Health is wealth

Arjun Krishnamoorthy

Wadhwa, Bangalore

arjunk@walaw.in

The adage in the title is well known, but these days, has also come to refer to what Erich Segal, writing in 1988, referred to as ‘reading the Wall Street Journal in addition to the New England Journal of Medicine’.[1]

A recent article in Forbes predicted an increase in (or return of) the number of large transactions in the healthcare sector in the United States.[2] In India, on the other hand, it could be safe to argue that the mergers and acquisitions (M&A) and investments by private equity (PE) and venture capital (VC) funds in the healthcare sector has made a large leap forward since the global pandemic (when health became a keyword not just for individuals but also investors) and continues to grow by leaps and bounds.

Recent reports indicate that the Indian healthcare sector is expected to reach $638bn by 2025, from $110bn in 2016.[3] Trends include the consolidation of hospitals to expand geographically, acquisitions and investments in single speciality hospitals, and increased manufacturing of medical devices. An emergent India’s aim to become a pharmaceutical hub has also led to rise in pharmaceutical manufacturing, including active pharmaceutical ingredients manufacturers.

Earlier investments and mergers and acquisitions may have been largely limited to the pharmaceuticals (including active pharmaceutical ingredients), with a view to acquiring the intellectual property in a drug. However, following the pandemic, investments and M&A have been seen in hospitals and digital health, especially with an increase in hospital sizes. As a people, Indians becoming more aware of their health has resulted in a shift towards digital diagnostics. The trend has been one of consolidation, with leading healthcare players acquiring or investing in healthcare service providers in tier two and tier three cities, leading to the creation of a strong ecosystem by making quality care available and accessible to India’s growing population.

The rise in disposable incomes and a rise in health tech has made private healthcare more accessible and increased demand in quality healthcare. This has resulted in the rise of multi-speciality hospitals and increased investment which has led to an increase in quality healthcare, at least in tier one and to some extent tier two cities in India. Companies operating in the intersection of health and technology are seeing, and in the long run are expected to see, increased deal-making activity.[4] With a large number of companies operating in this space, along with the integration of artificial intelligence, digital health can only see additional growth.

Incentives and potential revisions to legislations are also likely to see a growth in the medical device sector, with the sector expected to touch $50bn by 2030.[5] The publication of the National Medical Device Policy 2023 has led to companies like Medtronic, Boston Scientific and Siemens Healthineers proposing expansions to their existing operations in India through expansion in manufacturing, research and development (R&D), or tying up with academic institutes to set up innovation hubs. Major deals already include KKR acquiring Healthium Medtech for $839m. If the recent merger between Aster DM Healthcare and Quality Care India, at an approximate deal value of $5bn (the largest deal in the hospital sector in India) is anything to go by, this trend of exponential dealmaking since the pandemic is likely to continue, thereby indicating a sign of a rising focus on healthcare across India.

The pandemic also led to an increased government spending on health and more supportive policies such as the Production Linked Incentive Program and lesser penalties under the Drugs and Cosmetics Act, 1940 (the Act), as India looks to become the ‘pharmacy of the world’.

The current regulations viz the Act (and Rules thereunder) are in the midst of a proposed overhaul with a more consolidated and all-encompassing legislation (covering drugs, medical devices, cosmetics, traditional medicine, online pharmacies, and clinical trials).

The various initiatives and schemes of the Indian Government have also provided a boost to manufacturing practices and pricing, amongst others. Supplementing the Make in India initiative is the Production Linked Incentive schemes (offering financial incentives) which have been initiated to provide for quality-based and domestic manufacturing of active pharmaceutical ingredients, drug intermediates and key starting materials. Similarly, the notification of the Good Manufacturing Practice standards to be adopted by manufacturers in India would ensure that the quality is not compromised in any manner. Lastly, the National Policy on Research & Development and Innovation in the Pharma Med Tech Sector has been launched with a view to transforming India into a ‘high-volume, high-value player in the global market of pharmaceuticals, meeting the quality, accessibility, and affordability goals’, and sets out for incentives to private sector to infuse capital in research and development of new drugs and medical devices.[6]

These initiatives and proposed amendments to the laws are likely to provide an opportunity for further investment and exploring of opportunities in the Indian healthcare sector, including localisation, providing assistance in gaining momentum for the drug manufacturing sector in India so as to ensure that any domestic and international demands are met, improving quality control; and boosting R&D amongst others.

The enactment of the Digital Personal Data Protection Act (‘the DPDP Act’) on the lines of the European General Data Protection Regulation (GDPR) will have an impact on any mergers, acquisitions or investments in the healthcare sector, once the long-awaited rules under this legislation are finally notified. In the healthcare industry, the target company may be collecting personal data of patients and healthcare service providers, amongst others, and consequently would have to obtain consent from such persons to transfer personal data, as it may be necessary for the transaction, and such specific purpose would have to be identified in the notice seeking consent – the acquirer may have to consider allowing for the waiver of the standard deal confidentiality clauses in such instances.

A recent report[7] from the Data Security Council of India has indicated that the healthcare sector is increasingly vulnerable to cyberattacks, thereby implying that there could be considerable numbers in breaches of personal data. This implies that any party to the transaction, having been identified as the data fiduciary and if sufficient care has not been taken towards protection of data, could be liable for a fine of about $30bn.

Lastly, pricing in private healthcare in India is on the high side. While there have been proposals to cap pricing, albeit using temporary limits in accordance with the Central Government Health Scheme, the requirement of pricing as set out in the Clinical Establishments (Registration and Regulation) Act, 2010 and the Clinical Establishment (Central Government) Rules, 2012, are yet to be prescribed.

To conclude, the Indian Government, aiming to increase India’s economic growth, has introduced regulatory changes such as liberalisation of foreign direct investment, providing definitive timelines for fast-track mergers and antitrust approvals (failing to adhere to these timelines implies deemed approval) and encouraging reverse flipping, to name a few. These apply to the healthcare sector.

However, while there have been suitable positive developments to encourage dealmaking in the healthcare sector, it is a highly regulated sector. Therefore, it is essential that comprehensive diligence be undertaken on the target company before crossing the Rubicon, including:

• compliance with the numerous pieces of legislation (and not just the Drugs and Cosmetics Act or Clinical Establishments Act);
• undertaking an assessment of any disputes from negligence/malpractice and patents, amongst others;
• tracing the title of the land where a hospital/company is located; and
• adopting security practices for data protection.