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Investment opportunities in India’s healthcare sector

India’s healthcare industry has been growing at a compound annual growth rate of around 22 percent since 2016. At this rate, it is expected to reach USD 372 billion in 2022. Healthcare has become one of the largest sectors of the Indian economy, in terms of both revenue and employment.

India’s healthcare industry comprises hospitals, medical devices and equipment, health insurance, clinical trials, telemedicine, and medical tourism. These market segments are expected to diversify as an ageing population with a growing middle class increasingly favors preventative healthcare. Moreover, the rising proportion of lifestyle diseases caused by high cholesterol, high blood pressure, obesity, poor diet, and alcohol consumption in urban areas is boosting demand for specialized care services.

In addition to these demographic and epidemiological trends, COVID-19 is likely to catalyze long-term changes in attitudes toward personal health and hygiene, health insurance, fitness, and nutrition as well as health monitoring and medical check-ups. The pandemic has also accelerated the adoption of digital technologies, including telemedicine.

Further, there is a growing emphasis on and emergence of public-private partnership models in India’s healthcare sector. The country’s relative cost competitiveness and availability of skilled labor are also making it an increasingly favored destination for Medical Value Travel.

On the policy front, the Indian government is undertaking deep structural and sustained reforms to strengthen the healthcare sector; it has also announced conducive policies for encouraging Foreign Direct Investment (FDI). In fact, India’s FDI regime has been liberalized extensively. Currently, FDI is permitted up to 100 percent under the automatic route (i.e., the non-resident investor or Indian company does not require approval from the Government of India for the investment) in the hospital sector and in the manufacture of medical devices. In the pharmaceutical sector, FDI is permitted up to 100 percent in greenfield projects and 74 percent in brownfield projects under the automatic route.

India has emerged as one of the fastest-growing emerging economies over the last two decades, receiving large FDI inflows, which have grown from USD 2.5 billion in 2000-01 to USD 50 billion in 2019-20. The healthcare sector, in particular, has received heightened interest from investors over the last few years, with the transaction value increasing from USD 94 million (2011) to USD 1275 million (2016) – a jump of over 13.5 times.

All of these factors together create several opportunities for investment in India’s healthcare industry.

In the hospital segment, the expansion of private players to Tier-II and Tier-III locations, beyond metropolitan cities, offers an attractive investment opportunity. According to Invest India’s Investment Grid, there are nearly 600 investment opportunities worth USD 32 billion (`2.3 lakh crore) in the country’s hospital/medical infrastructure sub-sector.

With respect to pharmaceuticals, India has the opportunity to boost domestic manufacturing, supported by recent Government schemes with performance-linked incentives, as part of the Aatmanirbhar Bharat (Self-Reliant India) initiative. Further, between 2018 and 2024, patents worth USD 251 billion are expected to expire globally, presenting a lucrative opportunity for the country’s pharmaceutical sector, including the patent market. In addition to generic drugs, there are investment opportunities in other segments of India’s pharmaceutical sector, including over-the-counter drugs, vaccines and contract manufacturing and research.

In the medical devices and equipment segment, expansion of diagnostic and pathology centres as well as miniaturized diagnostics have high potential for growth. Medical Value Travel, especially wellness tourism, also has bright prospects, given India’s inherent strengths in alternative systems of medicine.

While the adoption of home healthcare solutions in India is currently at a relatively nascent stage, it has tremendous potential for growth in the future on account of the rising elderly population in the country, increase in the incidence of chronic diseases, enhanced demand for constant personalized care as well as the emergence of nuclear family structures in urban areas.

Lastly, technology advancements such as Artificial Intelligence (AI), wearables, and other mobile technologies, along with Internet of Things, offer several avenues for investment. Key segments where new opportunities are likely to emerge for health technology players in the near future include development of tools to facilitate emergency care and improvements to medical infrastructure, through technology-based optimization. This includes expanding the scope of wearable devices to track health conditions, developing patient-facing mobile health applications, as well as greater integration of AI, robots, and blockchain technologies.

