Ayala offers affordable healthcare for Filipinos to boost growth
The group sees profitable opportunities among low-income patients
CLIFF VENZON, Nikkei staff writer
MANILA -- Before Ayala Corp. became a Philippine investment powerhouse, the 183-year-old company operated a drugstore among its first businesses. As it accelerates its diversification strategy, the company is reviving its interest in medicine by offering comprehensive healthcare services to Filipinos.
In 1834, pharmacist Johann Andreas Zobel, an ancestor of the Zobel family that controls Ayala Corp., the oldest Philippine conglomerate, established the "La Drogueria y Botica de Zobel" drugstore in Manila's historic Walled City. The business was inherited by Zobel's son and then grandson, Jacobo, who studied pharmacy and medicine in Madrid. The drugstore was sold in 1903 and closed during World War II.
Ayala Corp. is now returning to the sector. On Feb. 9, Ayala Healthcare Holdings, or AC Health, said it was taking a minority stake in Wellbridge Health, a startup company that owns digital pharmacy MedGrocer.
"We feel that the [healthcare sector] is ripe for disruption, and there is more to do to really to uplift the quality of healthcare in the Philippines," AC Health chief executive Paolo Borromeo told Nikkei Asian Review on Feb. 13.
The investment in MedGrocer is the latest in a string of healthcare-related deals Ayala group has struck in recent years. AC Health was established in 2015 as a wholly-owned subsidiary of the Ayala Corp. to spearhead the group's healthcare-related businesses. In that year, it bought half of Generika, a retailer of cheap medicines, and launched FamilyDoc, a chain of clinics offering primary care services, such as consultation and diagnostics. The investment in MedGrocer, which enables consumers to buy and compare medicines online, is expected to boost sales at Generika while addressing the doubts that many Filipinos have about the efficacy of unbranded medicines. In addition, Ayala has a joint venture established in 2013 with the Mercado Group in operating QualiMed, which has three hospitals and six clinics.
The healthcare foray reflected a directive by Ayala Chairman and Chief Executive Jaime Augusto Zobel de Ayala to Borromeo's investment team to identify new sectors that the group could enter. Zobel said three conditions had to be satisfied: there must be a space for a new player, growth potential, and room for disruption. "We pitched healthcare," said Borromeo, who is also Ayala's head of corporate strategy.
Ayala's shares rose 1.2% on the day the MedGrocer deal was announced, outperforming the benchmark Philippine Stock Exchange index, which gained 0.24% on that day.
Ayala, however, is still reeling from a market sell-off last year triggered by the U.S. Federal Reserve's plan to gradually increase interest rates and foreign investor concerns about Philippine President Rodrigo Duterte's foreign policy shift toward China and away from the U.S., the country's traditional defense and economic partner.
On Feb.17, shares of Ayala closed at 781 pesos ($15.6), down 0.89% from the previous day. Since Duterte took office on June 30, 2016, Ayala shares have dropped 8.0% while Manila's benchmark index has declined 7.1%. In contrast, diversified conglomerate San Miguel, which has expanded from food to infrastructure, has surged by 36.6% during the same period.
Ayala began making inroads into new sectors seven years ago as its traditional businesses in real estate, banking, telecommunications and water distribution reached maturity.
During the first three quarters of 2016, the company's net profits grew by 11% to 19.6 billion pesos, driven by real estate, banking and water. During the same period in 2015, Ayala recorded profit growth of 26% to 17.7 billion pesos.
The diversification has led the company to invest in transportation and power infrastructure, taking advantage of the government's privatization program. It launched a chain of senior high school campuses in 2014 as the country kicked off a new education system that adds two more years to the secondary school level. The company also started producing motorcycles, while talking to potential partners for the manufacture of self-driving cars.
Healthcare is also seen as a bright spot. In many provinces and some districts in the capital, many people find it challenging to access basic health services due to a shortage of medical staff and supplies in government clinics.
A national priority
Duterte, who claims to be a socialist president, has promised to make improving public healthcare a priority. In August, he sent Health Secretary Paulyn Ubial to Cuba to study its public healthcare system, which is said to be a global model for efficiency.
The Philippine government in recent years has also been trying to increase the healthcare budget relative to the size of the economy, but the country, with a growing population, still lags behind regional peers. Health expenditure in the Philippines relative to the gross domestic product stood at 4.71%, while the share in Vietnam and Thailand were 7.07% and 6.53%, respectively, according to World Bank, citing 2014 data.
