Growth Drivers The Indian market for medical equipment is valued at around US$1,908 million in 2009.

Estimated growth Medical tourism is one of the fastest growing industries in the country .It has become a favourite destinations for patients from developed countries. Huge price differentials, availability of advanced technologies in private hospitals and highly skilled medical professionals in these countries are driving the medical tourism business. Procedure costs , US, UK, India, Thailand, Singapore, ($), 2008
Procedure Costs Heart bypass surgery Hear valve replacement surgery Spinal fusion Cosmetic surgery US 24,000 200,000 20,000 62,000 UK 20,000 90,000 10,000 50,000 India 6,500 8,500 2,000 5,500 Thailand 8,000 10,000 3,500 7,000 Singapore 10,500 12,500 4,500 9,000

Source: Planning Commission of India and Global Markets Direct

In 2002, Indian medical tourism generated $300 million in revenue. Since 2002 there has been an increase of 25% in medical tourists to India. Indian medical tourism revenue is forecast to reach $2 billion in 2012 when compared with $800 million in 2007 with a growth rate of 29% CAGR from 2007 to 2012.

Over the last five years, has been growing in the areas of Electronic Component manufacturing, Mechanical Fabrication, Biotechnology, Pharmaceuticals and Information Technology. These industries, in one way or the other, provide inputs to medical product manufacturing. As a result, India today is an attractive low cost destination for Medical Technology manufacturing. Access to healthcare is improving in India because of the rapid growth of private healthcare providers and an increase in expenditure by the central and state governments on the provision of healthcare. Privatisation of insurance sector has opened avenues for several private healthcare insurance companies. These are the two major factors driving the growth of Indian medical device market.

The Indian market for medical equipment is valued at around US$1,908 million in 2009. Despite strong growth rates, the market remains disproportionately small, ranking among the top 20 in the world but with low per capita spending. High quality products are sought after, particularly in the private sector, and the high tech end of the medical device market is dominated by multinationals with extensive service networks. Indian manufacturers of good quality mid tech products struggle with a stigma for unreliability. Indian purchasers are, however, price-sensitive and seek value for money. Continued investment in the private sector infrastructure, coupled with increased healthcare funding from the government, should result in a steady increase in the market for medical equipment. Espicom estimates the market will grow by an average of 7.1% over the next few years, to around US$2.7 billion by 2014. Among the segments in the medical devices market diagnostic equipment leads with Rs. 2000 crores, surgical equipment supplies worth Rs 1300 crores comes second and imaging and electronic treatment devices follow with Rs 1300 crores and Rs. 1000 crores respectively. The Indian medical equipment market is dominated by the medical instruments and appliances used in specialties such as ophthalmic, dental and other physiological classes. This segment accounts for 26% of the total market followed by orthopedic/ prosthetic goods segment accounting for 19% of the total market. Medical supplies such as bandages and disposables such as syringes, needles and catheters together constituted 21% of the total market. The other equipment which are in demand are high end speciality electro medical equipments that accounted for 11% of the total market. Xray apparatus accounted for 10% of the total market.

Another high growth segment in the medical devices industry is diagnostic kits. Diagnostic kits has a growth rate of 30% and a market size of USD 133 million in 2005. They include the reagents and the medical kits. With over fifty companies operating in diagnostic kits, the market has seen several interesting trends. Roche Diagnostics is the leading player followed by Transasia, Bayer and others such as Span Diagnostics, Piramal Healthcare, Orchid, Tulip Diagnostics, Zephyr Biomedical, Biorad, Liliac etc. Imports constitute over 50% of the market. Most imported products have high gross margins. Currently, the high value imported products include cancer diagnostic, medical imaging, ultrasonic scanning, plastic surgery equipment and polymerase chain reaction technologies. However, the market is becoming increasingly competitive due to low entry barriers (for MNCs), an increasing number of players and an expanding consumer base. The medical devices market for exports from India is estimated around USD 509 million with a CAGR of 22.15%. The exports mainly consist of dental instruments, surgical items and other laboratory equipment. Prominent MNCs operating in the Indian market include B Braun, Becton, Dickinson and company, Bayer, Johnson and Johnson, Phillips ,Roche, Siemens and GE. Some of the domestic players hat have consolidated their market position include, BPL Healthcare, Godrej Healthcare, Nicholas Piramal India Ltd., Opto Circuits India Ltd. and Advanced Micronic Devices Ltd.

