hitesh mendha poly medicure jan2009 picks

MOST PROMISING SECTOR IN INDIA

HEALTHCARE

PREPARED BY HITESH MENDHA, PUNE

HEALTHCARE

HITESH MENDHA

LONG TERM INVESTMENT

�The sector offers immense potential to

�Health is ascribed to be a dynamic

equilibrium, out come of which is

determined by a wide variety of

biological,socio,cultural,economic,

political, physical, psychological and

environmental factors.

�In a nation like India, where there is no

formal social security system in place,

notwithstanding the high tax rates,

healthcare and health insurance becomethat much more crucial.

�The sector offers immense potential to

healthcare players as the country

witnesses a rise in the incidence of

lifestyle-related and other diseases.

�A growing elderly population and rise in

income levels are also pushing for better

facilities in the country.

�One of the fastest growing and most

potent sectors in India is the healthcare

sector.

that much more crucial.


Financial Resources in the Healthcare Industry

�Healthcare is one of India’s largest sectors, interms of revenue and employment, and the sectoris expanding rapidly .

�Today the total value of the sector is more than$36 billion. This translates to $36 per capita, orroughly 6% of GDP and is expected to grow tocontributing 8% of India's GDP by 2012.

�The Healthcare industry in India is estimated toachieve a market size of $ 77 billion by 2012, andUS$ 150 billion by 2017, this translates into an


US$ 150 billion by 2017, this translates into aninvestment opportunity of over $30 billion by 2012.

�The Government contributes 20% to the totalhealthcare expenditure in India, the remaining80% comes from the private sector

�Driven by strong local demand, Indianhealthcare market is expected to continue growingclose to previously projected rates of 15 per cent.

�India has one of the highest private spending inhealthcare as compared to other countries (Fig. 1)

Figure 1: Healthcare spending as part of GDP

(Source: The Economist)

Financial Resources in the Healthcare Industry

�With average household consumption expected to increase by more than seven per centper annum, the annual healthcare expenditure is projected to grow at 10 per cent and alsothe number of insured is likely to jump from 100 million to 220 million, golden days forhealthcare sector is ahead.

�India's healthcare industry registered 42.44 per cent growth in net profit during April-June2009, according to the Associated Chambers of Commerce and Industry (ASSOCHAM).

�In the healthcare sector, the leading 10 companies posted a growth of 23.94 per cent intotal income and 21.37 per cent in total expenditure during the quarter.


Private providers(individual, charitable and for-profit)

Government and public employers

Indian Healthcare

Current Healthcare


THE HEALTHCARE DELIVERY SECTOR PLAYS AN IMPORTANT ROLE IN THE ECONOMY TODAY

Sector Direct employment Revenues/GDP

Healthcare

Education

Retail banking

Power

Healthcare is the largest service

industry in terms of revenues and

Indian Healthcare

Power

Railways

Telecom

Hotels, restaurants

IT

of revenues and the second largest after education in

terms of employment

By 2012, the sector could account for 7 to 8 per cent of GDP and provide

direct and indirect employment of 9 million


Indian Healthcare

INDIA: AN EMERGING HEALTHCARE HUB


�Over 60,000 cardiac surgeries done per yearwith out comes at par with international standards.

� Multi organ transplants like Renal, Liver, Heart,Bone Marrow Transplants, are successfullyperformed at one tenth the cost.

�Patients from over 55 countries treated at IndianHospitals.

�India has become a hot medical destination for

Indian Healthcare capability

�India has become a hot medical destination forpatients in the Middle East, Africa and even theWest.

�Word is fast-spreading that Indian hospitals canprovide world-class care at competitive rates.

�India today has big names in healthcare like theAll India Institute of Medical Sciences (AIIMS),Apollo Hospitals and Shankara Netralaya

Growing population and economy

�One driver of growth in the healthcare sector isIndia’s booming population, currently 1.1 billionand increasing at a 2% annual rate.

�By 2030, India is expected to surpass China asthe world’s most populous nation. By 2050, thepopulation is projected to reach 1.6 billion.

�By 2025, an estimated 189 million Indians will beat least 60 years of age—triple the number in2004.


�Goldman Sachs predicts that the Indianeconomy will expand by at least 5% annually forthe next 45 years (see chart)

�To meet this growing demand, the country needs US$ 50 billion annually for the next 20 years,says a Confederation of Indian Industry (CII) study.

�India needs to add 3.1 million beds by 2018 to the existing 1.1 million, and requires immediateinvestments of US$ 82 billion, as per the Technopak Advisors report.

