In Focus

Spinning the Money

The imaging and diagnostic market is poised for a consistent steady growth upwards holding great potential in the futute. By Divya Pamnani

India is at a stage of 'health transition,' brought about by rapid growth. The factors aiding this transition include changing disease patterns, growing health awareness, a well-informed middle class, increase in per capita spending, demand for health insurance and favourable government policies. The Indian healthcare industry, currently approximating to roughly $ 35 billion or five per cent of the GDP, is expected to grow to $ 50.2 billion and $ 78.6 billion in 2011 and 2016 respectively, according to a report by Ernst and Young( E&Y). At present, the Indian health imaging market is at roughly $ 350 million and is expected to double by 2010.

X-ray, ultrasound, CT and MRI are expected to collectively account for 68.6 per cent of the health imaging market, according to E&Y's report. Needless to say, imaging diagnostics will play an important role in shaping the future of healthcare industry in the country, with treatment decisions largely being based on these test results. Against this backdrop, impelling technologically-advanced diagnostic equipment and excellent infrastructure are being widely employed in hospitals and standalone imaging diagnostic centres, making India a medical value travel hub.

A Fragmented Market

Across the country, the imaging diagnostic market is highly fragmented and predominantly 'unbranded,' making it extremely difficult for the layperson to ascertain where to go for diagnostic tests. This is based on the established consensus by the providers of radiology nationwide, that the diagnostic services industry is tiered. These services are essentially offered by four broad groups. The first group consists of hospitals funded by the central, state Governments or municipal corporations. The second group consists of hospitals backed by trusts and private corporations. The third group gaining prominence is private imaging centres manned by groups of radiologists. The last category, considered indispensable by some, is aptly described as 'mom -and-pop clinics' run by single radiologists. The fragmentation of services, however, belies the tremendous market potential that holds true for the fledgling Indian market. "An analysis done by us reveals that though the diagnostics market is highly fragmented, it is estimated to be in excess of $ 350 million at present," affirms Rajaram Iyer, Head- Life Sciences practice, Grail Research, a leading business research firm based in New Delhi, and a member of Monitor Group.

The Business Environment

The basic difference between the four above mentioned groups of service providers in the radiology diagnostics space is the patient factor. "With Government funded and trust hospitals, the patient population is essentially diseased, economically vulnerable and availing of the gradation on the pricing of tests. Whereas with freestanding centres, the patient population clearly has more awareness of preventive health, has more spending power and is looking for quality service," explains Rahil Shah, CEO of NM Medical, Mumbai.

However, the latter is also where cut-throat competition is seen the most. This has resulted in a price war between players who have high-end quality and those who have low-end quality, point out critics. "The focus should be on value-added services, better technology and not price cutting," quips Sahil. Talking about the distinct patient pools that go to freestanding centres, Shah avers that this population expects high-quality service and a comfortable, non-hospital environment for their tests, in addition to the quality of their tests. "Hence, the way forward for free standing diagnostic centres will be multiple centres in different locations, each with high-quality technology, superb service and ambience so that one does not feel like they are in a medical setting. This is the only way by which high-end diagnostic centres can differentiate themselves from low-end centres who do not value the service concept," says he.

Following the wave of consolidation, many niche diagnostic players have emerged, spreading their wings to upgrade, diversify and establish a pan-India presence. Some players in this category would be Piramal Diagnostics, Metropolis Health Services, Dr Lal Path Labs to name just a few. The business model of these diagnostic services centres is highly corporatised and in few cases, is supported by venture capital equity funding. Recently, Metropolis Health Services, a diagnostic chain, raised over $ 8 million in equity from ICICI Ventures. Another recent venture was between GE India and MediCity, worth $250 million. In this case, both the entities collaborated to create a medical institute of world standards specifically in the areas of high-end medical diagnostics, clinical research and development and utility services.

