Most retail investors think only of the pharmaceuticals sector in the healthcare theme. However, healthcare is a much broader theme than pharmaceuticals – pharmaceuticals sector is a subset of the healthcare space. The global healthcare market size is around $7 trillion out of which pharmaceuticals market size is just around a $1 trillion. Healthcare includes, in addition to Pharma, hospitals, diagnostics, health insurance and other allied sectors.
Investors should understand that, 50% of the revenues from generic drugs, which is the largest component of the Pharmaceuticals market comes from exports. The United States is the largest export market for Pharma (around 40% of exports) – it is in this market Indian Pharma companies are facing headwinds due to the regulator’s (FDA) actions on non-compliant facilities and increased pricing pressures due to competition. The Pharma sector has underperformed over the last 3 years but we are seeing early signs of recovery. Unlike the Pharma sector, most of the other sub-sectors within the healthcare theme generate majority of its revenues from the domestic market.
Healthcare is one of the most critical services in any country and with lack of healthcare infrastructure in India (India’s healthcare spending is just 4.8% of her GDP versus 17.2% in the US) there is a huge opportunity for companies in this space to grow and penetrate the market. We discussed some key differences between the broader healthcare theme and the pharmaceuticals sector, so that investors can understand that, investment and growth opportunities in the healthcare theme is several times bigger than the Pharma sector.
ICICI Prudential P.H.D Fund NFO
ICICI Prudential P.H.D (Pharma, Healthcare and Diagnostics) Fund, an open ended equity mutual fund scheme, aims to capture the growth in this theme to create wealth for investors. The NFO will open on June 25th and close on July 9th. The scheme will have Growth and Dividend Options. Ihab M Dalwai will be the fund manager of this scheme.
Broad Investment Themes of ICICI Prudential P.H.D Fund
ICICI Prudential P.H.D Fund will invest in three broad themes – within each them, there are multiple sub-sectors.
Remedial Healthcare: Sub-sectors are Hospitals, Diagnostics and Pharma
Preventive: Fitness, Health Food & Beverages and Vaccinations
Health Insurance: Medical insurance
We will discuss some of the key sub-sectors with the broad Healthcare themes and look at the growth opportunities in these sub-sectors.
The growth potential in this sector is likely to be driven by the following factors:-
Severe demand supply mismatch: Hospital bed density in India is 1 bed per 1,050 people, whereas the global average is 2.9 beds per 1,000 people. If we are to reach the global average, we have to add 3 million beds.
Rising Lifestyle Diseases: Rising pollution levels, changing dietary preferences, sedentary lifestyles and rising stress levels are leading to increase in lifestyle related diseases. In fact, incidence of these diseases is increasing at an alarming proportion. Spending on cardiac (heart related) diseases increased 153% from 2008 to 2013 and is projected to increase by 412% from 2008 to 2018. Similarly, spending on oncological (cancer) diseases increased 132% from 2008 to 2013 and is projected to increase by 340% from 2008 to 2018. This spending is likely to increase at a similar rate in the future also.
Increasing Awareness: Rising income levels, increased health awareness, advancements in medical sciences and availability of cutting edge medical techniques, availability of superior quality healthcare services (though expensive) in the private sector and increasing penetration of health insurance has led to faster rates of growth in spending on healthcare. The healthcare space is one of the fastest growing sectors in our country.
Medical Tourism: India has been a favored destination for medical tourism in the region. A number of factors have contributed to growth in medical tourism in our country. India offers significant cost advantage to overseas patients compared to other destinations. The cost of heart surgery in India is 20 times less than the cost of heart surgery in the US, 8 times less than the UK and 3 times less than Singapore. Overseas patients can avail hospital facilities adhering to quality standards, accredited by agencies like NABH & JCI. India offers separate category of on arrival visas. Between 2013 and 2016, the number of tourists visiting on medical visas increased at 20% CAGR. Lack of quality medical infrastructure in other countries in the region will continue to fuel high growth in medical tourism.
The current market size of Indian Diagnostics industry is about Rs 65 Billion and it is growing at a CAGR 15%. Following factors are likely to drive a faster growth of this industry.
