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CHENNAI: Among the last things you expect as you enter a radiation therapy room for cancer patients is personalised settings for ambient light and music. Depending on whether you select the Underwater, Sky or Jungle theme, the ambience turns to your liking, as you walk through a short, maze-like path, into the heart of the Apollo Proton Cancer Centre in Chennai — a sphere-shaped apparatus called a gantry that looks like a CT scan machine from the future.The relaxed ambience stands in contrast with the heavy duty technology at play in the room. The room is fortified with 13-20-feet-thick concrete walls to contain the radiation. Out of sight, behind the sphere, is an imposing equipment that stands three-storeys tall. The cyclotron, which looks like it belongs in a nuclear facility than a hospital, accelerates charged proton particles in a controlled fashion into the radiation bay, where therapists direct them to tumours with very high precision. Proponents of the technology claim that it is more precise and causes less tissue damage in adjacent areas, resulting in superior clinical outcomes.74419441
The swank, 150-bed advanced cancer facility, built at a cost of Rs 1,100 crore, is a testament to the ambitions and risk appetite of Apollo Hospitals Enterprise Ltd, India’s largest hospital chain by beds, revenue and market capitalisation, and the unique family-led management at the helm, comprising of 88-year-old chairman Prathap Chandra Reddy and his four daughters. The proton centre was built at a time when there were concerns about the levels of debt the company was accumulating, as well as the promoter pledge of shares. But Reddy says he wouldn’t flinch.He wanted the proton centre. The Reddys eventually decided to sell Apollo’s insurance business, which helped them reduce the pledge and also enabled the company to pare its debt.Business Overview
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Note: Beds, hospitals and pharmacies as of December 31, 2019. *Includes multi-specialty clinics, diagnostic, diabetes and fertility centres, among othersSource: Company, Stewart & Mackeritch Wealth ManagementThe heavy investments it made in the last few years, including the proton centre (launched early 2019) and India’s first robotassisted cardiac surgery unit in Bengaluru (launched December 2019), appears to have won the approval of investors. The company’s stock has been climbing, hitting an alltime high of Rs 1,800 on February 20.
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In a difficult business that demands adroit balancing of the needs of the clinical side with the realities of the business side, Apollo, which pioneered private hospitals in India, now appears to have cast aside the debt overhang, and is now embarking on a new phase, with focus on consolidating its leadership position, growing its nascent online pharmacy business and using technology and preventive healthcare to help stem the growing burden of non-communicable diseases on India.The Proton BetThe claimed benefits notwithstanding, the expensive proton technology is a risky bet. As many floundering facilities in the US have discovered, it is hard to fill such hospitals with patients with the ability to pay, and also to convince insurers to cover the cost of proton treatment.
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But Apollo has some advantages. Its catchment area is not just India, where cancer cases are burgeoning. There isn’t another proton facility in South Asia, West Asia or Southeast Asia. Australia doesn’t have one either. The centre’s first patient, when it opened its doors early last year, was from Sydney. Most existing facilities are in Japan, the US and Europe. There are some 90 such facilities in the world.A recent study by the University of Pennsylvania found that proton therapy reduced the risk of serious side effects by two-thirds relative to photon treatment. But because the advancements in the technology have been rapid, there are no long-term studies establishing its superiority in clinical outcomes over the conventional treatment. But there are enough doctors who want the technology for their patients. In India, five private insurers and a group of state-owned insurers cover the cost of proton therapy. But proton therapy is not cheap, costing Rs 25-30 lakh on average per treatment.
