Make in India vs having made it in India: Skanray’s peculiar struggle

Earlier this month, Niti Aayog, the Indian government’s think tank, held a high-level meeting, with the secretaries of all stakeholder ministries—including the Ministry of Health—present. The agenda was simple. Boost the local manufacturing of medical devices—currently a $10 billion market.

India’s medical devices market is the fourth largest in Asia—after Japan, China and South Korea—and is projected to grow to $50 billion by 2025, as per industry estimates. However, while there are over 6,000 types of medical devices available worldwide, barely one-sixth of them are made in India. 

You see, in India, imports rule. About 80-90% of the medical electronics/equipment in the country are imported, according to the industry body Association of Indian Medical Industry (AiMED). 

So import-dependent is the sector that AiMED submitted a seven-point agenda to the Pharmaceuticals Secretary this month in a bid to ‘revive’ it. Among other points, AiMED suggested increasing the import duty to incentivise domestic manufacturing.

One would think this pro-indigenous manufacturing move would be celebrated by the likes of Vishwaprasad Alva, founder of Indian medical device company Skanray Technologies Pvt Ltd. After all, Skanray launched commercially in 2011 with the aim of manufacturing devices such as X-ray machines, ventilators and patient monitors from the ground up in India. Years before “Make In India” became fashionable.

But now, eight years later, the Mysuru-based company is yet to fulfil its potential. The rampant imports have hamstrung Skanray, and Alwa does not mince words when asked about the AiMED’s push for local manufacturing. “I can’t sit with these so-called Indian manufacturers with outdated technology and push outdated tech into the market. But I also don’t want to be seen as somebody who is hostile to Make in India. So it’s a very tricky situation,” he says.

Skanray’s financials over the years do not make for pretty reading. It has been profitable in only two years, and its revenue growth has been erratic—spiking only when Skanray made acquisitions.

The biggest jump came in the year ended March 2014, shortly after the company made multiple acquisitions, most notably that of engineering company Larsen & Toubro’s (L&T) medical technology business in the end of 2012. Skanray’s revenue surged to Rs 115 crore ($16 million) in the year ended March 2014 from a meagre Rs 0.49 crore ($68,200) three years prior. It was a statement of intent. Skanray had acquired a business with Rs 145 crore ($20 million) in revenue—20X its own turnover. “But in terms of valuation, we were 1.5 times higher,” Alva says, looking back.

M&A

In 2016, Skanray acquired Mectron India and Cardia International in Netherlands. Cardia’s acquisition added to their portfolio stressSKANcardi that provided vitals like pacemaker pulse and defibrillation protection. In 2017, it had joint ventures in the US, Mexico and Brazil, distribution agreements in Southeast Asia, Egypt, the Middle East and North Africa region. It also launched a European R&D unit in Madrid, Spain

Today, with 750 employees, the company has more than 100,000 installations of its suite of devices across the world. Yet, its revenue has hardly kept pace. It ended March 2018 with revenue of Rs 109 crore ($15 million), an actual fall of 5.2% since 2014. That, Alva says, was not due to a lack of orders, but rather the challenges in raising debt capital to help fulfil those orders.

But large Indian medical device makers beg to differ.

Sanjeev Marjara, director of R&D at Allengers Medical Systems Ltd, the largest Indian medical device maker by revenue, says, “We don’t see any competition from Skanray anymore in the market. Operationally, they aren’t doing good. Revenue is one indicator, they manage to sell products by lowering prices. But if we talk about profits, there are hardly any.”

The 12-year-old company, despite its reliance on ground-up manufacturing in India, has so far not been able to serve as an example for other smaller companies to follow. With the government’s “Make in India” clarion call, companies like Skanray come under the spotlight for their contribution.

There’s pressure mounting on Skanray—from other players and from the market itself. Intent is one thing, results, another.

Acquire and grow

 Skanray’s choice to tread the make-it-yourself path has seen it acquire businesses over the years to complement and grow its suite of products. The first such, as mentioned above, was that of L&T’s medical device business. But Skanray’s insistence on domestic manufacturing cost it Rs 30-40 crore ($4 million-5.6 million) in revenue the day the acquisition closed, after hiving off 30% of the L&T product portfolio that was made abroad. 

