Indian Healthcare

Kashyap Pujara Farzan Madon

Executive Director – Head of Research VP – Midcaps
[email protected] [email protected]
(+91 22 4325 1146) (+91 22 4325 1131)
 Indian healthcare – Secular growth story

Inadequate bed infrastructure in India Rising wallet share of the Indian consumer
100% 4
8 7
(Hospital beds/ 1000) 3
1
9 13 Health care
5 6
6.3 11 2 Education and recreation
3 9
80% 4 17
6 2 6 Communication
19
14 8
60% 3 20 Transportation
3.6 5 9
4 3.4 12 3
2.6 2.5 12 11 Personal products & services
6
40% 3 Household products
5 10 Housing and utilities
2
0.7 56 5 Apparel
20% 42
34
0 25 Food, beverages, & tobacco
Europe Brazil USA World China India 0%
Average
Source: WHO, India Brand Equity Foundation (IBEF) Source: Mckinsey, 1995 2005 2015E 2025E

No. of beds & investments to rise multi-fold Market size of the healthcare delivery system in India -
Cum addl. beds required
“In-patient” to grow at a faster pace
Out-Patient Dept In-Patient Dept.
Cum Invst. Needed (RHS)
2,000 6,000 5,000
('000) (Rs bn) (Rs bn)

1,600 5,000
4,000
4,000
1,200 2,846
3,000
3,000
800
2,000 2,000 1,569
400 1,000
1,000 787
1,612
0 0 1,085
727
2012 2017P 2021P 2026P 0
Source: Crisil 2007 2012 2017P
 Healthcare supply is skewed along rural and urban lines
Infrastructure is skewed towards urban areas Poor access outside of top cities
% of total in 2012

Rural Urban 5 Hospital beds per 1,000 people

~1.2 bn ~55 K ~0.9 mn ~1.6 mn
100%
4

80%
3
60%
2
40%

20% 1 India Avg: 1

0% 0
Population Hospitals Doctors Hospital Beds Metro Tier 1 Tier 2

Delivery is highly unorganized across different formats

Organised players Unorganised players
$13 bn $2 bn $2 bn $1.5 bn
100

80
(%)
60

40

Source: NAT HEALTH 20

0
Multispecialty hospitals Eye Care Pathology Imaging
 Hospitals: The best play on healthcare

 The Healthcare delivery market in India is estimated to be ~Rs 4 trillion bn as on FY15, and is approximately
twice the size of the pharma industry

 India has ~15% of the world’s population, but has one of the worst healthcare infrastructures among growing
economies and the lowest per capita spends on healthcare. Current hospital infrastructure is inadequate with
only 0.7 beds per 1,000 population vs. global average of ~3 beds per 1,000 population

 Demographic changes, improving income levels, rising awareness, changing lifestyles resulting in better case
mix, rising insurance penetration and scaling medical tourism will result in a consistent rise in discretionary
spending on healthcare

 To meet the rising demand and address the current shortage, India would require adding ~2 mn additional beds
by 2025

 The healthcare delivery market is estimated at Rs 3.8 tr in FY15 and CRISIL expected to grow at 12% over the
next 5 years. This growth is largely expected to come from significant growth in in-patient revenues

 Government spend on healthcare in India is significantly lower as compared to developed nations like US and
UK. Private sector has taken the lead in scaling the healthcare infrastructure. Govt. is facilitating private
investments by giving 5-yr tax holidays for hospitals set up in semi urban areas, in addition to lesser duties for
medical equipment

Indian healthcare market – A secular growth opportunity

 Overview of the healthcare market

Ins. & Medical Twice the size of the

Equip. Pharma Market
15%

Diagnostics
10% Health Delivery
System Healthcare Delivery
50%
(~ USD 90 bn)

Pharma
25%

Primary Secondary Tertiary

 Mainly at the grass root  Primarily includes nursing Super Specialty Multi Specialty
level homes and recovery rooms  Higher equipment costs and  Low gestation periods
 Minimal involvement of  Investment in such centres fixed staff costs result in higher  Follow strategy to initially
private players in this to reduce ALOS of tertiary gestation periods start off as multi specialty
segment care centres  More margins and higher and move towards super
volumes specialty

20% of healthcare services spend through the govt. 80% spend from the private sector