Overview of healthcare industry
India’s healthcare industry comprises hospitals, medical devices and equipment, health insurance, clinical trials, telemedicine and medical tourism. Healthcare has become one of the largest sectors of the Indian economy, in terms of both revenue and employment.

Employment generation potential of health sector. Rapid and sustained growth over the last few years has created large employment opportunities in India’s health sector. A report by KPMG and FICCI shows that the healthcare sector became the fifth largest employer in 2015, employing 4.7 million people directly. The NSDC estimates that the health sector will directly employ around 7.5 million people by 2022, adding approximately 2.7 million new jobs between 2017-22 – over 500,000 new jobs per year.

Beyond the direct impact on jobs and economic growth, the healthcare sector’s employment patterns have additional multiplier effects and distributional benefits. First, the health sector can boost India’s female labor force participation since it employs a large number of women. In fact, the final report of WHO’s High-Level Commission on Health Employment and Economic Growth (2016) specifically highlights the employment potential of the health sector for women.

Second, the health sector also generates additional jobs and economic activity indirectly i.e., in the non-health sector. The same report by WHO suggests that each dollar spent in the health sector results in an additional USD 0.77 contribution to economic growth as a result of indirect and induced effects. These effects include establishing infrastructure and facilities, purchasing equipment as well as building skills through education and training which, in turn, translate into direct manufacturing and services outputs, leading to more jobs.

Further, growth in insurance and digitization of the healthcare sector in India will generate additional jobs.

Under the National Digital Health Mission (NDHM), for instance, personnel will be required for digitization of family records from the community to the facility level. Human capacity, specifically personnel skilled in fields such as HIT (Health Information Technology), Health Informatics and Medical Informatics (sometimes called Clinical Informatics), is required to support such initiatives.

Third, the launch of Ayushman Bharat in 2018 has generated additional avenues for job creation. Each of the 150,000 Health and Wellness centres (HWCs) proposed to be established under the program will be managed by a team comprising a Mid-Level Health Provider (MLP) along with ANMs, ASHAs and a male health worker.Approximately 150,000 skilled and independently certified MLPs will therefore be required to manage the HWCs.

The other pillar of Ayushman Bharat, the Pradhan Mantri Jan Arogya Yojana (PM-JAY), has initiated the transition toward demand-side financing and strategic purchasing. Over time, expansion of PM-JAY, and a greater focus on improving health insurance coverage in general, will also generate new jobs as it requires supporting capacity building for purchasers (health insurance agencies) and healthcare providers alike. Other types of jobs that will be created through the expansion of insurance programs include actuaries for modelling public spending, coders, and data analysts. Such roles are critical for enabling implementation of strategic purchasing contracts as well as detecting fraud.

Ayushman Bharat initiatives will also give an impetus to the training of nurses and allied health professionals for delivery of skilled support services in secondary and tertiary care.

Finally, the expected rapid growth of India’s home healthcare market can also increase job opportunities significantly. Home healthcare, after all, is a labor-intensive industry, with the potential to create as many as 200,000 blue collar jobs annually across 50 cities in India. The industry can employ large numbers of skilled patient attendants and caregivers, including from rural areas. It can also create as many as 50,000 jobs for women annually, in nursing as well as attendant/caregiver roles.

Business and investment climate. India improved its Ease of Doing Business ranking from 142 in 2014 to 63 in 2019, a jump of 79 positions. The country has also been ranked number 1 in the Central and South Asian region in the Global Innovation Index, an improvement of 33 positions, from number 81 globally in 2015 to number 48 in 2020.

India has been one of the fastest-growing emerging economies over the last two decades, receiving large FDI inflows, which have grown from USD 2.5 billion in 2000-01 to USD 50 billion in 2019-20. In health, FDI has been concentrated in pharmaceuticals, constituting approximately two-thirds of the total health-sector-related FDI over the last two decades. Thus, there is considerable scope for more FDI in the medical devices manufacturing segment, in particular, for discouraging import dependency.

