INVESTMENT BANKING NEWSLETTER - Spark...

1Jan 2018 – Spark Financial Services Newsletter

INVESTMENT BANKING NEWSLETTERHEALTHCARE AND LIFESCIENCES

FEBRUARY 2018

2Feb 2018 – Spark Healthcare & Lifesciences Newsletter

FROM THE DIRECTOR’S DESK

Dear Reader,

It gives me great pleasure to welcome you to the inaugural edition of theHealthcare & Lifesciences newsletter by Spark Capital.

Healthcare & Lifesciences has been one of the key focus sectors for us at SparkCapital. We have been fortunate to have worked with some of the mostpromising companies and capital providers over last few years coupled with ourefforts to bring some of the new concepts/formats to the investing market. Wethought it would be an exciting idea for us to pen down our views on deal makingand trends shaping this space and share it with our clients and well-wishers on abimonthly basis.

CY17 was an active year for us at the Healthcare & Lifesciences InvestmentBanking franchise. We helped Omni Hospitals raise structured debt and were

instrumental in helping a South India based pharma company refinance their credit from a private sector bank. Wehelped arrange foreign debt for the Singapore subsidiary of a fast growing pharma company based in India. Throughour equities platform, we helped facilitate block trades in the counters for Healthcare Global (HCG) and NarayanaHrudulaya (NH). All of this in addition to the several transactions that are at various stages of execution are areflection of our belief in our full-service abilities to provide diverse solutions to our clientele suiting theirrequirements and life cycle of evolution.

Our understanding of the space coupled with our continued engagement with various stakeholders brings us to whatwe believe will be the big key trends that could play out over calendar 2018 and potentially next couple of years:

1. Regulatory activism in healthcare services/devices to stay – But should have limited impact on balance:

This topic dominated sound-bites through the last 12 months and also had its fair share of shadow on deal making –the views in the market ranged from ‘it’s all over for healthcare services in India’ to ‘wewant to continue to invest buttread with little caution and with some margin of safety in entrymultiples’. However, a fair share of smart money andstrategic operators also believed this could be merely noise that you live with and may not have much impact. Givendivergent views, perhaps it is most opportune that we decided to do a little deep dive on this burning topic, which webelieve will figure in most domestic healthcare services/ devices deal discussions over next 12 months too. I hope youfind the article titled ‘Decoding The Regulatory Black Box – More Myths Than Facts’ included later in the newsletter, aninteresting read.

2. Pace of deal-making a little slow but the interest remains robust – a ‘new normal’ emerging:

CY17 saw a marked slow-down in the broader Healthcare & Lifesciences deal making activity – both on strategics’and financial investors’ side. Compared to 105 and 119 deals in CY15 and CY16, there were only 77 dealsconsummated in CY17. Even the cumulative value came down to USD 818 Mn in CY17 compared to USD 1,285 Mnand USD 1,240 Mn in CY15 and CY16. There were multiple factors at play in our view causing a ‘mini-storm’ of sorts.On the pharma side, US pricing pressure and FDA issues took focus away from acquisition lead growth initiatives,while on the healthcare and medical devices, there was an overhang of regulatory activism. One of the key trends wesaw in the year 2017 was investors’ relentless focus on execution ability as well as sustainable profitability/ uniteconomics of the businesses – a trend that we would continue to see sustaining itself in CY18. To be sure, the overallinterest in the sector is quite robust as per our market read given compelling macro factors and significant drypowder earmarked for the sector. We think CY17 saw early signs of emergence of a ‘new normal’ in Healthcare &Lifesciences deal making and CY18 could reinforce it further.

3. IPOs solidly on the table as an exit/liquidity option – scaled-up players could benefit from scarcitypremium and valuation arbitrage:

To use a cliché, capital markets have been in the pink of health, given strong macro tailwinds, improved liquidity andgeneral rebound in listed equity markets globally. Interestingly, despite this being so, the Healthcare & Lifesciencesindex in India was a clear laggard in calendar 2017 (near flat return v/s 28% for benchmark index). This was largely onaccount of pharma sector headwinds and a combination of ‘price and time correction‘ in some of the listed healthcareservices stocks. That said, the valuation multiples for scaled up plays and first-time stories are still compelling andtherefore we would continue to see many PE backed (and in some cases non-PE backed companies), explore publicmarket listings as a serious option on the table for liquidity/exit. This could include players across the healthcarespectrum – viz domestic pharma companies, med equipment/ devices players and healthcare services/ delivery


FROM THE DIRECTOR’S DESK

providers. Our perspective is that while good valuation is a serious reason to list a company, one should also take intoaccount other important factors such as the company’s preparedness, stage of evolution/institutionalisation andfounders’ long-term game plan.

4. Domestic consolidation driven by scale and/or synergies would accelerate in 2018 across different segments:

On the domestic pharma side, this could be driven by portfolio gaps or succession issues coupled with gooddemand by suitors and attractive valuations especially for brands/divisions focusing on chronic therapy segments.For healthcare services segments such as diagnostics, single specialty and devices, PE backed consolidationprimarily to scale up and ‘platformize’ their portfolio companies could be a major motivation. We could see somestrategic interest in these segments as well to largely get the ‘alpha’ in the growth of their flagship companies aswell as a way to get immediate market access in a new region. On the advanced diagnostic side, most of the pure-play companies are sub-scale leading to some consolidation (such as the recently announced Strand-HCG Triesta).The hospital players could also see consolidation, either on account of mid-cap or standalone asset chains beingbolted-on by PE players (or for their portfolio companies) or by select strategic players. In our baseline scenario,over next couple of years, we think some such healthcare platforms could emerge in India.

In addition, we see several other smaller trends emerge and gain steam, namely:

a. Structured capital gaining in prominence as an alternative to equity deals in Healthcare & Lifesciences –driven by high liquidity in the structured capital segment, providing exit to investors in sub-segments facedwith temporary headwinds as well as founders’ desire to defer dilution event to retain larger equity share ofvalue creation;

b. Multi-specialty hospital chains expanding footprint while increasingly preferring asset light growth. Thissector continues to attract meaningful international strategic interest and emergence of new suitors beyondthe ‘usual suspects’;

c. Single asset hospitals finding it challenging to remain profitable and lending themselves to consolidation;

d. Rapid growth in online pharmacies and home health companies driven by increased awareness and adoption.

We are also quite positive on the ambitious National Health Protection Scheme recently announced in theUnion Budget 2018. We believe the coverage of 500 million population and Rs. 5 lakh cover per family couldbe a game changer for healthcare services. However, the devil is in the detail and the key is to understand theimplementation roadmap.

