Last week, I visited several Generic Drugs store outlets in Patna to learn and gather as many insights as possible. Just to reiterate, I have been in Patna for the past 15 months, and at this point, I believe I have a deeper understanding of the local consumer. However, after visiting these stores and joining many of the store’s WA groups, I realized how off the mark I was in my assumptions about everything. These moments in one's lifetime journey are when you realize why certain things are not going according to your plan. I have shared these insights in the 2nd part of this essay.
Our startup ecosystem is still quite young, despite many funds releasing returns to LPs (completion of a cycle) and displaying some 4X or 5X returns. There are over 100 unicorns (at least numerically), with many products boasting over 400 million monthly active users. The largest outcomes, in terms of revenue size, are yet to come and will not come solely from the top 10% of India. TBH, for me, Flipkart is still not the largest outcome; the best is yet to come.
Recently, Udaan’s Co-founder and CEO, Vaibhav Gupta, highlighted an important point about the future of India’s largest companies. He said, “100 of the biggest companies of 2050, most of them will be started around this time.” And I echo his sentiment because what I see on the ground is remarkable. It is going to be incredibly brilliant. Okay, it’s a good time to stop "beating around the bush" and come straight to the point.
In the past few weeks, my team, and I have worked on understanding the “evolution of India’s healthcare” consumers. It is not a new industry or something that is being created now. The roots of healthcare can be traced back to the time of independence; however, let’s consider a timeline of over 50 years. Hence, it is probably the best time for our team to have a sense of why we should not get trapped in the “sunk cost fallacies.” This is a 50+ page report evaluating some 100+ public companies listed as Small and Large Cap across the domain. Let me present you with a brief summary of our work, which includes around 7 different types of healthcare companies.
The evolution of healthcare in India is unique and can be divided into three parts::
The first wave: In the initial phase of healthcare, most companies focused on manufacturing (drug and Active Pharmaceutical Ingredients [API] manufacturing), hospitals, pathology (diagnosis), pharmacy, and Health Insurance. Hence, if we look today, most of the public companies in healthcare belong to the above categories.
The first wave ended up creating a few large public companies; however, most of them went public after achieving scale from metro consumers or started exporting to developed markets. Most of them designed their product positioning and pricing around those consumers. Hence, at this stage of the company’s journey, to maintain their business or market cap, they have to focus on the franchise part of the business (taking this as a reference from the brilliant book: Loonshot).
These are the good and bad of the companies from the “First Wave”:
Pharma manufacturing: Drug consumption is an unchangeable component of healthcare. The very first types of healthcare companies were drug manufacturers in India. These companies used to manufacture drugs and APIs. They had human capital available as commodities and were successful in using expired patent formulations to manufacture generic drugs at much cheaper prices, with massive profits from exports. Thanks to 3,000 pharma companies with a strong network of over 10,500 manufacturing facilities, a highly skilled resource pool, and 500 API manufacturers, we have made drugs available to everyone, not only for Indians but also for humans in developed countries. However, due to the unorganized nature of the industry and poor regulation, consumers are the losers because they are paying premiums for the same generic drugs that should be available at up to 90% lower cost. For example, in the USA, 90% of insurance-linked prescriptions are generic, and around 60% of all drug consumptions are generic drugs. In India, 89% of drugs are generic; however, they are sold at a premium, and consumers are paying up to 90% more. This is one aspect of healthcare that will change in the next 10 years: India’s drug consumption will be dominated by generic drugs.
Hospitals: Due to higher Capex and being the least scalable component of healthcare, hospitals were limited to the top 10% of Indians. This is evident considering that 90% of private health facilities are in the top 2 quintiles. Some people will argue that the reason there are no hospitals in the rest of India is because those Indians can’t afford them. The "Henry Ford of heart surgery," Mr Devi Shetty, started hospitals with the entire thesis to make heart surgery affordable (half the USA price). And that has been the genesis of building a multi-billion dollar company in the past 20 years. It's a story to celebrate; however, based on our population size and the demand for quality healthcare, the overall growth in physical infrastructure has been very low until a few years back. Just for example, India’s biggest healthcare company, Apollo Hospitals Ltd., only has 70 hospitals in 40 years, compared to the USA’s 9th largest hospital chain, which has 86 hospitals. We can understand the deficiency in physical infrastructure; however, this is going to be solved very soon. (Why?)
