Our Heatmap for India Healthcare and Life Sciences Investments for 2019 Kapil Khandelwal QuoteUnquote with KK www.kapilkhandelwal.com

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Healthcare and Life Sciences outlook 2019: Is
the heat still on?
Kapil Khandelwal January 2, 2019
The year 2018 started with a bang and a positive outlook on healthcare and life sciences
sector. While in US, the S&P 500 Healthcare index outperformed to add nearly 5 per cent
versus 6.23 per cent fall in broader S&P 500 in 2018.
Closer home, BSE Healthcare Index underperformed losing 6 per cent versus 6 per cent
gains on Sensex during the year. These are just broader market indices and public market
indicators of investment activity in healthcare and life sciences sector. The other side of
the coin has private markets. The activity there remained subdued in terms of number of
deals and investments in Q3FY18. This is because older post Lehman Era vintage is still
looking for exits. So what is the outlook for 2019?
Our investment heatmap for 2019 shows a much cautious mood across the healthcare
and life sciences sub-sectors with opportunities in some hot spaces. Is the heat still on in
2019?
As compared to the 2018 heatmap, the heatmap for 2019 has some fire being doused by
caution due to what transpired in 2018. When compared to the heatmap of 2018, the 2019
map still has some areas that will continue to remain hot for the sector on a selective
basis. The first half of 2019 will see the political heat of the general elections in India
leading to the uncertainty around investment in the sector. Largely, 2019 will be positive
socio-politically but may cause some dent on the margins and valuations of the sector.
Healthcare financing
Medical cost inflation after the rupee devaluation in 2018 and emerging price controls on
procedures and implants will continue to be in the range of 20 per cent to 24 per cent in
2019. As the 'India Stack' builds up to bring the next 500 million into its fold, the consumer
financing of healthcare events will still attract many operators leveraging fintech tools.
Innovation into financing products and services for consumer financing of healthcare will
see a few more players emerge. Incumbents of the likes of Bajaj Finserv will expect to
increase the coverage throughout India in 2019. However, subvention will be under
pressure from the healthcare operators due to margin pressures.
2019 Outlook: Very hot
What's going wrong: Regulation, maturity to scale
What's going right: India stack digitisation, consumer spending on health and wellness
Medical education
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2. The regulatory regime to open up different skills for healthcare has been playing catch up.
The recent regulatory reforms that started will not see much action on the ground in 2019.
The new age digital medium to skill in bulk is still balked by the respective skill councils
and regulators. Don't expect a single medical center of excellence on ground in 2019 in
any state from the policy announced. Many of the debt servicing issues of the sector will
still persist in 2019 with a few NCLT/bankruptcy cases coming up. M&A activity may heat
up from here.
2019 outlook: Moderate
What's going wrong: Regulation, corruption, no vision, skill shortages, alignment to
new age care, increasing debt burden, new age skills certification
What's going right: Skill demand
Med tech
innovation
and life
sciences
discovery
and
clinical
development
The pipeline for moving into clinical development in 2019 is very negligible. Various
initiatives over the last 4 years under various schemes to build the innovation pipeline
have not resulted in serious players being recognised to take on global scale. We will see
5 IP either going through attrition or being a global scale innovation from India. On the
clinical development front, the sector has maintained status quo since 2018. Investments
will be muted.
2019 outlook: Low
What's going wrong: Innovation pipeline, IP regulation, global collaborations, health
research culture; regulatory bottlenecks on clinical development
What's going right: Talent supply; cost advantage
Pharma and therapeutic solutions
Story of 2018 to continue. Expect M&A consolidation activity. No mega stories expected in
2019. Although growth may pick up further post GST issues are sorted, markets to remain
bearish on the sector. Election year populism may kick in a few more price controls in
India. Digitisation will be a key driver in 2019.
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3. 2019 outlook: Moderate
What's going wrong: Price controls, US generics policy, Indian generics versus Jan
Aushadhi
What's going right: Cost advantage, distribution infrastruction
Healthcare Providers
The hectic policy actions on all fronts in 2018 will result in some consolidation in the sector
on account of margin pressure due to price controls and heady valuation expectations on
exits. Expect only one major blockbuster IPO in 2019. Funding crisis to continue.
Expectations of a few innovative delivery models to emerge as costs build up and prices
will remain under pressure. Surprise could be in store in terms of further regulatory
changes. Expectations of Rs 50000 million being further invested will be reviewed post
Q3.
2019 outlook: Hot
What's going wrong: Margin pressure, price controls, NCLT recoveries, GST slabs
rationalisation on inputs, execution of programs on the ground, PPP in healthcare
What's going right: Ayshman Bharat, Jan Aushadhi
Healthcare insurance
Expect to see some innovative models for healthcare payers emerge in India for the
middle bulge of India Stack for the middle 500 million that are paying out of pocket. As
loss ratios mount, insurance rate will go northwards. Innovative products and pricing still a
distant reality with the regulator in India.
2019 outlook: Moderate
What's going wrong: margin pressures, product and new business models innovation,
product approvals, loss ratios
What's going right: Consumer demand
Health retail
India will still not get its first unicorn in healthcare in 2019 as many of the series B and C
players will fail to reach profitability. Valuations will be a key issue. Consolidation and
acquisitions expected for some to survive and grow. Expect two very large PE funded
players to close shop or merge. Regulatory puzzles of 2018 will not be solved till Q4 2019.
Digital business models will be the key drivers for private and VC investments.
2019 outlook: Very hot
What's going wrong: Regulation, maturity to scale
What's going right: India stack digitisation, consumer spending on health and wellness
Wellness
Expect the investment buoyancy from 2018 to continue. No major blockbuster IPOs
expected in 2019 from this sector. We may see newer business models emerge as
tourism and wellness merge. Digital wellness is yet to prove itself in 2019. Who comes to
power in the centre will decide what happens to Yoga after 2019.
2019 Outlook: Hot
What's going wrong: Regulation, maturity to scale
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4. What's going right: India stack digitisation, consumer spending on health and wellness
Alternative therapies
The Babas promoting alternative therapies will continue their journey northbound in 2019
as well. However, unlike Chinese alternative therapies, the Indian alternative therapies will
still not gain global mainstream in 2019.
2019 Outlook: Moderate
What's going wrong: Regulation, maturity to scale
What's going right: India stack digitisation, consumer spending on health and wellness
The writer is Managing Partner of Toro Finserve LLP, and Director EquNev Capital
Pvt Ltd
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