As part of this newsletter, we also wanted to bring in a direct perspective from leading industry operators incertain select segments. For this edition, we have picked diagnostics segment and accordingly have includedinterviews of a couple of leading companies in the segment in our ‘Expert Speak’ section. I would like to takethis opportunity to wholeheartedly thank and express our gratitude to Dr. A Velumani, Founder, Chairman &Managing Director, Thyrocare Technologies and Dr. Sanjay Arora, Founder & Managing Director, SuburbanDiagnostics, for being of great help and for providing their thoughts in the interview captured later in thisnewsletter.

Also covered in this edition are some of the latest developments in deal making. We are sure the section on“From our EquitiesDesk” would be an interesting read.

I am sure you would find this newsletter insightful and assure you of taking any feedback (including critique!)you may have on board for subsequent editions – planned once every two months. We hope you enjoy readingit as much as we did putting it together.

With best wishes,

Virendra Pandey

Director and Head – Healthcare & Lifesciences,Investment Banking


WHAT’S INSIDE?

08

INTERVIEW

NOT JUST ‘SUBURBAN’ ANYMORE

LATEST NEWS AND ANNOUNCEMENTS17

NEWS

Key news and happenings making the headlines in

Healthcare & Lifesciences

FROM OUR

EQUITIES DESK

Insights from Spark’s Institutional Equities Desk

19

ANALYSIS

05

INTERVIEW

BADSHAH OF B2B

How Thyrocare Technologies disrupted the conventional diagnostic model and why it continues to

be the unquestioned leader in B2B diagnosticsHow the B2C diagnostic space is adapting to

changing industry dynamics

DECODING THE REGULATORY BLACK BOX –MORE MYTHS THAN FACTS

A detailed look at Government regulatory activism in healthcare

12

EDITORIAL

RECENT HEALTHCARE & LIFESCIENCES INDIA

TRANSACTIONS

Recent activities and developments across the Indian healthcare and

lifesciences landscape

16

TRANSACTIONS


EXPERT SPEAK

Spark fact file

Investment Banking

USD 5.5 BnTotal transaction value till date

USD 3.7 BnCapital raised till date

USD 1.8 Bn M&A transaction value till date

300+ Number of fund relationships globally

USD 700 Mn Average annual deal closure value for the last 3 years

11No. of transactions > USD 100 Mn

~USD 1.2 BnCurrent value of transactions being executed


~USD 450 MnTotal transaction value till date

~USD 150 Mn Current value of transactions being executed

INSIGHTS FROM AN INDUSTRY VETERAN

Thyrocare Technologies Limited is India's first and

most advanced Totally Automated Laboratory

having its strong presence in more than 2000

cities / towns in India and internationally.

Thyrocare operates with a Centralized Processing

Laboratory (CPL) in Mumbai – India for esoteric

tests; and Regional Processing Laboratories in

major metro cities of India and other parts of Asia.

BADSHAH OF B2B

We interacted with Dr. A. Velumani,Founder, Chairman & Managing Director ofThyrocare Technologies, on the company’sdisruptive journey in the B2B diagnosticsmarket and various macro developmentsimpacting the sector

Dr. A. VelumaniFounder, Chairman & Managing

Director, Thyrocare

1. One of the main questions that haveperplexed investors over the past 12-15months is how Thyrocare growing at amuch faster clip than most of its peers.What would you attribute this to?

The single biggest factor, in my opinion,why we have grown consistently overthe past several quarters is our pricingpolicy. We are the leaders in thediagnostic services market with a verytight pricing across our test menu whichis evident from the difference in theprices between our facilities and that ofthe others in the organized market.

Having said that, it is interesting to notethat despite lower realization per sample,our margins are higher than our peers andconsistently so. The key here lies in thevolumes. We are able to load ourinfrastructure with very high volumesowing to our pricing policy which thenhelps in better allocation of fixed costsand higher margins. In fact, when westarted out with the lower price points,

it was thought that it was an attempt togain market share and that we willincrease our prices in the medium tolong term. Contrary to that, we haveallowed our pricing to be morecompetitive compared to when westarted and continue to enjoy thebenefits of the pricing disruption whichwe created in the B2B market. Ourbusiness model has always been to havean optimum test menu size and a leanprocess, which is unique in its own wayand very difficult for competition toreplicate at the prices at which we work.

Another important factor is that ourbusiness model is inherently based onworking with the local incumbents ratherthan having to grow by necessarilydisplacing them. And we havesuccessfully demonstrated to them thewin-win situation we can create byworking together. Our quality and pricingensures higher footfalls at their centreswhich helps their growth – and adds toour consistent growth profile as well.


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▪ Consummated ~USD 300 Mn of transaction value in repeat business

Deep Distribution

▪ Extensive reach to over 300 funds across

– Private Equity & Hedge Funds

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EXPERT SPEAK

2. If pricing is key to growth, what is stoppingpeers from engaging in price competitionsince none of them have followed in yourfootstepson pricingas aggressively?

Unfortunately, the game is no longer justabout pricing for a lot of peers now. Thekey to pricing tightly is also to be able tomanage costs. If you look at some of thecost structures of competing firms, itdoes not allow for the kind of disruptionwe brought into the B2B market adecade ago. In fact, in my opinion, theB2B market is the most disruptedmarket – the B2C market yet to see adisruption anywhere close to what hasalready happened in the B2B market.

So even if competing firms were tocompete with me on price, unless theyrationalize their cost structures, suchpricing cuts will only cause them tobleed on profits. Thyrocare’s pricing isalso a function of its volumes – it is notpossible to sustain our pricing withoutour volumes and our volumes can comeonly from the kind of pricing we follow.

3. Thyrocare’s model of B2B diagnostics isat a stark contrast to the brand-basedB2C model that most other chains in themarket today seem to be employing. Howimportant do you feel branding is in thediagnostic market in India?

A lot of efforts in the diagnostic industryhas gone into creating and nurturingbrands, some of which have been inexistence for over two decades. Andwhile branding is important, my belief isthat India is a very price sensitive marketand hence price continues to hold poleposition for a large part of thepopulation in deciding which serviceprovider to choose. To draw an analogy,Jet Airways was the biggest and mostpowerful brand in Indian aviation beforethe advent of Indigo. And Indigo did tothe aviation industry the exact samething that Thyrocare did to the Indiandiagnostic market – cut frills, managecosts and disrupt pricing. And today,Indigo’s brand value is almost as good asthat of Jet Airways, if not better.

There is no doubt in my mind thatbranding is an important factor andhence even we have invested heavily inbrand building – especially for a company

that largely derives its revenue from theB2B business model. However we are ofthe strong opinion that our branding andmarketing spend indirectly helps ournetwork partners grow their recall value intheir home markets thereby bringinghigher business for them and hence for us.

But from a pure B2C perspective, in myopinion, the extent of spend on brandbuilding does not justify the incrementalrevenue per patient. Anyone who canprovide comparable service atcompetitive prices will emerge as thewinner in the Indian diagnostic market.