- There is a sharpening focus on evidence – based treatment in the medical communities. A few decades back, when we were children, doctors would prescribe medication and course of treatment by physical examination and symptoms. Now they are more likely to recommend tests and prescribe course of treatment based on test results.
- Increased awareness of preventative healthcare has made people more conscious. More and more people are going them go for regular health check-ups.
- Increasing coverage of health insurance is also causing growth in diagnostics business. Health insurance plans not only cover post hospitalization diagnostic tests, they can also cover pre-hospitalization diagnostic tests if the tests lead to hospitalization. Further, some health insurance plans cover OPD expenses, including diagnostic tests.
- The diagnostics industry is currently dominated by the unorganized segment (85% market share). However, organized players can rapidly gain by market share by leveraging economies of scale and expanding their sample collection centre network.
India is already an established player in the global Pharma market, accounting for 10% of global production volumes. There are several factors which are likely to drive growth in this sector:-
Cost Advantage in the export market: Indian Pharma companies enjoy considerable cost advantage in the global market. Cost of setting up a production plant in India is 40% lower than in Western countries. Labor costs are 50 – 55% cheaper than in Western countries. Volume share of Indian Pharmaceutical companies in US Generic market has went up from 20% in 2010 to 35% in 2017. A lot of concern related to the Pharma sector in the stock market circles have centered round the Trump administration’s plan to reduce drug prices in the US. However, some investment experts and fund managers believe that the US administration’s plan to reduce drug prices will benefit generic drug manufacturers like Pharma companies in India because generic drugs are cheaper than patented drugs.
Investment in R&D: Companies have been focusing more on generic drugs which have some barrier to entry in terms of development complexity and building the specialty / complex generics basket. Cumulative Indian Top – 10 companies R&D expense has went upby 8 times in last 7 years.
Domestic Pharma business: While exports are major revenue contributor for Pharma companies, the domestic business also contributes significantly. The domestic Pharma business is growing at double digit.
Policy Support: The Government’s “Pharma Vision 2020” initiative aims to make India a global leader in Pharma manufacturing.
Health Food and Beverages
- With increased health consciousness, consumers are looking for supplements offering balanced nutrition i.e. energy boosting products, consequently increasing the demand for dietary supplements in India.
- Nutritional care segment is expected to grow at 12% CAGR over next 3-5 years.
- The health insurance industry has grown at 25% CAGR from 2007 to 2016. In the general insurance sector, health insurance is the fastest growing segment. From 13% of the total non-life insurance premium in 2007, Health insurance contributed 28% in FY 16.
- Health Insurance has low penetration in India with 58% of total healthcare spent contributed from out of the pocket expense. In the US, out of pocket expense is only 11%, which means that 89% of healthcare spending in the US is covered by health insurance. Rising per capita income, high healthcare inflation (more 11% per annum) and aspirations of high quality health care will drive faster growth in the health insurance sector in the future.
How will ICICI Prudential P.H.D Fund leverage the growth potential in healthcare space?
As discussed in this blog post, the growth potential of the healthcare space is enormous. What makes this theme very attractive for investors is that healthcare is vital and essential consumption, in other words it is a defensive theme, not affected by economic cycles – such a theme, in the long run, can give good returns in all market conditions. There are enough good investment opportunities in each of the sub-sectors and more may emerge in the future.
Just to give a few examples, you have Narayana Hrudayala, Healthcare Global etc. in the hospitals sub-sector; Dr Lal Path Labs in the diagnostics sub-sector; Sun Pharma, Ipca, Cipla, Biocon in the Pharma sector; Zydus Wellness in the Health Food and Beverages sector; ICICI Lombard, Max India, HDFC Standard Life in the Health insurance sector. Readers should note that these stocks are purely illustrative to demonstrate the investment opportunities in these sectors – the fund manager may or may not invest in these stocks.
In this post, we reviewed the upcoming NFO, ICICI Prudential P.H.D Fund. Investors should have a long investment horizon at least 3 to 5 years, if not longer, if they invest in this NFO. You should read the scheme information document very carefully to understand the risk factors, or consult with financial advisor before investing.
Mutual Fund Investments are subject to market risk, read all scheme related documents carefully.