The healthcare sector in India, especially diagnostics, is seeing considerable deal activity in terms of fund raising, mergers and acquisitions as well as strategic partnerships, with transactions being driven by the desire to consolidate, gain scale as well as gain entry into niche areas, according to Manmohan Tiwana, MD & CEO of Wodehouse Capital Advisors, a leading mid-market investment bank.
“We do a lot of work in healthcare, it is our number one practice,” Tiwana told businessline. The Indian diagnostics sector is largely dominated by regional players, hospital labs and standalone centres and is seeing a lot of consolidation, Tiwana said, adding, “we have done more than half a dozen transactions already.”
He pointed out that while earlier the consolidation was about adding more labs and expanding presence, now a different type of consolidation is happening through strategic acquisitions. Despite all the consolidation however the organized segment is still about a fifth of the total market. “So there is still a lot of scope. Smaller labs are getting bigger and once that bit is over, they will go to the next level.”
Size is also important to get economies of scale as discounted pricing on tests puts pressure on margins and the only way to offset that is through lower cost of materials. “…the cost of material will go down only if you’re able to procure in large numbers and you will be able to do so only if the business is of a certain size,” said Tiwana. With scale they can also offer better prices to patients.
Diagnostics companies are also trying to differentiate themselves by adding some uniqueness to their business either in distribution or adding new lines of business such as genomics.
In the hospitals segment, transactions are progressing slower since there is a real estate element attached to them. “Owners of hospitals have started valuing themselves as hotels,” Tiwana said, adding that they were measuring their metrics on a per bed basis, while prospective investors evaluate such investment opportunities on number of patients, realization per patient, profitability of the business, the treatments being offered and so on.
Fewer deals were taking place in the segment due to mismatch in business ideologies, profitability expectations and valuation differences between the hospital owners and the investors.” Professional management is not always the forte of all hospital promoters “and these are not seen to be attractive investment opportunities by prospective investors.”