The healthcare sector has received heightened interest from investors (venture capital and private equity) over the last few years, with the transaction value increasing from USD 94 million (2011) to USD 1275 million (2016) – a jump of over 13.5 times. Initial Public Offerings (IPOs) of 4 major companies, Dr Lal PathLabs, HCG, Narayana Hrudayalaya, and Thyrocare were oversubscribed, reinforcing investor confidence in the sector. A slew of investments by global health players, including the Parkway Group and a host of players from the Middle East, have strengthened the perception of India as an attractive healthcare investment destination.

Growth in multi-specialty and single-specialty hospitals in the country has taken place mainly on the back of private equity (PE) funding. A flurry of investments happened post the year 2000, mainly from overseas funds, when India allowed 100 percent FDI in the hospital sector. Till 2019, more than 110 PE and Venture Capital investors had invested in the healthcare delivery space in India. The value of merger and acquisition deals in hospitals jumped by a record 155 percent to `7615 crore (USD 1.09 billion) in FY19.

Ayushman Bharat. The Indian government has undertaken several major reform efforts to strengthen the healthcare sector over the last few years. The flagship initiative of the government, Ayushman Bharat, for instance, seeks to comprehensively strengthen the health system right from the primary level to tertiary care, thereby signaling a marked shift in focus from the implementation of vertical health programs. Its first dimension is focused on building the next generation primary healthcare system through a network of HWCs to promote good health as well as detect diseases early, which is especially critical in the context of India’s rising non-communicable disease (NCD) burden. As of February 23, 2021, 60,520 HWCs were operational in India.

Increased focus on disease prevention and extensive screening for diseases at the primary care level through HWCs are long-term, sustainable solutions for reducing the disease burden and consequently out-of-pocket expenditure on health.

Currently, out-of-pocket expenditure constitutes more than 60 percent of all health expenses, a major challenge in a country like India where a large segment of the population is poor. It is estimated that approximately 63 million people fall into poverty every year due to lack of financial protection for their healthcare needs. In order to address this important challenge, India launched the PM-JAY, the second important pillar of the Ayushman Bharat initiative. PM-JAY is the world’s largest non-contributory Government-sponsored health insurance scheme that enables increased access to inpatient healthcare for poor and vulnerable families in secondary and tertiary facilities. It could be a crucial inflexion point for the healthcare industry in India because of its emphasis on improving the performance of public facilities and leveraging the potential of the private sector in delivering healthcare for the poor. The scheme provides 500 million beneficiaries with an annual hospitalization cover of up to `500,000 per family. Over 24,000 hospitals have been empaneled under the scheme, as of February 23, 2021 and over 16 million hospital admissions have been covered. By providing drugs and diagnostics free of cost at the HWCs as well as covering most secondary and tertiary procedures under PM-JAY, Ayushman Bharat has the potential to protect millions.

National Digital Health Mission (NDHM). NDHM has the potential to make the health system more evidence based, transparent and efficient. The digitization push by the government will not only enable patients to share their health profiles with providers for treatment and monitoring purposes, but also access accurate information about the credentials and pricing of services offered by various health facilities, providers and diagnostic laboratories. It is anticipated that over the next 10 years, an incremental economic value of over USD 200 Billion can be unlocked for the health sector through rigorous implementation of the NDHM. Three major shifts can enable this: greater demand for health services, especially seeking early care for NCDs; improvement in quality of care enabled by digital health (shift from volume-based to value-based healthcare), and streamlining of multi-stakeholder processes and interactions through use of an integrated health data system. All of these elements together will lead to greater efficiency, cost savings and ultimately improve health outcomes and productivity.

DRIVERS OF GROWTH
Certain demographic and epidemiological trends are likely to boost the demand for healthcare as well as influence the nature of health services demanded in the years to come.

One such trend is rising income which could result in around 73 million households moving into the middle-class category in India over the next 10 years, thereby enhancing their purchasing power, including with respect to healthcare. It is expected that 8 percent Indians will earn more than USD 12,000 per annum by 2026.