Major projects driven through large private players –

Majority of facilities financed through govt spending
Apollo Group, Fortis, Max

Limited number of listed companies catering to the health delivery market

 Lack of healthcare infrastructure in India…

Low per capita spend on healthcare

 While India houses ~15% of the world’s population, it has 7,000
(USD)
inadequate healthcare delivery infrastructures and
6,000
amongst the lowest per capita spends on healthcare
5,000

4,000
 According to IBEF, India is way below at 0.7 beds per
1,000 individuals against a world average of 3 beds per 3,000

1,000 2,000

1,000
 We believe medical insurance has just scratched the 0
surface. Currently the “out-of-pocket” spending on USA Japan Korea Thailand China India

healthcare in India is at a whopping 80%

Inadequate infrastructure
Funding pattern 8
(Hospital beds/ 1000)
Local 6.3
State 2% 6
12%
Centre 3.6
4 3.4
2%
2.6 2.5
Social
Insu. 2
0.7
1% Out of
Insurance pocket 0
3% 80% Europe Brazil USA World China India
Average

Poor state of healthcare on account of under-investment by the government and low income levels
 …posing an opportunity for companies in the private sector

Building healthcare infrastructure

 The Indian governments inertia on providing quality
Projected Demand (2025) 2008
healthcare facility has forced the private sector to
play a much crucial role
Bed density
 Unlike the developed nations, in India, the majority of
the capex in the space has been incurred by the private
sector Doctors density

 Crisil estimated that by 2026, India would need to

Nurse density
more than double the hospital beds by 1.7 mn,
('000)
entailing investments worth Rs 4.8 trn
0.0 0.5 1.0 1.5 2.0 2.5

Source: IBEF, Axis Capital

No. of beds & investments to rise multi-fold Private healthcare spend as % of total healthcare
expenditure: Amongst the highest in the world
Cum addl. beds required
Cum Invst. Needed (RHS) 80%
2,000 6,000
('000) (Rs bn)
60%
1,600 5,000

4,000 40%
1,200
3,000
20%
800
2,000
0%
400 1,000

USA
Australia

Thailand
Europe

India
World Median

China
0 0
2012 2017P 2021P 2026P
Source: Crisil, Axis Capital Source: WHO, Axis Capital
 Drivers for the healthcare industry

Increasing
penetration of Increase in
medical lifestyle related
insurance to diseases, which
drive healthcare entail higher
spends spends

Opportunities in
Growing the Indian
Rising healthcare
disposable Healthcare awareness
income leading
to a desire for a
Sector among the large
growing
better quality of population
life

Affordable
Healthcare
driving Medical
tourism - Yet to
unleash its full
potential
Source: Axis Capital
 Focus on case mix
Having the right mix and focus on complex procedures like neuro,
cardiac, oncology yields higher revenue for the hospital
Changing case mix in India  ARPOB : Improvement in revenues through a
100% Oncology combination of reducing ALOS, improving
case mix and tariff hikes:
Cardiac
90%  Reducing ALOS: Reducing ALOS leads to
Other circulatory Lifestyle higher patient turnover resulting in higher
80%
Diseases revenues. Bulk of the revenue is generated in
Central Nervous
System
the first 72 hours of patient admission
Diabetes  Focus on case and surgical Mix: Apart from
70%
focusing on cardiac, transplants, neuro and
Asthma
oncology, we believe having more surgical
60% Others patients vs. medical patients also strengthens
the revenue stream
Sense organs Acute
50%
Diseases
Ortho  Improving occupancy rates: High occupancy
40%
Accidents
levels are essential for a hospital to grow its
revenues. For occupancy levels to be high, a
Acute Infections
30% hospital should have good branding and
attract reputed doctors. A good hospital
20% brand is built over the years with a history of
successful clinical outcomes, strong referrals
10% and accreditations
 Occupancy levels are also a function of
0% conversion of out-patients to in-patients
2001 2012E
 Opportunity for medical tourism

 Long waiting period in developed nations like the Comparative cost of surgeries (2014)
US, Canada, UK coupled with exorbitant cost for (US D) US A T hail and India
the uninsured patients make it imperative for Heart bypass 100,000 14,000 5,000

medical tourism Heart valve replacement 200,000 20,000 9,000

Bone marrow transplant 250,000 62,500 30,000
Cosmetic surgery 20,000 3,500 2,000
 High quality healthcare delivered at significantly
Spinal fusion 62,000 7,000 5,500
lower cost make India a preferred destination for a Knee surgery 48,000 8,000 6,000
medical tourist Liver transplant 300,000 75,000 45,000

