Kovai Medical Center & Hospital Ltd Management Discussions.

HEALTHCARE - INDIA OVERVIEW

Healthcare has become one of Indias most important sectors - both in terms of revenue and employment. Healthcare comprises of hospitals, medical devices, clinical trials, outsourcing, telemedicine, medical tourism, health insurance and medical equipment. The Indian healthcare sector is growing at a brisk pace due to its strengthening coverage, services and increasing expenditure by public as well private players.

Indias competitive advantage lies in its large pool of well-trained medical professionals. India is also cost competitive compared to its peers in Asia and Western countries. The cost of surgery in India is about one-tenth of that in the US or Western Europe.

Market Size

Deloitte Touche Tohmatsu India has predicted that with increased digital adoption, the Indian healthcare market, which is worth around USD 100 billion, will likely grow at a CAGR of 23 per cent to USD 280 billion by 2020. The healthcare market can increase three fold to USD 372 billion by 2022.

There is a significant scope for enhancing healthcare services considering that healthcare spending as a percentage of Gross Domestic Product (GDP) is rising. Rural India, which accounts for over 70 per cent of the population, is set to emerge as a potential demand source.

Government Initiatives

Some of the major initiatives taken by the Government of India to promote Indian healthcare industry are as follows:

• Indias first ever Air Dispensary, which is based in a helicopter, will be launched in the Northeast and the Ministry of Development of North East Region (DONER) has already contributed Rs.25 crore (USD 3.82 million) for its funding.

• The Intensified Mission Indradhanush (IMI) has been launched by the Government of India with the aim of improving coverage of immunisation in the country and reach every child under two years of age and all the pregnant women who have not been part of the routine immunisation programme.

• Ministry of Health and Family Welfare is planning to spend more funds, over and above the current sanction of Rs.955 crore (USD 148.22 million), to tackle lifestyle diseases such as cardiovascular disease (CVD), hypertension, obesity and diabetes in India.

• The Union Cabinet approved setting up of National Nutrition Mission (NNM) with a three year budget of Rs.9,046.17 crore (USD 1.40 billion) to monitor, supervise, fix targets and guide the nutrition related interventions across the Ministries.

• The Government of India aims to increase the total health expenditure to 2.5 per cent of Gross Domestic Product (GDP) by 2025 from the current 1.15 per cent.

ADVANTAGE INDIA Strong Demand

Healthcare revenue in India is set to reach USD 280 billion by 2020; expenditure is likely to expand at a CAGR of 17 per cent over 2011-20.Rising incomes, greater health awareness, lifestyle diseases and increasing access to insurance will contribute to growth. It is estimated that India will require 2.07 million more doctors by 2030 in order to achieve a doctor-to- population ratio of 1:1,000.

Attractive Opportunities

Investment in healthcare infrastructure is set to rise, benefiting both hard (hospitals) and soft (R&D, education) infrastructure. India is the largest exporter of formulations with 14 per cent market share and ranks 12th in the world in terms of export value. Double-digit growth is expected over the next 5 years.

Policy Support

The government aims to develop India as a global healthcare hub.

• Policy support in the form of reduced excise and customs duty and exemption in Goods and Services Tax.

• Creation of new drug testing laboratories and further strengthening of the 31 existing state laboratories.

NOTABLE TRENDS IN THE INDIAN HEALTHCARE SECTOR

Shift from Communicable to Lifestyle Diseases

With increasing urbanization and problems related to modern-day living in urban settings, currently about 50 percent of spending on in-patient diseases is for lifestyle diseases; this has increased the demand for specialized care. In India, lifestyle diseases have replaced traditional health problems.

Lifestyle diseases, also known as Non Communicable diseases (NCDs), are those which occur due to habits, lifestyle and surrounding environment of people. The main types of noncommunicable diseases are diabetes, cardiovascular, neurological, orthopedic, cancer and chronic respiratory diseases. The main habits/lifestyle related factors contributing to these diseases include unhealthy food habits, lack of physical activity, stress, having certain body posture for long durations, and surrounding environment. Additionally, ageing of population further increases the occurrence of lifestyle diseases as people aged more than 40 are more susceptible to these ailments.

Though India has managed to control communicable diseases like polio, malaria and cholera, the lifestyle related diseases are on the rise. All the top specialties contributing to the revenues of hospitals are non-communicable diseases. The largest contributor is cardiology, which accounts for 25% of the total revenues of the hospital. Second largest contributor is neurology, accounting for 10% of revenues of the sample set, next is orthopedics (9%), and oncology (8%). The noncommunicable diseases account for majority portion of the revenues of the hospitals and the expected rise in the incidence of these diseases will further boost the revenues of the hospitals, because of higher volumes, occupancy and Average Revenue per Occupied Bed (ARPOB) that these specialties provide.