Another important trend is the increase in life expectancy and ageing. Life expectancy in India is likely to exceed 70 years by 2022 and the country’s population is projected to increase to 1.45 billion by 2028, making it the most populous nation globally.

While on the one hand, India has the largest population of youth compared to any country in the world, on the other, the number of senior citizens (60+ years) is also growing. In fact, it is estimated that the share of senior citizens in India’s population will double from 8.6 percent in 2011 to 16 percent by 2041.In 2050, India is expected to have 300 million senior citizens.

Further, India is now faced with a dual burden of disease. While communicable diseases still account for a significant proportion of the disease burden (33 percent of Disability Adjusted Life Years [DALYs] lost), a rising morbidity and mortality cost is now attributable to NCDs (55 percent of [DALYs] lost).

India currently has around 60 million diabetics, a number that is expected to swell to 90 million by 2025. It is estimated that every fourth individual in India aged above 18 years has hypertension. Nearly 5.8 million Indians die from NCDs (heart and lung diseases, stroke, cancer, and diabetes) every year. The rising NCD burden is estimated to cost India USD 4.58 trillion before 2030.

Lifestyle disorders are on the rise due to a combination of rising incomes, accelerated pace of urbanization and increased life expectancy. The fat consumption in diets is increasing, which alongside reduced physical activity, is leading to an upswing in obesity, cardiovascular diseases, and cancer.

An ageing population with a growing middle class and greater longevity will boost the demand for health services in India as well as increasingly favor wellness and preventative services. Additionally, an increase in the prevalence of lifestyle or chronic diseases coupled with higher purchasing capacity will enhance the demand for specialized healthcare. Health insurance coverage is also expected to increase significantly on account of rising income levels and urbanization.

Demand-supply gap. In the area of medical diagnostics, India currently has only 2700 mammograms installed, less than 5 percent of the mammograms available in the US. Similarly, India has only 120 PET-CT scanners, with most of them concentrated in the metropolitan cities. Further, only 30 percent of cancer centres have advanced imaging technologies.

With the government emphasizing early diagnosis of NCDs through initiatives like the HWCs, there is an increased demand for medical devices, including for the purpose of large-scale screening. Implementing comprehensive screening programs as well as targeting specific disease profiles, which are relevant for the indigenous population, and specific communities, can enable early detection of diseases like cancers of the breast, cervix, and prostrate.

With respect to the availability of treatment services, similar gaps exist as up to 60 percent of health facilities are concentrated in a handful of large cities across the country. Presently, 30 percent-35 percent patients in India undergo surgery compared to 60 percent-65 percent globally. Similarly, only 15 percent-20 percent of patients in India undergo radiation therapy as against 40 percent-50 percent globally. Correcting the skewed spread and density of radiotherapy installations across government establishments and encouraging the installation of linear accelerators in private institutes, in PPP mode, will help reduce the gap in overall cancer care.

India currently has 1.3 hospital beds per 1000 population. There is also a shortage of skilled health workers, with 0.65 physicians per 1000 people (WHO standard is 1 per 1000 people) and 1.3 nurses per 1000 people.

An additional 3 million beds will be needed for India to achieve the target of 3 beds per 1000 people by 2025.Further, another 1.54 million doctors and 2.4 million nurses will be required to meet the growing demand for healthcare in India. Demand will also be created on account of the expansion of initiatives like Ayushman Bharat (PM-JAY) which will boost requirements for health personnel not only in larger cities but also Tier-II and Tier-III cities and villages. India will, therefore, need to increase the numbers of trained health personnel across various categories to achieve a ratio of at least 2.5 doctors and 5 nurses per 1000 people by 2034.

Other factors. Other important drivers of growth for India’s healthcare sector will be enhanced adoption of telemedicine and other digital technologies in the post-COVID era as well as the emergence of PPP models in healthcare. Chains of private hospitals are increasingly foraying beyond the metropolitan cities into Tier-II and Tier-III cities as well. More and more private players are seeking accreditation and developing new healthcare models. Further, various States have launched innovative initiatives to attract PPP investments into the healthcare space.