In 2013, Skanray went on to acquire Coimbatore-based Pricol Medical for an undisclosed amount. Pricol, a small company with Rs 4 crore ($557,000) in revenue, according to Tofler, added ventilators to Skanray’s portfolio. This gave the company a “complete intensive care unit (ICU) package” for hospitals. It also acquired Bologna-based CEI, which manufactures X-ray tubes. 

“This acquisition saved us the development time of having to design everything from scratch,” Alva says. Skanray’s X-Ray machines, Alva claims, have one of the world’s lowest radiation leakage levels. 

However, Skanray’s self-sufficiency and standards haven’t translated into stable, profitable growth. Its dealmaking has sparked revenue jumps, but it has posted a profit only in 2015 and 2016 on a standalone basis, according to Tofler. The company posted a loss of Rs 25.38 crore ($3.5 million) in the year ended March 2018, clocking revenue of Rs 108.75 crore ($15 million). 

Alva says Skanray ended March 2019 with Rs 220 crore ($31 million) in revenue. While that indicates just over 100% growth from the previous fiscal, it is less than that of rivals Allengers and Trivitron, which claim to have posted revenues of Rs 350 crore ($49 million) and Rs 540 crore ($75.4 million), respectively. 

Yet, Alva is unfazed. “Every year, we do a lot of adventure. We invest in a lot of technologies. We don’t wait to accumulate cash. Only in the last two years, we couldn’t acquire the companies we planned because of a credit crunch. We’re looking at aggressive expansions. We’re not a startup of the conventional kind.”

Unconventional is right.

Its L&T acquisition is a prime example. At the time, Alva ignored the overtures of venture capitalists, including IDG Ventures, and chose to fund the deal with an investment from Arun Kumar. Kumar is the founder of Bengaluru-based public pharmaceutical company Strides Pharma and a prolific angel investor in his personal capacity. Today, Kumar, sources close to him say, is not quite happy with the way the Skanray investment has turned out for him.

“MNCs really don’t want to manufacture here. It’s a real challenge. Even if I were the head of GE, I would think twice before manufacturing here because supply chain is very tough. Making only for the Indian market is not very lucrative. We also survive because of OEM and exports”

Vishwaprasad Alva, Founder, Skanray

Those were the years when private equity and venture capital money was flowing into the industry and accelerating dealmaking. Fidelity backed Trivitron, went on to acquire a minority stake in Kiran Medical Systems. Opto Circuits acquired US-based Cardiac Science for $54.7 million, while Consure Medical, Forus Health and Perfint Healthcare all got funding.

Despite how it has widened its business, Skanray’s competition have the edge over the company, quite frankly because they’ve no qualms about importing in a sector where it’s cheaper to buy than to make.

Make in India, but how?

Skanray’s obsession with self-sufficiency could become its Achilles Heel. And Alva is keenly aware of the challenges.

“We’re predominantly R&D. Without knowing the challenges of R&D in the country, we spent a lot of money to set up. We’ve invested a lot of money on core technology. Our R&D team in Italy is complementing gaps of Indian R&D. MNCs really don’t want to manufacture here. It’s a real challenge,” he says. 

“Even if I were the head of GE I would think twice before manufacturing here because supply chain is very tough. I got 100 of my old colleagues from various companies. It requires endurance, supply chain, and a support system.”

Praveen Nagpal, COO of Bengaluru-based BPL Medical Technologies, agrees with Alva that the R&D framework in India needs improvement. “Tie-ups with universities and understanding what equipment should be planned by companies operating out of India helps,” he says. Nagpal also says India lacks the support system that a country like China has in terms of export incentives. 

There are other reasons as well for high imports. First, it is cheaper than what it used to be—by around 11%, according to AiMED and market peers. Second, most high-end equipment is not manufactured locally, leaving no choice but to import.

