April 22, 2011

Apollo Hospitals to launch private label generics

Apollo Hospitals Enterprise Ltd will expand the range of its own branded products for retail from its pharmaceuticals stores.

Last year Apollo set up 200 stock keeping units to introduce 50 non-pharma FMCG products, including toothbrushes, toothpastes, lotions, creams, under the Apollo brand for retail.
“This helped us improve margins,” said Suneeta Reddy, director (finance), Apollo Hospitals.

At present, the Apollo range contributes about 2% to the turnover of the pharma business. “We are expanding the product range and penetration, and hope to scale up the contribution to 10% of turnover in two-three years,” said Obul Reddy, vice-president, finance, pharma division.

This year, the brand will be expanded to include products in generics and over-the-counter drugs such as cough syrups, cough lozenges, paracetemols. “We have identified quality sources and the products will be ready to hit the market in two-three months,” said Obul Reddy.

Apollo also plans to expand to 3,000 stores by the end of five years from the current 1,200 stores. “We are looking at adding about 300 stores per annum,” said Obul Reddy.Investment per store is Rs12-14 lakh, and the company is looking at investing Rs50 crore per annum in this business.

This fits in with its strategy for structural re-organisation, where it plans to consolidate profitability in the retail pharmaceuticals business and hive off 50% stake to a strategic partner.

“We will look for the right strategic partner who can add value to the business, and then hive it off. We will use the capital to add more beds. Core healthcare will always be our focus,” said Suneeta Reddy.

For the quarter ended December 2010, Apollo’s revenues from retail pharma grew 45% on year. Ebitda (earnings before interest, taxes, depreciation, amortisation) losses were contained and Ebitda margins improved by 303 basis points. “With Ebitda turning positive, we want to build up scale,” said SK Venkataraman, chief finance officer.

Apollo’s pharma business is at present the largest organised pan-India player in the segment. Next in line is MedPlus Health Services with 800 stores mostly in south India, followed by Religare with 150 stores.

Himalaya Drugs retails only its own products at its speciality stores, while Guardian Lifecare and 98.4 are smaller players focused in North India.

“Building up scale will give us the leverage to negotiate with suppliers, especially with Goods and Service Tax expected,” said Obul Reddy. Scale will also make the pharma business a more attractive proposition when Apollo decides to hive it off.

Indian and American equity firms are reportedly considering buying a 35% stake in the Hyderabad-based MedPlus Health Services for `410 crore. While refusing to comment on whether Apollo had done a valuation of its pharma business, Venkataraman referred to the MedPlus deal as a likely pointer to values.

Organised retail accounts for less than 3% of India’s `45,000 crore pharma retail business and there are about six lakh pharmacies in the country today.

Suneeta Reddy also said that although medical tourism is a growing business, she expects it will taper off over a period of time. “In, say, 10 years or so, every country will have to have its own healthcare system. It will be hard to send patients abroad for surgery. That is why Apollo is helping countries build their own capacities. We provide technical knowledge to countries in the Middle East, Africa, etc,” she said.

Apollo has a projects team that goes out to various locations and consults on a turnkey basis, and sometimes Apollo also manages the hospital. For instance, the hospital in Dhaka is a managed hospital. At present, the consulting business contributes about 2% to Apollo’s turnover and about 8% to profits.

“We have no plans to expand this business; our hands are full with getting our own projects off the ground,” she said.
As of now, medical tourism contributes 15% to Apollo Delhi’s revenues, and 8% to its total revenues.

Apollo’s Reach programme to tap Tier II cities is also well underway. “Tier II cities have tremendous growth potential,” said Suneeta Reddy. “For us, the cost of a Tier II project is one half of what it would be in Tier I because of low real estate prices.

Therefore, viability and Ebita break-even is much faster. The cost per bed is about Rs35 lakh and we are expecting an Ebitda breakeven in 12 months in these locations,” she said.

At present, Apollo is not able to do real tertiary care work in these hospitals. “We do cardiac, orthopaedic work and so on, but we want to do transplants. Over a period of time, we want to introduce oncology,” she said. This will take time because the capital investment is heavy.

Land has been acquired in six cities, including Thane, Trichy, Vizag, Nashik and Nellore, and construction work is due to start. “Till 2013, our list of Tier II cities is ready,” said Suneeta Reddy.

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