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Apollo Hospitals – First-World Health Care at Emerging-Market Prices - page 5 / 19

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Apollo Hospitals Group705-442

standalone outlets, which currently contributed about 30% of total pharmacy revenue.  In a market where the quality of medication varied substantially, consumers valued Apollo’s reputation for quality.  Suneeta Reddy, Director of Finance, explained: “Why is the Apollo pharmacy better than any other?  Because we have a regulated formulary, and there are no spurious drugs.  Apollo is a brand name that consumers can trust.”

International Consulting & Projects

The Apollo consultancy arm took on two types of projects. The first, “transition management,” helped clients design and build facilities.  With the second, “operations management,” Apollo actually ran facilities, often staffing the senior management team and, if required, the head of nursing. The team typically recruited and trained the majority of the hospital staff.

In 2004, international assignments accounted for 33% of consulting revenues, a figure that was expected to rise to 50% in the next few years.  International projects were varied.  They included a feasibility study for a 100 bed multi-specialty hospital in Accra (Ghana), the recruitment and training of nurses for a private hospital group in London, a build-operate-transfer (BOT) agreement for a hospital in Dubai, and the operation management for a 330 bed tertiary care hospital in Dhaka (Bangladesh).  The consulting team was planning several major projects including an operations review of a large West African health care group and the equipment and management of the radiology services in a 600-bed ministry of Health Hospital in the Middle East.

Apollo won many of its international contracts through competitive bids.  “We bid for the super specialty hospital commissioned by Petronas, Malaysia’s oil and gas giant, in competition with a who’s who of health care and we won it,” Dr. Reddy noted.  “One of our advantages is that we build hospitals at much lower cost then our competitors.  We build a 300,000 square foot facility with 350 beds at a cost of $30 million, perhaps $35 million.  The design of an Australian company would probably cost twice as much,” explained John Punnoose, head of Apollo’s consulting division.  One reason for the cost differences were the more limited space requirements.  “Our designs require 800 to 1000 square feet per bed without compromising on the services and the delivery of care.  In a typical Western design, 1500 to 2000 square feet are used,” said John Punnoose.  Another reason for the cost differential were the more modest consulting fees that Apollo charged.  Lower fees, however, still implied handsome profits.  Although the Consulting Division contributed only 2% to AHEL’s revenue, it was responsible for 10% of profits.  “Overseas projects just pay much more than domestic investments.  There is a market for our intellectual property, and it is highly valued by overseas clients,” said Suneeta Reddy.

Apollo Health and Lifestyle Ltd. (AHLL)

Building on the success of its hospitals, the Apollo group decided to enter the primary care market.  Ratan Jalan, CEO of AHHL, the subsidiary responsible for Apollo’s primary care clinics explained:

Two thirds of health care expenditures occur outside hospitals, that is a very large share of the cake.  And this market is very fragmented; there are millions of physicians who provide primary care services.  No one knows who the quality providers are.  There is slight regulation, much of it is not enforced, and the customer is left with little information.  Given that scenario, Apollo seemed well positioned to exploit its brand equity.

In an unusual step for the health care industry, Apollo chose a franchising concept to roll out its clinics.  Franchisees were expected to lease premises of about 3,200 square feet.  The total expected investment per clinic was on the order of Rs. 17 million ($400,000), all of which had to be financed by the franchisee.  Apollo insisted on a debt-equity ratio of no higher than unity.  The investment cost included a one-time franchise fee of Rs. 2.2 million ($50,000) for the seven-year agreement.  In exchange for this fee and a 5% royalty on sales, Apollo offered comprehensive support services.  It provided the design for the clinic, selected and trained all medical and support staff including

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