Oops, they did it again! We’re referring of course to Malvinder and Shivinder Singh, the promoter family of the erstwhile Ranbaxy and Fortis Healthcare Limited (FHL). Both brands were considered one of the best benchmarks in their sectors, trusted by patients, stock market darlings, poster boys of Indian pharma and healthcare.
Today, the companies and their promoters could prove to be classic case studies in corporate misgovernance. Luckily for both Ranbaxy and FHL, the underlying fundamentals of their sectors remain strong enough to attract buyers. In fact, the line of bidders for FHL expanded to as many as five contenders at one point of time! (For a detailed analysis of this developing story, read Raelene Kambli’s story: The wounded shark and its suitors).
But whichever bidder wins FHL, patients will benefit only if the sector self regulates and holds itself up to higher standards. And even if the due diligence clears the Singh brothers of fraud, though that looks highly unlikely with the information we have at present, the loss of trust will damage not just the FHL promoters and the board. The entire corporate hospital sector in India will face increased scrutiny from various stakeholders.
Firstly, from the investor community. PE funders will have to plan for deeper due diligence when considering an investment in healthcare. Many regional level hospital chains, and single facility entities which started out as doctor-promoted clinics and nursing homes, are reportedly gasping for survival. Consolidation in the sector is picking up. Some recent examples include Ahmedabad-based Shalby Hospitals, and Trivandrum-based KIMS Hospitals. Overseas players like Aster DM too are catalysing this wave of consolidation. The scale of the FHL deal has PE investors salivating at the cost efficiencies, PE funders have many choices, but what if they land up with a lemon?
The second group of stakeholders who should ideally be watching such deals more closely are patient groups. Unfortunately, the trust deficit between the patient community and the healthcare sector seems to be decreasing to new lows. Most recently, Prime Minister Modi made some very critical comments on all segments of the sector during his recent visit to UK. From pharmaceutical companies, to doctors to hospitals, none were spared. Doctors have taken to social media to hit back at the PM, saying it was unfair to judge an entire fraternity on the conduct of black sheep, but the cracks only widened. The PM’s stance is no surprise and only reinforces his government’s crackdown on prices of medicines, medical devices and the huge margins charged at most private hospitals.
Beyond the healthcare sector, FHL is one more example of India’s weak corporate governance oversight mechanism. Analysts are drawing parallels between two infamous cases of corporate fraud: Satyam Computers and the UB Group. A report dated February 21, by InGovern Research Services titled Fortis Healthcare: Repeat of Satyam?, the authors flagged frequent restructurings and directors’ resignations at FHL which had eroded investors’ trust as well as wealth. Following the money, the “deployed” funds of
₹437 crore with companies that became promoter owned companies is clearly not kosher.
But is this the Ranbaxy moment for Indian hospital sector? The Ranbaxy saga was a loss-of-innocence moment for India Pharma Inc. Today, the pharma sector is a little more forthcoming about the results of US FDA inspections and deviations discovered during these inspections. At least some companies are trying to shift from a let’s-hide-it to let’s-fix-it mode, though of course, its still not as transparent as it can be.
Similarly, if promoter families and boards of corporate hospitals clean up their balance sheets and become true corporate citizens in letter and spirit, the FHL deal could be a turning point for the sector. After all, as the saying goes, when life hands you a lemon, make lemonade.
And this is what India’s hospital management boards need to understand. Nothing will change the strong fundamentals of the sector: we need more hospital beds but expansions need investments. There will be no going back to business-as-usual. The new management will hopefully put in place stronger monitoring mechanisms. For a sector long dominated by the Apollo Group, the Fortis-Manipal or Fortis-IHH combine will shake up rankings and be true competition. But will the patient ultimately benefit? That remains unclear for now.