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Apollo has treated around 160 patients with proton therapy, according to Preetha Reddy, the company’s executive vice chairperson. “It is now a proven standard of care. When we took that risk, we were like, we know it’s good, our clinicians are saying it’s good, but is there data to prove that this is the best standard of care? Now it’s all there.” Was it not a risk then to make such a big bet on the centre? “If you call it a gamble, then for the chairman to come back from the US, where he had a phenomenal practice and where he could have lived quite comfortably, to start Apollo was (also) a gamble,” Preetha Reddy tells ET Magazine during an interview in Chennai.Madam Prime MinisterPrathap Reddy, a cardiologist, left his job in Mt Vernon, Missouri, to move to Chennai (then Madras), where he had gone to college, in 1970. Reddy and his wife, Sucharitha, were not happy raising their four daughters—the oldest of whom is Preetha, now 62—in the midst of the drugs- and free-love-fuelled hippie movement. Another factor in the Reddys’ decision was the desire of Prathap Reddy’s father to have them back in India. “My daughters were all below 12 so they couldn’t resist,” recounts Reddy with a smile at the company’s headquarters near its first-ever hospital, 40 minutes north of the proton centre.In the late 1970s, when Reddy, a native of Andhra Pradesh’s Chittoor district, was working at a hospital in Chennai, he started wondering if he could set up one himself in the city, especially after one of his patients died because he couldn’t raise $50,000 to go to the US for a cardiac surgery.But a legal framework to establish a hospital as a for-profit entity virtually didn’t exist then, as state- or trust-run hospitals were the norm. The establishment’s contempt for private enterprise then didn’t help. Reddy had to make several trips to New Delhi to convince politicians and bureaucrats in New Delhi, often in his poor Hindi.
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In 1979, Prime Minister Charan Singh, who was also the finance minister then, saw no merit in Reddy’s plans, tearing up his proposal. But Reddy was lucky. Indira Gandhi, who returned as PM in 1980, warmed to his idea and even encouraged him to consider locating the hospital in Andhra Pradesh or Karnataka, states ruled by her Congress party, instead of Tamil Nadu, which was then governed by the All India Anna Dravida Munnetra Kazhagam, according to a biography of Reddy. Though he had Gandhi on his side, Reddy found it hard to get through to the then Tamil Nadu chief minister, MG Ramachandran. Whenever Reddy went to meet Ramachandran, the latter would pretend to be asleep. Reddy went back to Gandhi, who asked her cabinet secretary to persuade Ramachandran. That did the trick.Ever since the first Apollo hospital was opened in September 1983, the company has come a long way. The company now has 71 hospitals in its network, including five it manages, and nearly 10,300 beds. “Apollo is a great execution story in the healthcare space. They took the lead by setting up the first multi-specialty hospital in many cities,” says Vishal Bali, executive chairman of Asia Healthcare Holdings and former CEO of Fortis Healthcare.
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Family Concern“None of us went to B-school. We learnt management by walking around and listening, an art that we picked up from our father,” says Preetha Reddy. Prathap Reddy, who now focusses his attention on ways to tackle non-communicable diseases, still does frequent rounds of the hospital near the company headquarters, talking to patients, doctors and the staff.Apollo also runs the country’s largest pharmacy chain, with 3,700 stores. The business contributed 40% to the company’s consolidated revenues of over Rs 9,600 crore in FY 2019. Apollo also has over 900 diagnostic centres, diabetes and dental clinics, among others. “Apollo’s ability to get to this scale much sooner than its competitors and diversify beyond hospitals has helped it stay ahead of the curve,” says Kapil Banga, assistant vice-president at Icra, a ratings agency.
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Prathap Reddy has managed to do this with ample assistance from his daughters, none of whom is a medical doctor. While Preetha Reddy also handles doctor engagement, Suneeta Reddy, 60, is MD and handles finance and strategy. The two younger sisters, Shobana Kamineni (59) and Sangita Reddy (57), are responsible for shaping the company’s consumer-facing digital plans. In addition, Kamineni, who is executive VC, heads the pharmacy business, and Sangita, who is joint MD, is in charge of operations and the technology used in healthcare delivery. While Prathap Reddy, Preetha and Suneeta are based in Chennai, Kamineni and Sangita are in Hyderabad. Sangita is also the president of the industry body Ficci.The siblings’ well-defined roles within the company, and their father’s continuing involvement in strategic decision-making, have helped the Reddys stave off potential conflicts which have torn many a family-run business apart in India. Between them, the sisters have 10 children and four grandkids. During meetings over two days in Chennai, ET Magazine reporters observed that the five of them were often in touch over the phone, discussing urgent business, inquiring about their father’s wellbeing, passing on word about the death of a family friend. Asked to recall how they resolved a recent conflict among the sisters, Suneeta Reddy said she couldn’t recall an instance when such a resolution was necessitated.
