Goldman sees healthcare at $268 bn

Growth will be driven mostly by private expenditure

HYDERABAD: Goldman Sachs has said the country’s healthcare market will grow more than seven times to $286 billion in size by 2020 from $40 billion in 2005, implying a CAGR of 14%.
That should warm the cockles of the Indian pharmaceutical sector.

Analysts Vikram Sahu and Ishan Sethi of Goldman Sachs, in their report last week, said the growth will be driven mostly by private expenditure, with total spends forecast to rise from 5.5% of GDP to 8% of GDP by 2020. Goldman Sachs said the sector’s fundamentals have improved, which prompted it to forecast an EVA of $2.1 billion between FY2007 to FY2010 for the 10 companies it covers.

While Sahu and Sethi have put a buy call on Glenmark and Nicholas Piramal, it has a neutral view on Sun Pharma, Dr Reddy’s Labs, Lupin, Cadila Healthcare, and Ranbaxy Labs.
Cipla and Biocon are listed as fit candidates for a sell call.

The initiation of coverage of the Indian pharma sector comes in the backdrop of a situation where the global pharmaceutical industry is facing multiple challenges that include political pressures while healthcare costs are rising rapidly, R&D productivity is declining, and the spectre of patent expirations on several blockbusters looms large.
This is illustrated by the fact that healthcare spending by four developed countries has risen 27 fold over 25 years to $2.75 trillion in 2005, Phase III pipelines are static despite $238 billion in R&D spend over 2001-2006 and global brand sales worth $189 billion will be vulnerable to generics between 2007 and 2011, the Goldman Sachs report said. While these factors have led to a wave of M&As and the trend would continue, consolidation will be the key theme in the generics industry too with just four to five participants expected to control a disproportionate share of the global market over the next five years.

“This in turn will shift the focus of the consolidation process from a quest for scale in the regulated markets to a search for low-cost manufacturing and cross border capabilities”, Sahu and Sethi said.
Building on the BRICs hypothesis first articulated by Goldman Sachs in 2001, the report goes on to observe that though healthcare is not perceived to be an immediate play in the theme, long-term demographics are compelling.
While the World Health Organisation has said the largest healthcare burdens in the developing world will shift from infectious diseases now to the so called ‘disease of civilization’ by 2020, this is further illustrated by studies by Goldman Sachs in diabetes, oncology and cardiovascular disease that suggest there would be a larger number of patients with purchasing power in the BRICs countries by 2025 than in Japan, EU or the US.
An overall assessment of the Indian healthcare system points to large-scale lacunae that belie this conclusion. But a deeper analysis presents interesting observations. Although government expenditure remained largely flat (as a percentage of GDP at 5.2%) since 1994, private spend has more than quadrupled from $7.7 billion in 1994 to $33.3 billion in 2006 (and doubled as a percentage of GDP).This increased private expenditure on healthcare will grow the sector from $40 billion in 2005 to $268 billion in 2020 implying a CAGR OF 14%, the analysts say.

Going by this in the final analyses investors in the sector will be able leverage growth opportunities at lower multiples for the Sensex as well as the global healthcare sector notably the US generics market, they observe.