100% FDI (Foreign Direct Investment) in Hospitals
Availability of local capital through initiatives such as the Aarogyam Loan Scheme (Every bank has its respective “Aarogyam Loan” for healthcare business for Capex [Fixed Capital])
Lack of trust in Public health facilities hence willingness to pay
The impact of that is visible on the ground. Just in the past 15 months, many specialist hospitals have been in the completion phase, and 30 to 35% of Patna’s Over the Line (OTL) marketings are related to healthcare. The impact is evident on the ground.
Pathology (Diagnosis): Pathology is one of the healthcare components that has been democratized, but there is still growth opportunity, and innovation will further drive down costs. The S-type loonshots are definitely saturated; I do not see new strategies in the pathology component. However, in the next 10 years, the opportunity for P-type loonshots is enormous. Let me list a few:
India’s own biological reference for health biomarkers (as of today, we are still using WHO’s generic biological reference for all healthcare biomarkers).
DNA and genomics-based cell-based biomarkers to identify NCDs (Non-Communicable Diseases) well before the time.
Remote Photoplethysmography (rPPG), portable medical devices for home diagnosis, etc., will further create a biomarkers database of Indians, and that would be the medium to prevent most potential hospitalizations and chronic diseases.
I would say it is an achievement for us as a nation that everyone in the country can afford a diagnosis by travelling a few kilometres at an affordable price!
Health Insurance: The first phase of Health Insurance was primarily designed for India’s top few percentages, and the penetration of Voluntarily Health Insurance is a testament to that. The first phase of health insurance products was built with a mindset for risk prevention; hence it was also the most mis-sold product and never took off beyond a few million.
The democratization of Health Insurance is yet to take place. For the top 10% of Indians, it will be personalization and Add-ons; however, for the rest of Indians, it will be affordability and suitability of products that could solve their affordability problem.
IMP: In a nutshell, the first wave of healthcare companies created value and wealth for patients, providers, and the rest of the stakeholders (hence all these public companies), even though it took some 30+ years.
Note: In our research, we realized many of the manufacturing companies listed on the Small Cap (SME listed companies) could be utilized better with their core capabilities of manufacturing specific formulations, experiences, etc. For example, many of the Small Cap companies are trending at less than their revenue multiple; however, all these companies have manufacturing facilities and specific capabilities that can be utilized better.
The 2nd wave: The 2nd wave of healthcare companies, those who utilized the tech layer on top and termed themselves healthtech companies, created marketplaces, online diagnoses, online doctor bookings, pharmacy retention (online drug delivery), home-based lab sample collection, and wellness, which also got added to the category. Other startups used technology irrationally and promised convenience without delving deep into the core of healthcare.
None of these companies solved or fixed India’s healthcare problems from the consumer or provider point of view, and the numbers are a testament to this. On one side, neither do we have large companies, another side 90% of India’s professionals are still offline; the same is true for the facilities, most of which still use paper. Hence, almost all of them struggled to create any value. After almost 15+ years, we still don’t have a good healthtech company that we can use as a reference and compare with the first phase of India’s healthcare companies. It might be premature to call the investment in the healthtech space creative destruction, and I would like to be proven wrong.
Can anyone please conduct a postmortem? I think this is a good time; we should do a postmortem of the value destruction in the Indian market by India’s healthtech companies. Failures are the best sources of learning.
3rd Phase of Healthcare Companies: In the next 5 years, we will see the 3rd phase of healthcare companies will have real chances to a. Solve India’s healthcare problems (make quality healthcare affordable for billion Indians) and b. Be among the categories of the largest companies. Here, we need to think differently in terms of scale - from the perspective of 1.2 billion Indians - and adopt a full-stack approach that could cover their entire healthcare needs (everything): more like a “SuperMed” that could cover every healthcare component for a year. These 3rd Phase Healthcare companies would also be among the largest companies of 2050 - companies built for perpetuity: companies for 100+ years.
We are standing at this critical juncture. If we utilize this moment well, we are talking about building companies of a size of $100 billion, and companies coming from this space can find the “Right to Win” that will exist perpetually (independent from any kind of volatility). The first step would be to focus on localization, add the power of technology to make it scalable, and move towards personalization.
The rest of the essay will discuss why localization is more important than personalization to build a scalable company for India’s 90%. But to understand that, I need to share the insights that we have gathered in the past 7 days from the Jan Aushadhi store’s WA group.