Allengers imports image intensifiers and X-ray tubes, while Skanray develops the two in-house. Yet “we are still making profits in it,” Marjara says. Still, he admits that the low prices—between Rs 2 lakh-7 lakh ($2,800-$9,700) per machine—that Skanray and others charge has made business tough. With revenue of Rs 262 crore ($36.6 million) in the year ended March 2018, Allengers holds 35-40% share of the Indian X-ray machine market.

Raising duties will not stymie imports, argues a senior executive of GE Healthcare. “If we were to have higher import duty, it will get passed on to the customer, and, in turn, the patient. Further increase will kill the industry. If 80% need is met through imports, increasing duty would hamper affordability,” the executive said on the condition of anonymity as they are not authorised to speak to the media.

Allengers sees things differently. The company, which imports components for its X-ray machines, argues that a higher import duty—such as the 20% proposed by Invest India on X-ray machines—would actually benefit it. “After two years, the import duty on the components will also be increased. So all those component manufacturers like those that make X-ray tubes will be forced to come to India,” Marjara says.

Chennai-based Trivitron holds the #2 spot, according to founder GSK Velu. “The market has been tough for every company. We were a trading company till 2010 and started manufacturing only in 2011-12,” he says, adding, 60% of Trivitron’s revenue comes from its international business. And it’s the African and the US markets that Velu is banking on to help Trivitron overtake Allengers.

Skanray and its peers may have different approaches, but they’re working in the same market, alongside the same government, and in that, they all have similar struggles. The biggest one being funds.

Bottleneck

For Skanray, working capital is always tight. “Banks don’t lend easily. The procedural delay with banks is very high. When you are a startup, collateral is always a problem. Banks have outdated business metrics for enhancing the limit, so it is not as easy as doing business in any other country,” he says.

According to Alva, India is the toughest place to do business. “While the Chinese get funds at 1.5%, the US at 2%, Europe at 2%, here banks give funds at 9% to 12%. Cost of PE funds are prohibitive,” he says. “When there is a sudden surge in orders, we can’t back it up.”

He says Skanray was always raising PE funds for inorganic growth, but it is now reliant on PE funds for organic growth as well. “We wanted to achieve organic growth through debts. Now it doesn’t seem to be working out. When I look back, I would be careful in choosing my debt and equity ratio. We should have done funding proportion and method differently,” he laments.

But the problem barely stops at banks. Since Skanray’s investors are small, it’s not able to raise the required funds, says Alva. The last time it raised funds was from Ascent Capital in 2013—an infusion of Rs 100 crore ($13.9 million). “We’ll probably go for Rs 1,000 crore ($139 million) this time,” Alva claims, without going into specifics about who Skanray is in talks with.

One day, Alva dreams, X-ray will contribute to 40-60% of the company’s revenue. “Opportunities are high, so someday X-ray may lead. At present, revenues coming from overseas and domestic markets are almost equal,” he says.

Other companies, albeit smaller than Skanray, which design, develop and manufacture their own medical devices such as Clarity Medical in Chandigarh and XcelLance Medical Technologies in Mumbai are mostly single-product companies. If Skanray’s growth (or the lack thereof) is anything to go by, especially in light of the Indian government’s Make in India initiative, it will augur well for these companies to tread carefully. Maybe even wait it out.

From groceries to smartphones: Flipkart’s hyperlocal deliverance

On 22 August, Amazon gained a yard on its peers in the grocery race in India. It launched Amazon Fresh, a hyperlocal grocery distribution chain which delivers over 5,000 items—including fruits, meat and dairy—within two hours. After rolling out the service in rival Flipkart’s home turf of Bengaluru, Amazon is now closer to cracking the hyperlocal supply chain—the delivery of products within mere hours—something it has struggled with in the past. 

The Indian grocery market is currently a $400-$500 billion market, according to Ankur Pahwa, head of e-commerce and consumer internet at advisory services firm EY. However, says Pahwa, the penetration of e-commerce in this space is just 0.5% at the moment because of the supply chain challenges involved. Despite this, Pahwa predicts the share of online groceries will double by 2021.

