May 2012

Indian Healthcare Sector: A Galore of Scope and Opportunity

CONFIDENTIAL

The information contained within this document is proprietary to MEGStrat Consulting and it reserves the right to all information

provided. The recipient would treat this material as Confidential Information.

www.megstrat.com

Executive Highlights

Industry Overview

• Introduction

• Industry Composition

• Current Scenario

Key Trends and Growth Drivers

• Conducive Demographics

• Rising Affordability

• Increase in Lifestyle Diseases

• Health Insurance and Medical Tourism

• Regulatory factors Boost Reach and Quality

• Market Trends

• Deal Activity

• Private Equity

• M&A

Operating Models

• Revenue Drivers for Tertiary Hospitals

• Operating Models

Opportunities and Growth Strategies

• The Unmet Need

• Opportunities

• Growth Strategies

• Building Functional Efficiencies

Risk Factors and Mitigation

The Way Forward

About MEGStrat Consulting

3

2

4

20

22

27

32

9

29

3 3

• The Indian healthcare industry, valued at USD 40.0 billion in 2011, is highly fragmented and

dominated by private players. The sector is expected to grow at 24.1% p.a. till 2020, fueled

by large investments from existing corporate hospital chains and new entrants backed by

private equity investors.

• Demand for Healthcare services is poised to grow exponentially owing to a growing old age

population with rising incidence of lifestyle diseases, rising incomes and affordability, and

increased penetration of health insurance

• India only spends 4.2% of GDP on healthcare, compared to an average of 8.3% globally, and

lower than other emerging countries like Brazil (8.4%) and China (4.3%). As such, India’s

current healthcare infrastructure would not be adequate to meet the exponential demand

expectations.

• Government-run facilities have inadequate equipment and poor quality. As a result, private

players can capitalize on the opportunity. The private sector is expected to contribute

80.0% - 85.0% of the USD 86.0 billion investment required in healthcare till 2025.

• The sector has attracted private equity players, who have been playing a significant role in

various strategies of Indian hospitals, including organic & inorganic growth, and to make

hospitals asset-light enterprises.

• Most hospital chains have aggressive expansion plans to scale up their operations and

establish a national presence. Increasing entry barriers like high Capex intensity and

reserve crunch will favor existing players to pursue accelerated growth.

• Indian hospitals are exploring various innovative models to improve their performance and

profitability, viz. introducing telemedicine, focusing on specialty centers and day care

centers.

• There is increased penetration into tier II & III cities that have lower Capex & costs and

higher IRR, using models such as hub & spoke and operating & maintenance contracts to

expand reach.

MEGStrat Disclaimer Applicable

4

The Indian Healthcare sector is at a vital juncture, perched for assured growth till 2020. Healthcare expenditure in

India being among the lowest globally, offers tremendous scope and opportunity to the industry stakeholders,

especially in the private sector.

However, considerable challenges

exist in terms of service

accessibility and patient care

quality. As such, Government

support would inherently play a

significant role in the overall

development and growth of the

sector.

Robust Demand

Healthcare expenditure in India is

projected to increase by 12% per

annum from 2011 -15

Increasing incomes, greater

health awareness, shift to

lifestyle diseases and increasing

insurance penetration to drive

growth of the sector

A Galore of Opportunities

Greater investment is required in

healthcare infrastructure to

increase the number of doctors

and hospital beds to bridge the

demand gap

The Union Government allocated

USD5.6 billion in 2011-12 for the

sector, an increase of 11% from

the previous fiscal year

Quality and Affordability Levels

There is a large pool of well-

trained medical professionals in

the country

Compared to countries in the

West and Asia, India has a

comparative cost advantage

Regulatory Support

Government of India aspires to

develop India as a global

healthcare hub

High level of effective policy

support in the form of reduction

in exercise duties and higher

budget allocation for the

healthcare sector

0

50

100

150

200

250

300

2005 2006 2007 2008 2009 2010 2012E 2020E

23 34 38 41 46 50

79

280

(USD

Billion)

