PE Firms Pump Cash Into India Health Care

  • $520M for sector in 2012
  • India poses no restrictions on such investments
  • Promoting a franchise business model

Private equity funds quadrupled their investment in India’s primary health care, betting the sick and ailing will stop seeing family doctors in often cramped and dingy quarters and check into modern chains sprouting up across Asia’s No.3 economy, sister news service Reuters reported. Goldman Sachs Group Inc., Warburg Pincus LLC, Sequoia Capital and the Government of Singapore Investment Corp. are among investors that pumped $520 million into India’s basic healthcare industry this year, compared with $137 million in 2011, according to Thomson Reuters data. Some analysts predict investment will surpass $1 billion in 2013.

Organized health care providers including Apollo Hospitals Enterprise Ltd and Fortis Healthcare Ltd are betting that growing numbers of patients will be willing to pay two or three times more for better-equipped clinics—all under a model that can be replicated fast and offers investors the potential for quick returns.

“The family doctor concept is slowly phasing out as migrants in cities look out for a brand rather than visiting a general physician next door,” said Santanu Chattopadhyay, CEO of NationWide Primary Healthcare Services, in which U.S.-based Norwest Venture Partners has invested $4.6 million.

The opportunity is vast: India’s unorganized primary health care system is worth $30 billion and is growing at least 25 percent a year. The challenge will be convincing the sick to give up their trusted family doctors. The country’s primary healthcare sector will draw at least $1 billion annually in private equity investment over the next couple of years, said Shantanu Deb Mookerjea, executive director at Mumbai-based advisory firm LSI Financial Services. “Single-speciality chains and diagnostic laboratories will be the game changer,” he said, adding that they are easy to set up and expand to suit demand.

Another attraction is that primary health care providers such as outpatient clinics and diagnostic centers are not capital-intensive, so investors don’t have to write out big checks.

Also, unlike many restrictive Indian industries, from insurance to real estate and telecoms, there are no limits on foreign ownership in health care. Instead, health care, like restaurant chains, is a play on rising spending power in India, although valuations tend to be lower than the retail sector. Investors pay single-digit multiples on price-to-earnings in primary health care, compared with 15x to 18x for food and other consumer chains.

Valuations could improve if private health care operators also adopted a restaurant franchise model. Under such a model, a healthcare operator would allow a franchisee to use its brand and provide expertise and support in exchange for a fee. The franchisor would avoid forking out money to set up new clinics—investments that will be borne by the franchisee.

“We would prefer to value our company based on our franchisee consumer model like a pizza (chain) rather than as a pill made by a drug maker,” said Atul Bhide, director of finance at Mumbai-based Vaidya Sane Ayurved Laboratories, which operates 160 clinics providing traditional ayurvedic treatment.

As a result, health care has been a rare bright spot for private equity in India, where overall investment fell 17 percent this year to about to $3.3 billion. “From small hospital chains and specialised treatment facilities, we are witnessing increased institutionalised activity, which could attract a lot of institutional investment interest,” said Vishakha Mulye, CEO of ICICI Venture, the private equity arm of ICICI Bank Ltd. Last year, Mulye’s fund sold its stake in diagnostic chain Metropolis Healthcare to Warburg Pincus for 3.92 billion rupees, a 10x return on its 350-million-rupee investment in 2006.

The biggest challenge will be convincing patients such as Chandrashekhar Khandke, a 30-year-old software professional at IBM in Pune, who said he has visited modern clinics a few times but still prefers his family doctor. “If I buy grains from a grocery store or from a supermarket, it doesn’t make much of a difference but when it comes to health, a family doctor matters a lot,” he said.

Overcoming the draw of a trusted doctor may prove harder than it seems, even in a country where healthcare infrastructure is poor, electronic medical records are rare, and the quality of doctors and other medical professionals is patchy. “Although branded clinics have potential, they find it tough to pull patients from a strong local doctor. Also, if there is a big hospital in the vicinity, then they lose out on patients,” said Deepak Malik, analyst at Mumbai-based brokerage Emkay Global Financial Services Ltd.

While fees at modern clinics range from 150 to 600 rupees for treatment of routine illness, sole general practitioners charge patients anything between 50 and 300 rupees per visit. “While these chains have a unique brand, a trusted doctor is even a bigger brand,” said Anil Advani, a doctor who operates an old but modest 800-square-foot (75-square-metre) clinic in Thane, outside Mumbai.

Kaustubh Kulkarni and Indulal PM are correspondents in Mumbai for Reuters.