Classification of medical devices

As per the new guidelines medical devices will be categorized into four classes A,B,C, D as qper their risk level and intended use. The classification rules are based on the vulnerability of the human body taking account of the potential risks associated with the technical design and manufacture of the devices. Low risk devices and equipment such as thermometers / tongue depressors will come under class A. Low to moderate risk devices including hypodermic needles / suction equipment will belong to class B. Class C will comprise moderate to high risk equipment like lung ventilator / bone fixation plate etc. While high risk devices such as heart valves, implantable defibrillator etc would be under class D.

Projected Medical Device Market, 2006-2012 (US$ Million)

Medical Supplies Medical X-ray Film Surgical Gloves Medical, Surgical Sterilisers Wheelchairs Contact Lenses Medical Equipment Electromedical Syringes, Needles & Catheters Dental Instruments & Appliances Ophthalmic Instruments & Appliances Other Instruments & Appliances Therapy Apparatus Orthopaedic & Prosthetic Appliances Medical X-ray, A, B, C Ray Equipment Medical Furniture Total 2006 101.4 29.8 9.6 8.2 9.2 30.1 801.2 192.9 199.8 30.7 37.9 339.9 60.3 274.9 164.6 19.6 1,508.90 2007 105.5 29.6 9.5 8.6 9.9 33.1 848.2 203.6 214.7 32.1 40 357.8 64.7 299.6 171.4 20.6 1,600.70 2008 109.8 29.4 9.5 8.9 10.6 36.5 897.9 215 230.6 33.5 42.3 376.5 69.4 326.6 178.5 21.5 1,698.70 2009 114.3 29.3 9.4 9.3 11.3 40.1 950.7 227 247.8 35 44.7 396.3 74.4 356.1 185.9 22.6 1,803.30 2010 118.9 29.1 9.4 9.7 12.1 44.2 1,006.60 239.6 266.2 36.5 47.2 417.1 79.8 388.2 193.6 23.6 1,915.10 2011 123.7 28.9 9.3 10.1 12.9 48.6 1,065.90 253 285.9 38.1 49.9 438.9 85.6 423.1 201.7 24.7 2,034.60 2012 128.8 28.8 9.3 10.5 13.8 53.4 1,128.80 267.1 307.2 39.8 52.8 462 91.8 461.2 210.1 25.9 2,162.40

Source: Espicom estimates

The domestic players believe that the absence of pricing norms allow larger players to charge exorbitant prices on import of medical equipments. Further, the manufacturing standards applied to this are the same as the one on the pharmaceutical industry, which should not be the case. Government regulations are very complex and difficult to adhere to, hence require a local expert with experience in this industry to guide the company through the regulatory matters. While some tariffs have been eliminated, others range from 5%-36%. Although it is expected that these would also be eliminated it could take a few years for the government to actually implement it. Private sector investment in healthcare has been increasing since the mid 1980s and it is expected that future increased demand for medical equipment and supplies will come from private sector hospitals and medical centres. India has a growing middle-class of around than 300 million people with disposable income and increasing healthcare expectations. Around one third of these can afford to pay for good quality private healthcare and this number is growing. Companies such as Apollo Hospitals Group and Max India have been building hospitals equipped to Western standards and capable of undertaking complex procedures. The Apollo Hospitals Group comprises a network of 35 hospitals, 6,400 hospital beds, 30 primary care clinics and more that 120 pharmacies. Apollo claims to be the single largest healthcare provider in Asia. The latest addition to the Apollo Hospital network is the 400bed multi-specialty Apollo Hospital, Ahmedabad, which opened in May 2003. Specialties include cardiology and cardiothoracic surgery, radiology, neurology and neurosurgery, nephrology and urology, orthopaedics and trauma care, paediatrics and neonatology, respiratory medicine, maxillo-facial and cosmetic surgery, oncology, gastroenterology, ENT, general surgery and ophthalmology. The best of India's private hospitals aim to attract an increasing number of 'health tourists'; private patients from overseas who are able to take advantage of India's high standards and relatively low prices. In 2004, the Maharashtra state government established a Medical Tourism Council to try to attract more foreign medical