KMCH, on their part expects large increase in Cardiac disease and Stroke related ailments. To address the stroke related ailments, we have put major focus on Cathlab, MRI and Mobile Stroke Unit. A unique helpline number 95665 95665 was established with a dedicated team of Doctors and nurses available 24 hours. It is truly a matter of great pride for Neurosciences, Interventional Radiology, Emergency Services, and Critical Care Department to have achieved this landmark.

Though the lifestyle diseases provide a lucrative opportunity to hospitals as the treatments are much more expensive and require hospitalization for longer period; however, recent regulatory actions are likely to trim the margins that hospitals get from some of these treatments. However, the hospitals have the flexibility to revise prices of services, package of the treatment, room rates, other consumables, doctor charges etc. to at least partly compensate for the decline in prices of the devices so the entire reduction in prices may not lead to commensurate drop in accruals.

Home Healthcare

With an aging population and the rapid increase in various types of chronic illnesses, there is an urgent need for quality healthcare. Private sector medical institutions and government hospitals are unable to cope since the average Indian finds them not easy to access. Thats why the Indian home healthcare industry has a massive market to grow in.

Sophisticated and technologically advanced medical gadgets make it easier to monitor patients, regardless of their location - even for the most chronic and serious illnesses, heart failure, stroke rehabilitation and respiratory failure. There are many advantages that home healthcare services offer and for which customers are happy and willing to pay for, including:

• Convenience - cuts down on travel time and expense

• Provides personalized attention on a one on one basis

• Recovering in the familiar and comfortable environment of ones own home

Increasing Penetration of Health Insurance

Two thirds of the healthcare spending in the country is currently being met from out of pocket because of the low penetration of Health Insurance, which has led to the tendency of delaying or

forgoing certain treatments, particularly discretionary treatments. Currently, only 11% of the population has access to any form of health insurance. However, the scenario is changing with more and more people opting for health insurance and many companies entering the market over the years. Health insurance in India reported a compounded annual growth rate (CAGR) of 19% over the last five years. As penetration of health insurance increases, it may be expected to drive more people to seek timely and superior healthcare services, which in turn would grow the patient pool and rise in healthcare spending.

Increasing Trend in Medical Tourism

Medical tourism industry also thrives on treatment of lifestyle diseases as the treatment of these diseases is complicated and is not available in many of the countries in South Asia, Africa and Middle East or is very expensive in developed countries such as USA, Germany, and United Kingdom etc. India enjoys the low cost advantage vis-a-vis other countries providing these treatments and Indian hospitals are well placed to benefit from the rising incidence of lifestyle diseases across countries majority of the medical tourists are availing bone marrow transplant, bypass surgery, renal transplants, hip replacement, knee replacement etc.

POLICY SUPPORT AND GOVERNMENT INITIATIVES

Encouraging the Private Sector & investments in rural areas

• Benefits of Section 10(23G) of the Income Tax Act, 1961 has been extended to financial institutions that provide long term capital to Hospitals with 100 beds or more.

• Government is encouraging the PPP Model to improve availability of healthcare services and provide healthcare financing.

Tax Incentives

• Benefits of Section 80 IB of Income Tax Act has been extended to new hospitals with 100 Beds or more set up in rural areas - such hospitals are entitled to 100 per cent deduction on profits for 5 years.

• All Healthcare, Education and Training Services exempt from Goods and Services Tax

• 250 percent deduction for approved expenditure incurred on operating technology such as telemedicine and remote radiology

• Income Tax exemption for 15 years for domestically manufactured medical technology products.

Other Government Initiatives

• National Health Policy, 2017 - a policy framework for achieving universal health coverage and delivering quality healthcare services to all at an affordable cost.

• An in-principle approval for a new category of over the counter (OTC) medicine has been given by the Drug Consultative Committee (DCC), Government of India to help save patients time and money.

• State Telemedicine Network (STN): States and Union Territories have been provided support under the National Health Mission (NHM) under Programme Implementation Plan (PIP) to create reliable, ubiquitous and high speed network backbone.

• Government of India launched "Ayushman Bharat Programme" - National Health Protection Scheme to bring health care closer to homes (Union Budget - 2018 - 19). Project is largest government funded healthcare programme in the world, expected to benefit 100 million poor families by proving a cover of up to Rs.5 Lakhs per family per year for secondary and tertiary care hospitalization.

Union Budget - 2018 - 19 - Health, education and social protection has been allocated Rs.1.38 lakh crore (USD 21.32 billion), the Department of Health Research has been allocated Rs.1,800 crore (USD 278.04 million), Rashtriya Swasthya Bima Yojna (RSBY) has been allocated Rs.2,000 crore (USD 308.93 million), the National Rural Health Mission (NRHM) has been allocated Rs.9,752.82 crore (USD 1.51 billion), the flexible pool for non- communicable diseases, injury and trauma has been allocated Rs.1,004.67 crore (uSd 155.19 million).