4. What are your views on the competitiveintensity in this space?

Competition has clearly gone up in thesegment. This is aided in part by theabsence of any significant entry barriersin this space including lack of regulatoryoversight, low capital requirements andhigher return ratios compared to othersegments of healthcare. In general, therehave been more entrants in the marketover the last decade compared to thosewho have been displaced orconsolidated – this is a good barometerof the increasing competitive intensity.

The diagnostic industry is unique in thesense that there are high profits at lowvolumes – aided by lack of compliancecosts and overheads – and high profits athigh volumes – aided by efficiencies ofscale and kicking in of operationalleverage. However, one can see a sharpdecline in profitability as one attains a mid-scale set-up, partly due to a step functionin compliance and equipment costs and asharp spike in overheads including rentals,manpower costs and other infrastructurecosts. Therefore people who enter thebusiness make good money to start withand even if the profitability declines asthey grow, they revert to their earlier sub-scale operations but don’t exit. Very fewplayers tide the growth stage and go on tobecome large meaningful players.

Therefore, to summarize, mostcompetition comes from smaller, un-organized players who make good moneywith their sub-scale operations and haveno desire to grow but are also too small toallow for consolidation by a bigger player.


EXPERT SPEAK

5. On an associated point, are you alsowitnessing shift of volumes from theunorganized market to the organizedplayers and is that process gainingmomentum?

The shift is happening but the growth ofthe industry is happening at a muchfaster pace. So while the industry isgrowing, both segments of the marketare growing with it but given that thenumber of organized players are small, itis difficult to peg the extent of this shiftin an ever growing market. At a macrolevel, some part of the commonpopulation are moving from so calledunbranded diagnostics to more brandeddiagnostic players, which is broadly whatpeople talk of as unorganized toorganized market shift, and in a way thatis helping us.

As an example, if we are growing say ata CAGR of 25%, 2% of that growth canbe attributed to this shift that is beingreferred to.

6. Thyrocare has also ventured in somenew testing lines like testing forTuberculosis, which is somewhat of adeparture from the lifestyle/chronictesting only model that you have beendoing. What are your plans on that front?

I think this is an interesting area for us tofocus on. Tuberculosis is neither achronic illness nor is it very acute – ittakes around one year for the treatmentto pan out and in that sense one couldcall it semi-chronic. The selection of theailment has also been done keeping inmind two things – one does not need tohave immediate test results whichmeans that all work in this aspect cancontinue as per existing TAT protocolsand secondly, there is no major playerfocusing on tuberculosis in a big way.Hence we call it FocusTB.

We believe that the market offersimmense potential and given the rightinvestment, branding and support, itcould emerge as one of the materialdrivers of our growth going forward.

7. What are your views on platformconsolidation in diagnostics – on the linesof what is being attempted in somehealthcare sub-segments? What do youthink are the benefits and pitfalls ofthat model?

My view is that it is a doable idea but it isa very difficult proposition to execute.Most importantly, I believe that the frontend customer facing operations must bedetached from the testing labs if thisconsolidation model was to be successful.Currently, any such consolidation willresult in coming together of manypartners, all of whom do the testing at thesame premises where the customersample is being collected. In order to trulyderive benefits of scale, testing needs tobe centralized while consolidation offront end outlets under one umbrellacould be beneficial.

Additionally, there are operational issueslike governance structures, capitalallocations and growth benchmarks thatneed to be pre-defined and then drivenby a common link in the system. So as Isaid, it is very doable but very difficultand someone who can pull it off willderive tremendous synergies and valuein the long run.

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EXPERT SPEAK

1. After the dream run over the last decade,there is an emerging consensus amongstorganized diagnostic players that growingorganically is getting increasingly difficult.What, in your opinion, are the factors thatare making organic growth challenging fororganized diagnostics in India?

There are multiple perspectives to this.

Diagnostics is still not a pull business –unlike getting a haircut where acustomer shows up at the salon onceevery two months or less – and hencethe diagnostic revenue profile is notannuity-like by definition. Bulk ofhealthcare continues to remain pushdriven – including diagnostics – whichmeans that there has to be an incidenceof anomaly in healthy well-being forsomeone to visit a diagnostic test centre.Unless we are able to create a pullfactor, there will always be an initialhiccup to growth.

Secondly, there is a lot of credibility andtrust factor in this domain given thedoctor-patient relationship dynamics. Alarge part of India still operates at thelevel where there is a personalisedconnect between the patient and the

service provider; trust and admirationthat is built over years. Also,convenience plays a stronger rolecompared to service and quality –although that is slowly changing withpeople realizing that it’s a matter ofhealth and hence the local mom and popdiagnostic centre may not have the bestfacilities; but this change will take time.

Therefore even if the brand pull is greatfor a lot of the diagnostic chains in thehome market, outside of the homemarket, displacing a local incumbentwith years of operational history may bea difficult task. This is especially true inplaces where there is a strong localincumbent providing quality service overa long period of time. In many suchcases, a lot more groundwork needs tobe done by the new diagnostic chaindespite its strong brand to stir thepatients’ propensity to shift.

Thirdly, diagnostics in India continues tobe largely an out of pocket expense.Therefore the willingness of people tospend and prioritize wellness tests orpreventive health checks is still verylimited, which in a way dovetails into the


NOT JUST ‘SUBURBAN’ ANYMOREExpanding Horizons For Customer Experience

Dr. Sanjay AroraFounder & Managing Director, Suburban Diagnostics

We interviewed Dr. Sanjay Arora, Founder and Managing Director of one of West India’s most prolific organized diagnostic chain and picked his brains on the

challenges facing B2C diagnostic industry today and what he believes is the way forward on several macro trends shaping the industry

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EXPERT SPEAK

point mentioned earlier aboutdiagnostics still not being a pull business.Insurance coverage for sectors likediagnostics, home health, etc. will be awatershed event changing the way needfor diagnostics is perceived in India.

And lastly there is little barrier to entry –especially in pathology where capitalrequirements are also limited. Thiscombined with the fact that India is stilllargely a price sensitive market meansthat local players with little overheadsand hence better pricing power (at leastfor routine tests) will continue to farmbusiness despite organized and brandedplayers’ presence in the market.

2. Two operational models in diagnosticshave emerged in India – the B2C model andthe B2B model. A number of B2Ccompanies also have a large B2B business.What are your views on each and how doyou see the industry panning out as regardspreference amongst the two models?

Different players in the market havegrown through different routes andhence the jury is still out in the market asto which is the better model. Butpersonally for us and that’s how wecontinue to drive growth at SuburbanDiagnostics, we believe that B2C is thepreferred approach. I guess from aclinical perspective, there is a lot morevalue that a customer facing B2C chaincan add to a patient and hence there is alot of medical satisfaction in running aB2C diagnostic business. B2C businessalso has a higher ticket value, one canfocus on repeat customers havingknown the test patterns and there is alsoa strong brand element here whichmakes the model very attractive.