Medical Tourism

�In 2007, India treated 450,000 foreign patientsranking it second in medical tourism.

�According to a study by McKinsey and the CII,medical tourism in India could become a US$ 2billion industry by 2012 (from US$ 350 million in2006). Credit Suisse estimates medical tourism tobe growing at between 25-30 per cent annually.

�The key selling points of the medical tourismindustry are its cost effectiveness and its


combination with the attractions of tourism.

�Treatment cost is lowest in India – 20 per cent ofthe average cost incurred in the US, Singapore,Thailand and South Africa.

�Besides world-class medical facilities, India isalso trying to promote its traditional medicine suchas ayurveda.

Medical Tourism

Indian Systems Of Medicine “ Staging a Comeback”

�In Ayurveda recognized as an official healthcare system inHungary.

�Doctors in the west are increasingly prescribing Indian Systemsof Medicine

�More than 70% of the American population prefer a naturalapproach to health


�Americans are said to spend around $25bn on non-

traditional medical therapies and products *

India’s Gift to the World

�Ayurveda

�Yoga

�Siddha

Rise in disease

�Another factor driving the growth of India’s healthcare sector is a risein both infectious and chronic degenerative diseases, like swine –flue(H1N1) recently.

�India faces high burden of disease because of lack of environmentalsanitation and safe drinking water, under-nutrition, poor livingconditions, and limited access to preventive and curative healthservices

�Lack of education, gender inequality and explosive growth ofpopulation contribute to increasing burden of disease.


�Full impact of the HIV epidemic and tobacco related diseases is yetto be felt

�Indians account for one-third of the world’s patients suffering fromdiarrhoea, TB, respiratory infections, parasitic infestations and prenatalconditions, and a quarter of patients with maternal conditions, a fifth ofnutritional deficiencies, diabetes, and the second largest number ofHIVAIDS cases, which alone stand at 5.19 million.

Expanding Middle Class �India’s thriving economy is driving urbanization and creating an expanding middle class, withmore disposable income to spend on healthcare.

�More women are entering the workforce as well, further boosting the purchasing power ofIndian households, Many of these women are highly educated: the ratio of women to men whohave a college degree or higher level of education is 40:60.

�If the economy continues to grow faster than the economies of the developed world, and theliteracy rate keeps rising, much of western and southern India will be middle class by 2020.

�The increasing size and spending power of this group is driving growth opportunities forcorporate healthcare providers.


�This has to be read with the fact that India's urban middle class is expected to swell morethan ten times to 500 million by 2025. The government can meet only 15% of this demand.

Deteriorating Infrastructure

�The physical infrastructure is woefully inadequate to meet today’s healthcare demands,much less tomorrows.

�While India has several centers of excellence in healthcare delivery, these facilities arelimited in their ability to drive healthcare standards because of the poor condition of theinfrastructure in the vast majority of the country.

�The number of public health facilities also is inadequate. For instance, India needs74,150 community health centers per million populations but has less than half thatnumber.

�At least 11 Indian states do not have laboratories for testing drugs, and more than half


�At least 11 Indian states do not have laboratories for testing drugs, and more than halfof existing laboratories are not properly equipped or staffed.

�The demand for quality healthcare infrastructure and services in India far

exceeds the supply.

Rapid Growth in Health Insurance

�Currently only 10 per cent of the Indian population has health insurance, which means thatthere is tremendous scope for growth in this area.

�The Indian health insurance business is growing at 50 per cent. The sector is projected togrow to US$ 5.75 billion by 2010, according to a study by the PHD Chamber of Commerceand Industry.

�An increase in health insurance coverage (at present, out-of-pocket expenses account for90 per cent of the total spend; just 10 per cent is through insurance) is expected to lead tomore hospitals coming up.


� The comprehensive health insurance programmes currently on offer will mandateaccreditation of non-hospital players.

�International insurance companies are being permitted to enter India under joint ventureagreements with local companies

�Private insurance will drive the healthcare revenues.

2012 – Demand Opportunity Overview

Demand Opportunity

Addition of 750,000 extra beds Tertiary Healthcare facilities

500,000 more Doctors & Medical Education &


1 million more qualified Nurses Nursing Schools

Infrastructure Additional investment of $ 25 – 30 billion required

Government & International Agencies only geared for up to US $ 7 billion

Balance investment to come from private sector

Recent Development

� Reduction of customs tariffs on life saving medical equipment and critical drugs.