Different Strategies

Radiology equipment is a high-dollar investment. A thorough business planning along with understanding of the realities of the Indian setting are essential to make the investment pay off. It is important for market entrants to note that their consumer base is not one billion people collectively, emphasising the need for a regionally-adapted strategy. At the same time, new imaging technologies are constantly on the horizon, while radiology applications are extending into more specialties, requiring radiologists and medical staff to be on top of their game. While balancing strategic, operational and personnel concerns, financial planning takes precedence.

For Government hospitals, resources are essentially budgeted. Finances are planned years in advance. Run entirely on a not-for-profit model, the sheer magnitude of diagnostic tests done at Government hospitals on a daily and yearly basis makes up for the high-cost factor of the equipment, with a lesser break-even-period compared to any other counterpart in the industry. " At KEM, approximately 90 CT scans, 600-700 X-Rays and 350 ultrasound tests are done on a daily basis and around 3,000 plus special investigations are done a year," informs explains Dr Hemant Deshmukh, Chief of Vascular & Interventional Radiology at KEM.

"By and large, the BMC has been making sustained efforts to bring in new generation equipment for all hospitals under its wing. Another advantage these hospitals have is bulk deals or clubbing of purchases for several hospitals at once, leveraging purchasing power from the equipment provider," adds Dr Deshmukh.

When it comes to trust hospitals, internal generation is the primary mode of raising finances. "There is no pressure to repay loans, while corporate conglomerate hospitals are backed by private corporations where profit is the bottom line," explains Dr Vimal Someshwar, Senior Radiologist in Mumbai. "Trust and corporate hospitals alike, definitely have an edge as captive cases and patient referrals are easier to come by, guaranteeing a sizeable patient volume and thus ensuring return on investment within three, five or seven years at the most," claims Dr Someshwar.

Debt funding

Public sector banks or nationalised banks as well as private sector banks provide succor when it comes to debt funding, a few of which include Union Bank, Citigroup, ICICI most commonly, HDFC and Reliance Capital. "The interest rate and terms of payment are the most important factors governing the feasibility of the loan. Pre-payment terms are to be looked out for, since these can be stiff. Also, it's best to not go for a floating rate of interest," cautions Dr Bhavin Jankharia, Director and Chief - Radiology Services, Piramal Diagnostics, who also adds that an advantage point for loans is that they allow for tax benefits. For NM Medical, they have been supported by debt funding over the past 25 years. "However, with radiology being technology intensive and high in cost, there is ultimately a cap to how much debt one can keep taking on in a portfolio," opines Shah.

Private Equity Option

With Private Equity (PE) players increasingly coming to the fore, there are more options available for funding expansion. However, when PE players examine the fundamentals of the imaging market they realise that it is vastly different from their traditional investments and hence the influx of PE in the diagnostics sector is a slow stream, opine analysts.

According to a Healthcare Survey in 2007, the Indian healthcare industry's average EBITDA margin is of 17.7 per cent and Return on Capital Employed (ROCE) is 13 per cent. Value creation takes longer in healthcare, but once created, it is sustainable. "Much like the retail sector, healthcare is essentially high-volume and low in margins, which is not traditionally how PE funds work. It's very unusual for PE funds to come in and be told that it would take at least six years to consider an exit option," explains Shah. Thus, PE firms in healthcare definitely need to have patience to get the right value, emphasising that healthcare is not a 'get-rich-quick-sector.' While PE firms in other sectors can exit within two to three years, in healthcare, PE firms need to wait for six to eight years to get the right value for money. Experts opine that the infusion of PE funds may well bring in fiscal discipline, a trait that needs attention in the fragmented diagnostic market space, notorious for the 'cut system.'

The foreign funds currently outnumber the Indian ones having higher entry points, with upwards of Rs 10 lakh. With the likes of Blackstone, Citi, JP Morgan, Apax Partners, Warburg Pincus, IFC, Tamasek, Chrys Capital and IL&FS already in the market, one cannot be anything but optimistic about the future prospects of PE for funding. Notable PE deals for diagnostic centres include the $ 10 million investment in Dr Lal PathLabs from Sequoia Capital India for a minority 26 per cent stake. They are currently a chain of 30 centres nationwide, in the hopes of adding 20 more centres in 2009.