Data from Euromonitor International, a consumer research company, shows that Filipinos are increasingly spending more on healthcare as household incomes increase. Consumer spending on health goods and medical services grew by 52.19% to 2,779 pesos per capita between 2011 and 2016. The figure is expected to rise by 36.57% to 3,795.4 pesos by 2021, according to Euromonitor.
This favorable environment convinced Ayala to seek opportunities to offer healthcare services as a private-sector supplier. Ayala's focus is to provide comprehensive healthcare services to those who have limited access to necessary treatment, particularly outside urban centers.
Under Ayala's existing operations, a patient can consult a FamilyDoc physician and get laboratory tests or buy generic medicines in the same clinic. The physician may refer the patient to a QualiMed hospital if greater medical attention is required.
"The hospital landscape is fragmented and not integrated. It is still a broken system in the Philippine relative to Thailand and Singapore," Borromeo said. "If someone can create a new innovation, there is so much value you can create."
Other companies also want to cash in the growing demand for quality healthcare as the middle class expands. Metro Pacific Investments has taken over 13 tertiary hospitals, which offer specialist treatment, in the last ten years with a combined bed capacity of nearly 3,000. The company is considering taking its hospital unit public to accelerate expansion.
The Villar property group, founded by former Senate President Manuel Villar, plans to build a chain of medical centers near its residential holdings. The group began building its first "Vitacare" hospital last year and wants to achieve a 3,000-bed capacity in five years.
While Metro Pacific and the Villar Group intend to offer healthcare services for relatively affluent Filipinos, Ayala's approach is different in focusing on a broader range of customers based on its strong brand image.
"We are trying to emphasize that Ayala is now touching people at different price points much more than ever before. We are trying to emphasize that, rather than people looking at us always at the very top," a local newspaper quoted Zobel as saying in November.
AC Health has earmarked between $100 million to $200 million to double the Generika and FamilyDoc networks. Generika has over 670 stores nationwide, while FamilyDoC has six clinics on the southern outskirts of Manila. By 2020, AC Health plans to expand Generika to 1,000 stores and FamilyDoC to 100 clinics. Ayala Land meanwhile is making separate investments in QualiMed facilities, which it plans to expand by one or two locations annually.
Ayala wants to occupy the entire spectrum of healthcare, from consultation to medical financing. "If we see other opportunities requiring more capital, we would study them very carefully and determine if we should invest," Borromeo said.
He added that the number of Filipinos covered by private healthcare insurance has remained flat at round 4 million during the last 20 years, creating another possible opportunity for the group. Because of the limited scope of the state healthcare insurance system, the World Health Organization has noted that "high-level of out of pocket payments," which account for half of the total health spending in the Philippines, represent a "major financing concern."
A comprehensive strategy
Discussing AC Health's possible next moves, Borromeo said the company is looking into building specialty clinics, such as for cancer patients. In the longer term, they are also looking into going into drug manufacturing and healthcare financing. "We will look at the M&A opportunities," he said. "We are looking at the entire healthcare ecosystem."
Luis Limlingan, managing director at Manila-based brokerage Regina Capital Development, said Ayala's healthcare investment is promising. "It's one of the industries that need to be developed," he said.
Ayala, however, may find it difficult to conduct drug manufacturing because of the dominance of strong local players, such as United Laboratories and Pascual Laboratories. "The fact that these players have not gone public--that means they have enough capital," Limlingan said.
Ralph Bodollo, an analyst at local brokerage RCBC Securities, said Ayala has a reputable record in forging successful partnerships. "Its track record can make a difference" he said. Bodollo argued that Ayala was able to forge partnerships in many of its business, from power to property. "Generika was a closely held investment before they came in," he added.
Ayala expects its new businesses, including healthcare, will account for 20% of its projected profits of 50 billion pesos by 2020, more than double than its 2015 earnings. The new and unlisted ventures currently contribute around 10% to profits.
Bodollo said he does not expect healthcare to be a meaningful contributor to Ayala's earnings for at least five years. Borromeo could not provide financial information for AC Health, but noted that Generika's sales grew 15% last year, while FamilyDoc clinics opened last year now have around 16,000 patients combined, mostly coming from the first two branches.
The Philippine healthcare sector may also see increased competition as foreigners begin to notice the same factors that persuaded Ayala to invest in healthcare. Last year, Sanitas Internacional, a Spanish company that has health center and insurance operations, started developing several projects in Philippines and it is also looking at Indonesia, according to the company's website.
But if Ayala can achieve the strategy it had proposed, the group will see its healthcare venture expand well beyond the Walled City where its roots began.