KEY SEGMENTS OF HEALTHCARE INDUSTRY
Hospital industry
The hospital industry in India accounts for 80 percent of the total healthcare market. The long-term outlook for the hospital sector is stable, with annual revenues likely to grow robustly over the next few years on account of rising domestic demand for healthcare as well as medical tourism. It was valued at USD 61.79 billion in FY17 and is expected to reach USD 132 billion by 2023, growing at a CAGR of 16 percent-17 percent.

While metropolitan cities like Delhi, Mumbai, Chennai, and Kolkata boast of world-class hospital groups (Max, Hinduja, Fortis, and Apollo) with high-end infrastructure, healthcare companies are now also expanding into Tier-II and Tier-III cities such as Nashik, Indore, Visakhapatnam, Jaipur, Mohali, Surat, and Dehradun. These cities offer a unique advantage as the intensity of competition and cost of real estate is considerably lower compared to the metros.

It is noteworthy that around 65 percent of hospital beds in India cater to almost 50 percent of the population concentrated in Uttar Pradesh, Maharashtra, Karnataka, Tamil Nadu, Telangana, West Bengal, and Kerala. The other 50 percent of the country’s population living in the remaining 21 states and 8 Union Territories has access to only 35 percent of hospital beds. Simple arithmetic indicates that there is tremendous potential to grow hospitals beds, by at least 30 percent, for ensuring equitable access to healthcare for citizens in all parts of the country.

During the nationwide lockdown in India on account of the COVID-19 outbreak, restricted patient movement and fear of infection impacted hospital operations significantly, with planned procedures dropping by as much as 80 percent and unplanned procedures reducing by 66 percent according to some estimates. The hospital segment, however, began to recover post Unlock-1, with occupancy levels going up to 60 percent of pre-COVID times. It is expected that revenues for this segment will reach pre-COVID levels by Q2 of 2021.

Non-metros (Tier-II and Tier-III cities) are expected to recover faster than the metropolitan areas and Tier-I cities, as they were less badly hit by the COVID-19 outbreak. The same is true for oncology, dialysis, cardiac, and neuro-surgeries, which are recovering faster than other segments. Additionally, leading private hospitals may witness growth in the gynecology and obstetrics segments, in particular, with local hospitals/nursing homes shutting down or becoming non-functional during the coronavirus outbreak.

Investment opportunities. The hospital industry in India is witnessing huge demand from both global and domestic investors. The government’s plans to increase budgetary allocation for public health spending to 2.5 percent of the country’s GDP by 2025, will benefit the hospital sector as well.

There is tremendous demand for tertiary care hospitals and specialty hospitals, in particular. Currently, a considerable gap exists between the number of beds available and the number of beds required. India’s hospital bed density is less than half the global average of 3 hospital beds per 1000 population, implying that an estimated 2.2 million beds will be required over the next 15 years.

Apart from metropolitan cities, demand for health services is rising in Tier-II and Tier-III locations across the country. The per-capita income in these locations has increased rapidly over the past few years. Further, inputs such as land and labor are available at a lower cost in these cities. An added advantage is that these locations can also cater to the population in nearby villages and towns.

There are nearly 600 investment opportunities worth USD 32 billion (`2.3 lakh crore) in the hospital/medical infrastructure sub-sector on Indian Investment Grid (IIG), a platform maintained by Invest India for showcasing investment opportunities by sector. Stressed assets in the hospital industry can be given preference as brownfield projects to healthcare investors by enabling them to diagnose the challenges. This will ensure a significant reduction in the burden of sick industries in the healthcare sector as well as utilization/ upgradation of existing resources by reducing the expenditure.

