Healthcare Global
Enterprises Ltd (CMP 130 Market Cap 1600 cr)
Data is God. I usually say these
words and recently one friend asked me whether my emphasis was on
quantum of Data. But I told him that quantum is more about linear flow or one
dimensionality but God is multi-dimensional. So what I see when I say “Data is
God” is the ACCESS to the data. Like, we humans have access to 3D world and so
all our experiences and interpretations are impacted (or burdened) by this fact
(or illusions). We have very limited access to the universal Data and that’s why
most of the times we are unsure about everything. Then there are life forms
having much more access to universal data and we call them Deities and that’s
why they have better understanding of life compared to us and can do things
which are more like a miracle for us. And then the God, the ultimate creator,
has ACCESS to all the data of the universe. We can’t even guess whether the God
has created the data or he had access to data with which he created the great
creation (our universe INCLUDED).
So creativity is about use of data.
That day (click here) I have written about the need for investments in R&D if India
wants to capture next leg of growth. R&D is not something where one
captures an innovative idea by luck or in some moments of trance or by
accessing the future. Innovation happens when we have data in our mind…vast
amount of data is required first.
Here, I remember one such company
from India which is doing great work in the field of Genomics and
Bioinformatics by focusing and investing big in R&D. The company is- strand
life sciences from Bangalore. Genomics and Bioinformatics are just about DATA...VAST DATA. Genomics medicine is a branch of medicine which
uses the complex interplay of DNA and biological expressions in our bodies to
study/diagnose their impact on our health and development of tailor made
treatments. The firm tracks its humble beginnings when in 2000 four professors from
the computer science department at IISc joined hands to pursue their passion in
the field of genetics and biological research. They were- Vijay Chandru (66),
Ramesh Hariharan (51), Swaminathan Manohar (60), and Vishwanathan Vinay (56).
They were inspired to pursue their passion by none other than our great- Ratan
Tata. IISc even holds a small stake in Strand. Strand was spun off from Indian
Institute of Science (IISc) and it was first such instance when a Public
institution like IISc invested in a business (I have talked about the similar
model in my recent post related to PSUs Click here for the post on PSUs).
Strand Life
Sciences- India’s attempt to claim a place in global high end R&D
Capability in Bioinformatics and Genomics
I am writing this
post on HCG but I choose to put the focus first on Strand because HCG is having
a 38.5% stake in Strand Life and the work Strand is doing in the field of
Cancer diagnosis is critical to the success/survival rate of cancer in
India and as HCG is one of India's biggest player in cancer care so Strand is
critical to HCG also. Cost effective early stage
diagnosis is critical in ensuring the high survival rates from cancer and this
is one of the reasons for high survival rates of countries like USA. It is
surprising that Strand is not covered at all by the market while evaluating HCG
because I feel Strand is critical for the growth of HCG as a whole. Hence, in
the coming paragraphs as I explain the massive technological achievements of
Strand Life in Genomics you are going to feel goose bumps. Strand started as a
Bioinformatics firm and developed some path breaking Bioinformatics products
for
analyzing DNA sequences- GeneSpring and Avadis which are used by research
institutions worldwide.
As shared many times
in earlier posts (especially in the post related to value investing-click here for the post) superior technical
abilities in a high growth sector with high entry barriers is the most value
accretive factor for me while choosing a stock for investment not the financial
analysis of the historical performance. I see most value in the superiority of
the business model not in the financial ratios. Traditional value investing
seeks to benefit from the asymmetry (so a matter of chance) of the stock market
in pricing a stock accurately near to its real worth. But for me value
investing gets most of the value from business analysis; financial analysis is
just for the purpose of ritual, for reverence (or to abandon). So in order
to understand the superior capabilities of Strand Life and massive scope of
Bioinformatics and Genomics in the future world of medicine we first need to
understand the application, role, importance and complexity of Bioinformatics and
Genomics in the structural and functional analysis of genomes and in drug
discovery.
As this sector is
just in its infancy so it will be premature to evaluate the performance based on
financial data because this is going to witness quantum jump in demand and
financial performance in the near future. So rather than trying to estimate
micro level financial metrics like EBITDA or Cash flows I prefer to estimate
the total size of the industry in the near future and this will give you an
idea about the future potential and after that it is up to the strategic
planning and execution of the company to capture a big pie of the total
industry and this we can gauge from the technical abilities and superiority of
its R&D investments. I find it really very strange when I see people
choosing stocks on the basis of filters- some certain % of EBITDA, NP etc. etc.
and they find their big moment. But I really like this because this has given
me the freedom and time to pick some real gems at peanuts due to market players using this filteration exercise for their stock pickings. Recent case is Laurus Labs where market denounced it due
to its limited ability to understand business model of Laurus where large
investments for new business (Final dosages) hit operating margins due to costs
bookings in the form of depreciation, Interest and operating expenditure of new
plant with no revenues. But just see the recent results of Laurus labs where
most of the topline growth is added to the bottom line and stock price has been
shot up to 1100 from 470 when I advised it last time just 2 months ago (click here for recent post on Laurus).