Having said that, the B2C model is also avery difficult model to succeed in – thereare multiple things that you need tofocus on and get right for the businessmodel to find some traction. One needsto be persistent, costs need to be tightlycontrolled (especially given customerdemands) and selection of geographiesto enter needs to be carefully thoughtthrough. Additionally there also needs tobe focus on conveying the rightmarketing message, build a very strongnetwork credibility and doctor connect

and one needs to do this over and overagain as seeds of expansion are sownwith growth.

The B2B model on the other hand is basedon one’s ability to drive volumes throughto the system and hence by definition is anextremely competitive and price focusedmarket. For example, strong organizedbranded diagnostic chains who neverdiscounted their services on the B2C sidein their home market are entering newermarkets with heavy discounts on the B2Bside, which is then forcing incumbents inthese markets to further discount theirservices. I believe that this is a verydangerous spiral but that’s the nature ofthe business on the B2B side which hasbecome a heavy discount game ratherthan focus on where one can add clinicalvalue to a patient.

What has also happened in the market isthat a lot of the players have had torevise their business models toaccommodate the changing businessdynamics in the diagnostic landscape. Soplayers that started primarily as B2Ccompanies and had been so for over adecade and a half are now looking atB2B given that competition is eating intosome of their original business. Alsoplayers that are expanding into newergeographies are targeting to get to scalequickly in that geography via the B2Broute and will hopefully look at thateffect rubbing off on the B2C business.

The key I guess lies in having a right mixof B2B and B2C businesses. Mostdiagnostics businesses in my opinion willhave a J-curve history where at thebottom of the J, the B2B componentoutstrips their B2C revenue profile butas the scale expands and the companygrows, the balance shifts towards theB2C side. Ideal operations in my opinioncould target a 65% B2C business and a35% B2B business mix and that is themix we would ideally want to have forSuburban going forward.

3. Coming to the split between the pathologyand the radiology business, do you think somecomponent of radiology is important for apathologyfocusedoperations?

That’s a question that is both easy anddifficult to answer. The easy answer is


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EXPERT SPEAK

that it is not essential for a pathologyfocused player to have any component ofradiology. There are enough and moreexamples of very successful pathology-only businesses that continue to doexceedingly well. Suburban Diagnostics,when we started operations, was also apathology only business and it was onlyover a period of time that we startedintroducing radiology services from acompleteness of test menu perspective.On the flip side, most of the chains downSouth or chains started by radiologistsacross the country started off as beingpure radiology diagnostic service providersand have added pathology services onlylater to ride on the brand pull they enjoy inthe market. In fact, some continue to focussuccessfully only on radiology till date.

But when the insurance sector startedopening up in India, they started to look atan opportunity for partnering with acomprehensive diagnostic serviceprovider, which was the time a lot ofinvestments were made in the radiologybusiness. From a Suburban Diagnosticsperspective, the way we look at havingradiology diagnostic services is to be ableto offer the complete suite of preventivediagnostic services – just to make healthaspirational, to create that true pull factor.So we probably will continue to haveservices like ECG, ultrasound, stress testsand X-Rays but don’t think we will investheavily into MRI and CT Scan equipmentand associated services. The idea is to beable to service the corporate wellness sideof things and also the preventive healthcheck requirements of our customers.

Besides, adding a host of radiologyservices to our offerings has bolsteredour market positioning. We areproponents of the fact thatcomprehensive diagnostics is not just ablood test, but goes beyond that. It’s theright mix of pathology and radiologyservices in conjunction with each other,that provides the clinician a 360 degreeview of the patient situation and leads toa comprehensive and reliable diagnosis.

4. Talking about the regulatory landscapein India for diagnostics – if regulation doescome in, our view is that it will be betterfor the organized players given that there

will be an increased cost of complianceand doing business for unorganizedplayers. But it will also mean that therecould be some noise around pricing whichmay be a negative for the industry. Whatare your thoughts on the regulatory aspectof doing business?

In my view, as long as the intent onregulating the sector is right, regulationcould be a good trigger for the diagnosticbusiness in India. In my view any regulationshould aim to create a level playing field sothat no one has any undue advantage orany disadvantage – it should facilitatepeople who are below standard to move upto a standard threshold and at the sametime it should be able to weed out peopleand businesses who are unqualified or cutcorners, from the industry. I guess anyregulation is most universally acceptedwhen it also acts as a facilitator forbusiness. Giving an analogy that I like, it(regulation) should be like the banks of ariver which guides the river flow (industry)as it moves along rather than being like adam that preventsthe flow altogether.

As far as pricing is concerned, I guessthere has to be a clear distinctionbetween what are costs associated withthe treatment and what are the costs ofconsumable and products. I guess in thecurrent parlance, people are mistakingrecipe costs for raw material costs – therecipe cost in my view is significantlyhigher compared to the raw materialcosts. And the reason for that is thatthere are add-ons in terms of manpowercosts, infrastructure costs, costs ofproviding the right service setting andcost of the knowledge of the medicalpractitioner imparting that knowledge,among others. If raw material costs arealone being thought of as determinantsin price fixation, then I guess morethought needs to go in to make thepolicy a win-win for all stakeholders.

5. There are also very interesting businessesthat are emerging doing high-end esoterictests and a lot of PE money is funding thesenew businesses. How do you think this sub-segment will shape up in times to come?

I guess there are interesting segments inwhich a lot of work is happening –molecular biology, flow cytometry and


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EXPERT SPEAK

genomics to name a few. Also, with thetremendous advancements in technology,what is specialized today will becomeroutine tomorrow – at least that is whatempirical evidence shows us. Healthcare isevolving and it is difficult to know wherethe next disruption will come from. I ampretty sure that technology will have a bigrole to play in this but I guess it is alsoimportant for strategic players and forprivate capital providers to invest in suchsegments with an eye on the long term. Ifwe don’t invest today, we will be leftplaying a catch-up game in the long run.

Healthcare is getting more personalized, itis becoming more individual specific andgenomics will play a big role in howmedicinal protocols and practices will bedecided. Medicines that work on anindividual may not necessarily work foranother and if one is able to personalise thediagnostics, the therapeutics and theoutcome, it’s a win-win for everybody and Iam pretty certain that moleculardiagnostics, genomics and genetic studieshave a big role to play in thispersonalization of healthcare. So while theroutine pathology market itself is bigenough, players building such niche willbecome increasingly relevant in times tocome, especially organized diagnosticchains intending to offer an ever-increasingbouquet of tests to their customers.