5

Industry Revenues

Source: MEGStrat Analysis, IBEF, KPMG

71%

13% 9%

4%

3%

Hospitals

Pharmaceuticals

Medical Equipments and Supplies

Medical Insurance

Diagnostics

3

Healthcare

Hospitals

Government Hospitals

Include healthcare centers,

dispensaries, district hospitals

and general hospitals

Private Hospitals

Include nursing homes, mid-tier,

and top-tier private hospitals

Pharmaceutical

Manufacture, extraction, processing,

purification, and packaging of

chemical materials to be

used as medications for

humans or animals

Diagnostics

Businesses and laboratories that offer analytic or

diagnostic services including

body fluid analysis

Medical Equipment and

Supplies

Establishments primarily engaged in manufacturing

medical equipment and

supplies, such as surgical, dental,

orthopedic, ophthalmologic, and laboratory

instruments

Medical Insurance

Health insurance that cover an individual’s

hospitalization expenses and

medical reimbursement facility incurred due to sickness

Market break-up by revenues (2012E)

Hospitals and Pharmaceuticals are

the top revenue generating

subsectors in the Indian Healthcare

industry, accounting for 71% and

13% of industry revenues

respectively.

Other subsectors including Medical

Equipments & Supplies, Insurance

and Diagnostics share a smaller

part of the pie; however, play a key

role in the overall development of

the sector.

6 Source: MEGStrat Analysis, IBEF

Government-run facilities have inadequate equipment and

low quality. A chronic shortage of healthcare

infrastructure exists, especially in rural areas and tier II &

III cities, with potential requirement of 1.75 million new

beds by the end of 2025. Most hospital chains have

aggressive expansion plans to scale up their activities and

establish a pan India presence. Various innovative models

are being explored to improve their performance and

profitability, viz. getting into telemedicine, and

increasingly focusing on specialty centers and day care

centers. High upfront investments, long gestation periods,

and rising real estate costs are compelling private players

to innovate with business models and expand into under-

penetrated tier II & III cities. As a result, these private

players can capitalize on the opportunity to expand. The

private sector is likely to contribute 80.0% - 85.0% of the

USD 86.0 billion healthcare investment required till 2025.

The sector is expected to grow at 24.1% p.a. till 2020,

witnessing significant interest from private equity players,

who would play an integral role in the strategies employed

by Indian hospitals, such as organic & inorganic growth,

and making hospitals asset-light enterprises.

0%

2%

4%

6%

8%

10%

12%

14%

16%

USA Brazil UK China India Global

15.2%

8.4% 8.7%

4.3% 4.2%

8.3%

% o

f G

DP

Spending as a % of GDP (2008)

India’s healthcare spend is significantly lower when

compared to the global, developed and other similar

emerging economies.

In 2008, the healthcare spend in India was close to half

the global average in percentage terms, when

evaluated on a “percentage of GDP” basis.

The Indian healthcare industry, valued to be worth USD 40.0 Billion in 2011, is highly fragmented and dominated by

private players. The industry is rapidly developing and is being fueled by large investments from existing corporate

hospital chains and new entrants backed by private equity investors. A growing old age population with rising

incidence of lifestyle diseases, combined with rising incomes & affordability and increased penetration of health

insurance are fuelling growth of the industry.

68%

32%

Private

Public

Indian Healthcare Spending(2008)

As of 2008, the private sector accounted for 68% of

overall healthcare spending. The overall healthcare

spending in India is expected to rise by 12% per

annum.

7 Source: MEGStrat Analysis, WHO

3

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

UK USA China Brazil India Global

83%

48% 47% 44%

32%

61%

17%

52% 53% 56%

68%

39%

% o

f T

ota

l H

ealt

hcare

Spend

Public Sector Spending Private Sector Spending

Global Comparison of Healthcare Spend

0

1000

2000

3000

4000

5000

6000

7000

8000

USA UK Brazil China India Global

7164

3222

875

265 122

899

USD

Per Capita Spending (PPP)

0

1000

2000

3000

4000

5000

6000

7000

8000

USA UK Brazil China India Global

7164

3771

721

146 45

854

USD

Per Capita Spending (USD)

The healthcare spend, when

compared on public-private

contribution basis, exhibits

a skewed scenario. The

Private Sector contribution

to the healthcare sector at

~68% is amongst the highest

in the world in percentage

terms. Public spending,

however, is amongst the

lowest in the world and is

~29 percentage points lower

than the global average.

The Indian healthcare spend, on a per capita basis, both in terms of USD (at average exchange rate conversion) and in

terms of Purchasing Power Parity (PPP), is amongst the lowest globally. When compared to the global average, the per

capita Indian healthcare spend is ~95% lower on an average exchange rate basis and ~86% lower on a PPP basis.