With a multi-billion dollar opportunity waiting to be realised, the next wave of growth for e-commerce companies will likely be through your grocery cart. And the battle lines are already drawn. In addition to Amazon, online grocery players like Bigbasket and Grofers, and even food delivery company Swiggy and on-demand delivery service Dunzo are in the fray. All of them backed by deep-pocketed investors. Alibaba for Bigbasket, SoftBank for Grofers, and Naspers and Google backing Swiggy and Dunzo, respectively.

Walmart-owned Flipkart, India’s largest e-commerce firm, is no different. Already, the e-commerce giant has made its ambitions for its groceries arm ‘Supermart’ clear. Flipkart expects grocery to be one of its top categories in the next 3-5 years. To do this, it intends to expand the online-only Supermart stores beyond India’s major metros and into tier-II and -III cities in the coming years, says its grocery head Manish Kumar.

Flipkart started Supermart in 2017 after a short-lived hyperlocal grocery pilot in 2015. The service is now operational in five cities, primarily selling staples, packaged food, snacks and beverages. This, obviously, is a far cry from Amazon’s latest offering. Missing from Flipkart’s arsenal are fresh fruits, vegetables, meat and dairy products. To be a full-stack grocery provider, Flipkart needs to bridge this gap. Fresh food, after all, requires more frequent top-ups compared to, say, rice or pulses, which are typically monthly purchases. 

Flipkart has been working to fix this. Over the last year, it’s been running a fruits and vegetables pilot in Hyderabad. This, according to an executive in its grocery segment, is to figure out the supply chain for perishables as well as understanding the customer demand for perishables.

But Flipkart doesn’t just want to play catch-up. It wants to leapfrog its rivals. The company has a hyperlocal pilot planned for December to see how it can extend its hyperlocal capabilities to deliver regular products from its site within a few hours as well, say two executives at Flipkart. This could be a potential game-changer, turning Flipkart from a laggard to a pioneer. This plan, however, hinges on groceries. 

Flipkart’s plan to begin solving for a hyperlocal supply chain with groceries makes sense for two reasons. Groceries have a higher order frequency and a complex supply chain, making it the toughest to crack. If Flipkart can sort out its hyperlocal capabilities for grocery, it could potentially transpose this onto other categories like electronics or large appliances.

Flipkart’s seriousness can be seen in the person they’ve charged with figuring this out—Sandeep Karwa. According to a longtime executive at the company, Karwa, who has been with the company for over seven years, was critical to Flipkart’s success in its two biggest categories—mobile phones and large appliances. 

But even as Flipkart draws up a masterplan, curiously absent from the picture is its parent company, Walmart. The American retail giant is yet to publicly announce any major plans for Flipkart’s grocery arm, focussing instead on its B2B (business-to-business) cash-and-carry stores.

Walmart, too, has hinted at the importance of kiranas (mom-and-pop stores). In a blog post about last mile delivery on 22 August, JP Suarez, senior VP at Walmart International said that small shops are vital to “get into communities we wouldn’t be able to otherwise.” And Walmart’s reported plans—like a potential $50 million investment in fresh produce supply chain startup NinjaCart and a possible partnership with the Tata Group—bear this out. Hyperlocal capability could be the last piece of the puzzle that merges the two seemingly disparate paths of Walmart and Flipkart.

The grocery struggle

The grocery business has not always been kind to Flipkart. Its first tryst with hyperlocal started in 2015 with a pilot called Nearby. The e-commerce giant teamed up with local kirana stores to deliver fresh produce in some areas of Bangalore. Four months in, the issue-plagued pilot was scrapped. Problems ranged from the quality of produce to fulfilment rate and crucially, inventory management, said an employee who was part of the pilot. 

This is a common misconception. Flipkart never had a play in the grocery category before Supermart. We did a pilot on hyperlocal delivery, learnt from it and built the new service by incorporating those learnings,” wrote Manish Kumar in an emailed response to The Ken. 

Flipkart is hardly the only company to have teething troubles in the grocery space. Even pure-play online grocers like Grofers have had their struggles. To begin with, it is a low-margin business—typically hovering around 10-15%—since last-mile logistics eat into the margins. This is one reason companies are increasingly moving towards private labels, which allows for better control over inventory and cuts out middlemen, boosting margins by up to 30%. 