� Depreciation rates for medical equipment under the Income tax law have been increased.

� Lowest interest on lending for private sector hospitals exceeding 100 beds will improveaccess to low cost funding for hospitals.

� Health insurance schemes for the poor. But the biggest leap has been the community-based universal health insurance scheme for the poor whereby a cover of Rs 30,000 isavailable for as low as Rs 2 per day with the Government contributing Rs 100 per annum forfamilies below the poverty line.


� Reduction of excise on certain critical drugs and abolition of duty on drugs and materialsimported for clinical trials.

� The entry of big pharmaceutical companies into this segment is a clear sign of corporatefocus on this sector.

�In case of medical tourism patients not only come to India from Asian countries but alsofrom countries like UK where the waiting period for any surgery sometimes is severalmonths.

What is driving the sector ?

� The increase in expenditure by government towardsenhancement of medical facilities is a big plus, as isthe involvement of large corporate houses.

�� The reduction in customs and excise duties onvarious items is proving to be of great help to thesector resulting in the formation of the healthycompetition.

� Constant research and development have led to thediscovery of new and better life saving drugs while the


development of infrastructure and various incentivesprovided by the government is proving to be a greatbooster.

�The government has also come up with variousinsurance schemes, which could help the sector andthis is aided by the formation of various institutes,which have given the country the best of the doctors.

Where are the roadblocks?

� One of the biggest roadblocks is the factthat the cost of many of the requiredequipments in this segment is too high.Resultantly, small healthcare centres cannotafford them and lag behind.

� Many people are unable to enjoy thebenefits of the new and advancedtechnology, as the cost of treatment by theseadvanced equipments is very high which is


advanced equipments is very high which isoften not affordable.

�There are many dealers in the market whodupe people by selling them outdatedmedicines. However, the government is usinglegislation to place serious curbs on thismalpractice.

Investments in Healthcare

� The sector has been attracting huge investments from domestic players as well as financialinvestors and private equity (PE) firms.

� Funds such as ICICI Ventures, IFC, Ashmore and Apax Partners invested about US$ 450million in the first six months of 2008-09 compared with US$ 125 million in the same period ayear ago.

�PE funds to invest at least US$ 1 billion in the healthcare sector in the next five years.

�In February 2009, India Venture invested almost US$ 18 million in Tamil Nadu-based KaveryMedical while in June IFC invested US$ 30 million in Max India.


�Piramal Life Sciences, the research and development (R&D) arm of Piramal Group isinvesting US$ 41.17 million in the next two years’ period to discover and develop new chemicalentities and novel drug delivery systems.

� The Hinduja Group will invest up to US$ 72 million in increasing capacity of its hospital inMumbai by 350 beds in the next four years through expansion of existing facility and setting upof a new unit.

�The government, along with participation from the private sector, is planning to invest US$ 1billion to US$ 2 billion in an effort to make India one of the top five global pharmaceuticalinnovation hubs by 2020.

Areas of Opportunity

� Medical infrastructure forms the largest portion of the healthcare pie. Beds in excessof one million need to be added to reach a ratio of 1.85 per thousand at an investment ofUS$ 77.9 billion.

�The medical equipment industry is growing at 15 per cent per year. It is estimated toreach US$ 4.97 billion by 2012.

�The medical textiles industry is projected to double to reach US$ 753 million by 2012.


�Clinical trials have the potential to become a US$ 1 billion industry by 2010 and thehealth services outsourcing sector has the potential to grow to US$ 7.4 billion by 2012,from US$ 3.7 billion in 2006.

�Rejuvenation services such as spas, alternative therapies, ayurveda treatments andbeauty services are expected to grow by as much as 30 per cent

INDIA OFFERS HUGE POTENTIAL FOR INVESTMENTS IN HEALTHCARE OVER THE NEXT 10 YEARS

Investment requirements in India (Estimates)

US $ in Billion Next 10 years

Healthcare 22-31

Investment needs of the healthcare

Indian Healthcare

Power**

Telecom**

Roads** 24-33

40-51

95-126of the healthcare

sector are comparable to

other infrastructure sectors

HUGE GROWTH POTENTIAL – TO GROW BETWEEN US $ 43 – US $ 77 BILLION IN 2012

US $ IN BILLION ESTIMATE

36

43

51.0

60.0

8.0

8.0

17.0

43.0

Indian Healthcare

* With 6% GDP real growth per year

2010

Private

spending

Government

spending

2012Scenario 1:

Baseline increase in

private spend

2012Scenario 2:

Baseline with

insurance in middle class

2012Scenario 3:

Baseline with insurance and

high government

spending

36

7

29

35.0

43.043.0

Key

Assumption1% GDP

Government Spending 1% GDP 2% GDP


Government Initiative

� The Government launched the National Rural Health Mission (NRHM) in 2005. It aims to

provide quality healthcare for all and increase the expenditure on healthcare from 0.9

per cent of GDP to 2-3 per cent of GDP by 2012.