8 Source: MEGStrat Analysis, WHO

MEGStrat Disclaimer Applicable

9

• India’s population has grown from 1,024

million in 2000 to 1,191 million in 2010

and is expected to reach 1,272 million by

2015, at a CAGR of 1.3% over 2010 – 2015

• Increasing population will impose pressure

on the already inadequate healthcare

infrastructure, creating a severe need for

more hospital beds

• India’s average life expectancy has

increased from 57.0 in 1990 to 65.0 in

2009. This, coupled with a declining

population growth rate, implies that the

number of people in old age groups (>60

years) is likely to increase

• Population above the age of 60 is likely

to double from 96.4 million in 2010 to

192.7 million in 2030

Population Growth

Old Age Population

An increase in ageing population will boost the

demand for healthcare services.

10

1024

1191

1272

0.0%

0.5%

1.0%

1.5%

2.0%

500

1000

1500

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

Population (Million People) Population Growth Rate (%)

Population Estimates

Source: MEGStrat Analysis, US Census Bureau, IMF

• In the recent decade, India has witnessed rapid growth in income levels and wealth

• GDP per capita has grown from USD 729 in 2005 to USD 1,389 in 2010, and is expected to reach USD 2,226 by

2015

• Increasing wealth and standard of living has led to greater health awareness, resulting in higher healthcare

spending

• Healthcare expenditure per capita in India has increased from USD 27 in 2004 to USD 45 in 2009

• Rising affordability and the resultant quality consciousness along with increasing healthcare spending is a major

factor driving the demand for the healthcare industry

Affluence Leading to Health Consciousness

GDP Per Capita (USD)

0

500

1000

1500

2000

2500

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

729

1389

2226

Rising affordability

and attention on

quality of life to

increase

healthcare

expenditure

0

5

10

15

20

25

30

35

40

45

2004 2005 2006 2007 2008 2009

27 30

34

42 45 45

Healthcare expenditure per capita (USD)

11 Source: MEGStrat Analysis, WHO, IMF

• India is experiencing fast growth in number

of people suffering from lifestyle related

diseases

• Percentage of population suffering from

cardiac diseases, diabetes, obesity and

cancer are expected to rise from 7.7% in

2005 to 11.6% in 2015

• As of 2008, lifestyle related diseases

comprised 13% of total ailments in India,

which is expected to increase to 20% by 2018

• This increase is likely to trigger additional

demand for specialized treatment, which

can be provided better in specialty or super-

specialty hospitals

• This will also lead to increasing margins for

hospitals, since these are the high margin

end of disease spectrum

Accelerating Incidence of Lifestyle Diseases

0.0%

2.0%

4.0%

6.0%

Cardiac Diabeties Obesity Cancer

3.1% 3.0%

1.3%

0.3%

4.9%

3.7%

2.7%

0.3%

Perc

enta

ge o

f Popula

tion

2005 2015

Increase in Lifestyle related Ailments

Ailment-Wise Case Mix (2008)

6%

4%

3%

2%

5%

3%

4%

12%

10% 8%

43%

Cardiac Oncology

Diabetic Orthopedic

Gynecology Neurology

Urology Gastro intestinal

Accidents Fever

Others

12 Source: MEGStrat Analysis, Edelweiss Research

3

• Health insurance is gaining high momentum in India

• Gross health insurance premiums have increased

at a CAGR of 30%, from USD 733.9 million in 2006-

2007 to USD 2,095.3 million in 2010-2011

• Penetration as % of GDP has risen from 0.08% in

2006-2007 to 0.12% in 2010-11

• Reduction in out-of-pocket expenses on health from

92.2% of total private expenditure in 2000 to 74.4% in

2008 clearly indicates the increase in health

insurance

• Penetration of health insurance will significantly

increase the affordability of healthcare services for

the population, while improving the quality of

healthcare

Rising Health Insurance

Health Insurance Penetration

Gross Health Insurance Premiums

0

500

1000

1500

2000

2500

2006-07 2007-08 2008-09 2009-10 2010-11

733.9

1215.3 1320.5

1533.2

2095.3

USD

Million

• Treatment for major surgeries in India cost ~10.0% of

that in developed countries; further, the Indian

tertiary and specialty hospitals boast of a high level

of quality

• Medical tourism is attractive for patients from

developed countries (due to the cost advantage) as

well as emerging countries (due to better quality).