The next challenge is the specialised supply chain, especially when perishables like fruits and vegetables are involved. These need to be stored and transported in temperature-controlled supply chains or ‘cold chains’ to ensure quality and freshness—an additional investment for e-commerce players. Finally, perishables are time-sensitive, and a strong last mile delivery fleet is essential to complete the hyperlocal machine. 

Flipkart’s 2015 pilot opened its eyes to the challenges with groceries. “One of the first lessons we learned is that the supply chain for grocery is unlike any other, due to specific storage requirements etc.,” Kumar said. Apart from the supply chain, the recurring order rate for grocery is much higher than other categories. For instance, the fruits and vegetables pilot in Hyderabad clocks 100-400 orders a day, accounting for 5-25% of all grocery orders there, the Flipkart executive said. 

Flipkart’s renewed grocery impetus is a marked u-turn from its stance in 2016. After a festival sale that year, then-CEO Binny Bansal took a shot at Amazon saying, “We did not sell ‘churan’ (digestives), ‘hing’ (asafoetida), detergent and products of daily need to make up the numbers. We sold real products like LEDs and smartphones that people love to buy during the festival season.” 

By 2017, however, Flipkart rolled out Supermart. It now sells churan, hing and detergents along with other daily staples. But as of September 2019, Supermart is only in Bangalore, Chennai, Delhi, Hyderabad and Mumbai, despite having plans to expand to 5-6 other major cities by the end of 2018. 

“You cannot build a billion dollar company on just groceries, the idea is to create a hub that keeps them coming back and then upsell other products”

— A Bigbasket executive

Cost, cost, cost

Flipkart’s trepidatious rollout of Supermart is deliberate. “We don’t want to rush into launching new cities every few months, but rather are focused on giving our customers the best in each of the five cities we are operational in, mastering the landscape of each city and then looking at the next step,” Kumar says. 

While Flipkart gives the impression that it is playing the long game, Walmart’s acquisition of the company was also instrumental in making groceries a top priority. In August 2018, roughly three months after the acquisition, Flipkart wanted to expand Supermart to 5-6 cities by the end of the year. That did not materialise thanks to Walmart putting expansion plans on hold to focus on bringing down costs, specifically its cost per shipment, according to two of the Flipkart executives mentioned above. 

Cost per shipment is the amount it takes to deliver an order, including warehousing, logistics, manpower and packaging expenses. The cost per shipment around November 2018 was Rs 400 ($5.58), and the aim was to bring it down to Bigbasket’s cost per shipment of Rs 220-230 ($3.07-3.21), the executive mentioned earlier said. 

Around that time, Flipkart was in talks with fresh meat and seafood startup Licious for a tie-up, Licious’ chief executive Vivek Gupta confirmed. (Read about Licious and the meat market here.)  But after Walmart’s diktat, Flipkart stopped engaging with Licious and focused instead on controlling costs. Licious confirmed that talks with Flipkart ended around the time of the latter’s Big Billion Day sale in 2018. 

This focus has paid off. As of June 2019, Flipkart’s cost per shipment—at least in Chennai and Bengaluru—is now brought down to Rs 210 ($2.93), even lower than Bigbasket, according to the Flipkart grocery executive mentioned above. With the model now partially proven, the company intends to expand once more. Flipkart wants to launch in six new large cities before its flagship Big Billion Day sale in 2020 and is also contemplating launching in its first Tier II city. 

Earlier this year, Flipkart also showed interest in farm-to-fork supermarket chain Namdhari’s Fresh. A tie-up with Licious and a merger with Namdhari’s would have taken care of fresh produce and meat, filling the gaps in its offerings. (We wrote about Flipkart’s plans for Namdhari’s here.) But the deal is not yet done, said three of the Flipkart executives quoted earlier. Flipkart isn’t just looking to plug holes; it intends to plug them at the right price—another sign of Walmart’s emphasis on cost control.

In the meantime, Flipkart intends to launch fruits and vegetables in the coming 2-3 months across the five cities Supermart is already in, the Flipkart executive mentioned above said.