The unfortunate part however is that, as acountry, today we are still grappling withbasic issues of health and hygiene, lack ofinfrastructure and most of our diagnosticfacilities and resources are still only gearedup to face infectious diseases and basicailments. These issues are still veryprevalent and unless we think of the biggerpicture of improving our health indices andthe health economic parameters, uptake forsuch specialized services will remain verylimited and sub-scale

6. In a lot of ways, diagnostic serviceproviders are also the first brush of apatient with organized healthcare (withthe exception of a GP) and hence are thefirst ones to experience and build connectwith the patients, build repeat value andmuch more. Given this first level connect,do you think branch out to associatedareas like home healthcare, wellness

clinics or chronic disease management is agood idea for diagnostic companies?

These are good thoughts. Homehealthcare is going to happen andincidence of home healthcare willincrease in India over the next decade ortwo. So looking at this in a focuseddisease profile manner rather thanlooking at it generically is the way to go.So perhaps looking specific segmentslike lifestyle diseases, women health,bone health, diabetes management orchronic disease management or workingwith cases of infectious diseasespresents a great case for a deep dive andcreating a niche for oneself. All in all, Iguess it is a very attractive opportunityand I am personally very excited about it.

However from an investment perspective,one really needs to weigh the pros and consof entering such associated segments andtherapeutic areas. Especially for diagnosticchains, in my opinion, it is best to maintainneutrality and ensure that one does notreally create any conflict of interestbetween the various stakeholders that onehas to interact with as part of the business.

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Perhaps the single biggest dampener in deal making in Healthcare and Lifesciences in2017 was the constant flux in regulatory landscape – staring from state specificlegislations to a nationwide curb on stents and knee implant pricing and finally a limiton trade margins (in some cases the trade margin was set at zero!) for essential drugsand consumables.

Given several important state elections in 2018 (including Karnataka) and theimpending general elections in 2019, we believe that 2018 will see continuingregulatory changes. Interestingly however, price regulation in healthcare was part ofneither of the political party manifesto leading into the general and state elections.Product pricing (which continues to be primarily a central government subject matter) maycontinue to be under pressure but implementing procedure pricing caps (matter of statesubject) will be difficult to execute.

Given the scale of regulatory activism, we thought it best to take a closer look at the eventsthat shaped CY17.

Select Sector Transactions MYTH FACT

Exclusive Advisor

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Undisclosed

February 2009

Exclusive Advisor

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From

USD 19 Mn

October 2009

Exclusive Advisor

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From

USD 12 Mn

December 2009

DECODING THE REGULATORY BLACK BOX – MORE MYTHS THAN FACTS (1/4)

For the first time healthcare regulations have been formulated

by West Bengal & Karnataka

Very similar regulations prevalent in West Bengal (since 2010) &

Karnataka (since 2007), but rhetoric is high this time around!

Procedure Pricing has been set by State Governments and is

already, or is expected to be, implemented

Items of fine print in the regulations, like pricing, left to

committees and consultations –no diktat on procedure pricing as

yet!

Pricing is universal – expected to be followed by all private

healthcare providers across patient categories

On ground intelligence indicates pricing to be implemented only for

patients under government schemes – free pricing otherwise

Government activism on stents and knee implants was swift and

unexpected – things are becoming ad-hoc!

Govt. first included stents in Schedule-I of DPCO, asked for

pricing info across channels, held consultations with players –

nothing ad-hoc in the calibrated sequence of events!

It’s game over for MNCs –will not be able to compete on price with domestic devices manufacturers

NPPA mulling separate category for high-end stents and implants –MNCs to continue to play

Increasing NPPA focus on capping trade margins and not prices –

playing field to be levelled!

VS.



Caps introduced on cardiac stent pricing

On December 21, 2016, the governmentamended the DPCO and added “coronarystents” (including drug eluting stents orDES) under Schedule-I of DPCO. Oheritems added to Schedule-I were disposablehypodermic syringes and needles and intraocular lenses, among others.

As a background, India treats drugs asessential commodities and has enacted aprice control order (i.e. DPCO) to ensureaccess and availability of these drugs. TheDPCO mandates that drugs which are partof its schedule (i.e. Schedule-I) shall not besold at a price higher than the ceiling pricefixed by the government. These drugs arecalled Scheduled Drugs. The applicabilityof DPCO, which essentially deals withdrugs, to medical devices was one of thefirst of its kind and hence caught many bysurprise. Under the “Make in India” policyof 2015, medical devices was flagged offas one of the sectors of focus. This eventimplicitly underlined medical deviceindustry’s significance and sent clearsignals that it has the attention of thegovernment. The intent of the NPPA couldalso be gauged from the fact that it soughtinformation on Price to Retailer / Price toStockists / Price to Hospital, the MovingAnnual Turnover and Maximum Retail Pricefrom manufacturers, importers andmarketers before inclusion of stents asScheduled Drugs. Consultations were heldin January’ 17 and finally on February 13,2017, it fixed prices for various categories

of stents slashing existing rates in somecases by as much as 80%.

The order was valid for one year, withrenewal in February, 2018. Then inFebruary 2018, much againstexpectations, stent prices were reducedfurther. Additionally, it was mademandatory to provide billing detailsseparately for certain consumables used incardiac processes.

Impact:

a. Price data published shows that controlmajorly cuts into the margins of thedistributors and hospitals - Impact onP&L of cardiac heavy healthcaredelivery players was felt immediatelywith a steep immediate reduction inEBITDA for the specialty

b. Market share of MNC stent makersdropped by 6% to 33% - Indian playersgained share; Chinese made an entry

c. The order set the tone for price capson knee implants and price activism onother devices and consumables

d. Given prices were capped irrespectiveof the generational advancementand/or therapeutic superiority, MNCsrushed to withdraw their high end-stents from Indian markets –NPPA hasrecognized this and has written to theministry asking for a separate categoryfor high-end stents, which will mostlikely not be subject to pricing caps orat least not as aggressive ones

NPPA regulates trade margins of several

formulations

WB forms committee to amend existing

regulation

Karnataka introduces the KPME Bill in legislative

assembly

GoI amends DPCO; adds coronary stents

to Schedule–I

Maharashtra proposes bill against doctor cuts

and commissions

NPPA regulates pricing of knee

implants

WB introduces and passes bill regulating clinical

establishments

Stent Pricing norms released by NPPA

Dec’16

Jan’18

Jun’17Healthcare Regulation - Sequence of Events for Key Milestones

Advisor

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~USD 32 Mn

December 2017

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By

Undisclosed

December 2017

Select Other Sector Transactions

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By

~USD 15 Mn

January 2018

Exclusive Advisor

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By

~USD 10 Mn

December 2017


Impact:

a. The Act and the media coveragesurrounding it cast a dampener onprivate investment in the state

b. P&L of all major delivery providerswas under stress for FY17 andH1FY18

c. Our on ground checks suggest thatwhile no such pricing caps wereproposed, presence of a regulationcould result in continued uncertainty

KPME – Karnataka’s Tryst with Regulation

One of the reasons why Karnataka’sattempts at regulating private healthcaredrew attention of the entire nation wasthat Karnataka is one of the mostpenetrated state as far as privatehealthcare infrastructure is concerned.Some of India’s best known hospitalchains and finest medical talent residesin Karnataka. It is also perhaps one ofthe most invested state in the countryby private capital providers.

