Many experts point out that it is time for healthcare organisations to start maintaining financial hygiene and better monitoring of their financial dealings. This is paramount to mitigate setbacks incurred during a crisis and will help in regaining financial strength in the post-COVID era. Sameer Sah, Partner, Khaitan & Co highlights how healthcare and life sciences companies need to respond to financial setbacks in conversation with Raelene Kambli
How will the current crisis impact cost cuts, strategic investments and fundraising among healthcare companies in India? Besides, how can healthcare businesses identify trigger variables that will affect revenue and cost?
As far as costs with regards to life sciences companies are concerned, it is important to note that the business of these companies is quite multinational and exports will pick up sooner rather than later given the essential nature of their products. Having said that, toplines will take some hit, and to that extent, bottom line preservation requires some cuts. There is always the risk of additional price control being introduced. Therefore, while one would not expect major directional changes on company strategy, any additional fringe items that can be dispensed will be dispensed – such as peripheral R&D or bare-bones R&D where there is no measured chance of success – will see nixes.
As far as healthcare services companies are concerned, such companies would look at costs (HR and otherwise) that much more closely, due to a reduction in revenue caused by the postponement/suspension of elective procedures, lack of international patients (India is a major medical tourism centre), etc.
Strategic investments are typical of two kinds i.e., brownfield and greenfield – and we believe those plans may be delayed a bit, but the growth direction should continue because of the strength in the fundamental business. With overall demand economics leading to low valuations – to the extent that a willing buyer or seller can be found, parties will continue to explore inorganic growth – although, the execution of such transactions will go slow. Businesses with cash from the past may be opportunistic in their acquisitions. We do not anticipate much organic capacity expansion to take place unless there has been something in the pipeline that requires execution, as this would once again put pressure in terms of cost.
As far as fundraising is concerned, given the tightening of capital markets, this will be challenging. However, we are seeing companies pursue NCD borrowing as a possible route. We also foresee a challenge raising funds from banks and NBFCs in the future.
What are the necessary steps for contingency planning within hospitals, medtech companies and health tech firms?
As far as hospitals are concerned, contingency planning would be required from a human resources perspective due to the exposure of staff and doctors to COVID-19 patients (known and unknown).
Further, this is something that will, in all likelihood, continue past the lockdown duration as well. As far as medtech companies and healthcare firms as concerned, they would need to re-prioritise their R&D spending. R&D at times can be a potential sunk cost depending on uncertainty or otherwise of success and some of the contingency funding planned for such sunk cost may need to be re-prioritised as safety for future needs.
Companies would also need to review whether their distribution channels and supply chains are in order. One of the major issues highlighted early in the crisis was the shortage of APIs for even basic products such as paracetamol. Companies would need to address this going forward. The government has announced certain measures to boost API production within the country but that is an effective long-term contingency plan that companies need to put in place by backward integration.
With regard to medical device companies, recent amendments to the Medical Device Rules, 2017 – which have broadened the scope of regulations – have caused some confusion, with the online system for registration not being made available on time. Further, by way of a 31st March, 2020 notification, price control is now in effect for all medical devices, thus potentially affecting topline.
There will also be a knock-on effect of reduced demand caused by the shortage in demand for elective procedures.
What recovery strategies should healthcare companies apply to regain financial strength?
We believe companies would need better financial hygiene and better monitoring. For instance, healthcare services companies would need to re-examine their arrangements with corporate customers to see delinquency and payment timelines. With regard to drugs and medical device companies, parties will have to evaluate what kind of extended credit or additional credit can be provided since in the short term, as there will be a shortage in demand as people will step out only for things that are absolutely critical.
- Advertisement -