Flipkart’s F&V category in Hyderabad has a limited selection

The hyperlocal hype

If groceries are a complex category to crack, a hyperlocal supply chain also poses its own challenges. Convenience comes at a cost, as Bigbasket found out during its own tryst with the hyperlocal game. 

Delivery in the grocery business can broadly be classified as monthly purchases—like the scheduled deliveries Bigbasket and Supermart offer, which are determined at least a day prior—and unplanned purchases, the spontaneous kind Swiggy and Dunzo cater to. The former makes it easier for companies to control inventory and optimise fleet utilisation. In 2016, Bigbasket started 90-minute deliveries for a delivery fee of Rs 60 ($0.84), higher than its Rs 30 ($0.42) fee for slotted deliveries, but decided to phase out express deliveries altogether from July since the unit economics didn’t work out. 

“Hyperlocal has a fundamental design problem. There is an under-utilisation of fleet, compared to a slot-based delivery where the van is going to run on a specific schedule. There is no idle time in slot-based delivery, so unit economics for hyperlocal is always going to be worse than the predicted or scheduled model,” an executive at Bigbasket said. Can the two—scheduled and spontaneous—co-exist, though? It would be tough, says the Bigbasket executive.  

The demand for convenience, however, has Bigbasket trying to work out a hybrid system. It wants customers to get their orders on the same day, but at a cost that is sustainable for the company, explains the executive. 

Bigbasket is now in talks to combine forces with Dunzo. If this plays out according to plan, Bigbasket will become Dunzo’s grocery backend, while Dunzo would provide a delivery fleet, the executive quoted above said. The executive asked not to be named as the plans are not final yet. 

But this is just one way to solve for hyperlocal grocery delivery. Another is through tie-ups with kiranas. Both Flipkart’s pilot and Dunzo’s model currently follow this. The master plan, though, is through ‘dark stores’—4,000-6,000 square feet warehouses close to the city where inventory is stored and can be delivered quickly. This is the model Flipkart is now attempting, the Flipkart executive who has knowledge of the hyperlocal pilot said. The dark stores will eventually be used to store items across all its categories once this is operationalised, he said.  

But the problems with the hyperlocal model persist even with dark stores, a former executive with companies like Swiggy and Bigbasket said.  The former executive says the average order value for groceries in a slot-based system is between Rs 1,350-1,400 ($18.8-19.5). Hyperlocal delivery, meanwhile, is far lower. The difference in average order value is because hyperlocal caters to need-based items like curd, bread or fruits and vegetables—low-ticket items in an already low-margin game. 

For a food delivery platform like Swiggy, the average food order is Rs 200-250 ($2.8-3.5) and can go up to Rs 350 ($4.9) but not more, while in a hyperlocal grocery model, the bill order is even lesser, around Rs 100-150 ($1.4-2.1), the executive added. So even as Flipkart has brought Supermart’s cost per shipment under control, it will have to go back to the drawing board to rationalise costs for a hyperlocal play.


”The foundation of Flipkart’s grocery strategy is the understanding that it is a challenge that requires problem solving on a city-by-city basis”

— MANISH KUMAR, FLIPKART GROCERY HEAD

Family ties

The task ahead is massive, but Flipkart has already made considerable strides that will bolster its confidence. Sure, grocery is still a small segment for Flipkart—contributing only 1-2% to its overall revenue of Rs 21,658 crore ($3.02 billion) in 2018, the long term executive at Flipkart said. But it has come a long way.

In 2017, Flipkart’s grocery unit clocked 600-700 orders a day at a GMV (gross merchandise value) of about Rs 1 crore ($139,630) a month. For the last five months, however, it has consistently clocked a monthly GMV of around Rs 40-50 crore ($5.6-7 million), the executive mentioned earlier said. Impressive for Flipkart, but miles behind the likes of Bigbasket and Grofers. Bigbasket is targeting an annual GMV of $1 billion by March 2020, while Grofers is reportedly on track to hit Rs 550 crore ($76.8 million) a month in GMV this year. This hasn’t deterred Flipkart. 

