Why Private Equity Firms Are Betting Big On Indian Healthcare?

The season of mergers and acquisitions (M&A) in the healthcare and pharmaceutical sector is here to stay with private equity investors taking a greater interest than ever in India's health ecosystem. Industry insiders say that the post-Covid years have been a boon for private equity investments and M&A activities. They say that over the five-year period of 2018-2022, the Indian healthcare sector witnessed M&A activity with a cumulative deal value of USD 35 billion, which was a healthy increase in deal value over the preceding five-year period. 

According to the experts tracking these deals in 2023, the total deal value in healthcare and pharma combined is pegged somewhere over USD 6 billion in private equity investments alone with a deal value of USD 3.4 billion in M&A activities in the first eight to nine months of 2023. They say that in volume terms, the number of M&A deals till October has already surpassed the 2022 total, with a 20 per cent increase. 

Private equity (PE) firms are increasingly looking towards India owing to a host of reasons such as the demographic dividend, inflating per capita income and China plus one strategy playing out. According to the data by Ernest & Young, out of the total investment by private equity firms in India healthcare and pharma combined accounted for only 5 per cent of the total deal value pre-Covid. This number has now gone up to 12 per cent in 2023. 

“The PE deal value which used to be USD 1-2 billion odd pre-COVID has consistently touched upwards of $4 in the last two to three years. In terms of private equity inflow into the sector this year so far in the first 7-8 months, already 5 billion has happened excluding the Blackstone deal. The speed and the velocity of fund flow into this sector are significantly expanding,” says Kaivaan Movdawalla, Partner and Healthcare Leader, EY Parthenon.  

Why Healthcare Is PE’s Favourite

The top deal of the year came in April from the purse of Singapore-based sovereign wealth fund Temasek which invested two billion US dollars in Manipal Hospitals - the PE firm now holds 59 per cent stake in the second-largest hospital chain in India.  

Whereas the US-based PE firm Blackstone took over two of the biggest hospital chains in south India in October - Care Hospitals and Kims Hospitals in a deal valued at around a billion US dollars.  

According to the data by EY, healthcare has garnered more investments from PE firms - from 4 per cent of the total deal value of India in 2017 to 10 per cent in 2023. Comparatively, the pharma sector has only moved by one per cent from one per cent in 2017 to two per cent in 2023. 

“India has secular demand-supply drivers, we've got a very high disease burden, an expanding middle class with growing purchasing power, rising penetration of private health insurance and the Ayushman Bharat scheme which has unlocked the demand at the bottom of the pyramid,” says Movdawalla.

He further says that post-COVID much greater momentum is being witnessed in organised or quality private healthcare which is attracting a heavy inflow of PE money. In Indian metros, the total bed density remains largely uncapitalised with 2.5 to 3.5 beds per 1000 population and for quality hospitals which are accredited by NABH the bed density falls to 0.4 per 1000 population. For quality beds, today there is a demand-supply gap of 20-30 per cent, Movdawalla informs. 

Pharma Leads The M&A Activity

The pharmaceutical sector commands a majority in M&A activities with a 4 per cent deal value of the total M&A activity happening across sectors in India versus a 1 per cent deal value of the healthcare sector. Experts say pharmaceuticals have traditionally enjoyed strong M&A activity given the scale of the sector, the large number of assets in the sector and attractive growth tailwinds 

They further highlight that presently the pharmaceutical sector is undergoing a consolidation trend in the domestic market driven by margin pressure. “There is an emphasis on expanding capacities within India, particularly in Contract Development and Manufacturing Organization (CDMO), Active Pharmaceutical Ingredient (API) manufacturing and Biosimilar businesses,” states Kalmath S J, Partner, Grant Thornton Bharat. 