India’s huge expat population itself is a large target

market

• The medical tourism industry is expected to increase

from USD 350.0 million in 2010 to USD 2.2 billion in

2015; Specialty care and tertiary hospitals are

estimated to account for USD 1.0 - 1.5 billion of the

total potential revenue

Medical Tourism: Lower Costs enable Growth

Medical Tourism Industry Size

0

400

800

1200

1600

2000

2400

2010 2015

350

2200

USD

Million

Healthcare Cost Differential

Treatment Cost (USD) India USA Singapore India cost as % of USA

Heart surgery 4,800 100,000 15,312 4.8%

Heart value replacement 4,800 160,000 13,000 3.0%

Bone marrow transplant 30,000 250,000 150,000 12.0%

Liver transplant 69,000 300,000 140,000 23.0%

Knee replacement 5,000 48,000 25,000 10.4%

Hip replacement 5,200 38,000 12,000 13.7%

13

0.08%

0.10% 0.11%

0.12% 0.12%

0.00%

0.02%

0.04%

0.06%

0.08%

0.10%

0.12%

0.14%

2006-07 2007-08 2008-09 2009-10 2010-11 %

of

Nom

inal G

DP

Sources: MEGStrat Analysis, IRDA, WHO, Morgan Stanley Research, PUG Research

3

•The benefit of section 10 (23 G) of the IT-Act has been extended to financial institutions that provide long-term capital to hospitals with 100 beds or more

•Government is encouraging the PPP model to improve availability of healthcare services and offer healthcare financing

Boost to the private sector

•The benefit of section 80-IB has been extended to new hospitals with 100 beds or more that are set up in rural areas; such hospitals are entitled to a 100% deduction on profits for five years

Pushing investments in rural areas

•Custom duty on life-saving equipment has been reduced from 25% to 5% and exempted from countervailing duty

•Import duty on medical equipment has been reduced to 7.5%

Tax incentives

•Incentives and tax holidays are being offered to hospitals and dispensaries offering health travel facilities

Incentives in the medical tourism industry

•Regulates the import, manufacture, distribution, and sale of drugs and prohibits the manufacture and sale of drugs which are misbranded, adulterated, spurious, or harmful. Specifies license requirements for manufacturer / distributor of drugs & cosmetics

Drug and Cosmetic Act, 1940

•Regulates the mode of treatment & disposal of bio-medical waste. Requires the institutions that generate waste to, ensure that waste is handled without adverse impact on health & environment

Bio-Medical Waste (Management & Handling) Rules, 1998

•Makes it mandatory for all clinical establishments to register under the act. The act is to be eventually implemented nationwide and may lead to closure of nursing homes which do not meet the requirements

Clinical Establishment Bill, 2010

•NABH accreditation of facilities confirms quality assurance and its standards focus on patient safety and quality care

National Accreditation Board for Hospitals and Healthcare(NABH)

•DGCI formulated guidelines in July 2006 for the import and manufacture of medical devices

Drug Controller General of India (DGCI)

•FDI in hospitals is permitted up to 100% under the automatic route

Foreign Ownership

14

3

Focus

On S

maller

cit

ies

Higher Profitability in Hospitals in Tier II & III Cities

• The healthcare market in tier II & III cities is expected to grow at a CAGR of 17.9% till 2023,

~5.0% higher than a CAGR of 13.2% for healthcare market in metropolitans

• Hospitals in tier III cities require Capex of USD 113,600 per bed, as compared to the Capex

requirement of USD 454,500 per bed in metropolitans

• Operating costs in tier II & III cities are ~30.0% lower than metropolitans & tier I cities

• The IRR in hospitals in tier III cities is double of that of the ones in tier I cities

• A tier II & III city hospital attains operating profitability in the 1st or 2nd year of operations,

as compared to a tier I city hospital that reaches this stage around the 5th year

0

100

200

300

400

500

Metros Tier I Cities

Tier II Cities

Tier III Cities

454.5

340.9

204.5

113.6

Capex per Bed (‘000 USD)

-30%

-20%

-10%

0%

10%

20%

30%

Year1 Year2 Year3 Year4 Year5

Metros Tier I Cities Tier II Cities Tier III Cities

Operating Margins of Hospitals

IRR in Hospitals

0%

10%

20%

30%

Tier-I Tier-II Tier-III

13%

21%

26%

15 Sources: MEGStrat Analysis, PUG Research

3

• Due to increasing urbanization and the problems associated with modern-day living in urban settings, disease profiles are shifting from infectious to lifestyle-related ones