Bioinformatics uses tools (software
tools) for computation and analysis to capture and interpretation of biological
data like that of Genome. It is a field of science in which biology, computer
science, and information technology merge into a single discipline. Bioinformatics has its main application in the
analysis and interpretation of genome. The
total length of the human genome is over 3 billion base pairs. This is massive
amount of data like if we took the DNA from all the cells in our body and lined
it up then it would form a strand (extremely thin) of 6000 million miles
long!!! I was reading that day that total length of Human genome (DNA) is
equivalent to some 70 round trips to Sun and 7000 trips to Moon (may be even
more)!!! Supreme creator has really done a miracle in condensing this gigantic
data into every cell (through dense thread like coil structures organized and
stored in chromosomes).
And let me tell you
one thing- I think when Humans accessed this massive DNA data then that was the first moment of convergence of science and Theism/Spiritualism (not
religion). Our DNA and Genome are highly sophisticated designs
and when we peep deep into the mastery with which our DNA and Genome are
created and structured we are left with no doubt that some supreme creator (God)
is behind this. Discovery of DNA proved that life follows a coded path or
information in cells not an outcome of complex chemical reactions as was
perceived earlier. Our DNA is not our regular matter or energy but they are
information processing centers. Information is not an outcome of natural chaos
like a pattern of clouds which may resemble a human face. Information is a
creation and is always created by intelligence beings just like our computer
program. We can see some random alphabet in the pattern of clouds but what if
we see a long pattern of clouds resembling
“HCG is valued at 10 times its EBITDA while others are valued 20 times
EBITDA”. This line is not a pattern but this is a complex set of information
and it is not possible that it can be formed randomly by natural chaos.
Like, each cell of our body has two
copies of genome (Genome is a complete set of entire DNA (including all genes)
of a being within a single cell, and a gene is a length of a number of DNA molecules
that codes for a specific protein, genes are structured/stored in chromosomes)
with one copy from each of your parent (mother and father). However, the case
is different with sperm and egg cells because both have only one pair of
Genome. But why is this difference? Because if a sperm cell (from father) and
an egg cell (from mother) also have two copies of Genome then this would mean
that when egg and sperm combine at conception the number of copies of Genome
shall be 4 in every cell of the baby not 2!!! And when this generation will be
having babies then number of pairs of genome will be 8 and so on it will rise
with every generation this DNA burden will eventually crush the cell. That’s
why germ cells in our bodies have only one pair of Genome. They do start with
two pairs but they eventually divide and in the end left with only one pair and
this arrangement means that life in every human starts at two pairs of genomes.
So some supreme being has planned and designed the structure of life in finest
details.
Bioinformatics
and Genomics- the biggest revolution affecting every sphere of life
The human genome sequencing project
was a massive success and great milestone for humanity to start a new charter
of growth. However, the first genomes to be sequenced were of viruses and
bacteria. So as of now, the genomes of huge numbers of microbial, plant, living
organisms have been sequenced but this vast amount of data generated by genome
sequencing projects was unmanageable due to its sheer size and complexity.
Further, storage of this genome sequencing data was of not much use because
their true worth lies in doing comparative analysis of different sets of genome
sequencing in order to interpret and retrieve useful information which can be
used for some purpose. This is why the role of Bioinformatics is so important
because Bioinformatics analysis through its various tools has enhanced our
understandings about the genome structure. Without it, it is almost impossible
to manage, compare, analyze and interpret this gigantic data.
Bioinformatics uses very complex
sets of algorithms and statistical tools to compare, analyze and interpret the
relationship among the members of large data sets like comparing sequence data of
a gene (say insulin) of a particular human with the already existing sequences
to find out if there is any anomaly. Apart from analysis Bioinformatics
develops tools to cost effective storage and efficient access and management of
different types of information.
Like, let’s take the example of the
hemoglobin gene which is found on chromosome 11 which contains some 1500
different genes (in 135 million DNA letters) apart from hemoglobin gene. Hemoglobin
gene is composed of some 1600 DNA letters. A normal hemoglobin gene starts with
following DNA letters (in pair of 3):
ATG GTG CAT CTG ACT CCT GAG GAG...
Each of this 3 letter word tells
the cell to produce a particular amino acid (protein). We need the production
of these various amino acids in correct order or we will end up With a disease.
Like a fellow with Sickle cell anemia disease has the following pairs of DNA
letters:
ATG GTG CAT CTG ACT CCT GTG GAG...
As we can see there is a change in
the second last pair (letter T in place of A) and this change of just one
letter in 3 billion letters can create a life threating disease!!!
So with Bioinformatics these types
of comparisons and analysis can be accomplished in remarkable short span of
time and this analysis serves as the building block for the search of the cure
for the disease.
And this knowledge is playing vital
role not only in human well-being but it is extending far beyond covering every
aspect of human life whether it is agriculture, Nutrition and Food Microbiology,
Bio-energy etc. Like, for example, the use of Bacillus thuringiensis (BT) gene
in making cotton crop insect resistant. BT gene was extracted from a bacteria
and after mapping its entire genome, scientists inserted its genes in various
plants to make them insect resistant. So now BT has been used for making crops
like Cotton, Corn, potatoes insect resistant which has resulted in very less
use of poisonous insecticides on crops.
