Column : Why Fortis Wockhardt is a big deal

Written by MG Arun | Updated: Aug 27 2009, 02:36am hrs
One of the highlights of the Fortis-Wockhardt deal, where the former has bought ten hospitals of Wockhardt for Rs 909 crore, is its valuation. Valued at around Rs 52 lakh per bed, Fortis is considered to have made an offer Habil Khorakiwala, chairman of Wockhardt, could hardly refuse. Why did Fortis decide to pay such a nice sum for the hospitals, despite the fact that Khorakiwala was in a dire need to find a buyer at the earliest to pay off his companys debts What does this deal, the largest in the Indian healthcare sector, suggest about the present state and potential of Indian healthcare

For one, Fortis has an ambitious target of reaching $1 billion (around Rs 5,000 crore) in revenues by 2012, with 40 hospitals and 6,000 beds. Fortis, which had bought Escorts in 2005 for over Rs 585 crore, already operates 28 hospitals across the country. So with the ten hospitals from the Wockhardt stable, Fortis has, at one stroke, come comfortably close to its target much ahead of the planned time period. The Wockhardt buy also gives it a total of 5,180 beds. It is estimated that Fortis would have had to shell out Rs 70 lakh to Rs 1 crore a bed, had it gone in for building up such a capacity from scratch.

Second, the deal helps Fortis, which was largely focused on the northern sector, to create a national healthcare delivery network. The ten hospitals are spread across Mumbai, Bangalore and Kolkata. With the acquisition, Wockhardt has ensured its presence in some of the key states like Delhi, Maharashtra, Karnataka, Punjab, Haryana, Rajasthan and Uttar Pradesh.

A third aspect is the current state of healthcare in India. The Economist Intelligence Unit has estimated the Indian healthcare sector (including pharmaceuticals) could grow to $82.5 billion by 2011, accounting for 4.5% of the GDP. It is estimated that there are 13 lakh private healthcare providers in India, of which 97% are unorganised and fragmented. Healthcare expenditure as a percentage of the GDP has been increasing, with the growth being driven by an increase in private expenditure. According to a study by Ernst & Young and Ficci, the percentage of private healthcare expenditure in India is the highest among Bric countries. It has been estimated that in India, the percentage of private healthcare spend in total healthcare expenditure is 81%, whereas it is 56%, 61% and 38% for Brazil, China and Russia, respectively.

Next comes the unmet needs of a majority of the population when it comes to access to healthcare. For the six states that comprise 37% of Indias population, hospital beds per thousand population are less than two-thirds of the current national average of 0.86, which is one-third of the world average. The growth in infrastructure has not matched the rise in the population and the increase in reported ailments.

Sadly, India lags behind other developing countries in terms of key healthcare indicators. The countrys disease burden was 37% higher than that of Brazils and 86% higher than

Chinas.

Yet as many as 68% of Indians do not use public facilities since they feel these are sub-standard in quality, while 47% cannot use these facilities since they are not located nearby, according to the All India National Family Health Survey of 2004. Most of the people opt for private treatment, although it is costly compared to public treatment (20-40 times for out-patients and 2-3 times for in-patients).

This high cost of healthcare can be a growing concern, considering that as much as 70% of Indias healthcare expenditure is financed out of pocket. According to a 2008 study, only 12% of the Indian population is covered by health-related insurance schemes.

The growth of the private sector has been attributed to a host of government policy changes following the economic reforms in 1986. While public health expenditure has remained more or less stagnant between 0.9% to 1.2% of the GDP, private expenditure has increased from 60% in 1990-91 to 80% in 2000-01.

While large private healthcare chains can tap into these avenues that open up domestically, medical tourism from abroad is another lucrative area that some of these firms are looking to cash in on.

With the country offering highly cost-competitive and technologically advanced treatment in the areas of cardiology, joint replacement, orthopaedic surgery, gastroenterology, ophthalmology, transplants and urology, this is an area that is poised to become a $2 billion industry by 2012, according to a joint study by CII and McKinsey. Although opportunities abound, it will be interesting to watch how existing players spread their services pan India and even abroad, and how much they will be able to penetrate the rural population with innovative, affordable health delivery mechanism.

mg.arun@expressindia.com