Equipment Providers

As a result of a visible lack of a domestic manufacturer of medical devices, currently more than 65 per cent of the equipment are imported mostly from the US, Japan and Germany. Players namely Siemens AG, GE Healthcare and Philips Medical Systems occupy the top three slots in the Indian medical imaging market with nearly equal market share. Understandably, at present, most of the diagnostic services take place in sophisticated urban areas. The reach of these top-players, therefore, is mostly in urban India. Domestic companies such as BPL Health Care Limited, Trivitron Medical Systems Private Limited, Esaote India Limited and Sigma Diagnostics India Private Limited are active in the semi-urban and rural markets. Equipment providers are allowing liberal finance schemes to ease liquidity problems and boost sales in India. "If access to adequate funds is difficult, providers supply the equipment, allowing facilities to pay per usage, with the option of buying out a machine after a certain number of years," explains Shah.

"Many players that opt for equipment supplier funding, do not have to worry about generating funds at one go, allowing for an amicable 'pay-as-you-go' policy, a seemingly win-win situation for the provider and the radiology set-up," elaborates Girish Mehta, President and CEO of Piramal Diagnostics. GE on the other hand is aggressively trying hard to make diagnostic imaging equipment accessible to radiology set-ups. Not only does GE allow for access to equipment on a month-to-month rental programme, pay-per-usage as mentioned earlier, but also allows for part of the rental money towards purchase down the line. "Further, for key customers, GE also provides guarantees to GE Capital. No other company does that," affirms Dr Jankharia.

GE expects most of this growth to come from expanding its imaging products range, especially in the so-called tier II and tier III cities, boosting its reach in semi-urban and rural markets by acquiring local equipment manufacturers that can complement its product portfolio and help expand the network. GE Healthcare is also looking to introduce certain made-for-India models of high-end medical imaging systems such as medical scanners and digital imaging to expand the reach of such products to small and medium hospitals.

Philips Medical Systems has recently started a channel of distributor financing, with over 50 distributors in the country, also having recently added 30 more distributors to its list. The role of the financing distributor is that they identify potential customers, recommend them to specific banks and essentially guarantee the bank that the loan will be repaid. Having recently acquired Mumbai-based Medtronics and Alpha, both manufacturers of X-ray systems and imaging equipment, Philips Healthcare has further been able to consolidate its positioning in the diagnostics imaging industry and thereby increase its product portfolio.

Re-use

For small (50-100 bed) to medium (up to 200 beds) sized hospitals, the refurbished equipment market is a seemingly economically feasible alternative, seen quite often in tier II and tier III cities.

Equipment sharing conventionally follows two models. "A few radiologists get together and install equipment or many clinical doctors get together and install equipment and then hire radiologist s" explains Dr Jankharia. Utility of imaging equipment is undeniable, which has resulted in the surfacing of various alternative routes to acquire these machines, while also trying to keep expenses in check. Equipment sharing is another such model, common in small set-ups of less urban areas, making these diagnostic tests more affordable for the layman.

Sanrad is the pioneer and market leader of re-furbished and re-conditioned machines from Japan, providing a great financial advantage and benefit to the doctors, clinics, hospitals, in effect helping to reduce cost to patients. "Not only do refurbished machines bring down the price drastically, but Sanrad also provides payment schemes to its clients for little or no interest, with easy repayment by installments," affirms Ratish Nair, Head of Medical Electronic Division at Sanrad.

Outsourcing Options

Another emerging trend is to outsource the entire radiology department of a hospital to a group of radiologists. "In such instances, hospitals do have to bother about funding, but are also unburdened from running the department, while being able to savor a share of the revenue," explains Mehta. In January of 2008, Piramal Diagnostics entered into a partnership with Dr LH Hiranandani Hospital, for complete outsourcing of the radiology department. Piramal Diagnostics has already been entrusted with the diagnostics facilities of many renowned hospitals, such as Mumbai-based Guru Nanak Hospital and Research Centre, Lok and Bhakti Vedant Hospital; Jeewan Mala Hospital and Aashlok Nursing Home in Delhi, Mittal Hospital in Ajmer, Shanti Nursing Home in Bangalore and Victor Apollo Hospital in Goa. It has also entered into a long-term agreement with the Madhya Pradesh Government to establish and run the CT and MRI facilities in Maharaja Yeshwant Rao Hospital in Indore. Thus, domestic outsourcing of radiology departments to external labs, inherently having benefits for both parties, with Piramal Diagnostics serving as a role model in this arena, more of such partnerships should be expected to come to light in the near future.