• It is estimated that by 2012, 50% of the spending on in-patient beds would be for lifestyle-related diseases, which is resulting in increased demand for specialized care

Shift from communicable to lifestyle diseases

• Many healthcare players such as Fortis and Manipal Group are signing management contracts to provide an additional revenue stream to hospitals

Management Contracts

• Telemedicine is evolving fast in India, supported by the ICT sector

• Several major private hospitals such as Apollo, AIIMS, Narayana Hrudayalaya have adopted telemedicine services and some have developed PPPs

• Currently, about 650 telemedicine centers exist throughout India

Evolution of telemedicine

• Medical professionals of Indian origin practicing abroad are willing to return and settle in India

• This trend is being supported by Improved healthcare infrastructure in India, increase in medical tourism, improved compensation structures and growing restrictions on licensing and practicing in UK and Europe

Expat Doctors

• Holistic well-being is a combination of modern and traditional medicine

• Various hospitals have tied-up with holistic health centers to combine traditional healthcare knowledge and practices with conventional systems

• Various services offered in wellness centers are diet & nutrition, yoga, herbal medicine, humor therapy and biofeedback

Holistic Well-Being

16

3

Date Target Acquirer

Deal value

(USD Million)

Jun-11 Angels Health Pvt Ltd Housing Development Finance Corp NA

Jun-11 Vaatsalya Healthcare Solutions Aquarius India & Seedfund 10

May-11 Jeevanti Healthcare Seedfund 2.2

May-11 Super Religare Laboratories Sabre Partners 11.2

Apr-11 Super Religare Laboratories Avigo Capital Partners 22.5

Mar-11 MedPlus Health Services

Mount Kellett, TVS Capital and Ajay Piramal

Group's healthcare fund 88.4

Jan-11 Global Healthcare Sequoia Capital and Elevar Equity 3.3

Jan-11

Integrated Health and Healthcare

Services Halcyon Finance & Capital Advisors 44.4

Dec-10 BSR Super Speciality Hospitals Aureos Capital 10

Nov-10 Medfort Hospitals TVS Shriram Capital & ePlanet Ventures 13.1

Aug-10 Dr Lal PathLabs TA Associates 34.8

Jun-10 Metropolis Health Services Warburg Pincus 84.9

May-10 Nova Medical Centres GTI Group and New Enterprise Associates 5.3

Apr-10 Manipal Health Systems Kotak PE 33.5

Feb-10 HealthCare Global Enterprises Milestone Religare Advisors 10

Nov-09 Krishna Institute of Medical Sciences Milestone Religare Advisors 12.9

Mar-09 Vaatsalya Healthcare Solutions Oasis Fund and Seedfund 3.7

Feb-09 Kavery Medical Centre and Hospitals India Venture Advisors 17.8

Jun-08 CARE Hospitals Ashmore Group 23

Sep-07 Apollo Hospitals Enterprise Apax Partners 104.3

Mar-07 Fortis Healthcare India Trinity Capital 19.7

Private Equity Deals

17 Source: MEGStrat Analysis

Recent Strategic Deals

Date Target Acquiror Deal Value

(USD Million) Deal Synopsis

Jul-11

Indian Health

Organization Pvt

Ltd

Aetna Inc N.A.

Supported Aetna in gaining entry into the Indian market

and getting access to 80,000 customers, 3,000 doctors,

clinics and wellness programmes.

Jun-11 Max Healthcare MAX India 31.2

The deal gave an exit to Warbug Pincus, which had

invested in the Company in 2004 and 2005 through two

tranches.

Apr-11 Super Religare

Laboratories

Fortis

Healthcare

India

178.5

Integrated operations of a hospital company with a

diagnostic chain. SRL has a strong network of laboratories,

wellness centers and collection centers. Fortis has been

looking for acquisitions in new specialties to augment its

current operations.

Jan-11 Dr Agarwal's Eye

Hospital

Dr Agarwal's

Health Care 2.0

The acquirer (promoter) bought 20% additional stake in

the target via open offer to increase promoter stake to

75%.

Aug-09 10 Wockhardt

Hospitals

Fortis

Healthcare

India

185.2

The acquisition costed USD 107,000 per bed, against a

greenfield cost of USD 133,000 per bed. Also, the deal

gave Fortis a strong presence in Mumbai and Bangalore,

where it did not have presence earlier.

