Pharma’s new prescription: Hospitals?

Pharma’s new prescription: Hospitals?

Is the slow down in the global pharma industry forcing Indian companies to look more closely at hospitals? That’s reason enough for leaders of both industries to share space on the same page. Arshiya Khan finds out more

Indian pharmaceutical companies, which have traditionally provided generics drugs and established a strong brand name, are now expanding their scope of operations to include discovery research and outsourcing activity and also exploring new pharma related investment avenues at a broader level. Thus they are looking at progressing from pharma companies to integrated healthcare companies by leveraging their brand name and building it further. The brand name of a reputed pharma company brings strong credibility to the extended healthcare ventures as well.

The best example of this strategy is Ranbaxy Laboratories. Ranbaxy, manned by Malvinder Singh, has already established itself as one of India’s leading pharma companies and is among the top 10 generic companies in the world. The promoter family has, however, always had interests beyond pharma. Its stakes in the wider healthcare space fall under -Fortis brand, headed by the younger Singh sibling, Shivinder. Fortis today encompasses a chain of hospitals, clinical laboratories, and healthcare stores. The company is now counted among the leading players in the organised healthcare segment in India. Another success story is the Wockhardt Group and its presence in pharma, biotechnology and the hospitals segment.

And the latest to expand its portfolio by entering the fast growing healthcare delivery sector is the Delhi-based Panacea Biotec, which is to set up a super-specialty hospital in Gurgaon. The company has entered into collaboration with Dr Umesh Gupta of Umkal Group to set-up a multi super-specialty hospital. The others already on the bandwagon are Zydus which has a stake in Apollo Hospitals, Reliance Life Sciences which is planning to invest at least Rs 1,000 crore to set up hospitals in the country’s metros and dispensaries in small towns. The group currently owns and runs HN Hospital in Mumbai. Apollo’s white knight offer to Orchid Chemicals and Pharmaceuticals is also another case in point, of pharma aligning closely with the hospital segment. Besides as over 70 percent of Fortis is held by the promoters with money in hand, if viable opportunities arise, investments should be easier for them, informs Dr Narottam Puri, President-Medical Strategy and Quality, Fortis Healthcare, Escorts Heart Institute & Research Centre. Also the group owned Fortis has plans of expanding rapidly. They will be adding six hospitals in their chain in Delhi and National Capital Region (NCR). And they are targeting to have 40 hospitals (6000 beds) by 2012.

An obvious effect of strong economic growth and improving socio-demographic factors is the growing demand for better quality healthcare and the increased investments in developing world-class healthcare infrastructure. The India growth story has certainly led to a strong demand for high quality healthcare facilities and centers. Thus the Indian healthcare sector as a whole, rather than just the pharma industry offers promising investment opportunities.

Huzaifa Khorakiwala, Executive Director, Wockhardt

Sandeep Sinha, Deputy Director, Healthcare Practice, Frost & Sullivan

Dr Narottam Puri,

President-Medical Strategy and Quality, Fortis Healthcare, Escorts Heart Institute & Research Centre

Hitesh Gajaria,

Sector Leader, Pharmaceuticals, KPMG (India)

Point of convergence

Is pharma and healthcare converging? Or is it just a diversification strategy on the part of pharma companies. Sandeep Sinha, Deputy Director, Healthcare Practice, Frost & Sullivan, points out, “It is a forward integration from the pharma company’s side and a backward integration from the hospital’s side. I do not think it makes sense for new entrants from the business point of view. But for companies like Wockhardt and Ranbaxy it does.” He cites an example of Wockhardt Hospitals where most of the drug requirement is met by the pharma arm, which is given the first prescription. Similar is the case of Ranbaxy and Fortis Hospitals.

Also the two coming close will provide the pharma companies with a ready database of patients to conduct clinical trials, a research site, and access to a vast population, hence an expansion strategy for them. Puri, highlights, “As I belong to a Ranbaxy related company which has gone into healthcare there were obvious synergies, drug discovery to drug trials, available patients and data base a compatible business model and an understanding of consumer behaviour for us setting up a hospital.”

Striking a similar chord Sinha points out, “There are three things—one is the research side. They will have access to huge clinical data and the other is clinical research and third is forward integration. You will obviously be able to sell all your medication. So I feel these are the three clear cut opportunities for any of these pharma companies diversifying in to hospitals.”

And therefore this is nothing but a part of a larger branding for pharma companies. In this case, it is no doubt that consumer seems to be the king whom all pharma companies are out to woo. This is why companies like GlaxoSmithKline, Wockhardt, Dr Reddy’s Laboratories and Ranbaxy have help lines to disburse information about diseases and medical products, to follow a direct-to-customer approach. But this burst of altruism on part of drug companies is more than just an `attempt to generate a loyal customer base’, it is also about competition.