And as we can see and guess the
possibilities are endless where we can use the knowledge of Genomics for
achieving remarkable feats earlier though impossible like, for example, regeneration
of limbs. Humans can’t regenerate their limbs/organs after their amputation/damage (barring some exceptions like Liver and bones when pieces are joined but still
these are cell/tissue regenerations because if entire liver is lost then it
can’t regenerate.). But many others like Axolotls (salamanders) flatworms,
zebrafish can do. Axolotls are the champion here as they can regenerate complex
body parts lost at any age. Some Salamanders species can also stay young
forever. So by understanding how their genomes respond to any such injury
resulting in the loss of a limb/organ we can progress on to replicate the same
in humans. In Regeneration, real time genomic response is required and so real
time study is required to study the activated genes when faced with limb loss.
And before anything first of all we need to sequence the entire DNA of
that particular being like Salamander andwe can see the difficulties here in
studying/sequencing the genome. And after sequencing the next challenge is the
identification of all the genes because genes are a specific length of DNA and
it is extremely difficult to identify which length of a DNA code is a gene.
Before Bioinformatics, only way to identify the genes is to study their
behavior in the organism or by studying DNA in the laboratory which is an
extremely time consuming process. But Bioinformatics helps in identifying the
genes by analyzing the sequencing data in the computer by comparing the
data/experience of other beings.
Because if we can
see, technically human should also have this
amazing regeneration capability because once we were a small embryo ( a single
cell) with genome and then with this genetic code we were developed into a
complete being with all the complex organs and limbs. So we can
see that there is not much difference in the presence of genetic information in
a human and Salamanders but there are some steps which are missing in Humans
inhibiting our capability to regrow complex limbs. Some genes are switched off
in humans which are responsible for growing/re-growing limbs in these animals.
So, first step is to understand the
genomics of these beings and this was not an easy task itself. Why?? Because
its genome is massive…some 32 billion base pairs which is 10 times of human
genome!!! But number of genes of both humans and Salamanders are same
(20000-25000) so we can understand the difficulty in identifying these genes in
such a massive genome even after sequencing of the entire genome is done. But
that day I read that thanks to Bioinformatics scientists have finally sequenced
the entire genome of Salamanders so the day may not be far when we will hear
something great in this front. Now they will study whether limb in these
animals is regenerated with the help of some novel genes (not presented in
Humans but then we can insert them with genetic engineering) or same genes but
they control them better than humans. Regeneration of limbs mean high growth of
cells which is identical to cancer but it surprising that Salamanders do not
get cancer at all and this is what keeping scientists very excited for a
possible solution of current human epidemic-cancer.
Image:Salamander
That day my eight year old son
asked me that he did not want to see his mother getting old. And I showed him
the image of the holy Salamander and gave him a brief note on DNA/Genes in case
this can be a motivation for choosing Genetics as a career for him.
Further, as now we
understand the role and capabilities of Bioinformatics and genomics so we can
hope to see a cure for Covid-19 soon in the near future because these days we
can analyze the DNA of Covid-19 virus in its minute details and this will
enable us to find a cure to destroy the DNA of Covid Virus. Further, as now we
already have huge data base of the genome of many other hundreds of viruses
along with the treatments being used and tried (not successful though) so there
is a high chance that with Bioinformatics we will be able to compare the genome
of Covid Virus with the existing data base and in case the same is matching
with an exact genome or similar type of genome then we can have an idea about
where to look out for the cure.
Cancer,
Genomics and Strand life
Cancer is a genetic disease and all
cancers are caused by damaged or mutated genes. Cancer is a very individual
disease and cancer of one person can be very different from the cancer of the
other. So, genomics is the Holy Grail for the cure of cancer. Traditional
cancer treatments use chemotherapy, radiation and surgery to kill/remove the
cancer cells but they also kill healthy cells along with cancerous cells and have
severe side effects. And that’s why for early stage cancers chemotherapy is not
used.
Chemotherapy uses deadly
DNA-damaging chemicals/compounds to kill the cancer cells by damaging their
DNA. But it doesn’t work on all the patients uniformly and in some cases where
it is non-responsive it does more damage in the form of killing healthy cells.
And it doesn’t work on all because humans are genetically very different so
response to the therapies focusing on cell work differently.
So no doubt that genomics will
provide the much needed details about the genetics of cancer in a particular
human being and then on the basis of such analysis individual targeted
medicine/cure can be devised. Hence, there are high chances that the
chemotherapy will not be used in the near future and personalized precision treatment
based on genomics analysis will be used instead. In fact, even now genomics is
being used extensively and it has already made a marked difference in the
cancer treatment. Genomics enables health professionals to see the genetic
abnormalities in an individual after comparing the genome of that fellow with
the data base of genome of a healthy human. Then they can study whether the
genetic abnormality is inherited like some types of breast cancer are inherited
or DNA damage has happened due to external factors like smoking. Also, as now
we already have the genetic information about the inherited breast cancers so
doctors can warn and advise for the precaution and advance treatment for their
current and future generations. So in order to assess the cancer risk factors,
genetic diagnosis will play a huge role.