Like in Kolkata, the Karnataka PrivateMedical Establishments Act, 2017 (the“KPME”) also replaced an earlier law with asimilar name that dated back to 2007. Acommittee headed by Justice (Retd.)Vikramjit Sen, set up to recommendchanges to the 2007 law tabled its reportin May 2017. Amongst the otherrecommendations of the committee, themost controversial was the provision toalso bring government hospitals under theKPME fold. The government contendedthat nearly 12 insurance companies hadcomplained that the PMEs (private medicalestablishments) were overcharging andthat it had paid over Rs. 1,000 crore since2003 to the 250-odd private hospitals.Amendments to the 2007 law, tabled inthe legislative assembly on June 13, 2017,had the following key provisions that laterbecame the main bone of contentionbetween the industry and the government:

▪ KPME expressly provided for charges tobe fixed by the State Governmentincluding package rates for bed charges,OT, ICU, ventilator care and procedures

▪ Modification to charges to account forchange in course of treatment wasdisallowed unless expressly consentedto by the patient

State Activism – City of Joy not so joyful forHealthcare Delivery Providers

On February 22, 2017, the Chief Ministerof Bengal called for a ‘live telecasted’meeting with all major private healthcareplayers and communicated her displeasureat their operations and pricing. This set thecontext for setting up of a panel torecommend changes to existing legislatureregulating healthcare delivery in the state.

The result of the above was The WestBengal Clinical Establishments(Registration, Regulation andTransparency) Act, 2017(the “Act”), whichwas introduced and passed by theAssembly on March 17, 2017. The termclinical establishments was defined toinclude almost any form of privatehealthcare delivery service provider in thestate including diagnostic serviceproviders. The Act sought to replace anearlier version under a similar name passedin 2010. Key provisions were as under:

▪ Compensation to be provided topatients/kin due to medical negligenceranging from Rs. 3 – 10 lakh

▪ Provide necessary medical treatment tovictims of accidents / sudden calamities,without taking into consideration theability of the patient to pay the costs

▪ Free services to 10% of IPD and 20% ofOPD patients for hospitals constructedon government land

▪ Every establishment with 100+ bedsrequired to declare bed charges, ICUcharges and package rates which can’tbe altered

▪ Strictly follow the fixed rates andcharges including the package rates

▪ No delay in releasing the dead body ofpatients to their representatives due tobilling or other issues, including inabilityto pay the treatment cost

▪ Monetary penalties for non-complianceincluding for provisions to holdmanagement responsible and causerepeal of license to operate

The 2010 law, which was repealed, alsohad similar provisions (it had a rate chargefor hospital services as far back as 2002),but added scrutiny for the Act came fromlatter 5 provisions mentioned above, and thefine print being construed as the Statewanting to become the ‘nodal pricing agency’for all private healthcare procedures.



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September 2017

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~USD 74 Mn

October 2017

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~USD 15 Mn

November 2017

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51% Acquisition

of

~USD 24 Mn

November 2017


Primary Knee Replacement Systems andRevision Knee Replacement Systems.Under each category there are 4 sub-categories and under each such sub-category, there are four super-sub-categories. Ceiling prices have beenprescribed for aforementioned super-sub-categories. As an example, pricing pre-Notification of Rs. 1.7 lakh capped to Rs.39,000 and pricing pre-Notification of Rs.1.2 lakh capped to Rs. 24,000.

In hindsight, this was an expected movebut then the Notification came as surpriseto many especially since Knee Implantswere hitherto not recognised as ‘essential’and because the government fixedmaximum trade margin for distributors andhospitals between 4%–16% depending onthe category of Knee Implants, which wassignificantly lower than existing margins.Also, the provisions of the DPCOtechnically allow NPPA to determine priceand not margins and hence the move wasseen as unprecedented in many ways.

What happens next is anybody’s guess,especially since the Medical Device Rules,2017 make all medical devices fall withinthe ambit of DPCO from January 1, 2018and become subject to the government’sresiduary power to fix ceiling prices. Thelanguage of the provision that givesresidual power to the government is broadenough to allow the government to fixceiling price of any medical device. Newsreports suggest that there is a newPharmaceutical Policy in the making whichwould seek to regulate trade marginsspecifically, something the current onedoes not envisage at all.

In the meanwhile the NPPA in Novemberand December 2017 has already introducedprice ceilings for several formulations. In afirst, it fixed the institutional procurementprice as the ceiling price without adding anytrade margin for 14 formulations includingglucose injections, morphine tablets andemergency injections. This it did again byinvoking para 19 of the DPCO – citing extra-ordinary circumstances – much in the sameway it capped prices for knee implants.

Several componentmakers’ industry bodies(e.g. for needles and syringes) arevoluntarily talking of self-regulation forcapping their trade margins to 75% overdiscounted ex-factoryprices including GST.

Interesting times lie ahead!

▪ Final bill to not exceed estimatesprovided to patient

▪ No delay in releasing the dead body ofpatients or service recipients to theirrepresentatives due to billing or otherissues, including inability to pay thetreatment cost

▪ Provision for imprisonment for up tofive years for contravention ofprovisions of KPME by medicalpractitioners

Just like in Kolkata, several provisions wereexistent even in the 2007 law butamendments were viewed as an attempt toregulate pricing and profitability.

The bill was referred to a standingcommittee after protests from medicalpractitioners on June 16, 2017.Consultations ensued but, with a deadlocklooming large, a state wide strike wascalled in November lasting several days.Finally a compromise was reached withimprisonment provisions being diluted andthe bill was passed on November 17,2017. The Governor assented to the samein January, 2018 and KPME came intoforce from February 10, 2018.

