Investing for returns but delivering positive outcomes is the holy grail for a new generation of investors in the world today. For sure there are some hardliners that turn a whiter shade of pale at any mention of an outcome beyond dollars and cents, but as investors in emerging markets we think it makes a great deal of sense to look for growth opportunities in the places where goods and services are structurally lacking.
Take healthcare in India as an example: we know that India is home to nearly 1.4bn people and that this vast population spends only USD 231 per capita per annum, which is tiny compared to the OECD average at over USD 4,000[1]. This is an obvious opportunity and investors in the right companies should expect to get both returns and positive outcomes if they back the right businesses.
What does the right business look like? At Arisaig, over the last 26 years, we have been investing in certain types of business models that build strong moats that will not just survive but thrive over the long term and deliver the compound earnings growth that delivers investment returns.
Specifically, we love product business models (both B to C and some B to B) with their brand building prowess and Intellectual Property, platform businesses with their network effects, subscription services that rely on switching costs, and finally we love outlet-based business models that build scale and distribution prowess.
The latter business model is interesting from a healthcare outcomes perspective in places like India where there are some 800,000 pharmacies and c. 90% are unorganised[2] that look like the one I visited a couple of weeks ago in India.
At these outlets Indians are battling 3 main issues – authenticity, availability, and affordability. Authenticity as it is estimated that up to to 20% of medicines in India are counterfeit[3], consumption of which potentially resulting in adverse health consequences; availability given that fill rates average a mere 60 – 65%[4]; and affordability is obviously key in a country where GDP per capita levels are less than USD2,300[5] and budgets for unforeseen health issues are incredibly tight, especially when 55% of healthcare spend is out of pocket[6]. There is also a large dependence on medications for chronic diseases such as diabetes, meaning recurring out of pocket expenses.
This could be true in pretty much all emerging markets but the tragedy in India is that it has an incredibly strong pharmaceutical manufacturing base with an estimated 3,000 pharma companies offering 60,000 different drug brands on its doorstep.[7] There is, however, a stubborn disconnect between this production capability and local availability.
We have been researching a pharmacy chain locally called Medplus that we believe would directly address the issues above – one that has built direct relationships with manufacturers to get affordable, authentic and quality products to the Indian population.
The pharmacy’s reach makes this market worthwhile for local manufacturers because it offers national-scale demand and cuts out labyrinthine wholesaler structures. This creates a Win-Win-Win for manufacturers, the pharmacy and local patients; the only losers are those padding out the supply chain in the middle, where much of the waste, tax avoidance and incursion of counterfeit medications currently takes place.
Its direct relationships with pharmaceutical companies and backward integration of its supply chain mean an efficient supply chain but the business strategy is to pass this on to consumers rather than build its margins. It also can ensure authentic drugs and its dynamic inventory management system ensures fill rates of 90%. It supports its margins with private label sales.
Our meetings on the ground in India with Vatsal Mody and our research team have supported the importance of affordability as the cornerstone of Medplus’s value proposition to consumers but convenience is key also given that there is a pharmacy on most street corners in the cities.
The company is aiming to nearly triple its store count from 2,748 stores in 2022 to nearly 6,000 over the next three years but at this point it will still only have less that 5% market share, and so have many years of growth ahead of it. By comparison Walgreens in US has 18% market share[8].
There are also potential adjacencies to explore in terms of offering a diagnostics offering in major cities, which is something we often see offered by pharmacies in emerging markets.
It is long duration earnings growth that drives investment returns for Arisaig’s investment portfolios and so has been a focus of much research by Vatsal and the team in India of late.
At Arisaig, we think the right business models that are addressing structural shortfalls in key areas of development in emerging markets will not involve tradeoffs of doing well or doing good. With a business like Medplus the two go hand-in-hand.
Rebecca Lewis, Co-CEO, Arisaig Partners
Sources
[1] OECD, available at: https://data.oecd.org/healthres/health-spending.htm
[2] Due to informality of the sector, exact estimates are difficult. Industry estimates we have seen for the proportion of unorganised/unbranded pharmacy retail stores range from 89% to 98%
[3] 2019 Special 301 Report, Office of the United States Trade Representative
[4] Motilal Oswal Healthcare Report, October 2019
[5] World Bank
[6] https://data.worldbank.org/indicator/SH.XPD.OOPC.CH.ZS?locations=IN
[7] Invest India. https://www.investindia.gov.in/sector/pharmaceuticals#:~:text=The%20pharmaceutical%20industry%20in%20India,%26%20Manufacturing%2C%20Biosimilars%20and%20Biologics, accessed Feb 2023
[8] Statista, 2021