Let me give you a different meaning of convenience from the perspective of 90% of Indians:
Today, I believe that everyone loves convenience; it is not a matter of need or wants. The conflict arises when you want consumers to pay for convenience and they have other needs to fulfill. Most startups inflate product prices in the name of convenience and assume consumers will pay, and when they don’t, these startups struggle. Finally, the ecosystem creates narratives that most Indians don’t pay for convenience or can’t afford products and services. I was assuming the same just a few months back; however, today, we have a deeper understanding of the meaning of convenience for 90% of Indians.
A few scrrenshots from the store WA group
Key highlights:
I saw a QR code to join the store’s WA group; to be honest, I was not expecting the group to be active and alive.
I joined on 9th March; there were some 42 members. At the time of writing this, there were some 56 members.
Most of these are existing customers of the store and are aware that drugs are available at much cheaper prices. Most of these existing store’s customers would take a picture of the drugs and ask whether that is available or not, and if they get confirmation about the availability from the store manager, then they text: “I will come around this time.” Now, this is also called convenience provided for this convenience; the customers don’t have to pay. But this ultimately saves their time. Adding such convenience doesn’t add extra cost to the product; however, it helps customers save time and build lifelong trust.
Also, as this store deals with only 1700+ SKUs, most of the queries go unfulfilled. The demand is so strong.
Of course, this convenience is only possible and scalable with the help of technology. This level of trust comes from localizing the products and services for a specific target group, considering our country is the most diverse country in the world.
Based on the above insights and activities in the WA group, I was able to draw a rough 2X2 matrix taking four parameters: Personalization, Localization, Digital, and Physical. It seems this fits with the companies building for India’s 90%. And if startups would like to build products and services following this framework, it might create the “Right to Win” in perpetuity.
A rough diagram of localisation and personalization
I have plotted, Personalization and Localisation on the X-axis similarly, Digital and Physical on the Y-axis. Because ultimately, we would be using any of the two channels to scale both types.
Personalization through Digital medium: Our ecosystem knows only one type of personalization because this is super scalable and demands minimal capital. Hence, every company aspires to achieve this type of personalization because once achieved, personalization can be made available at zero cost. “This is one of the reasons we have so much conviction around making healthcare affordable because healthcare can be personalized using ABDM and made available at zero cost for everyone in the country using their smartphone”. However, we are aware that, at this stage of the journey we should not dilute our focus. :)
Personalization through Physical medium (Offline): Don’t say personalization is not possible in the physical medium. Of course, it is costly and non-scalable; however, we have many businesses built on the thesis of personalization in the offline world. Gym trainers are a good example of personalization through a physical medium. Companies such as Dehaat utilized this type of personalization to build category-defining companies; of course, they moved the value chain and found scalable models. If anyone is building for 90% of India, this might be the better method to take off the ground.
Localisation through a physical medium (offline): Just as Personalization in the digital medium is a desire of every startup, most traditional businesses are localized and hence will survive for decades or even centuries. Of course, this type of localization is non-scalable or difficult to scale. Having said that, if anyone is building for the next 90%, starting with this would be a good way to get a sense of what truly works and use technology to make what is workable and scalable.
Localisation through digital medium: This is the “Sweet Spot” for any startup building for the next 90% of Indians. Of course, finding this sweet spot demands groundwork and a slightly longer time compared to conventional tech startups. However, identification of this “Sweet Spot” also means having the “Right to Win” because on one hand localization brings that much-needed trust and the ability to scale means - there is no stopping for that company, not even massive investment - “The Right to Win” impact would be found in perpetuity.
[New addition after essay publication on 20-03-2024 at 15:44]: The company called Stage (https://stage.in) which is Netflix of Bharat has been able to find this “Sweet Spot” and today they have millions of subscribers from India’s rural quintiles which seems crazy.
Achieve a complete cycle: The best method to achieve the full circle would be to start with localisation through the Physical medium and find technology and methods to achieve the same in the digital medium. Of course, this would demand focus and experimentation, and once there is a localised scalable model start building the personalization. Today, many of India’s largest companies have been built on this thesis.
In conclusion, my past 10 days of experience broke all my preconceived notions about convenience. The good news is that we will be implementing these insights in solving the problem of quality healthcare in India. If you are building in healthcare/healthtech, I would love to chat with you.
Thanks for reading, if you find my essay useful, please share this in your network.
I shall see you all the next week :)