18

0

2

4

6

8

10

12

14

16

2006 2007 2008 2009 2010 2011

Inbound

Domestic

India Healthcare M&A Activity

Sources: PwC, MEGStrat Analysis

MEGStrat Disclaimer Applicable

19

3

Revenue Drivers

Other businesses

Other revenue generating streams such as pharmacies

Operating beds

Number of beds based on Capex and project execution

Occupancy

Number of beds occupied; 80% is considered to be “full” capacity

Outpatient to inpatient conversion

Higher revenues come from inpatients than outpatients

Inpatient share

Typically, inpatients generate ~75.0% of hospital revenues

Average length of stay (ALOS)

First 2-3 days generate maximum revenues from a patient

Average revenue per operating bed (ARPOB)

ARPOB depends on casemix, type of procedures, utilization of

equipment, and pricing

Corporate tie-ups

Result in long-term contracts, however, increase receivable days

20 Source: Industry Research

3

Hub & Spoke Model

1. Under a hub and spoke model, a super-specialty hospital (hub) is established in a major city of a

region, with smaller multi-specialty hospitals or day care centres in surrounding towns

2. Enhances profitability by ensuring better treatment at the spokes, and transfer of patients to hubs

only if required, increasing occupancy and ARPOB

Operating & Maintenance Contracts

1. A corporate chain (like Fortis or Apollo) takes over management of a hospital owned by a trust

2. The corporate hospital may or may not acquire an equity stake in the target

3. In return, the corporate hospital gets a fixed annual management fee or a share of the revenue/

EBITDA

Hub

Spoke

Spoke

Spoke

Spoke

Corporate hospital

(such as Fortis or

Apollo)

Target Hospital

21

MEGStrat Disclaimer Applicable

22

Healthcare infrastructure deficiencies

The penetration of healthcare infrastructure in India is much lower than that of developed countries and even lower

than the global average in terms of healthcare infrastructure and manpower.

Indicators Year India USA UK Brazil China

Hospital Bed Density (per 10,000 population) 2000-2009 12 31 39 24 30

Doctor Density (per 10,000 population) 2000-2009 6 27 21 17 14

Births attended by skilled health personnel (%) 2000-2009 47 99 NA 97 98

No of doctors 2009 6,43,520 7,93,648 1,26,126 3,20,013 18,62,630

No. of Nurses 2009 13,72,059 29,27,000 37,200 5,49,423 12,259,240

No. of Dentists 2009 55,344 4,63,663 25,914 2,17,217 1,36,520

Avg. no. of doctors per bed 2009 0.6 0.81 0.53 0.69 0.46

Avg. no. of nurses per bed 2009 1.27 3 0.16 1.18 3.02

No. of doctors per 1,000 population 2009 0.6 2.7 2.1 1.7 1.4

No. of nurses per 1,000 population 2009 1.3 9.8 0.6 2.9 1

Parameter 2008 2018 2028

Additional Beds Required 1.1 million 3.1 million 2 million

Bed/1000 population ratio 0.7 to 1.7 4 5

The Requirement

Parameter Annual Production (2011) To fill the gap

Physicians 30,558 993,500

Nurses 114,218 2,510,250

Inadequacy of Public Sector: An opportunity for Private Sector

• Healthcare has received inadequate attention from the

government in India

• Indian government spends 4.1% of its total budget on

healthcare, compared to a global average of 13.9%

• The government contributes only 32.8% of total

healthcare costs, compared to a 60.5% globally

• Government-run healthcare facilities are not well managed,

and are known to have poor quality of services and

inadequate infrastructure & equipment

• The shortage is more severe in rural areas, where only 43.5%

villages in the country have a doctor

• Bridging the gap requires high investments; this opportunity

can be capitalized by private players to expand operations

into smaller towns which lack good quality private hospitals

Infrastructure / services % of villages

Connected with roads 73.9%

Having any health provider 95.3%

Having trained birth attendant 37.5%

Having Anganwadi worker 74.5%

Having a doctor (private & visiting) 43.5%

Having a private doctor 30.5%

Having a visitor doctor 25.0%

Health Infrastructure in Villages

23 Sources: MEGStrat Analysis, IMF, Intel Case Study, KPMG

3

India has a competitive advantage in healthcare over peers, owing to its large skilled manpower, low

cost of surgeries, vast opportunity in Research & Development and medical tourism.