OPPORTUNITIES

Healthcare Infrastructure

• Additional 3 million beds needed for India to achieve the target of 3 beds per 1,000 people by 2025

• Additional 1.54 million doctors and 2.4 million nurses required to meet the growing demand for healthcare; 58,000 job opportunities are expected to be generated in the healthcare sector by the year 2025.

• Over USD 200 billion is expected to be spent on medical infrastructure by 2024.

• Over the years, India has made strategic interventions in National Health Mission and the national disease control programmes to ensure quality and affordable healthcare.

Research

• Contract research is a fast growing segment in the Indian healthcare industry

• Cost of developing new drugs is as low as 60 per cent of the testing cost in the US

• About 60 per cent of global clinical trials is outsourced to developing countries

Medical Tourism

• The Indian medical tourism industry is expected to reach USD 6 billion by 2018 from USD

• 3.0 billion in April 2017, growing at a CAGR of 27 per cent over 2013-16

• The number of foreign tourists coming to India for medical purposes rose by almost 50 per cent to 201,333 in 2016 from 134,344 in 2015.

• Cost of surgery in India is nearly one-tenth of the cost in developed countries

THREATS

• Yoga, Meditation, Ayurveda, and other traditional methods of treatment are major service offerings that attract medical tourists from European nations and the Middle East to India and their gaining prominence are threats to modern healthcare.

• The Ministry of AYUSH, Government of India has been implementing various initiatives to promote ayurveda, yoga and other AYUSH systems of medicine on an international level and was allocated Rs.15.28 crore (USD 2.36 million) in 2017-18 for this purpose.

• Many big players also setting up wellness centers across India, with traditional healthcare remedies as the focus of their offerings which pose a threat to the industry.

• The traditional (ayurvedic) market in India is expected to rise at a CAGR of 16 per cent over 2016-2021.

• Changes in regulation although well intended may have unintended effects and may change cross subsidization patterns thus resulting in hesitation of new medical products coming into India.

INVESTING IN INDIAS MEDICAL EDUCATION

Rationale

In order to cater to healthcare needs of a population of 1.2 billion, India would need an additional 7 lakh doctors by 2022. There exists tremendous scope for establishing new medical institutes for producing world class doctors, nurses and paramedics. Private players are encouraged to set up medical institutions and the clause to permit medical colleges as commercial venture has been notified.

Indian doctors are world renowned in their expertise and have high reputation in the US, Canada, Australia, New Zealand, UK and other European nations. India has a demographic dividend in terms of a high share of young population.

Medicine as a profession commands tremendous respect in Indian society and a large number of youth aspire to become doctors, highlighting the tremendous demand for medical institutes.There is an existing gap in number of doctors to cater to the healthcare needs of the country. The current doctor: patient ratio of 1:1681 is below the World Health Organisation (WHO)- recommended figure of 1:1000.

Number of Medical Colleges needs to be increased from the present 439 and the Government recognizes the role of the private sector in this regard.

Present Status

Medical College proposed to be established for an annual student intake of 150 undergraduate students. Construction of 700 Bedded Medical College Teaching Hospital is underway and is slated to complete by end of March 2019. Other infrastructure like Students Hostel, Staff Quarters are also under construction. The total cost of the Project is put at Rs.600 Crores and is proposed to be part financed by way of a long term Debt. It is expected that the first intake of students will commence from academic year 2019-20. The Medical College will allow your Company to enter into low cost segment thus making KMCH into a comprehensive healthcare institution and also have an education foray.

RISK MANAGEMENT

On account of multi-fold increase in scale and the expanded area of operations, your company gets exposed to a wide range of both internal and external risks and uncertainties. These internal and external factors may affect achievement of the companys objectives - whether they are strategic, operational or financial. Risk managements objective is to assure that uncertainty does not deflect the endeavor from the business goals. Adequate measures are taken to mitigate areas of significant risks that have been identified. Our risk management systems also ensure that risks are contained within manageable levels.

INTERNAL CONTROL SYSTEMS AND THEIR ADEQUACY

KMCH is committed to maintain high standard of internal controls throughout its operations. Your company follows an internal control program that aims at safeguarding funds, provides efficient and effective management of assets and ensures accurate financial reporting. While reviewing our internal controls, sufficient regard is given to the risks to which the business is exposed, the likelihood of such risks occurring and the costs of protecting against them. Your company has a dedicated team of internal auditors. They review the entire operations of the company and submit their findings to the audit committee. The audit committee takes note of the same and guides the management in implementing the suggestions.

CAUTIONARY STATEMENT

Statements in this Management Discussion and Analysis describing the health care sectors objectives, projections, estimates, expectations and predictions contain "forward looking statements" within the meaning of applicable laws and regulations. These statements and forecasts involve risk and uncertainty because they relate to events and depend upon circumstances that may occur in the future. Actual results might differ materially from those either expressed or implied.