 The Indian medical tourism industry is poised to

grow at 30% annually, primarily driven by world-
class healthcare services that are offered at a
fraction of the overall cost, compared with
developed nations like UK and USA
 According to the Associated Chambers of Commerce
and Industry of India (ASSOCHAM), the cost of
surgery in India is nearly 1/10th of the cost in US and
European countries

 International accreditation provides further comfort

to foreign patients

Boom in medical tourism to complement the growth of domestic healthcare delivery market
 Revenue/Profit drivers

Revenue spilt Profit drivers

Out-patients In-patients Average Revenue Per

Occupied Bed (ARPOB)
Volume 90 10
Largely determined by the case mix
coupled with the hospitals brand image to
price its product

Case Mix
Value 30 70
Average Length of Stay Lifestyle related
(ALOS) diseases on the rise
An optimal resulting in higher
Maximum revenue balance of revenues and profits.
generation happens in these factors Hospitals can attract a
Diagnostics Professional Tariffs Diagnostics first 3 days, hence crucial to
Consultancy Consumables better case mix by
& pathology charges (Beds, OT) & pathology hospitals focus on achieve having the necessary
reducing the length of higher profits infrastructure/equipme
stay by improving
nts and reputed
patient turnover.
doctors for these
60-65% of the revenues
ailments.
 In-patient - A person who is admitted to hospital for
Occupancy
medical, surgical treatment, observation or care and
Given high fixed costs, high occupancy
stays at least one night rates critical for success. A combination of
lower ALOS and higher occupancy rates
 Out-patient - A patient who visits a hospital or clinic result in high operating margins. Mature
hospital usually operates at over 75%
for diagnosis/treatment but is not admitted overnight occupancy

In-patient churn / turnover – Key to hospital revenues

 Profit drivers

Average Revenue Per Occupied

Bed (ARPOB)
Largely determined by the case
mix coupled with the hospitals
brand image to price its product at
a premium / discount compared to
peers in that area

Case Mix
Lifestyle related diseases on the
Average Length of Stay rise which results in higher
(ALOS) An optimal balance of these revenues and profits. Hospitals
Maximum revenue generation factors crucial to achieve can attract a better case mix by
happens in first 3 days, hence higher profits having the necessary
hospitals focus on reducing the infrastructure/equipments and
length of stay by improving reputed doctors for these
patient turnover. ailments.

Occupancy
Given high fixed costs, high
occupancy rates critical for
success. A combination of lower
ALOS and higher occupancy rates
result in high operating margins.
We believe a mature hospital
Source: Axis Capital usually operates at over 75%
occupancy
 Hospitals: Difficult business ; but benefits accrue over the long term

Set-up cost Operating Metrics Operating Profit

Indicative Hospital Operating Model Buildup
(%) Book Breakeven

7 400 (%)
Contingencies

Year 5
Cash Breakeven
Land 24 300

EBITDA Breakeven
Revenues (Rs mn)

200
Medical
Equip 24
100

0
Year 4

Construction 38 (100)
Year 1 Year 2 Year 3 Year 4 Year 5
Cash Consumables Personnel Cost Year 3
losses 7
Admin & Other Exp EBITDA

Fixed Cost Structure 25% Occupancy 80% EBITDA Flow

 Operating highlights for a 200 bed hospital

Profit projection for a 200 bed tertiary hospital

(Rs mn) Yr 1 Yr 2 Yr 3 Yr 4 Yr 5 Yr 6
Occupancy (%) 35% 50% 57% 60% 70% 80%
ARPOB (Rs/ bed/ day) 15,000 16,000 17,500 19,500 20,963 22,500
Avg. Length of Stay (days) 6.0 6.0 5.5 5.0 5.0 5.0
Net Revenues 383 584 728 854 1,071 1,314
Expenses
Consumables 115 175 182 214 268 329
Personnel 186 234 257 293 315 336
Other costs 115 175 200 231 268 329
EBITDA (32) (0) 89 117 221 321
EBITDA (%) -8% 0% 12% 14% 21% 24%
Depreciation 7.5 7.5 7.5 7.5 7.5 7.5
Interest 80 70 60 50 40 30
PBT (120) (78) 22 60 173 284
RoCE (%) -7% -4% 2% 4% 11% 18%

