September 2012

To be Afloat


Amit Chander
, Head-Investment Healthcare, Baring PE Partners Ltd, is of the opinion that the Indianhealthcare is encouraging investors more than ever before.,

dIgitalhealth

Most of the capitalis going to mediumsize companies whereinvestors take up minorityequity interest and partnerwith the entrepreneurs intaking the business to thenext level.


How well is the Indian healthcaresector doing when it comes toattracting investment funding? Whatelements the sector has that make itinvestment worthy or vice-versa.

Indian healthcare sector is a preferredforeign investment destination for avariety of reasons. The sector is attractivelypositioned to grow at twicethe growth rate of Indias GDP givenfavourable demographics, increasingaffordability and improving access tohealthcare over the next several years.Take demographics for instance, it isestimated that for the next 40 yearsalmost 500 million people in India willeither be below 15 years of age or bemore than 60 years of age implyingnearly 40 percent of the population willbe in an age that is vulnerable to medicalproblems and will demand healthcareinterventions of some nature orthe other. International studies haveshown that as a nation gets wealthier, it
spends more and more on the healthcareneeds of its population.

dIgitalhealth

In your opinion what kind ofinvestment trend the Indianhealthcare is showing? Is the sectorable to attract good amount offunding both from domestic andoverseas investment market?

There is no dearth of capital for healthcareventures in India with investors activelyallocating capital across the valuechain from pharmaceuticals to hospitalsand diagnostics. Most of the capital isgoing to medium size companies where
investors take up minority equity interestand partner with the entrepreneursin taking the business to the next level.This could mean expanding manufacturingfacilities or opening up new clinics orhospitals or for market expansion purposes.The availability of capital thoughis fairly scarce and limited for earlystage, start-up ventures which are workingon innovative technologies. Limitedevidence of high returns being generatedby ventures in this area has resultedin only a select group of investors to operatein this part of the value chain.

What are the criteria that an investorlooks at in a healthcare companybefore investing? Apart fromfunding what other assistance dothey offer to them?

There are four parameters that investorslook for strong growth outlookfor the business, high return on capitalprofile of the company, ability to scalethe company to get a meaningful exitthrough an IPO within 5-6 years andstrong corporate governance being followedby the entrepreneur. The first factoris typically external and a single entitycan do little to influence it. PE fundsassist the entrepreneur in the remainingthree aspects. Helping identify scale efficiencies,operating best practices andgood managerial talent can significantlyimprove the chances of successfulscale-up. Designing strong board processes,augmenting the audit function,recruiting independent directors are allareas in which PE funds can contributevery positively.

Do the investors remain on boardtill the company breaks even? Ifnot, what is the exit policy that suchinvestment company follows inhealthcare?

The decision to exit is driven by twoconsiderations the life of the investorsfund and the maturity of the business tosupport an exit event. All investors investfrom funds with a finite life and have toexit their portfolio companies when thefund life comes to an end. Astute investorsmatch the maturity profile of thebusiness they are investing in with the lifeof their fund. They would prefer that thebusiness model of the company is wellestablished by that time in terms of scale,profitability and management depth tomake it an attractive investment for eitherother financial investors or a strategicpartner. If neither is possible then buybackof their shares by the company isan option. Given the strong interest ofinvestors in the Healthcare sector moreoften than not an exit is feasible by sellingto another financial investor.


Naresh Malhotra, Director, Modern Family Doctor Pvt Ltd, has a successful track record in launching andestablishing multiple brands in various healthcare segments. He shares his insights.

How well theIndian healthcaresector is doingin terms ofattractinginvestmentfunding?

The healthcaresector is attracting the maximum attentiontoday from Private Equity andVenture Capital. The Investors see ahuge potential, with a growing populationand a highly underserved market.Add to this the higher incomes, moredisposable incomes, lack of facilitiesprovided by the Government and youcan understand why everyone wants toinvest in the healthcare sector.

What are the criteria that aninvestor looks at in a healthcarecompany before investing in? Apartfrom funding what other assistancethey offer to such companies?

An investor wants to see rapid growth,profitability, faster scalability and willlook at entrepreneurs who are eithergoing into niche spaces or enjoy theadvantage of being the first entrant inany niche market. They like to go tomarkets which have a huge potential.Other assistance which VCs, PEs provideis getting best practices, overseastie ups, bench marking with best ofbreed and corporate governance.

Can you please mention a fewhealthcare companies got recentlyfunded?
Nationwide, Nova, Express Clinics, Vatsalya,and Mulchand Hospital have receivedfunding recently.


Meet The Risk Mitigator

Vishal Gandhi, Managing Partner and CEO, BIORx Venture Advisors Pvt Ltd, shares histhoughts on the investment scenario for Indian healthcare sector.