Hence, we can easily see that the
future of medicine is only about-Genetic diagnosis and genes based personalized
targeted medicine/treatment. But as I have told earlier, right now we are not at
the end of this genomics miracle but we have just scratched the surface of it.
In Human Genome project from 1990 to 2003, scientists were estimating the
presence of some 100000 genes in human genome and they were hopeful that once
we had the genome sequenced then we would decode/interpret all the genes very
fast but things were not that easy. The reasons: inherent complexity in the
interpretation of massive data and changing definition of Gene which also
includes non-protein coding genes. Only 1.2% of
entire human genome account for protein encoding genes. The rest of 98.8% is
non-encoding DNA and earlier was considered useless and junk but now the
evidence is emerging that these are also vital for our survival and well-being.
Many of these are responsible for the regulation of DNA/genes in cells
like switching on and off a gene. But I find it hard to believe that 98.8% is
less important than 1.2% and so I think this non-coding regulatory DNA may turn
out to be more important.
Result- we are still not sure about
the exact number of genes in human genome and there are competing human genes
data bases with differences of thousands of genes among them (estimates are
around 20000-25000 genes). And in the absence of consensus, it is very
difficult to interpret whether a new gene (marked by Bioinformatics) is a
“normal” human gene or some disease generating mutated gene. There is still
massive work required to interpret entire human genome.
Still, even with these numbers,
most of the times researchers are working and focusing only on some 2000 genes
out of 20000. This information is provided by Bioinformatics analysis. Until
now, the main focus is always on large genes with codes for many proteins or
genes which are prone to dangerous mutations so there is not much work on other
genes with potential for new drugs and treatments but are ignored. The need
here is the funding of more research into these ignored and unknown genes. Though
we are yet to uncover 98% of our genome but if you ask me it is not a drag but
a great opportunity. So there is no doubt that with more study and research
this field of medicine will only get better and precise and in future humans
will be healthier and live much longer.
Path breaking
work by Strand life in Genomics and Genomic/Genetic diagnosis
As of now, cancer
treatment and Genomics were not advanced and even genetic diagnostic tests were
not available in India and this is one of the reasons we always see our
celebrities going to USA for their treatment. But even this tour to USA may not
be enough because we Indians are different at genetic level from the fellow
Americans. Genomic database of Americans may not provide for the proper
comparison with Indian people visiting for treatments. So India needs to have
the genomic data base of its vast population in order to devise the cancer
treatments. But India with high genetic diversity with 17% population still
accounts for just .2% of the genome database collected across the globe. So keeping
in view the genomic diversity and variability in our populations across
country, Indian genomes can provide very interesting and vast sets of genetic
mutations and variations. One such initiative for human genome mapping project
named Indigen project (some 10k-20k people) in India is already underway by the
Government (also for agriculture) and Vijay Chandru of Strand Life was one of
the members of the team who prepared the draft proposal. However, due to
genomics testing already done by firms like Strand, Medgenome and other
independent research bodies have the database of some 500000 Indians and that’s
why the likes of Strand and Medgenome have better chances to make good
diagnosis products.
Strand life was a pure research
based firm and it achieved great success with its Bioinformatics products
(based in complex algorithms) which were lauded globally and still are the
leader across the globe. But in 2013 Strand Life decided to enter the field of
Genomics diagnosis after they get the funding of $10 million from San Francisco-based
financial firm Burrill & Co. Strand launched personalized Genomics
diagnosis tests in India in collaboration with hospital chains like Max, Mazumdar-Shaw
Cancer Center, HCG etc. In the 1990’s India lagged behind the genomics based
treatment because of the high costs. But the likes of Strand have done massive
work in bringing down the costs to Indian standards. Like, Strand has brought
down the costs of these genomic diagnosis tests to some 20000-30000 Rs. which
earlier was 3-4 lac rupees. These tests are instrumental in the devising of
personalized targeted medicines and saved the lives of many cancer patients in
India. Now thanks to these genomics tests, India has cancer survival rates
compared to the best across the globe.
In 2014, Strand secured the patent
for its Virtual Liver product-HepTox which allows the pharma industry to assess
the side effects of a potential drug on the liver in pre-clinical studies which
cuts down the time and expenditure related to human and animal trials. Later on
the same was acquired by Biocon owned Contract research firm Syngene
International Ltd. Strand counts the likes of Kiran Mazumdar-Shaw of Biocon,
Dr. GV Reddy of Dr. Reddy’s as its shareholders. In Bioinformatics, once it was
having some 30% share in the global Bioinformatics industry.
Also, the genomic diagnostic firms
like Strand already has vast data base of genomic data of Indian population.
