At Matrix India we are excited about healthcare businesses. We have a portfolio of healthcare services investments (e.g., Cloudnine, Centre For Sight, Meditrina) as well as health tech companies (e.g., Practo). We continue to actively scout for opportunities in healthcare, especially in areas that we call the ‘picks-and-shovels’ evergreen enablers of healthcare.

The overall domestic healthcare market is deep (~US$ 140 BN in 2016, Figure 1), growing rapidly (11% CAGR over the last 5 years), and profitable (~15% EBIDTA, Figure 2). It is also one of those markets where Indian companies have a clear edge over foreign players, from a service delivery as well as regulatory point of view.

Figure 1 – Healthcare market in India (USD BN)

Figure 2 – Healthcare Industry EBIDTA margins

The majority of VC/PE dollars invested in domestic healthcare have been in healthcare services (69% in 2017, Figure 3 [1]); However, we think there is a tremendous opportunity in the healthcare ‘enabler' space (areas adjacent to healthcare services). If we break the entire healthcare opportunity down, while 75% [2]of spend is in healthcare services,the growth is higher in the healthcare ‘enabler’ space - areas like finance, insurance, and domestic pharma (including distribution, Figure 4)[3]

Figure 3 – Total VC/PE Investment in Healthcare in India (USD MN)

Figure 4 – Annual market growth rates for ‘enabler’ sectors

We feel there are plenty of “VC fundable’ opportunities in the second bucket - these are markets that are centre-of-box in terms of scalability, capital efficiency, as well as deep profit pools. Some of the opportunities that seem exciting to us include:

1. Pharma distributionin India is extremely fragmented. While there are, by estimates, 80K+ distributors in India, it is also an industry with very lowconcentratione.g., the top 3 distributors control only ~1% of the market (Figure 5). This is in sharp contrast to markets like the US and China that have a much higher concentration (Figure 5)[4]. We think the market is ripe for consolidation in the pharma B2B space because of a combination of factors - GST, tech adoption (leading to improving margins through better inventory management and fulfilment for the ‘haves,’ and a widening gap with the ‘have nots’). While this is a challenging business from a margin point of view (pharma margins are capped, and players need to think of an optimum portfolio utilizing consumables and generics), we see enough opportunity for using technology to add basis points to the business – some fast-growing players are going beyond pure distribution to areas like inventory management and consumption analytics for their customers. Asset-light pharma ‘super’ distributors are being built out (e.g., Ascent Healthcare, Entero Pharma) and we feel there is room for more.

Figure 5 – Market share of top 3 distributors

1. Healthcare insurance models:While there has already been a lot of private investment into ‘full service’ health insurers, we feel that specialised plays are under-explored and can prove to be profitable e.g.
   1. Low cost basic cover - finally, there are companies that are trying to use analytics to reduce underwriting cost for new policies, increase the % of STP (straight-through-processing) policies, and develop better fraud algorithms. This offers an opportunity for a no-frills low cost basic coverage plan at a lower premium than currently being offered
   2. Disease-based cover - Diabetes plans have now begun to get mainstream; similar specialized coverage for chronic illnesses combined with lifestyle-based pricing offers another opportunity
   3. Micro-Insurance plays similar to BIMA - benefits based coverage for a nominal daily/monthly fee along with access to basic healthcare services; this is valuable for BOP, can be easily distributed, and is intuitive to understand for the purchaser
      
2. Healthcare finance:Healthcare finance has been a largely untapped market so far. While most healthcare spending (~65%) [5]is out of pocket, formal credit for healthcare forms a negligible portion of this. Most non-savings healthcare expenditure comes from friends and family, informal credit (at often usurious rates), or disguised as personal loans. It is estimated that 21% of families thathave a debt burden,do so because of a healthcare-related loan [6]. While the challenges in healthcare lending are well known (lack of data, difficulty in selecting procedures to underwrite, inconsistent origination at the hospital/clinic for subvention products), there has been a spate of action recently (e.g., focus on the market from traditional horizontal NBFCs) as well as focused healthcare lenders. These are clear indicators of a large market ready for disruption. We are also seeing some innovation in the space in terms mode of financing e.g., savings and benefits offerings such vs traditional lending models.
   
3. Improving hospital and clinic throughput:Finally, the perennial challenges of Indian healthcare are known to all - low doctor density (Figure 6)[6], and low hospital bed density (Figure 7)[6]. Because of this demand-supply mismatch, there has been a renewed focus on improving hospital and clinic throughput and efficiency through tech-enabled tools, and we feel there are opportunities here e.g.

Figure 6 – Physicians per 1000 population

Figure 7 – Hospital beds per 1000 people

• Improving hospital throughput: Tools that focus on improved hospital efficiency e.g., reducing length of stay in ICUs (which are in-demand, and where revenue drops off after the first 2 days of a patients’ stay).
• Monetizing doctor down-time: Opportunities to help doctors monetise down-time through remote patient communication - this results in patients visiting doctors only for the more serious issues, or for first-time diagnosis as opposed to follow up
• Triage systems for tertiary care: Helping hospitals dealwith only the most urgent care cases by triaging out the patients for whom primary care is more suited, through a tele-consultation and referral platform

The health-tech and health enabler segment of the market is still in its nascent stages, these are some of the opportunities we believe will see significant value as well as company creation going forward. While there will always be new areas that emerge, we remain focused on the overall healthcare enabler theme as a source of investable opportunities. If you are building a company in this space (or indeed if you want to discuss or debate our thesis, or tell us how we are wrong) please don’t hesitate to write in to healthtech@matrixpartners.in

[1]VCCircle data

[2]IBEF report

[3]Edelweiss research -link

[4]Industry research

[5]World Bank Data Bank 2015

[6]Planning commission report 2009