But as the pharma market today is facing serious issues, like patents, pricing policy, dry pipelines etc, so is their entry into hospitals an exit from the pharma sector? “This is not true,” avers Hitesh Gajaria, Sector Leader, Pharmaceuticals, KPMG (India). He explains, although the pharma market is fraught with some serious issues, there are a wide range of opportunities for companies to explore across multiple segments such as the domestic markets, global generics space, Contract Research and Manufacturing Services (CRAMS), discovery research and biopharmaceuticals. In fact, most companies have already made significant investments in these areas. He reasons, “This alignment is in the interest of discovering a new and profitable investment potential in India’s fledgling healthcare industry which currently clearly lacks the capacity to service any significant proportion of the population. In turn this could lead to creating a successful integrated and powerful brand name across the various parts of India’s total healthcare industry. The success stories of companies such as Ranbaxy and Wockhardt stand out as good examples for others,” he remarks.

Agreeing Huzaifa Khorakiwala, Executive Director, Wockhardt says, “Until now that is not the reason because not all pharma companies have gone into hospitals. There are just three or four who have done it. So it is not because of the dry pipelines. It is just that they are looking to diversify and play a bigger role and they want to expand the business in the area where there is a gap within the country.”

Going ahead, these companies may adopt a combination of strategies for market expansion and to establish a pan-India presence. These typically include acquisition of new facilities, setting up of their own greenfield projects, and entering into long-term management contracts. In addition to this, companies could also expand their telemedicine networks, include more specialty services and expand their primary and secondary care infrastructure. Yet another strategy consists of strong corporates tying up with NGOs and charitable organisations which are currently running healthcare institutions and injecting both capital and strong management skills to revamp ageing facilities and bring in latest healthcare tools, equipments and techniques to take healthcare delivery to the next level.

No more attractive

These opportunities may be enough for pharma companies to keep going, but it’s not the case with investors. More than opportunities that investors can rely on, there are reasons for them turning away from pharma. The long gestation period for R&D, delayed returns and low success in drug discovery, the nascent nature of India’s new drug discovery efforts, lack of sophisticated infrastructure, lack of adequate scientists with requisite synthetic chemistry skill sets and exposure to new drug development efforts are a few main reasons. The recent example is that of the pull out of ICICI and Citigroup Venture from a three-year-old drug discovery partnership with Dr Reddy’s Laboratories. Also there is lack of interest shown by private equity (PE) investors in the efforts of India’s leading drug companies such as Piramal Life Sciences, Wockhardt and Sun Pharma to hive off their R&D assets into separate entities, which is an example of the growing risk averse nature of PE in pharma. The high risk, long term reward ratio of drug discovery process is an unattractive proposition for them. Even the global PE companies are no longer interested in investing in pure pharma R&D companies with less attractive pipelines and in early stage drug development.

On the contrary, PE seems to be favouring the healthcare sector, hence another reason for the pharma’s slant towards hospitals. They are becoming increasingly interested in regional hospitals. For instance, Soni Group of Hospitals has attracted PE funding and is planning to expand in to different regions.

Another major reason can also be the impending stricter drug price control policy that seems to have taken away the shine from PE players’ interest in the sector. With the government failing to agree upon the price control pattern suggested in the draft policy, the matter is just being passed from one level to the next level of hierarchy, but nothing seems to be working.

But the healthcare segment has its share of problems as well. One of the long standing demands of hospital majors is that the government gives infrastructure status to the industry, but the government is not budging. Elaborates Khorakiwala, blaming the low spend on healthcare as the main reason for this convergence. “There is a need gap in the country. The healthcare infrastructure is inadequate, because the government spends very little on healthcare, as compared to the GDP. And this cannot support the healthcare infrastructure which is required. So pharma companies are trying to fill this gap,” he avers.

He points out that pharma companies have good capital resources, they are professional managers and understand the healthcare business and are setting benchmarks in quality standards. For example Wockhardt Hospitals has tied up with Harvard Medical and also has accreditation from JCI, which in turn is attracting medical tourists to India.

Supporting this view adds an industry source on condition of anonymity, “There are not enough hospitals in India to cater to the demand and this is the reason why there is increasing corporatisation and invasion in the hospital segment given the intense competition among pharma companies.”

In the long run

Will this be the next ‘in’ thing? Not very affirmative Sinha remarks, “There are not many pharma companies that are going this way. If we look at the historical data there is Ranbaxy since the last 15 years and Wockhardt for the last 10 years. I do not see a trend.” He elaborates, that if one or two major group are setting up healthcare facility, he would not consider it as a very positive move and great step by the pharma companies. Reliance has been talking about getting in to healthcare but there is no strong indication by them till now. “My concern is that though it is a very positive move I do not see many players getting into the healthcare space from pharma,” he highlights.

Though pharma companies have all the reasons for the close alignment it is still a very distant trend that may or may not work out. Because ultimately running a hospital is not something that everybody and any body can do. The veterans like Apollo took almost 60 years and Wockhardt 15 years to reach where they are today.

If this happens the medical shop you prefer to buy your pills from, the diagnostic centre you choose to get tested at, and the hospital you feel confident about staying for a couple of days will share a common bond—the brand name. And pharma companies will no longer be just pharma companies but ‘healthcare hubs’.