Opportunities for investments in Healthcare

• High cost differential in India allows for outsourcing of Pathology and Laboratory tests by International hospital chains

Diagnostic & Pathology Services

• Provides rural areas access to better quality healthcare

Telemedicine

• An additional 2 million beds and 993,500 physicians are required for India to bridge the gap and prepare for demand estimations in 2025

• To achieve these targets an investment of USD 86 billion will be required

Healthcare infrastructure

• Contract research is a rapidly growing segment in the Indian health care industry

• Foreign players are entering into contract research to reduce their operational and clinical cost

• About 60% of the global clinical trials is outsourced to developing countries

Contract Research

• The Indian medical tourism industry is poised to grow at a CAGR of 58.3% into a USD 2.2 billion industry by 2015

Medical tourism

• Less than 15% of the Indian population is covered through health insurance

• Increasing healthcare cost and burden of new diseases along with low government funding is raising demand for health insurance coverage

• Many companies are offering health insurance coverage to employees, driving market penetration of insurance players

• With increasing demand for affordable quality healthcare, the penetration of health insurance is poised to grow exponentially in the coming years

• The health insurance premiums are expected to grow at a CAGR of over 28% for the period spanning from 2008-09 to 2012-13

Health Insurance

24

3

Growth strategies

Organic growth

Greenfield projects

Increase in ARPOB & occupancy

Reduction in average length of stay

Inorganic expansion Acquisition of existing

hospitals

Hiring off non-core assets

Hive-off real estate assets to make

operations asset-light

Diversification across the value chain

Build/ acquire businesses such as

pharmacies, & diagnostics labs

Growth by addition of number

of operating beds

Revenue growth by increasing

operating efficiencies

Buy-outs or through operating

& management contracts

Cash infused by sale of real

estate assets, and increase in

ROA

Example: Fortis’ acquisition of

Super Religare Labs in May

2011 for USD 178.5 million

Asset-light model

is the preferred

growth strategy

for Private Equity

investors

25

3

Apart from infrastructure improvement, capacity addition and development of manpower

being critical for the Indian healthcare sector, it is also necessary that the existing facilities

are operated in an efficient manner. This can be ensured through various measures such as

Accreditation, adoption of Cost Accounting Procedures and increased penetration of

Healthcare Insurance.

Accreditation

Accreditation is one of several models of external evaluation used by healthcare entities

throughout the world to regulate, improve and promote health care services. Domestically,

accreditation is sought from the National Accreditation Board for Hospitals and Healthcare

Providers (NABH), an entity under the control of the Quality Council of India.

JCI, an international accreditation arm of the US joint commission also provides accreditation.

Few hospitals in India like Moolchand Hospital and Fortis hospitals, have already been

accredited by this body.

Trends of Accreditation

To date, only 17 Indian hospitals are JCI-accredited and all are large corporate entities,

including hospitals in the Apollo, Fortis, and Wockhardt Hospital systems.

As of March 2007, over 700 Indian hospitals had applied for NABH accreditation. NABH is

involved in the accreditation of blood banks, diagnostic centres, nursing homes, dental clinics

and Ayurvedic centres in addition to private hospitals, nursing homes. As of January 1, 2008,

only 12 medical facilities were accredited by NABH.

Advantages of Accreditation

Patients benefit in terms of high quality of care and patient safety. They are serviced by

credible medical staff and their rights are respected and protected.

Accreditation results in continuous improvement of the overall services of the hospital in order

to provide high quality care with least possible risks. Accreditation provides an objective

system of empanelment by insurance and other third parties. It provides access to reliable and

certified information on facilities, infrastructure and level of care with education on good

practices to improve business operations.

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Risk Factors Mitigation Long gestation periods Hospitals require significant upfront investments and have a long payback period. This makes investments in the sector less attractive

Increasing number of hospital acquisitions are happening through operating & maintenance contracts which have short gestation periods and faster revenue ramp up.

Lack of qualified staff Finding qualified staff & specialized doctors is a major challenge for hospitals in India, especially for new start ups, leading to wage inflation and inadequate quality

Stringent license requirements abroad and improving health infrastructure in India is encouraging doctors to return to India. Medical education & training is seeing growing investments, especially by healthcare companies such as Manipal.