In the M&A universe, the famous washing powder brand Nirma foraying into pharmaceuticals was the biggest mover.  “In 2023, the Nirma-Glenmark Life Sciences deal, valued at USD 689 million, constituted more than one-third of the total M&A deal value till October 2023. Additionally, four deals, each exceeding USD 100 million, contributed to the year-on-year increase. These include the Serum Life Sciences-Biocon Biologics deal valued at USD 150 million, the IPCA Labs-Unichem Labs deal worth USD 126 million, the Dr Reddy-Mayne Pharma deal amounting to USD 105 million, and the Manipal Health-AMRI Hospitals deal valued at USD 280 million,” Kalmath S J points out.

Key Drivers In M&A, PE Investments

The interests that seem to be driving consolidation have been consistent over the years say industry voices. Whereas PE firms are playing as financial sponsors in the healthcare and pharma sector, especially for differentiated and scaled-up assets. This coupled with global supply chain realignment, especially diversification from China during the pandemic continues to drive increased investments in India.

Experts say PE firms typically have a seven-year window allowing them enough time to exit with a premium on their invested value, however, in healthcare, the window is only three to five years say experts which makes for quick returns in the shortest possible window. 

“PE activity has also been driven by the rationale of developing platform assets by deploying an inorganic roll-up strategy with the key benefits of this strategy being larger scale, greater diversification, expansion of capabilities, and ability to harvest revenue and cost synergies, all of which ultimately improve asset quality at exit for the PE owner,” states  Subhakanta Bal, Managing Director, Rothschild & Co.

Trade activity in pharmaceuticals, especially in the B2B segment, continues to be strong, says Bal. He says that trade activity has been driven by a desire to enhance market share and plug specific whitespaces from a therapy area standpoint. In certain therapeutic areas, organic growth has been lower than expected, making acquisitions a preferred alternative, he adds.

Experts also contend that pharmaceutical companies are willing to expand in high-growth segments such as high potent APIs, oncology, peptides and injectables. Nutraceutical ingredients are also witnessing interest from PE funds on the back of strong growth driven by rising consumer awareness and a shift towards preventive care. 

On the other hand in healthcare, larger chains are acquiring smaller providers to expand their footprints. “Single speciality segments, especially IVF, mother and childcare and eyecare are experiencing increased activity. Some notable transactions include ASG Hospitals-Vasan Eye Care and Asia Healthcare-Asian Institute of Nephrology and Urology,” informs Kalmath S J. 

A Decade Of Growth For Healthcare, Pharma

Given the scope to increase access across the health ecosystem enabled by multiple macro drivers such as a rise in per capita income and an increase in insurance penetration, experts maintain that the Indian healthcare sector will be a multi-decade secular growth story gauging strong investor interest across pharmaceuticals, healthcare services and, increasingly, medical devices. 

“With multiple companies scaling up in the MedTech space, there is a rise in interest from financial sponsors. We could also see more inbound trade M&A activity in the MedTech space as overseas companies look to expand their footprint and get access to commercial infrastructure in India,” says Bal. 

Speaking on the tier 1 and tier 2 opportunities for healthcare Movdawalla says that India will see significant growth in affordable healthcare with providers tailoring their business models for inclusion. 

“Tier 1 and 2 cities are where a large part of India’s GDP growth is going to happen and they will become a very important growth engine of this healthcare market. Doctors would want to come there with the patients becoming value-conscious and aspirational. And they have an unmet demand and as one provides quality healthcare - these markets will expand exponentially,” Movdawalla explains.

Industry experts remain optimistic for the healthcare and pharma sector in 2024 - driven by promising signs of recovery in the country's deal activity. They say that despite short-term fluctuations, the industry demonstrates significant long-term investment potential, particularly in the segments that gained traction in 2023. 

Industry voices say that the healthcare sector is insular to external shocks and guarantees a revenue growth of 10-12 per cent. They contend that the future deal environment in healthcare and pharma will continue to attract PE investors with an estimated USD 3 billion to USD 4 billion deal value in 2024.

“Every private equity firm has healthcare ranking second in its portfolio. This is the decade of healthcare in India,” states Movdawalla.