Impact:

a. One of the biggest factors in causingdiscomfort in investment inhealthcare delivery services

b. Price caps in place for now only forpatients of government schemes

c. Decision on pricing and execution ofrecommendations left to severalsub-committees – our on groundchecks suggest status quo for now

d. Other states like Maharashtra haveintroduced bills to stop doctors’commissions both ways and in fact havecategorized these as corruptionpractices to be probed by the anti-corruption bureau with criminal charges

Knee Implants go under scalpel of PriceControl

Following coronary stents, thegovernment imposed a price ceiling onknee replacement systems (“KneeImplants”) for a period of one year byway of a notification dated August 17,2017. Notification categorized KneeImplants into two major Categories:



Co-Book RunningLead Manager

To

IPO

USD 183 Mn

February 2017

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March 2017

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USD 32 Mn

March 2017

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~USD 52 Mn

July 2017


Company Transaction type Launch date Deal size

Initial Public Offering February 2018 USD 140 Mn

Qualified Institutions Placement December 2017 USD 142 Mn

Initial Public Offering December 2017 USD 79 Mn

Qualified Institutions Placement December 2017 USD 47 Mn

Company DescriptionBuyer / Investor

Transaction Date

Deal size

Invested into By February 2018 USD 13 Mn

Invested into By February 2018 USD 21 Mn

Invested into By December 2017 USD 36 Mn

Invested into By December 2017 USD 24 Mn

Company DescriptionBuyer / Investor

Transaction Date

Deal size

Acquired by January 2018 Undisclosed

Digeplex and associated brands

Acquired byNovember 2017 USD 14 Mn

India Branded Business Acquired by

November 2017 USD 76 Mn

Domestic Formulations Business Acquired by

November 2017 USD 556 Mn

Acquired by October 2017 USD 150 Mn

RECENT HEALTHCARE & LIFESCIENCES INDIA TRANSACTIONS

Source: Deal DatabasesDeals between Oct’17-Feb’18

M&A Transactions in the SectorA

Equity Capital Market Transactions in the SectorC

Private Equity Transactions in the SectorB


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March 2016

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Buyout

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February 2016

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USD 32 Mn

June 2016

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USD 10 Mn

August 2016


LATEST NEWS AND ANNOUNCEMENTS

NPPA has written to the Union Health Secretary onJanuary 9 requesting for an urgent meet of the cardiacstents core committee of the NLEM to reconsider andreview need for a new category of drug eluting stents –provided stent makers are able to prove generationalsuperiority.

Move comes as Abott announced non-introduction of itslatest stent Xience Sierra in India and after withdrawal ofXience Alpine series in Sept’17. Boston Scientific is alsoconsidering withdrawing high end stents.

Move comes as companieswithdraw new generationstents from market

Stent Pricing

NPPA SEEKS NEW CATEGORY FOR HIGH END STENTS

“The pricing regime will be strict than what it is so far. Thegovernment is answerable to the people," NPPA ChairmanBhupendra Singh said at an Indian Drug ManufacturersAssociation event in Mumbai earlier in January, 2018.

Singh said trade margins for 25 per cent of drugs sold in thecountry ranged from 100% – 1,200%.

Earlier in Q3FY18, price caps were introduced for variousdrugs and formulations and trade margin caps wereintroduced for some items.

More pain ahead?

Regulation

STRICTER PRICE ACTION TO HIT MARKET SOON, WARNS REGULATOR

Sector’s revenue to increase by 9% p.a. till FY20, withoverseas revenue growing by a mere 1% in 2018 and thenimproving. But for domestic growth of 10-11%, overallfigure would look worse.

In light of the above, the reason for Indian pharmaceuticalcompanies being keen on global acquisitions is not hard tofathom, even if the sales of the portfolio on offer aredeclining. While stemming a sales decline may be difficult,improving profits by cost rationalization could be possible.

Also, some acquirers are unlisted (no quarterly performancepressures), have low debt and partnering with PE firms ensuresrisk dispersion and higher acceptability amongst shareholders.

Cost rationalization and risk sharing with PEs makes it an attractive bet!

M&A

PHARMA M&A: BUYING ITS WAY BACK TO GROWTH

Several Indian drug makers who have large operations in theUS are now pushing to acquire assets, thereby eitherinvesting in greenfield manufacturing facilities or throughbrownfield M&As.

The government reduced tax for American companies to21% from 35% – ~15% difference between Indian and UStax rates is a big lure for Indian pharma companies, a sectorthat derives 40% of revenues from USA.

Indian drug companies' search for US manufacturing assetsis also to push up the portfolio of complex genericsproducts—expected to be the next big growth driver.

INDIAN PHARMA RUSHES TO “MAKE IN AMERICA”

Hope to advantage from tax arbitrage under newly announced Trump tax policy

Pharma

Source: News Publications

The domestic pharma industry growth rate was the lowest in eight years as the business

BRAND LAUNCHES IN 2017 LOWEST IN 4 YEARS!

Slowdown in approvals or asign of things to come?

Pharma3,7516,095

4,446 4,516 3,932

2013 2014 2015 2016 2017

New Brand Launches in India

was impacted by roll out of the goods and services tax (GST)regime and also delayed product approvals by the NationalPharma Pricing Authority (NPPA).

Anti-malarials and anti-infectives recorded negative growthwhile cardio-therapy growth was down to single digits (6.7%)(from double digit growth recorded for last few years).


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November 2015

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November 2015

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December 2015

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January 2016


LATEST NEWS AND ANNOUNCEMENTS

Still in a nascent stage; largely serviced by unorganizedplayers, start-ups and recent hospital initiatives.

Estimated at ~USD 3.20 Bn in 2016, and expected to growto ~USD 4.46 Bn by 2018 and USD 6.21 Bn in 2020 as perestimates and analysis of Cyber Media Research Limited.

Any insurance coverage to the space to be a further add ontrigger for growth in the sector.

Estimated at ~USD 3.20 Bnin 2016

Home Health

MARKET FOR HOME HEALTHCARE SERVICES IN INDIA TO DOUBLE IN A YEAR

“Some of the assets are good with manufacturing sitesbeing approved by the US Food & Drug Administration, theUK's Medicines and Healthcare Products RegulatoryAgency and other regulators and agencies depending ontype of asset. All these demonstrate the potential of thesecompanies”, said a source close to the process.

Under the insolvency and bankruptcy code, the creditorsalong with the resolution professional have to invite andfinalise resolution or revival plans from interested bidders,buyers and even the promoters within 270 days, failingwhich the assets of the company would be put up forliquidation.

Orchid Pharma alreadyon the block

Insolvency

LENDERS KEEN TO EXPLORE NCLT OPTION FOR STRESSED PHARMA ASSETS

Even as Shalby’s IPO scraped through and the stockcontinues to remain under pressure, an increasing numberof companies are looking at an IPO option for fund raisingand providing an exit to their investors.

Amongst companies that will come to market over the next3-6 months include Bharat Biotech, Bharat Serums, KrishnaInstitute of Medical Sciences and Aster DM Hospitals toname a few.

The move comes in light of an increased investor interest inIndia’s capital markets, growing liquidity and a generalimprovement in macro environment.

Slew of IPOs lined up

Liquidity Events

COMPANIES LOOK TO CAPITAL MARKETS FOR FUNDS; PROVIDE EXIT TO PE INVESTORS

Domestic pharma companies received more than 300approvals in 2017 to launch generic drugs in the US, whichis an all-time high. The clearances came despite regulatorypressure from the USFDA, and unprecedented warningletters issued to facilities.