And this gives it an edge in devising genomic diagnostic tests and personalized
medicine. So Strand is a pioneer in genetic testing in India and is working on
to detect cancer early from blood and saliva. In 2017, it introduced a cost
effective liquid biopsy diagnostic test which helps in the detection of tumor
traces from a simple blood sample instead of doing costly invasive biopsies or
radioactive scans. The success rate of this test is around 35% for early stage
cancer and 70-90% in fairly advanced stage cancer and these scores are at par
with the best in the world. As costs are coming down, more and more Indian
people are getting interested in getting their genome mapped to find out the
potential dangers to them in the future. Also, as more genomic diagnostic tests will be
covered under Insurance policy this industry will see huge growth going
forward.
In the early days of Genome
mapping, the costs were prohibitive (lakhs of Rupees) and it took around 2
years to complete a genetic testing but now even in India these can be done in
2-3 weeks with costs ranging from 3000 to 50000-60000. So India now is at the
start of a revolution in the genomics medical diagnostics. Indians are prone to
many genetic diseases related to blood, heart and eyes. Accurate genomic
diagnosis and DNA sequencing is leading to many innovative genomics treatments
like precision medicine and Gene editing. Gene editing is the next big thing in
the precision treatment of genetic disorders where a scissor like enzyme (found
in a Bacteria) cuts out the malfunctioning DNA of a gene and then replaces this
by good piece of DNA developed in lab.
A time will come in the near future
where a doctor would look into the DNA sequencing/genes mapping of an
individual before prescribing any medicine to him. Genetic tests costs of
10000-60000 are within the reach of most of Indian middle class and very soon
we’ll see this as the first test to be done on a newborn in India. There are
many instances where a baby has inherited deadly genetic disorder from his
parents although his parents were not having the same disease. But it happens
because both the parent can have one copy of a faulty gene and they can pass on
this faulty copy of the gene to their child. So genetic testing/mapping can
list out the potential dangers in the genes. This will enable parents to take
informed decisions during early pregnancy or whether to plan future pregnancy
or not. So a person with one faulty gene in its genome has to make sure not to
marry a person having similar faulty gene…and you people have guessed right
that time is not far when instead of Kundali matching people will resort to
Genetic matching.
Genomic
Diagnosis is next big thing in medical diagnosis
So we can easily see that genomic
diagnosis and sequencing is going to be a huge market in India. Right now the
industry size is small and it is around 300-400 cr only but it is only a matter
of time when this industry will see exponential growth. As per estimates this
industry will touch around 1500-1800 cr in next 2-3 years. As these tests are
being available cheaply in India we’ll only see their adoption at faster rate.
India is already staring at a potential cancer crisis in the country as most of
the cancer cases are left undiagnosed due to lack of awareness and availability
of early stage testing. But now as they are available so it is only the matter
of time when players like Strand Life will open more labs across India
spreading awareness about genomics diagnosis. Here, Government has to play a
major role in supporting. Insurance companies will also need to come forward to
support this and they will come forward as early detection of potential genetic
disorder risk will enable them to provide for early treatment of their
customers and pricing their products. So they have a huge stake in the
widespread growth of this industry.
Indian diagnostic
industry is still about normal pathological tests which are 90% of the total
market. Genomic diagnosis is just 10% of the market but it is growing very
fast. For example, USA did 1.6 million genetic tests in 2015 but the figure
rose to 26.5 million in 2019!!! So, right now genetic testing market is nowhere
near the potential if we see the USA market or routine diagnosis market of Rs.
40000 cr. We will see similar type of growth in India also. Also,
Strand bought the routine diagnostic testing business of the USA based Quest
diagnostic in India in 2018 in order to offer comprehensive diagnosis services.
Still, Bioinformatics is the biggest revenue generator for Strand but there is
no doubt that the future lies in Genomics. Strand now has around 27 testing
laboratories in India and recently one of its biggest labs in Haryana was approved
for the Covid-19 testing.
Strand’s NGS laboratory is the
first and only facility in India to have the accreditation from the College of
American Pathologists (CAP), and the National Accreditation Board for Testing
& Calibration Laboratories (NABL), respectively. In 2019, it joined the
Global Diagnostics Network (GDN) which is a strategic working group of 10 major
diagnostic laboratories collaborating to generate enhanced diagnostics insights
to improve the delivery of global healthcare.
Bangalore based Medgenome is the
biggest player in India followed by Strand Life. In early 2018 Strand raised 80
cr from Quadria Capital for its genomics business. Not much data is available
about the financial performance of the Strand Life but its topline should be around
70-100 cr however this figure does not capture the inherent strength of Strand.
Until now, Strand has primarily focused on investing big in path breaking
research and achieved remarkable capabilities in the field of genomics. But it
is yet to commercialize its achievements in Genomics and this is where the
partnership with HCG will prove to be a big catalyst.
Clinical
Research: Another field where I think Strand
can achieve big success is the clinical research. Global drug giants are
looking at india for clinical trials and India is well placed for high growth of
clinical research due to presence of superior healthcare system and vast patient
base for variety of diseases like life style diseases, cancer and neuro
disorders. So, clinical research is best placed to become the fastest growing
sector in the life sciences. Strand life has unique capabilities to achieve big
in clinical research in the form of Bioinformatics, Genomics and laboratory
analysis, large database of Indian genome and vast network of hospitals in
India (HCG). So this is one area which can really grow fast in India and there
is no reason why Strand Life shouldn’t do well here.