Medical devices, equipment, and diagnostics
Medical devices represent a sunrise sector of the Indian economy. With relatively lower barriers to entry compared to other industries, the size of the Indian medical devices market is estimated at USD 11 billion, expected to grow to USD 50 billion by 2025. The medical devices sector has been growing steadily at a CAGR of 15 percent over the last 3 years. India’s diagnostics market is currently valued at USD 4 billion. The share of the organized sector in this segment is almost 25 percent (15 percent in labs and 10 percent in radiology). The diagnostics market expected to grow at a CAGR of 20.4 percent to reach USD 32 billion by 2022. Further, export of medical devices by India is expected to reach ~USD 10 billion by 2025.

Currently, India is the 4th largest medical devices market in Asia, after Japan, China, and South Korea. It is also among the top 20 markets globally. There are over 6000 types of medical devices in India. Presently, it is estimated that India imports nearly 86 percent of its medical devices. In particular, the country is dependent on imports for higher-end medical products such as cancer diagnostics, medical imaging tools, ultrasonic scans, and PCR technologies.

India’s trade in medical devices has increased though India remains a net importer. In 2019-20, India’s medical devices imports stood at USD 1.77 billion against exports of USD 0.99 billion. However, in recent years, the CAGR of exports (10.22 percent) scores over the import CAGR (5.89 percent), indicating the growing export potential of the sector.

The medical devices sector has also seen a significant flow of investments over the last few years, with the government allowing 100 percent FDI under the automatic route.

Four classes (A, B, C, and D) of medical devices are manufactured in India as per the Global Harmonization Task Force Rules. The manufacturing value chain for the high-end medical devices (C and D) is led by multinational companies that have extensive service networks in India. This segment has over 90 percent dependency on imports and therefore also provides considerable opportunities for investment to devise a focused approach for minimizing the trade deficit. Classes A and B, on the other hand, which are relatively less technologically advanced, are produced largely by domestic manufacturers. Most of the Indian manufacturers of these devices are micro, small, & medium enterprises (MSMEs) with an average turnover of USD 450-500 million.

The start-up ecosystem in India’s medical devices sector is diverse and vibrant, with over 250 organizations engaged in innovations for addressing important health issues. For instance, Consure Medical is an organization that is developing devices to provide therapy for tackling faecal incontinence. BeatO has designed a convenient and smart device for measuring blood sugar levels. Forus Health is a medical technology start-up that has designed and developed affordable technology solutions for increasing access to eye care. Other promising examples include Indiolabs, a company developing platform technology devices for soft tissue core biopsy, as well as Sattva MedTech, a leading Indian medical start-up, working in the area of child and maternal healthcare.

A challenge for the medical devices industry is the cost of manufacturing disability of around 12 percent-15 percent, vis-a-vis competing economies, primarily on account of lack of adequate infrastructure, inadequate domestic supply chain and logistics, high cost of finance and power, shortage of quality power, limited design capabilities as well as inadequate focus on research and development.

The COVID-19 pandemic also impacted the medical devices sector, with sales of many devices dropping to 20 percent in April 2020 as compared to the sales in April 2019. It is, however, envisaged that India’s medical technology sector will reach pre-COVID levels by Q4 of 2021.

Investment opportunities. The government recently introduced a cess of 5 percent on import of certain medical goods to help finance healthcare infrastructure and services. This increases the cost of importing medical devices in India thereby supporting domestic manufacturers.

There are significant growth opportunities in India’s diagnostics sector. Over the next few years, growth is expected to continue at a fast pace. Diagnostic and pathology centers are also expanding their offering to include various kinds of services in specialized areas like cardiology and neurology. A challenge for the sector currently is that it is highly fragmented, divided between organized labs, standalone, and hospital-based centers. Large investors are, however, building hub-and-spoke structures, thereby consolidating the industry. The notification of the Clinical Establishment (Central Government) Rules, 2019, will also lead to standardization and better quality.

Another area of growth is miniaturized diagnostics as it is now becoming possible to diagnose many conditions very cheaply with a small hand-held device or an add-on to a smartphone. The capability of such devices is increasing exponentially as is their potential to diagnose a large number of ailments instantly at a low cost.

Based on Investment opportunities in India’s healthcare sector, NITI Aayog.

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