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“Everyone is very affectionate. At least until now. That’s very fortunate,” Prathap Reddy said, while discussing his grandchildren and their involvement in the business. He was referring to the entire family unit. Prathap Reddy says he has been talking to his grandkids to understand their expectations. “They can just enjoy the dividends or they can be managers. If the five of us could create so much, the ten of them could do a lot more.” The Reddys have put together a succession plan, which Preetha Reddy calls a “work in progress”, for the sisters to take turns as chairperson of the company after Prathap Reddy. “Families that say everything is cast in stone may not be doing the right thing,” says Preetha Reddy.Though the next generation is clearly being groomed for the future, at the moment, the four Reddy sisters are firmly in charge.Digital PivotResponding to concerns over the company’s ballooning debt thanks to the proton centre and the addition of new hospitals in Guwahati, Navi Mumbai, Lucknow and Indore, and over nearly a fifth of the promoters’ stake in Apollo being pledged, the Reddys in June 2019 decided to sell the Apollo group’s 50.8% stake in Apollo Munich Health Insurance to HDFC for Rs 1,336 crore. Apollo Hospitals held 10% in the insurance venture and the promoters the rest.This, along with a Rs 500 crore gain from restructuring the frontend of the pharmacy business to comply with foreign direct investment norms, will help the company pare its net debt from Rs 3,522 crore as of December. The company’s free cash flow (cash generated by a business, net of operating and capital expenses) also turned positive in FY 2019 after being negative for six straight years and will only increase further as the company’s annual capital expenditure is now only Rs 200 crore, compared with an average of Rs 690 crore between FY 2015 and FY 2019, according to Stewart & Mackeritch Wealth Management.
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The proportion of the promoters’ pledged shares has declined from 78.1% in March 2019 to 29.6% in February 2020, according to a company filing with the stock exchanges, thanks in part to the sale of a part of their stake. These steps, coupled with impressive results in successive quarters, have made investors bullish on Apollo. The company’s shares have risen 51% in the past year, compared with a 3% increase in the S&P BSE 100 index. Kamineni admits she was sad to let go of the insurance venture, which she had built, but she now has set her sights on a new and highly competitive business — selling medicines online. “Insurance will get a traditional multiple. What we are building will get stratospheric multiples.”But she does not want to use the playbook of venture capital-funded startups, which rely a lot on discounts to hook customers. “I would invest in providing customers a better service over a longer term instead of giving them discounts. Kamineni hopes to use her wide network of pharmacies, rather than warehouses, to fulfil deliveries of medicines ordered online. “You have to be hyper-local. Delivery costs can kill you.” Apollo’s e-tailing business is now operational in Chennai and Hyderabad.Pradeep Dadha, founder of Netmeds, an online pharmacy, agrees that physical stores can indeed cut delivery expenses. But warehousing has its advantages, he adds, citing the example of the drug atorvastatin, which has over 500 brands in the market. “Due to the low acceptance of substitution by patients, it becomes enormously difficult to maintain fillrates for brick-and-mortar stores. A typical retail store would stock around 3-7k SKUs (stock keeping units), as opposed to 170k+ SKUs available in the market. This is where online pharmacies have an inherent advantage.”
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Besides the e-commerce foray and the proton centre, Apollo is looking to grow its health & lifestyle division. In two years, the company has grown its network of retail centres for diagnostics, dialysis, dental and child care and shortstay surgery, among others, from 472 to 917. Sangita Reddy, who heads Apollo Health & Lifestyle, is also driving the group’s efforts at using artificial intelligence and analytics to make healthcare delivery faster and more precise.“What the robotic arm gives you in surgery is greater access and accuracy, minimal peripheral tissue damage, minimal blood loss and faster recovery.” Apollo is also working on AIinterpreted CT scans which can reduce the time taken to initiate a surgery in case of brain haemorrhage from an hour to as short as five minutes.Even with the threats of price caps on drugs and medical devices, as happened with coronary stents in 2017, and state-funded insurance schemes such as Ayushman Bharat, which are not be profitable to hospital chains, the healthcare sector in India has much to look forward to. India, after all, has just nine hospital beds for every 10,000 people, compared with more than four times the number in China. Naturally, the demand for quality healthcare is only bound to grow. And Apollo is in good shape to tap into that.
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