Off-shoring of Radiology

The market boom within diagnostic services has also seen a remarkable increase in the requirement of outsourcing of radiology services globally. With a pool of well-trained Health Insurance Portability and Accountability Act (HIPAA) compliant radiologists in India, a shortage of radiologists world over, and high-tech infrastructure investments, India is an up-and-coming market for tele-radiology, providing offshore X-ray reporting services to the US, Singapore and the Middle East.

Outsourcing teleradiology services to India has proven to be an advantage to small and medium hospitals for countries outside India, which may not have a resident radiologist. According to an estimate, approximately 50 per cent of the 6,000-odd hospitals in the US, still do not have the technology for teleradiology and this represents a huge potential market to be tapped. Many off-shore sites in the US and other countries are looking to India for low-cost tele-radiology services to meet the ever growing radiology needs. With the present pool of talent in India, this opportunity is flourishing and hence, India has become the prime choice for medical centres to outsource their tele-radiology services. "Teleradiology is the next frontier in outsourcing and represents India's continued growth and dominance in the outsourcing of knowledge intensive business processes," adds Iyer of Grail Research.

The Road Ahead

Radiology is now at the forefront and not just a back office diagnosis function. It certainly has a central role to play in going forward. "Both, hospital and stand-alone models, will do well if strategically and suitably located. Domestic outsourcing for hospitals is also a good option as it cuts down the initial capital outlay. However, purely from a long-term perspective, hospitals would do better if they manned their own service diagnostic departments as quality can be ensured and in days ahead when accreditations will be a must for success, the uniformity of processes will be an important issue towards maintaining quality," believes Dr Dinesh Kapoor, Chief Radiologist, Indraprastha Apollo Hospital, Delhi.

Dr Someshwar believes that small 'one-man-show' centres are limited in scope, with little growth opportunities. "It is impossible for a single provider to cover a country as big as India - and healthcare is so specialised, especially radiology - which is firstly so technology intensive, requiring a lot of capital and secondly it needs a lot of expertise among the reporting doctors. With these factors in mind, it is going to be hard for one player to cover the length and breadth of India. The way forward would be for regional players to get together, form alliances and offer their services across the country," agrees Shah.

Consolidation by way of large set-ups buying out small centres will continue to happen, so as to cover the length and breadth of India, emphasising a bullish perspective on M&As. Survival of the fittest, eventually will see pooling of clinicians, collaborations, consolidations and joint ventures.

"Furthermore, working of private centres and hospitals in synergy is a good business model to follow - where the radiology department can be outsourced to a private centre. In this case, investments in a CT or MR machine becomes much more practical, where guaranteed 10-15 patients a day come in directly from the hospital, in addition to outside referrals," concludes Shah.

Lastly, a number of MNCs are looking to enter the Indian market - both insurance players as well as imaging players. Forming partnerships with foreign players would prove to be successful ventures, given their understanding about the dynamics of healthcare markets. 'Paying for quality' is essentially the take home message for the radiology diagnostic services. If one is able to create a brand awareness and maintain quality standards, patient quantity and survival is ensured. For expansion, outsourcing growth partners locally and from abroad will indeed aid survival.

As Mehta predicts, "Large independent set-ups will survive, preferably offering pathology in combination with radiology diagnostic services and having a turnover of over Rs 10 crore per year. Hospitals will increasingly outsource their radiology departments. Medium sized practices in high-end imaging (CT and MR) will not survive. Small 'mom-and-pop' centres will continue to remain indispensible."

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