While Walmart has been busy with investments for its B2B network, Flipkart has been quietly bolstering its supply chain. There is the potential deal with Namdhari’s Fresh, recent talks to invest $40 million in logistics startup Shadowfax, its investment in another logistics startup, BlackBuck, and locker provider QikPod. And, of course, there’s the expertise of its parent entity to bank on—Walmart’s grocery chain know-how, its cash-and-carry B2B stores, and focus on the kirana network. 

“Walmart has expertise in building strong supply chains and developing vendors in the region. They have shown great success in building these models out globally. While Walmart has been extremely successful in the backend, Flipkart is strong at the front-end of the customer experience. Bringing these synergies together will help make them a strong contender in the field,” EY’s Pahwa says. A Flipkart executive says that Walmart could get more actively involved with Flipkart’s grocery ambitions once Supermart hits a certain scale, a worrying prospect for competitors. With hyperlocal delivery the potential rocket fuel for Flipkart’s grocery ambitions, the alignment of Flipkart and Walmart may be closer than their rivals would like to believe.

MedGenome has a silver bullet for TB diagnostics, but no gun

August saw two major milestones for diagnosing and curing extensively drug-resistant tuberculosis, or XDR TB—the most drug-resistant of TB strains. On 14 August, the US drug regulator approved a new drug—Pretomanid—only the third new antibiotic developed to fight TB in over half a century. It’s a ray of hope for some 2,700 people living with the superbug in India, as per 2018 figures from the Revised National Tuberculosis Control Programme (RNTCP).

Pretomanid is promising, especially since, unlike the last two drugs—Bedaquiline and Delamanid—it is developed by the non-profit TB Alliance rather than a traditional pharma company. As The Ken has reported earlier, pharma companies prefer to control supply. TB Alliance, meanwhile, is all about access. US-based Mylan N.V. will bring Pretomanid to India after November 2020. While this is reason enough to hope that the drug will be available to those in need, the story is not the same for the second breakthrough that also came about in August.

On 8 August, six-year-old Bengaluru-based genomics company MedGenome announced it had developed India’s first Whole Genome Sequencing (WGS)-based test. Called ‘SPIT SEQ’, it provides a detailed analysis of every single mutation present in tuberculosis bacteria directly from a phlegm sample. Sequencing of the bacteria’s DNA can show the entire resistance profile of the patient, allowing doctors to determine every drug they are resistant to in one go.

SPIT SEQ is a marked improvement from the conventional culture growth test. Not only does it test for antibiotic resistance across a wider range of drugs—13 as opposed to 4—but it also brings down diagnosis time. Currently, patients must wait until testing on all possible drugs is done. With a long turnaround diagnosis time, repeated testing leads to multiple changes in the course of treatment. The whole process can take upwards of eight weeks—a criminal delay when time isn’t a luxury. Finally, after much trial and error, doctors settle on the right cocktail of drugs necessary for treatment. ‘SPIT SEQ’ cuts through this, enabling doctors to quickly prescribe the most effective drug to a tuberculosis patient within days.

SPIT SEQ is special because while WGS itself is common the world over, most of it is done using culture. This isn’t ideal because the TB bacteria (mycobacterium tuberculosis) takes upto eight weeks for culture growth. MedGenome, however, uses a microbacterial bait to isolate and extract the TB DNA directly from phlegm samples, speeding up the process while remaining accurate. At present, SPIT SEQ allows for diagnosis in less than 10 days, and has been validated with over 100 samples where it recorded 100% sensitivity and 98.04% specificity when compared with German company Hain Lifescience’s Line Probe Assay.

However, this leap in TB diagnostics has a catch. While conventional tests for screening are available locally, only around six large government reference labs nationwide, can host sequencers. The new test is accurate and fast, but it is not yet accessible by those who need it.

Rising costs

In October, French President Emmanuel Macron will host an international conference in Lyon to raise $14 billion to fight AIDS, tuberculosis and malaria. This would be used to fund public-health systems that can’t keep up with the rising costs of treating these diseases

As per the Global TB report 2017, the estimated incidence of TB in India was approximately 2.8 million, accounting for about a quarter of the world’s TB cases. Under the national TB programme, 46,000 suffering from MDR TB and 2,700 from XDR TB, in 2018, were registered for treatment. If MedGenome is to be of help to diagnose drug resistance in tens of thousands of more TB sufferers like these, it needs to travel beyond a referral lab. 