HCG-Well
poised for the growth of Cancer care and Genomics in India
Cancer care in India is way
under-penetrated and under-served and this is one of the reasons for the high
cancer mortality rates in India (.68 vs .38 in USA) as detection of cancer is
done at an advanced stage when it has already spread to other parts of the
body. But Cancer crisis is getting very severe in India. WHO has estimated that
1 out of 10 Indians will suffer from a cancer in their life time and 1 out of
15 will die of cancer. Every year some 8 lac people die of Cancer and around 13
lac new cancer patients are added every year which is going to increase fast.
These are very scary statistics. Apart from the fact that Cancer care is
inadequate, the situation is made worse by the concentration of around 95% of
cancer facilities in Tier 1/2 cities and small cities and rural people do not
have timely access to cancer care.
The likes of HCG and Tata Memorial
Hospital have focused on Hub and Spoke model to penetrate deeper into small Indian
cities/villages. In Hub and Spoke model, Hubs which are capable of treating
complex forms of cancer are connected to other spokes capable of treating less
complex forms of cancers.
But in Cancer care, timely
detection is the most critical factor. Further, Indian people are mostly suffered
from cancers of breast, Cervical and Oral which have almost 100% survival rate
if detected on time and these are easily preventable. Like, skin cancer survival
rate is 100% if detected early but it drops to 30% and 16% if detected in stage
3 and 4 respectively. That’s why Hub and Spoke model is critical for the Cancer
care in India and as Spokes can easily provide cost effective cancer diagnosis.
Compared to other healthcare streams like Heart care, cancer care is still not
that advanced and still huge efforts are underway to achieve better progress in
the survival rate. Like, cancer diagnosis tools bases on Blood/saliva are a massive
success to ensure the early cancer detection and Strand has already done path
breaking work in this and is ready to reap the benefits of superior efforts and
investments in research.
India is not far behind technically
in cancer care compared to the likes of USA. USA has lower mortality rate because
of high rate of diagnosis. Failure to diagnose cancer is a major lawsuit
against hospitals in USA so healthcare professionals in USA do not take any
chance when it comes to cancer and that’s why there are some studies which say
that USA is over diagnosed and over treated for cancer because they do
procedures like Chemotherapy even for early stage cancers which are not recommended
at all. So these survival cases raise the survival rates. Still it does not
mean to say that we are at par with USA…we have vast distance to travel. But our
deficit is related to penetration, technically we are not far behind like in
2018 India received the approval for using Immunotherapy for treating cancer
like kidney cancer, urinary cancer, breast cancer within one year of its
approval for use in developed countries like USA (HCG is also using this). Similarly, I remember in 2018
India got Digital pathology solution produced by Philips Intellisite Pathology
Solutions within one year of its launch. HCG got the same in Apr-2019
and in Dec-2019 HCG became the first in India to fully digitize its HCG-Strand
Laboratory in Bengaluru.
Government role is going to be a
big factor as Cancer care is very costly and still beyond the capacities of
most Indians. Government is already on this and some cancer treatments are
covered under Ayushman Bharat scheme. But still more work is required on this and
Government support will further pave the way for deeper penetration and growth of
cancer care in India.
But major positive for India is the
low cost of Cancer treatment which is in many cases is around 1/10th
of cost in USA and on an average it is about 2 to 5 times cheaper than
countries like USA and Canada. Hence as I have explained in detail in my Post
related Narayana healthcare, India is going to be a favorite destination for
medical tourism for cancer care also. India is already getting large numbers of
cancer patients from Middle East, Africa and SAARC nations but still we need to
break some myths related to backwardness of Indian cancer care as in cancer
care India is regarded as a secondary destination as compared to other Asian countries
like Taiwan, Singapore.
Finally time
for some Rituals- Financial Analysis
It may appear on the surface that
HCG is doing badly operationally when one looks at its financial performance-
Turnover of Rs. 1100 (hit by Covid) cr in 2019-20 and Losses before tax of Rs.
119 cr. But just a little bit of scratching of the surface and things will
unfold into a new dimension.First of all, there is an impact of Rs. 40 cr due to implementation of new lease standard 116 otherwise the losses are much lower than the reported figure of 119 cr (loss before tax). Most importantly, HCG has done massive expansions in last 3 years by investing some 700 cr in creating new facilities across India. Numbers of beds
under its network are at 2071 in Mar-20 as compared to 1364 in 2017. Its gross
block is around 1200 cr in 2020 as compared to some 600 cr in 2017. It was a
profitable company in 2017 with NP of 23 cr on revenues of 700 cr. Now, I think
you can easily guess why its performance could have suffered after that-
because of costs related to new expansions hitting the profits with relatively
much lesser growth in topline. Like, its topline growth is around 50% from 700
cr to 1100 cr however depreciation is at 104 cr in 2020 (excluding lease
impact) vs 57 cr in 2017, interest cost of 82 cr vs 23 cr, Employee cost at 208
cr vs 121 cr. So as
maturity profile of recently commissioned hospitals is low hence they are not
contributing much to the topline but their expenditures are hitting P&L
badly as turnover growth is just 50% but most of the expenditures have been
grown up by more than 100%.