In your opinion, what kind ofinvestment trend is Indianhealthcare showing?

Healthcare as a sector started attractingprivate investment only about tenyears ago. Before that it was regardedas a charity field wherein no profitableventure could be thought of. But thanksto healthcare enterprise chains like Fortis/Apollo, the scenario has changed.In these past few years, we have witnessedmore and more private investment,
merger and acquisitions in thesector. This is a need of the hour consideringwe are a country where the bedto patient ratio stands at one bed for athousand patients. In order to changethis scenario, Private investment is theonly way forward to change this scenario.The healthcare sector has hugepotential to attract investment given weare a country of more than 1.2 billionpopulation and 75 percent rural populationstill has to travel few hundred kmsto get decent treatment for even mostcommon diseases.

What criteria an investor looks atin a healthcare company beforeinvesting?

First and foremost , a start-up or a companyshould only approach the angelinvestors/ VC/PE once they have establisheda proof of concept from theirown equity or money raised from family/friends. The investors look into the robustnessof business plan the companyhas. They also look at the following areas:
b) How scalable the business interms of entry barriers?
c) How well networkedthe promoters are
d) How is themanagement team of the company andalso what retention policy the companyhas for their employees.

What are the steps a healthcarecompany opts before finalising aVC or PE funding?

Before finalising a VC make sure youhave all the elements needed to makeyour venture attractive in the eyes of theinvestors. Right from a sound businessplan to well planned out revenue modeleverything has to be in sync with thenature of the business so that the investorsdo not get a chance to turn downthe proposal. Make sure the investorsare from the same domain and theyhave domain expertise that would givevalue addition along with funding.

What is the role of BIO Rx?

We play the role of risk-mitigators. Becauseof my professional experience Ican suggest ways to companies thatthey may not even think of. Sitting in acabin you would assume you are thebest, but we as an experienced partywho has learnt the tricks of the trade byworking for similar companies acrossthe value chain and life cycle of company,BioRx can guide them about waysto avoid risks when choosing investmentpartners. Because many a times,a company needs a debt and ends uptaking a private equity investment. Sowe can tell them if they should go for adebt or equity depending upon whatsthe best capital structure

 


The InvestmentRoadmap

Amit Mookim, Partner, Strategy Services Group, National Industry Head Healthcare, KPMG, feels the investment scenario for Indian healthcare ischanging for good

How well is the Indian healthcaresector doing in terms of attractinginvestment funding?

Healthcare is emerging as one of the topinterest areas for private equity and venturecapital investors. Rapid growth prospects,lack of scale in businesses and increasingmarket size in India makes it aninteresting avenue for funding.

In your opinion what kind ofinvestment trend the Indianhealthcare is showing?

The sector is attracting funding fromboth domestic corporate, domestic investorsand overseas investors. The reference is across various deliverymodels both asset light and scalable,such as eye care, ambulatory care, IVF
clinics, dialysis centres as well as multispecialtyhospitals

What are the criteria that a PE/VC/ Insurance company looks atin a healthcare company beforeinvesting in?

Management team, depth of talent, economicsoundness of the idea and abilityto deliver, scalability of the model, ability
to exit in a finite timeframe, are someof the criteria that an investor looks atin the healthcare company. Apart from
funding, some investors play an activerole in influencing strategy, getting managementpersonnel on board, opening
new market opportunities/ contacts andinstitutionalising processes.

What is the exit policy that suchinvestment company follows inhealthcare?

Growing companies need several seriesof funding, and this is the same inhealthcare. Some investors dilute partially
during ensuing exit rounds, but atthe same time, in a sector like healthcare,given the size of companies, exitthrough IPO etc is still a distance away.

List of companies that got funded recently

 


 

 


Lets Talk Funding

Ajay Kumar Vij, Co-founder & CEO, Asian Healthcare Fund, dives deep into the ocean of healthcare investmentand brings out the following expert opinion

How well is the Indian healthcare sector doing in termsof attracting investment funding?

Indian healthcare, as compared to what they have in developed countries, has a long way to go. Facilitated by growthdrivers like a rapidly growing middle class with enhanced affordability,increasing urbanisation and rising prence ofchronic diseases, the Indian healthcare sector is expectedto demonstrate sustained growth over the next 10-15 yearsand is expected to be one of the fastest growing healthcaresectors globally. This makes the sector an attractivedestination for Private Equity investors who want to investin companies which can demonstrate sustained earningsgrowth over the medium term.

 

Is the sector able to attract good amount of fundingboth from domestic and overseas investment market?

