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Finding Market Opportunities in 'the Best Place to Get Sick'

India's health care industry ails from severe under-penetration among its population, especially in rural areas. Still, the low penetration levels are a glass half full for global pharmaceutical companies, many of whom have steadily increased their investments in the country, drawn by India's talent base and R&D capabilities for drug development, and its strengths in alternative medicine, like Ayurveda (India's traditional system of holistic medicine). Insurance providers, meanwhile, like the country's low cost of health care, which has made it a destination for so-called "medical tourists" from developed countries.

Those are the key drivers for pharmaceutical firms, hospital chains and investment funds as they look for opportunity in India's health care industry, according to a panel discussion on "The Health Care Duopoly: India, the Medical Center of the World" at the recent Wharton India Economic Forum in Philadelphia. The panel included top executives from pharmaceutical companies GlaxoSmithKline and Cadila Pharmaceuticals, Asia's largest health care chain Apollo Hospital Group, and investment funds, who identified areas
of advantage in an otherwise dismal scenario.

The Upside of Low Penetration

"I am happy and delighted there is under-penetration [in India's health care industry]," said Anula Jayasuriya, co-founder of the Evolvence India Life Science Fund, a US$90 million venture capital fund formed three years ago to invest in pharmaceutical, biotechnology, medical device and related contract service companies based in India. "From an investor's perspective, we see a great opportunity" to extend the health care industry in under-served areas.

Jayasuriya added that she expected Indian pharmaceutical companies to become a bigger force globally in the near future. "My crystal ball says ... I see an Indian company and a European and U.S. pharmaceutical company becoming one," she said, noting that Sanofi-aventis and GlaxoSmithKline are reportedly talking about a possible acquisition with India's Nicholas Pharmaceuticals. That's only speculation, she said, "but that [kind of deal] would be one measure of success."

Jayasuriya was responding to a relatively pessimistic scenario offered at the beginning of the session by the panel's moderator, Michael Fernandes, executive director of the investments division and country head for India at Khazanah Nasional, the investment arm of the Malaysian government. Fernandes said that while global pharmaceutical companies had steadily increased their investments in India over the last 50 years, including contract research in the last five years, the overall results of these investments have been disappointing. He also noted that the largest Indian pharmaceutical company -- Ranbaxy Laboratories -- was sold last year to Japanese firm Daiichi Sankyo.

"It doesn't seem like an Indian company would be among the top three in generics globally," Fernandes said. "Some experts say it may not happen at all." Pharmaceutical innovation in India, too, has had "a number of false starts," he added. "Lots of phase two and three products have failed; not a single Indian-innovated product has been launched globally, although there are a number in the pipeline."

Jayasuriya read the scenario differently. "Innovation is an attrition game," she said. "The number of molecules that failed in India is not surprising, even if you use a fraction of the U.S. failure rate." She added that she is encouraged by the pipeline of Indian generics, and that while pharmaceutical drug development in the U.S. has many of its roots in universities, "Indian companies are hotbeds of innovation." Offering an example, she talked of Indian biotechnology company Biocon launching the country's first new drug -- a monoclonal antibody for head and neck cancer. The drug was originally created in Cuba, "but that is also a developing country, an emerging market," she said.

Hasit Joshipura, GlaxoSmithKline's vice president for South Asia and managing director of
GlaxoSmithKline India, was also optimistic about the ability of India's health care industry to deliver on new drug development. "I can see an Indian role in every major new drug, such as developing medicines for AIDS or other problems of poor countries," he said. For many years, pharmaceutical companies in India were, for the most part, subsidiaries of multinational players, so "there was no need to look at innovation.... But now you see frenetic activity, and in five to six years, you will see the next innovative products coming out of India."

Indian pharmaceutical companies could seize the opportunity to be "at the forefront for the next generation of vaccines and biologics," according to Michael Ross, president of the U.S. subsidiary of Indian drug firm Cadila Pharmaceuticals. His company is currently working on a vaccines program. "For every dollar you spend on vaccines," he noted, "you save US$8 down the line. It's a very efficient way to lower costs of healthcare."