� During the 2009 interim budget, the government allocated US$ 2.42 billion for NRHM.

�The Tamil Nadu government has allocated US$ 698.16 million for health and family care forthe year 2009-10, up from US$ 564.34 million a year ago. The increased budget includescreating a mega blood bank—Asia’s largest—in Chennai and upgrading several hospitals,


besides launching a new insurance scheme.

�The government has announced a US$ 63.2 million initiative to promote domesticmanufacture of medical devices such as stents, catheters, heart valves and orthopaedicimplants that will lead to lower prices of these critical equipment.

Indian Healthcare

PROMINENT HEALTH CARE COMPANIES

IN INDIA


Prominent Health care companies in India

� Apollo Hospitals: Apollo Hospitals group owns and manages 41 hospitals in andaround India, becoming the largest healthcare provider in Asia.

�Cipla Ltd. -: Cipla founded as The Chemical, Industrial & PharmaceuticalLaboratories is a major Indian pharmaceutical company, best-known formanufacturing economical anti-AIDS drugs.

�Ranbaxy Laboratories Ltd. -: Ranbaxy Laboratories Limited, headquartered inIndia, is an integrated, research based, international pharmaceutical company,producing a wide range of quality, affordable generic medicines, trusted by


producing a wide range of quality, affordable generic medicines, trusted byhealthcare professionals and patients across geographies.

�Dr Reddy's Laboratories Ltd. -: DRL initially began as a supplier to Indian drugmanufacturers, but soon started exporting to other less-regulated markets.

�AKAS Medical Technologies, Chennai -: AKAS Medical is an ISO 9001:2000Certified critical care equipment manufacturing company.

�Electronic Engineering Corporation, Chennai -: Electronic Engineering Corporation, manufacturers and exporters of a wide range of bio-medical electronic instruments and scientific pumps.

�Abi Herbal Products, Erode District -: Producing home made 100% herbal cosmetics.

�M. S. S. Asan Exports -: Exporter of wide range of medicinal herbs, herbal products, edible oil and organic fertilizer.

Prominent Health care companies in India


products, edible oil and organic fertilizer.

� Poly Medicure Ltd.-: Poly Medicure today counts amongst world’s leading medical disposables manufacturer with a core focus on R&D and innovation.

Multibagger in the Making

POLY MEDICURE


POLYMED- Leading the future

� POLYMED was conceived and established by agroup of engineers and technocrats dedicated tothe idea of providing the benefits of modernhealthcare to the mankind at affordable price.

�This unique philosophy has been the drivingforce behind the company since its inception in1995.

�Today it has grown into one of the mostdynamically versatile manufacturers of disposable


healthcare products in the region with over 60different products.

�POLYMED has successfully implemented a well documented QMS (QualityManagement System) which has been accredited by SGS Yarsley InternationalCertification Services, United Kingdom with ISO 9001:2000, ISO-13485:2003 and CEmark from DNV, Norway thus making the entire product range compliant withInternational Quality Standards.

�POLYMED’s some specialist products are also US FDA 510k approved.

�Modern Production Facilities & Processes

�POLYMED manufactures its products using stateof the art technology in ultra modern facilitiescovering over 300,000 square feet of manufacturingfloor space with about 50,000 square feet of cleanrooms of class 100,000 to class 1,000.

�A tool room with modern facilities & CNCmachines supports the manufacturing processes. Ahigh degree of automation and an effective process

POLYMED- Leading the future


control helps in delivering consistent product quality.

�Innovation & continuous improvement

�POLYMED has a fully staffed and highly equippedR & D section to design and develop new andinnovative products.

Investment Rationale

� Established in 1995, Poly Medicure today counts amongst world’s leading medicaldisposables manufacturer with a core focus on R&D and innovation.

�Research efforts put-in by the company in last several years has led to it filing morethan 70 patents out of which it has already got 10 in its kitty with 2 being in world’slargest medical disposables market viz., USA.

