Healthcare Global Enterprises Ltd.- Data is God

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 1/10^th 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).