New Delhi: Investors who have turned upbeat about India’s healthcare assets over the past one year are also examining the sector — comprising pharmaceutical companies, hospitals and diagnostic chains — with a critical eye, conducting more in-depth due diligence than ever, prior to signing large cheques.
Investors are wary of high chances of malpractices that could hurt their investments in a business that is always under regulatory and consumer scrutiny. They are going beyond the regular financial due diligence, delving deeper into records of star doctors, treatment protocols, doctor-management relationship, how susceptible are doctors to quitting, how do doctors refer patients to hospital chains, referral fees, and if unnecessary tests and procedures are being prescribed, said forensic consultants, investors and industry insiders.
“There has been a rise in forensic due diligence given higher scrutiny surrounding the pharma and healthcare segment. “Over the last year, it has also witnessed a surge in deal-making activity so much that PEs and VCs are demanding to delve deeper in terms of investigating beyond the regular accounting”, said Amit Rahane, partner, Forensic & Integrity Services at EY.
Unfavourable Consumer Feedback
“This is to ensure better compliance related to third-party transactions or vulnerability to fraud,” said Amit Rahane, partner, Forensic & Integrity Services at EY.
“Investors are calling for a thorough investigation into the practices surrounding reputed medical practitioners — specifically, how patients are being referred to hospital chains, whether they are receiving referral incentives, and if so, through which accounts these payments are being routed,” said Rahane. “There are also concerns about the appropriateness of recommended therapies and diagnostic tests, with questions being raised over the potential over-prescription of unnecessary procedures.”
The deeper scrutiny is triggered by an increase in negative consumer feedback.
“Investors are seeking a careful assessment of consumer sentiment—drawing from online reviews and other feedback platforms—as well as a deeper understanding of employee sentiment, including concerns around being overworked, underpaid, long working hours, and overall working conditions,” said Rahane. “These factors are increasingly becoming critical decision-making criteria for private investors when determining where to allocate their capital.”
In the case of pharma companies, aside from compliance, they are looking at marketing/promotion strategies, doctors’ junkets and pharmacovigilance (monitoring safety of drugs).
“That apart, with several drugs going off patent in recent times, investors are keeping an eagle’s eye on generic drug manufacturers taking over these portfolios,” said Sivarama Krishnan, partner & leader, Risk Consulting at PwC India.
Recently, multinational Abbvie Healthcare came under the scanner of the Department of Pharmaceuticals for allegedly unethical marketing practices — spending nearly Rs 2 crore for sponsoring the foreign trips of 30 doctors.
“Regulations on marketing and promotional activities by pharma companies are becoming stricter and the liability of non-compliance is huge. Pharma investors in India – which is attracting heightened interest – are a little wary because of the unorganised nature of prescription inducements and high chances of malpractice,” said Krishnan.
Employee Screening
Alarmed by investors intensifying their scrutiny, hospitals and pharma companies are also commissioning in-depth background screening of employees. Under the scanner are key doctors, nursing and paramedical staff, as well as housekeeping and other blue collar workers, said Ajay Trehan, founder and CEO, AuthBridge. Plant heads at pharma companies, people on shop floors, lab technicians and R&D professionals are also among those who are frequently background-screened. Litigation searches are conducted to see if a doctor was sued in consumer court or is unethically running a private clinic as a side hustle.
The employee background verification company has seen a 70% increase in demand for such verification from pharma and hospital industries combined between FY24 and FY25, said Trehan.
A broader unfavourable perception about Indian manufacturing facilities, the number of FDA defaults and higher litigation risk that can be passed through to the company and a heightened attention to off-balance sheet disclosures are some of the things that are spurring a much closer look by the investors, said Krishnan.
Small Town Proliferation
Experts said greater investor scrutiny is also prompted by an increasing interest among bulge-bracket PE funds in healthcare facilities in non-metro locations.
“Several Tier-2 and -3 towns and cities such as Lucknow, Siliguri, Guwahati, Jaipur, Bhubaneswar and Patna are attracting investor interest and a demand for closer scrutiny in the remote places,” said a PE executive who did not wish to be named.
Some of the treatment areas that PE firms find attractive to park their monies for future value creation, such as IVF, nephrology, mother & childcare and diagnostics, have seen widespread malpractices in recent times. There are several cases of malpractice related to the proliferation of fertility centres and linkage of doctors from large hospitals in organ transplant rackets. All this is leading to greater caution by investors before they bet their money in the sector.