patients. The medical fee table published by the MTC at the time indicated huge cost benefits to overseas patients, with private heart surgery amounting to around one fifth of the average US$50,000 it costs in the West. The same ratio applies to joint replacement, neurosurgery and cancer treatment. The MTC plans to tempt private patients initially, with all-in packages including travel, medical and living costs for a fixed price. The next stage is to target state-run health services, particularly those with high costs and long waiting lists. For example, the MTC has had some exploratory talks with some UK NHS managers about the possibility of sending patients to India. There is certainly an opportunity in the private sector for manufacturers of high quality products that represent value for money, although competition is fierce and the high tech end of the market is dominated by multinationals with extensive service networks. At the other end of the scale, India has a vast rural population, for whom all but basic healthcare provision will remain out of reach for the foreseeable future. There are a number of ongoing World Bank assisted projects that aim to improve the healthcare infrastructure. While there will be some opportunity for foreign manufacturers to provide equipment, however, the low to mid tech end of the market will be met mainly by the domestic industry. Segment Hospitals Distribution and Retail Diagnostic Products CRAMs CROs Diagnostic Laboratory Services Size USD 30-33 BN USD 200-220 MN USD 880-900 MN USD 12-13 BN USD 140 MN USD 850-870 MN Growth 12-13% 11-12% 25-26% 25-26% 29-30% 20-21%

Source: Industry Estimates, KPMG Analysis

OPTOS CICUITS Opto designs, develops, manufactures, and distributes devices that use light to detect and sense, and medical monitoring equipment. Its non-invasive product profile includes SPo2, multi-parameter monitors, pulse oxy-meters, digital thermometers, and fluid warmers. Opto also operates in the invasive segment through its 100% subsidiary EuroCor, which specialises in research, development, and manufacture of interventional cardiology products. For FY10, revenues from this segment are expected to be INR 2.84 bn. Following the recent acquisition of Criticare, Opto has successfully expanded the noninvasive products portfolio. The acquisition will expand Optos non-invasive product portfolio by adding gas monitors and central monitoring stations, which already have USFDA and CE approvals. Recently, Opto received FDA approval for its model Sequel a patient monitoring system developed by Criticare. We estimate its non-invasive segment to generate revenues of INR 7.63 bn in FY10.
Common size metrics- as % of net revenues Year to March FY FY08 FY09 FY10E FY11E 07 Operating expenses 67. 70.7 68.3 68.4 68.4 2 Material cost 49. 57.5 56.5 55.9 56 5 Employee cost 6 4.5 4.9 4.6 4.6 Other expenses 11. 8.6 7 7.9 7.8 6

Depreciation and amortisation Interest expenditure EBITDA margins Net profit margins

1 2.9 32. 8 29. 5

1.3 2.3 29.3 28.5

1.7 6.6 31.7 26

2.9 4.9 31.6 23.8

2.5 3.50 31.6 25.2

Growth metrics (%) Year to March Revenues EBITDA growth PBT Core net profit EPS

FY07 FY08 FY09 FY10E FY11E 80 86.1 74.9 30 26.6 93.5 66.2 88.9 30 26.6 93.2 79.6 59.9 18.8 34.1 92.2 79.6 59.9 18.8 34.1 67.2 76.2 58.5 18.8 34.1

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