled mainly through owned hospitals and pharmacy chain. Any deviation in the company's strategy of future developments and expansion would shift the profitability estimates forward.

Availability And Retention Of Medical Professionals

With the surge in global demand for medical professionals, the attrition rate in the sector is expected to increase. This trend has posed crucial challenge to identify fresh talent, developing mechanics to train and retain them. Apollo hospitals has taken steps to mitigate this risk through putting medVarsity online backed by Apollo and NIIT which as a catalyst to students and is complimentary to existing study system.

Rapid Technological Advances

The hospital sector is highly capital-intensive in nature, with 40-45% of the expenditure being incurred on equipment. The industry is characterised by frequent innovations and changing technology. Normally equipment is upgraded every 7-10 years, which requires cash inputs. Any frequent shift in technology and impairment of equipment would put a dent on the profitability.

Conclusion

The Indian healthcare sector can be viewed as a glass half empty or a glass half full. The challenges the sector faces are substantial, from the need to improve physical infrastructure to the necessity of providing health insurance and ensuring the availability of trained medical personnel. But the opportunities are equally compelling, from developing new infrastructure and providing medical equipment to delivering telemedicine solutions and conducting cost-effective clinical trials. For companies that view the Indian healthcare sector as a glass half full, the potential is enormous.

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