�Polymed has state-of-the-art manufacturing plants in Haridwar, Jaipur & Faridabad inIndia and one in China and one joint venture in Egypt.


�It exports nearly 34 % of its products to Europe while Indian market contributes 25 % toPolymed’s sales. It exports its products to 50 countries currently with Europe being themajor market at present.

Business at its Inflexion Point

�The efforts Polymed has put-in since last several years and the aggressive approachPolymed’s management is now pursuing promises the start of golden phase for Polymedstarting from current FY10.

�Research efforts put-in by the company in last several years has led to it filing morethan 70 patents out of which it has already got 10 in its kitty with 2 being in world’slargest medical disposables market viz., USA.

�The efforts which I am talking is the R&D efforts because of which Polymed has, sincelast 4 years, constantly launched 10 new innovative products every year and has filed formore than 70 patents out of which 10 it has already got with 2 being in USA.


more than 70 patents out of which 10 it has already got with 2 being in USA.

�The main fruit of these efforts has come in the form of USFDA approval in June 2009for launch of five of Polymed’s products in US market which happens to be the largestand most fruitful market for medical disposables manufacturers.

�Out of these five products, which have got approval, two products are the one, whichhad got the patent in USA. Hence, launch of these two products will mean healthymargin for Polymed.

Financials

Some important financial to look at: -

� Equity Capital – 5.50 cr

� Promoter Holding – 49%

� FY09 Revenue - 112.22 cr.FY09 Operating Profit – 10.79 cr.FY09 Net profit – 5.92 cr.FY09 EPS – 10.76 cr.


FY09 EPS – 10.76 cr.

� FY10 1st Half Revenue – 62.49 cr.FY10 1st Half Operating Profit – 8.55 cr.FY10 1st Half Net profit – 6.32 crFY10 1st Half EPS – 11.49FY10 Annualized EPS – 22.98

Financials

�By Conservative estimates, Polymed is likely to post a top line of Rs. 132 cr. and abottomline of 11.5 cr. for FY10, which translates into FY10 EPS of Rs.20.90. In my FY10estimates, I have included only March2010 qrtr. sales of products to be launched in USA.

�For FY11, Polymed is expected to post a topline of 186 cr. with bottomline expected tozoom to Rs. 20.40 cr., which will translate, into FY11 EPS of Rs. 37.

�. These are only conservative estimates as from 3 out of 5 USFDA approved products viz.,IV Catheter, Safety Scalp Vein Set and Safety Infusion Set, Polymed expects to rake in Rs.50 cr. sales every year.

�The potential of Polymed’s major product viz., IV Catheter can be judged from the fact that


�The potential of Polymed’s major product viz., IV Catheter can be judged from the fact thatB. Braun AG is going all out to restrict Polymed from selling this product because it has thepotential to significantly affect B. Braun’s own product sales as Polymed’s IV Catheter is farmore superior and competitive in pricing than B. Braun’s.

�B. Braun first tried to restrain Polymed in India but it failed to do so as Indian court gave aclean chit to Polymed. Hence, B. Braun did it in its own tertiary by restraining Polymed inDecember 2009 from marketing its IV Catheter in Germany. This retrainment is expected toaffect only Germany sales of Polymed and is not expected to have any major impact on itssales in US and other countries.

CONCLUSION

In current market which is at a twenty two month high, an investor needs to look at twoangles – First, not to lose the opportunity of multiplying the money by remaining in cashand missing the rally & Second, not to invest in those stories which seem fully priced atthe moment and so have the potential to correct significantly if a correction sets in.Hence, if I look at both the angles then Poly Medicure seems to be the safest bet.

�Poly Medicure is a decent medium to long-term bet if we consider its business, itsfinancials and recent development.

�It is operating in a segment which is recession- proof.


�Recent developments like USFDA approval, opening of sales offices, focus ondomestic as well as international makets, etc. all give safety to future financial growth ofthe company the verge of reaping rewards of past efforts.

�Valuations are very cheap as Polymed’s closest Indian peer (not strictly- as no otherlisted company is into medical disposables) Opto Circuits is quoting at a 17+ PE whilePolymed is available at a PE of 6.9 based of FY10 EPS estimates and at a PE of just 3.9based on FY11 conservative estimates. This valuation is pretty cheap in current marketscenario, which calls for a significant rerating of Poly Medicure soon.

THANK YOU


hitesh mendha poly medicure jan2009 picks

Investor Relations

research efforts put

conservative estimates

health insurance

iv catheter

medical tourism

financial resources

healthcare industry

wide range