In Healthcare there is high
operating leverage as most of the expenses are fixed so when a hospital is new,
revenue will be lower but fixed charges like depreciation/lease rentals of
building, machinery, staff payments hit hard. Healthcare uses very expensive
medical equipment so upfront fixed expenses are high so this gives a false
impression of losses. But as most charges are fixed so most of the incremental
revenue goes to bottom line. We can look at the superlative performance shown
by NH this year which will show the operation of operating leverage. I am
taking the performance of 9 months ending Dec-2019 to eliminate the Covid
impact in Mar-2020. Up to Dec-19 the topline of NH was Rs. 2385 cr vs 2096 cr growth
of 14%. But its NP was 107 cr vs 22 cr…a massive jump of 500% as compared to
topline growth of just 14%. And stock price of NH increased from 200 to 400 in
Jan-2020 (click here for the post on NH). We can see similar impact of operating leverage on the performance of
HCG anytime in this year.
For valuation, EBITDA can be used but as it has just completed a
major expansion in last 3 years so I do not think it is wise to try to assign a valuation
to it even on the basis of EBITDA. I have seen people using this metric blindly in all situations. Similarly I have seen attempts to value HCG on the
same basis. But as I have told you hospitals are a very different business and it is not easy to apply traditional valuation models on it. Like, for
EBITDA based valuation we can see that the value will be heavily distorted by
the presence of newly commissioned hospitals (large numbers) which are having
negative/break even EBITDA as of now. So these facilities which do not add
anything to the EBITDA of the company will not get any valuation at all!! So if
we try to value HCG on the basis of EBITDA (it shows some 135 cr for Hospital
business in 2019, 121 cr in 2020) then the result will give extremely wrong
valuation because it will not assign any valuation to the loss making/break
even hospitals. In fact, loss making hospitals will further reduce the overall
EBITDA of the company and this will result in the assigning of negative value
to a hospital like -50 cr for its Nagpur hospital. But can a hospital has
negative value or a zero value??
So I think the better approach to
value these growing hospital chains is- use EBITDA for matured hospitals with
positive EBITDA and use replacement cost based or revenue based approach for
the loss making/breakeven facilities. Last year Max healthcare was sold at some
25 times EBITDA. But Cancer hospitals are much more expensive to set up and due
to costly equipments the capital cost is very high. Further HCG is a young
entity so I would take 30-35 times EBITDA for valuing HCG. Its mature center
EBITDA is 160 cr (including IVF business) so at 30 times EBITDA the value is
4800 cr. I do not have the value for cost
incurred on new hospitals but they have given the debt taken for new hospitals
and the same is 432 cr as on mar-20. We can move ahead with this figure by
adding some value addition in the form of expertise in setting up/planning and
also in the form of first mover advantage in setting up a new hospital in a small
city because this acts as a deterrent against new investments by competition. I
think we can easily take the same at minimum 500 cr.
Let’s also try to value on the
basis of revenue which is 150 cr for loss making centers. Max deal has happened
at some 2.5 times of revenue that too of mature hospitals. So I think we can
take this at 3-4 times for HCG loss making centers which will take the value at
some 450-600 cr which is near to 500 cr we derived on the basis of cost. So
Value of Mature hospital 4800 cr+ new hospitals 500 cr-Debt of 700 cr will make
the value around 4600 cr. It is very high compared to the current market cap of
Rs. 1600 cr. So let’s try to lower the EBITDA multiple to 20 thinking wrongly
that this is due to covid. So at 20 multiple, the value of mature centers
excluding debt is 2500 cr and by adding 400 cr (only debt no value addition) for
loss making centers the value is 2900 cr still 80% higher than the current
market capitalization which shows that it is way undervalued.
Further, other comparative players like Narayana and Apollo are trading at 6 times of their book value while HCG is trading at 3 times its book value. The likes of Fortis and Aster are trading cheap (at one time and 3 times) but Fortis is fighting its own set of problems and Aster DM i think gets more than 50% revenues outside India so i have left both. Further, as i have shared earlier Cancer hospitals require more capital investments but still if we take 6 times of book value as the basis the valuation of HCG will be some 3200 cr aswhich is near to our other valuations so we can say that our valuation of HCG is on right track. Some people ask me why for some stocks market pays such a high valuation compared to its book value...5-6 times is a big value. Actually stock valuation is where market sometimes shows great creativity. Like, if we can see low book value in case of hospitals in their infancy is an illusion because hospitals are a high capital investment business so in the initial period (say 4-5 years) there are losses due to the impact of high depreciation and other high fixed expenditures which results in big losses and so reduction in the book value. But this reduction in book value is not real as company is building business and growth catalysts are still intact. And with better performance in future due to operating leverage book value will be restored to normal levels. That's why in the initial phase market assigns high valuation multiple to book value but as they are matured this valuation multiple is normalized.