Rising real estate prices Increasing real estate prices lead to higher initial outlay or higher lease payments, resulting in decreasing profitability

Substantial amount of growth in the industry is driven from tier II & III cities, mainly because of lower real estate cost. Some have adopted the leased model to offset high real estate prices.

Lack of capital Huge capital will be required to meet the growing demand of healthcare. However, long gestation periods make the sector unattractive

The growth prospects of the industry have led to a rapid increase in investments in hospitals. Private equity players have invested USD 373.4 million in the sector since 2010, and existing players are rapidly deploying capital for expansion.

Increasing operating cost Increasing costs of equipment and labor lead to margin pressure and lower profitability

Equipment manufacturers like GE and Philips are increasingly focusing on India to sell healthcare products, resulting in favorable terms of supply.

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MEGStrat Disclaimer Applicable

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High investments

in a growing

market, along with

openness to

innovate endorse

well for the sector

Public Sector and Government Interventions – Current and Going Forward

Improving the Reach and Quality:

1. The government plans to build 6 super speciality tertiary care hospitals with research and

education centres across the country. These would cater to the weaker sections making

high end clinical care available to the masses.

2. Encouraging current initiatives on PPP’s in the sector should continue.

3. The government should continue flagship programmes such as Rashtriya Swastha Bima

Yojana (RSBY) and State level Insurance schemes like the Arogyashri and Chiranjeevi

4. To improve availability of medical staff in rural and far-flung and inaccessible areas,

doctors, specialists and para-medicals are given monetary benefits such as 25% hike to

those posted in rural and distant areas and 50% hike for those in areas that are almost

unreachable by road.

5. A truncated medical course designed by the Central Government from the Chinese

“barefoot doctors model” that is assumed to produce 145,000 rural doctors every year,

would cover most primary level needs. The existing health sub-centres, the first point of

care for villagers, are now being manned by Auxiliary Nurse Midwives (ANM).

6. Through NHSRC, the NRHM (National Rural Health Mission) is encouraging almost 200

hospitals to go for a sustained Quality Accreditation program and this is sought to extend

to 400 hospitals.

7. CGHS (Central Government Health Services) has made it mandatory for all healthcare

institutions and diagnostic centres providing care to have either NABH / NABL

certification.

Healthcare Education:

1. To meet the demand for more human resources, especially the doctors and nurses, the

government has reduced land requirements from 25 acres for medical colleges to 10

acres in urban areas. The INC norm of 4 acres for nursing colleges has also been relaxed.

2. Private medical colleges are allowed to conduct their own CET and the reservation

criteria for government seats and management quota have been relaxed with a uniform

pre-decided fee. Only the NRI reservation is maintained at 15%.

3. Private medical colleges are now allowed to register under Section 25 Act, unlike earlier

when they had to be under the Charitable Trust banner.

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Public Sector – Action Items:

1. Special benefits, Viability Gap Funding, and subsidies on cost of care for PPP initiatives

would make it more attractive for the private sector to participate.

2. Awareness drives, IEC for Health Insurance schemes covering both the rural and urban

poor to be initiated through collaborative approaches.

3. Incentivize corporate sector to take up healthcare initiatives for CSR activities.

4. The current compulsory rural stint for medical professionals should be continued;

however, it needs to be augmented with better facilities and support systems.

Import Duty Concessions:

1. Reduction in Import duty on equipment from 25%to 5%.

2. Customs Duty reduced from 16% to 8% for medical and veterinary furniture.

3. Custom’s duty on 24 medical equipment like X-ray, tele-therapy stimulator equipment,

goniometer have been reduced to 5%.

4. Depreciation on medical equipment raised from 25% to 40%.

Medical Device Interventions:

1. The government announced a USD 69 million in October 2009 to promote domestic

device/ manufacture to enable price control of critical equipment including stents,

catheters and heart valves, among others.

2. Central government to set up the first specialised device centre ‘National Centre for

Medical Devices’ in Gujarat to promote indigenous R&D efforts.

3. Medical Devices Regulation Bill has been tabled and is under consideration.

4. Enabling IT driven healthcare to improve the reach and costs. Tele-medicine, as a

branch of diagnosis and treatment, should be encouraged and widely implemented to

help ensure availability and accessibility of care to all areas in spite of infrastructural

inefficiencies.

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Enabling [M]easurable [E]ffective [G]rowth Strategies

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