The final approvals for Indian players are up by nearly 43%from 211 in 2016, and corner about 40% of all global filingsin the highly lucrative around $70-billion US market. This,even as all drug biggies — including Zydus, Sun Pharma, DrReddy's and Cipla — faced regulatory ire, while some werepulled up for manufacturing lapses by the US regulatorduring last year.

INDIAN PHARMA COS GET RECORD USFDA GENERIC DRUG NODS

…despite regulatorypressure from USFDA andunprecedented number ofwarning letters

USFDA Activism

WORST BEHIND US?

Growth in healthcareindex comes monthsafter lacklustreperformance

Markets

The S&P BSEHealthcare index grew~11.7% betweenOctober 1, 2017 andJanuary 30, 2018,which was only a shadelower to the ~14%growth in the S&P BSE Sensex over the same period.

The rise comes after a lacklustre first nine months of the calendar where it fell nearly ~12% despite the strong growth in S&P BSE Sensex. The trend is in line with growth in global healthcare indices like Nasdaq (~10%) and Hang Seng (~18%), among others.

Source: News Publications


Exclusive Advisor

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Structured Capital Raise

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USD 60 Mn

April 2015

Exclusive Advisor

ToSelect Institutional Buyers

Secondary Stake Acquisition

In

~USD 403 Mn

Sept 2015 onwards

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USD 43 Mn

May 2015

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~USD 16 Mn

May 2015


FROM OUR EQUITIES DESKInstitutional Equities

Highlights

198Stocks under coverage

USD 1.2 TnTotal market cap of stocks under coverage

INR 260 Bn Total cash market volume in H1FY18

350+Number of fund relationships globally

“Go-to” broker for stocks in the mid-market space

19Stocks under coverage

~USD 85 BnTotal market cap of Stocks under coverage

▪ Play on India’s growing healthcare demand and well-positioned to benefit from thecountry’s changing demographics, rising incidence of lifestyle-related illnesses and greateradoption of Evidence-based Medicine (EBM)

▪ Industry is highly fragmented with regional and pan-India chains accounting for only~15% of the market – consolidation of the industry will be gradual given several structuralcharacteristics including dominance of hospital-based labs, low entry barriers, laxregulatory environment and strong regional incumbents

▪ While pan-India chains have embarked on an aggressive growth path with greater focuson high-end testing and wellness segments, expect pressures on volume growth, pricingand margins, as regional chains (some of which are PE-backed), compete fiercely todefend their turf

▪ Key thoughts: (1) Highly fragmented market with low entry barriers; (2) Still a ‘hyper-regional’ play; (3) PE-backed players driving competition and pricing pressures, especiallyin the B2B segment; and (4) Growth pressures and greater focus on quality should lead togradual consolidation in the long-term

▪ Initiate coverage with a cautious outlook on the sector

Initiation of Coverage on Indian Diagnostic Services Sector1

Pharmaceuticals – “Complex” Story will be “Rewarding”2

▪ Pricing challenges in US yet to bottom out – Indian players have had a patchy trackrecord in complex generics, lagging their global peers in high-value generic segments,partly due to approvals delays on account of GMP compliance issues but believe Indianpharma’s complex generic prospects are improving

▪ Key reasons: (1) Strengthening of pipelines in recent years – top 10 Indian pharmacompanies spent ~$12bn under R&D and capex in the last 3 years (vs. <$5bn in thepreceding 3 years) – a significant portion of the spending was towards building complexgeneric pipelines for US; (2) Streamlining of approval process for complex products by theFDA; and (3) Improving GMP compliance –recent trend of successful inspections andEIRs should aid approvals

▪ In the end, it has to be “Specialty”: Believe complex generics (including biosimilars) will getcrowded eventually and a higher exposure to branded/specialty segments will be a moresustainable strategy for larger generic companies in the long run

▪ Given the complexities in specialty pharma business execution, in the medium-term,execution on complex generic opportunities will remain critical for growth

Key snippets from some interesting notes by Spark’s Equities Team

Pharmaceutical Outsourcing – Opportunities Galore3

▪ Outsourcing of non-core research and manufacturing activities – a major trend in theglobal pharmaceutical industry for over a decade

▪ Early stage drug discovery, manufacturing clinical trial quantities of drug substances andAPI manufacturing – some key areas for Indian CMOs and CROs. Indian industry playershave heterogeneous areas of expertise, service offerings and customer profile

▪ R&D productivity improves, but drug discovery cost increasing – key driver foroutsourcing

▪ Increase in VC funding for pharma / biotech industries in recent years bodes well for theindustry - these typically are companies without their own development/manufacturingcapabilities and are a significant source of business for CROs and CMOs

Source: SPARK Research

5th position in 2017 All India research team

Amongst 2 Indian Houses in Top 5



DISCLAIMER

▪ Information provided in this document with respect to the industry have been compiled from publicly available

sources, including official publications and research reports, and is given as general information and has not been

independently verified by Spark Capital Advisors (India) Pvt. Ltd. (“Spark Capital”). Spark Capital has not carried out

any independent verification of any information contained herein (including statements of opinion and expectation).

Accordingly, Recipients should not place undue reliance on such information. The delivery of this document does not

constitute a representation that the information given in this document is correct whether at the date hereof or any

time subsequent to the date hereof. Spark Capital makes no representation or warranty with respect to the accuracy

or completeness of any information or idea contained in this document, nor does Spark Capital undertake any

obligation to update this document.

▪ This document does not purport to contain all the information that the Recipient may require. This document is

being provided to give a general overview on the industry. Please note that all forward looking statements contained

in this document have been sourced from multiple databases. No representations are being made about the

correctness or achievability of these statements or their underlying assumptions.

▪ This document has been prepared solely for the purpose of providing information related to the Healthcare &

Lifesciences sector and is not to be reproduced or used for any other purpose.

▪ Neither Spark Capital nor the Promoters nor any of their respective affiliates, directors, officers, employees,

shareholders, agents, representatives and advisors of Spark Capital shall have any liability for any loss or damage

(direct or indirect) suffered by Recipients on account of their reliance on any representations (express or implied)

contained in, or any omissions from this document or any information transmitted orally, in writing, electronically or

in any other form to the Recipients.

▪ All enquiries relating to this document should be directed to Spark Capital personnel mentioned in this document.

BENGALURUUnit Nos. 503 & 504, 5th Floor, Prestige Towers,No. 99/100, Residency Road,Bengaluru – 560 025

CHENNAINo.2 ‘Reflections’, Leith Castle Centre Street,Santhome High Road,Chennai – 600 028

MUMBAIUnit No. 1116-C, 11th Floor, ONE BKC,Bandra Kurla Complex,Mumbai – 400 051

Virendra Parasnath Pandey

Director

[email protected]

Laasyaa Chadaga

Vice President

[email protected]

Shreyan ML

Vice President

[email protected]

Shreyas Subedar

Assistant Vice President

[email protected]

HEALTHCARE AND LIFESCIENCES TEAM

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