Strand Valuation
But above valuation of HCG is excluding the
stake of 38% in Strand life which for me will be one of the biggest growth catalysts.
As I have told you earlier there is not much information about the revenues and
valuation of Strand. Like, in Feb 2018 Quadria acquired stake in it for 80 cr
but how much stake it acquired is not known. But as 38% is with HCG, then there
are investors like Kiran Shaw, Reddy, and Promoters etc. So I think Quadria
much have acquired somewhere 10%-20%. At 20% the value is some 400 cr and that
was 2 years ago. After that Strand has acquired the diagnostic business of USA
based Quest in India. But if you ask me sometimes it is better not to try
evaluating something as revolutionary as Strand.
Once I was talking to a friend who
wanted to make a career in Astrology. During our discussions I shared my view
about Astrology that it has lost its credibility because it tries to answer (and
change) everything. Further, most of the things look beyond its reach and
illogical keeping in view its current technical/theoretical advancements. Like
the sun we see in the sky is the sun that existed 8 minutes ago because it
takes around 8 minutes for the light to travel from sun to earth. Same is for
all the stars. A person comes into this world 9 months before taking birth.
Similarly I always feel that equity investing starts to behave like Astrology
when it tries to put a value on everything. Some things are unfolded only on
time and it is better not to make a crude guess of what may unfold especially
with outdated techniques. CAGR, DCF etc. have outlived their lives and for
emerging businesses they have very limited utility. We need something better
now (Even for settled businesses targets announced by brokerage houses do not
hit 95% of times). The likes of Quadria has acquired stake in Strand so they
have to put a value on it but most of the times that value is purely arbitrary
and does not have much perspective. That’s why we see cases like Quess
Corporations where Thomas Cook has made astonishing returns. Thomas cook
invested in Quess in 2013 and by 2020 the value of its investment increased by
some 25 times!! But in 2013 nobody could guess that by 2020 the same can be 25
times. In fact everybody would have laughed at. So the price paid by Thomas
cook was just the funds needed by Quess for their future growth and so the
valuation was arrived for the sake of valuation not out of some precise
calculation. Nobody can evaluate a disruption and innovation early in its life.
Same thing I feel for Strand and I think it is good that we are not required to
put a value for strand. I only wish for HCG to raise its stake in Strand in the
future.
CVC Investments will be a game changer
Further, to make the valuation
exercise more confusing the company has sold 31% stake to a private equity player
CVC at a valuation of 1600 cr. So, one can feel that the valuation offered is
quite lower. But I think there may be some valid reasons for this. Main reason
can be the devastating impact of covid on all businesses and healthcare was
also badly affected and there are high chances that healthcare will remain
stressed due to negative impacts on the incomes of people and this will hit
their capacity to spend on healthcare services. HCG was having a debt of 700 cr
(some 30-40% in foreign currency) and with not much help from government for
healthcare sector I think even their survival was at stake. So there was high uncertainty
in Apr-may-2020 about the impact of Covid and this might have affected the debt
reduction plans of the management in 2020-21 as Covid will easily wipe out 2-3
quarters this year. HCG stock price was beaten down to some 60 levels in
Mar-20. Hence, management realized the urgency to reduce the debt and this
might be the reason for going for the stake sale. In May-20 price offered was
100 which was increased to 130 in June-2020. HCG has got some 500 cr from the
stake sale and this they will use for the debt reduction and this will make
things much better for them.
I also think that the present
situation created due to Covid crisis will hit the business of many hospital
chains and those with weak balance sheets will feel the more pain and this may
help HCG doing much better even in tough times and we may see some management
contracts happening with other local hospital chains. Further, the scope of
deferment of cancer care is very less as compared to other healthcare problems
so HCG should not face that much difficult time as may be felt by other
healthcare services.
HCG is planning to sell its
fertility business under Milann brand which is having revenues of 70 cr. I
never liked HCG doing this unrelated business especially when the scope of
growth in the core cancer care is so high which requires huge capital
investments. Actually these types of unrelated acquisitions raise the doubt of
fund leakages by the management because why a wise man would attempt this type
of adventure when they are hard pressed in their core area. Still, I want to
give them the benefit of doubt keeping in view the otherwise good reputation and credibility of the management and the fact that HCG did this in 2013 way before their
IPO and most importantly the presence of marquee investors in the form of IFC, Tamasek,
CVC raises the trust factor to great extent. Now, they have decided to sell
this fertility business which is a good decision. So I hope that things are
going to get better for them from hereon because HCG has already suffered quite
a bit. They went for massive expansions but were hit badly by the onslaught of
Covid. But current valuations are already discounting (over-discounting) all
such sufferings and it is one of the best play on the growth of Genomics, Genomic
diagnosis and Cancer care in India.
(Views are personal and should not be taken as a recommendation for buying or selling a stock. Stock markets are inherently risky so kindly do your Due Diligence before investing. I am not a certified SEBI Analyst and holding the shares discussed in this Post. reach me at oscillationss@yahoo.in).