Here Come the Medical Tourists

Ross said India's relatively lower health care costs have also spurred a surge in "medical tourism -- although I hate that term." Hospitals in India could secure accreditation from the non-profit Joint Commission International to take advantage of the increasing interest from patients and insurers in developed countries, he added. "The cost of a procedure is a third less in India, but the care is excellent. You will see more and more people going overseas for health care."

Insurers like Blue Cross waive a patient's co-pay if they go overseas for surgery because of the lower costs. For companies having trouble keeping up with today's medical expenses, this could be a tremendous opportunity, Ross said, joking that ailing companies like General Motors could benefit. In fact, he suggested to fellow panelist Shobana Kamineni, executive director of Apollo Hospital Enterprises, that her chain consider alliances with large insurers to lower the cost of its services for patients, and thereby expand its market opportunity.

According to Kamineni, about 15% of Apollo's patients are foreigners, and they come not "for vanilla care" like cosmetic surgery, but for complex surgeries like hip replacements. "India can become a real hub for medical tourism," she said, noting that Apollo attracts patients from Canada, the U.K. and even countries like Afghanistan because of lower costs and also shorter wait times. Over the years, costs for medical services have remained low in the country because they would be otherwise unaffordable for most of India's citizens, who are unable to obtain health insurance beyond age 60. "India is probably the best place to get sick -- it is the cheapest," Kamineni said.

In recent years, health insurance in India has been growing at a rate of 38% to 40%, according to Joshipura of GlaxoSmithKline. He said that although India has shown increases in life expectancy, its health care industry will have to factor in the need to treat a wider range of diseases as health awareness and affordability grows, especially in the larger rural markets.

Increasing Reach

Joshipura stressed the need to develop health care infrastructure to ensure access to the rural markets. He pointed out that India's expenditure on health care is just about 4.5% to 5% of its GDP, compared with 10% to 11% in France, Germany and Switzerland, and more than 15% in the U.S. The government could play a greater role in expanding access to health care in India, he added: Government-funded health care reaches only 0.9% of the market; the private sector fills in the gap.

But intelligent use of technology could help reach "the 500 million people who don't have access to health care" in India, according to Jayasuriya. She cited applications for India's rural markets, such as diagnostic labs in kiosk-like facilities where, for instance, a sick child's parents could determine whether or not an infection calls for rapid intervention. Sanofi-aventis had a model built around such kiosk-type labs that don't necessarily have to be staffed by doctors, she noted. Similar applications could also find uses in developed markets like the U.S. in, for example, neonatal screenings. Another technological
innovation Jayasuriya referenced was a reverse-engineered home dialysis machine that Indian computer maker HCL had developed for US$400 compared to a price of US$4,000 in the U.S. market.

Expanding the reach of health care services is easier said than done in India, Kamineni said. Apollo Hospitals, which now has 42 hospitals and 8,000 beds nationwide, plans to open four hospitals next year in Mumbai. Creating new capacity in hospital beds is a formidable challenge, she noted, adding that the high cost of land in urban areas is not offset by any government concessions even though the end use is health care. "My dad [Prathap Reddy, the group's founder and chairman] says it is easier to build a liquor factory, because the risks are so much [higher] with hospitals. It's like flying a plane every single day."

Finding good talent is also a problem, Kamineni said. Her group runs two medical colleges and 14 nursing schools to serve its talent needs. The solution lies in privatizing education with a for-profit model to attract investors, she argued. "There is no [talent] planning in the health care business. Between last year and this year, we added 20,000 people to our work force."

Alternative Medicine

Kamineni was, however, optimistic about the possibilities with India's traditional systems of alternative medicine, notably Ayurveda. Johnson & Johnson is looking for Ayurvedic drugs, for both prescription and nonprescription uses, including non-alcoholic mouthwashes and pain-relieving medications, according to Ross. "They are hunting in India for products to sell all over the world."

According to Joshipura, India hasn't done enough to develop its alternative systems of medicine. "China has done a good job with Chinese medicine," he said, suggesting India follow that example. "It's going to take time for a Western company to develop familiarity [with alternative medicine systems like Ayurveda]." Ross agreed: "If you talk to the multinationals [about alternative medicine], you have to develop scientific data; it's not just about word of mouth."