Investments in healthcare has been showing an increasingtrend from both domestic and international investors with investmentsacross the value chain from hospitals to specialtyclinics, medical devices, pharmaceuticals and diagnostic
chains. Healthcare companies are getting funded both atthe early stage (e.g. Wellspring Healthcare was funded byReliance & Catamaran Ventures last year) and at a moremature stage (Funding of Vasan by GIC earlier this year)

What are the criteria that an investor looks at in ahealthcare company before investing?

A PE / VC firm would look at a number of factors like strengthof management team and its ability to ute, the size
and attractiveness of target market, uniqueness of businessmodel, regulatory issues, entry barriers and competitive
landscape and potential exit options before investing ina healthcare company. PE funds like Asian Healthcare Fund
which have significant in-house operating capabilities are able to add significant value to companies that they invest
in by virtue of their in-house business building abilities. Thisvalue add is typically in areas like fine tuning business growthplans/strategies, establishing robust systems and processesto support faster expansion, business development, recruitmentof senior management, M&A and fund raising etc.

Do the investors remain on board till the companybreak-even? What is the exit policy that suchinvestment company follows in healthcare?

A PE investor typically takes a long term view of the companiesthey invest in with typical investment horizons of 3-5years. Once this period expires and the company has utedits growth strategy, the PE investor would endeavourto exit the company. Whether the investors remain on boardtill the company reaches break-even or not depends on thestage of investment, type of investor and specific companysituation. The preferred option of exit for a PE firm is an IPO.Secondary sale to other financial investors, strategic saleand company buybacks are some of the other exit optionspursued by PE firms.

Give us the names of few healthcare companies gotrecently funded?

There is Orbimed, which reportedly acquired close to 12 percent stake in midsize drug-maker Shasun Pharmaceuticals
Ltd by investing Rs 50 crore in February 2012. Then there isEvolvence, which has reportedly invested Rs 60 Crores in DrAgarwal Eye Centre in July 2012. GIC has invested US$ 100into Vasan Health earlier this year.Some of the successful healthcare organisations backedby investments include Apollo Hospitals, NovaMedical, DrLal Path Labs, Trivitron, Metropolis Healthcare, MankindPharma, Intas Pharma, Dabur Pharma etc.


Meetingthe Challengesthrough Investment

By Group Captain (Dr) Sanjeev Sood, Hospital and Health Systems Administrator, Air ForceHospital, Chandigarh

National Accreditation Board for Hospitals (NABH)defines small HCEs as a healthcare facility that providesallopathic services by doctors registered withMCI or SMC either as a standalone/solo or a small nursinghome up to 50 beds. These are mostly run by private entrepreneurswho invest their own capital and operate in highlyfragmented and unregulated environment. Being run onsavings of couples or few colleagues, they dont have deeppockets to acquire sophisticated technologies, hire legal expertsor undertake massive expansion plans like corporategiants. So what are the financing options before them to realisetheir expansion plans?

Debt funding
Debt funding is by far the commonest available option .Publicsector banks as well as private banks provide succour whenit comes to debt funding. The interest rate and terms of paymentare the most important factors governing the feasibilityof the loan. Financial institutions are aggressive and willingto disburse higher bank credit in days of recession to rapidlypush growth in recession proof healthcare sector. These institutionsare willing to offer range of loans for raising workingcapital, term loans for capex, equipment funding, securitisationof receivables, services for private banking, trade financefor medical equipment vendors / hospitals as well as merchantbanking services.

Leveraging PPP model
Land and building cost are up to 45 percent to 65 percent ofcapex cost of hospitals. Medical entrepreneurs can look at investorsto fund the same so as to reduce capital cost per bedand reduce break even period to less than 18 months. Theycan obtain land at concessional rates from government in theoutskirts or forge a public private partnership with land ownersso as to mitigate the cost of these assets. Going for greenand efficient building design for optimal land use and energyconservation in the long run is an imperative these days.Alternatively, small HCEs can consider setting up hospitals(with 100 beds or more) in rural areas to avail tax exemptionunder sec 80 1 B for the first 5 years. Entrepreneurs can alsobuild public private partnership with state governments formanagement of primary and secondary health care units byis another great option. Diagnostic Imaging Centers can providetheir services in teaching hospitals by forging PPP- as awin- win situation for all the stakeholders.

Funding the expensive equipment
Expensive medical equipment like MRI, cyber knife can alsobe funded by specialised companies/investors on a referral/commission basis in the hospital premises there by reducingcapex cost. Cost of expensive equipment such as blood gasanalyser and vacuum assisted closure can be further savedby convincing the vendors to simply park their machines inthe hospital instead of outright purchase and buy consumablesfrom them, thus benefitting both. Asset utilisation can befurther enhanced by sharing expensive imaging equipmentand other facilities such as laser equipment, cyber knife andblood bank with other hospitals and using them round theclock instead of 7-8 hours daily.

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