 Assumed capex cost of Rs 8 mn, funded by a 1:1 debt equity

 Though a long gestation business, a matured hospital can earn EBITDA margin of ~25% and achieve RoCE of
over 20%
 Porter's five forces analysis

Threat of New Entrant

 Hospitals - high gestation business: Takes 2-3 years to build a hospital and another 3
years to break-even. Also higher land prices makes it difficult to displace established
players. Eg: Apollo in Chennai; Fortis in North and NH in Bangalore & Calcutta
 Barriers to entry incl. Attracting top doctors and para-medics, best management
practices and capital

Bargaining power of Suppliers Competitive Rivalry Bargaining power of Buyers

 Established players are able to draw  Healthcare continues to be
 Apollo, Fortis and NH have
patients due to their ability to attract underserved, with low bed density
established their presence in
best talent and latest technology
various parts of India. A large  Large number of patients; most
 Low bed density make India a
chain of hospital helps derive a awaiting treatment at a lower
lucrative market
lot of economies of scale price point. NH caters to this
 Despite newer player entering, there
 NH does ~10% of India’s heart segment of quality at low price
still exist room for more
surgeries and for most  Certain clusters like Hyderabad have  At the other spectrum, patients
consumables deals with limited shown signs of intense competition looking at successful outcomes
number of suppliers and pricing is not very relevant.
Hospitals can charge a premium
Threat of Substitute Eg: Apollo and Fortis

 Virtually NO threat of substitute as

healthcare is an essential part

Once a hospital is established it is are more of an annuity business

 Overview of India diagnostics
Size of Indian Healthcare Industry ($ bn)
500

390
400

300

200

91
100 59 73
40 44 51

0
2009 2010 2011 2012 2013 2014 2025

Diagnostics Industry Size ($ bn); As a % of Healthcare

20 5.0%
4.4%
4.0%
15
3.2% 3.2% 3.2%
3.0% 3.1% 3.0%
2.8%
10
2.0%

5
2.9 1.0%
1.6 1.9 2.3
1.3
1.1 17.0
0 0.0%
2009 2010 2011 2012 2013 2014 2025

Source: NAT HEALTH

 The bigger Question on Actual Market Size

Healthcare market
(~$ 91bn)

Diagnostics-3.2% (~$ Hospitals-70% Others-27%

2.9bn) (~$ 63bn) (~$ 25bn)

Indian diagnostics space

Unorganized
Organized Labs
Hospitals
0.35 bn
4.03 bn
4%
45%

Organized
Hospitals
Unorganized 2.02 bn
Labs 23%
2.55 bn
28%
*Assumption that lesser no. of tests conducted in-house
Source: Industry Reports, SRL Analysis

17
 Rapidly growing diagnostics industry

India’s share of global disease burden is ~20%, though its share India’s per capita spend on diagnostic services is low
of healthcare infrastructure is much lower
10,000 USD/ annum (adj. for purchasing power - 2013 data)
% of global share
25%
8,000
20%
6,000
15%
4,000
10%

5% 2,000

0% 0
Diseases Health Doctors Nurses Beds Lab US UK Brazil India
burden workers technicians

India’s diagnostic market is expected to grow to ~Rs 600 bn Diagnostic industry sub-segments
(17% CAGR over FY15-18). 3% of healthcare industry
Immunol
700 Others, ogy,
(Rs bn) 22% 21%
600
16-17% CAGR
500 Pathology,
Imaging, 70%
400 30%

300 Haemat
ology,
200 18%
Biochem
100
istry,
0 39%
2014-15E 2017-18P
 Key drivers for growth in the pathology industry

 A decade ago people would

undertake a test only if the doctor
Predictive recommended. Preventive check-ups
(currently ~5% of revenue) is gaining
Preventive
Esoteric test like traction due to health awareness and
Braca gene test, corporate packages
Monitoring Wellness packages, Actin
calcium serum, Vit-  Prescriptive and wellness packages to
Screening D grow at a faster pace
Blood sugar,
lipids
Malaria, dengue,  Doctor Education for esoteric test
typhoid,

Low accession to test ratio set to improve in India  Prescription are based more on
evidence which are aided by
Accession to Test diagnose test
14
12  More sophisticated tests which can
10 accurately predict the cause or
8 future occurrence (gene test)
6
4
 Prescriptive test can grow faster
2
with greater doctor education: eg
0
USA Europe SRL India (National
lipids test and cardiac markers like
Avg) HBDH, CPK
Thank You