MedGenome, which is funded by the likes of Sequoia Capital and Emerge Ventures, has begun the process of mainstreaming SPIT SEQ. Already, it has submitted its test results to the Indian Council of Medical Research (ICMR). Next, its tech will have to go through an extensive in-country validation to get the apex research body’s stamp. If successful, and if it gets a World Health Organization (WHO) approval, it would be eligible for incorporation in the national TB programme. Even to go beyond India, it would need a WHO approval. 

India has a strategic plan to tackle TB, with a goal to eradicate the disease by 2025—five years ahead of the world target of 2030 as enshrined in the Sustainable Development Goals. Bringing diagnostic tech like SPIT SEQ closer to the patient could help India meet its goal.

Mass effect

Approval is undoubtedly MedGenome’s most major hurdle today. Without the approval of either ICMR or WHO, SPIT SEQ will remain limited in scope. ICMR approval on its own would be pivotal, given that India has the highest TB burden in the world. As a part of the national TB programme, the tech would effectively be mainstreamed in the country, reaching those who need it most and can afford it the least.

WHO approval, meanwhile, could see the tech adopted in other high TB burden countries. China, India and South Africa have the highest number of TB cases globally and, together with Brazil, account for 46% of all new cases. Without WHO approval, MedGenome’s tech stands little chance of being deployed in any of these countries, regardless of its promise.

Today, the complete battery of tests from a phlegm sample, including culture, costs Rs 17,000 ($237). A SPIT SEQ along with a set of basic tests costs just over two-thirds of that—Rs 12,000 ($168). But MedGenome knows it can and needs to do better. But it will struggle without access to the mass market.

At present, the cost of one test is fixed at Rs 7,500 ($105), with a diagnosis taking around 10 days. However, with an increase in the number of samples, the whole process can be radically optimised. Not only can the cost be brought down by 20% to Rs 6,000 ($84), but diagnosis turnaround time can also be brought down to two or three days as the company needn’t wait to collect a minimum number of samples. Today, MedGenome waits for three days to collect a minimum number of 24 samples.



MedGenome, which has launched the tech commercially on a business-to-business level (B2B), has received an order to process 2,000 samples. Some African countries have also shown an interest, says VL Ramprasad, COO of MedGenome. To cater to this interest, he adds, MedGenome is thinking about doing something locally in these countries since shipping the samples isn’t feasible and could affect the viability of samples.

Role models

Even as SPIT SEQ dreams of the mass market, another Bengaluru-based company has already made considerable progress in this regard. Molbio Diagnostics Pvt Ltd, which has operated in the TB space for 18 years, is celebrating the Government of India’s call to purchase 1,512 of the company’s TrueNat machines. These perform point-of-care molecular tests that can diagnose TB as well as test for resistance to the anti-TB drug rifampicin (part of the first line of TB treatment) in one hour.

TrueNat will replace the first drug resistance test available in India—Cartridge-Based Nucleic Acid Amplification Test (CBNAAT).

CBNAAT is done using a machine called GeneXpert—developed by US-headquartered Cepheid—which has 1,300 installations across India. A large number of these were purchased by India’s national TB programme and are used at the district hospital level. In December 2010, the WHO also recommended that countries incorporate the test into their programmes. CBNAAT, like TrueNat, detects TB and resistance to rifampicin. 

GeneXpert, however, has found itself overtaken by TrueNat as the latter is not just cheaper but faster as well. While GeneXpert costs $17,000 (Rs 12 lakh), TrueNat costs only half of that—Rs 6 lakh ($8381). And while TrueNat spits out results in an hour, GeneXpert takes twice as long. MedGenome is some way off both these tests. While it tests for a greater range of drug resistance, the estimated minimum cost of instrument needed for conducting SPIT SEQ is $19,000 (Rs 13.5 lakh).



MedGenome would do well to learn from TrueNat’s story if it wants to get to the mass market. In addition to just cost, the fact that TrueNat is battery-operated (unlike GeneXpert which needs uninterrupted power supply) and didn’t need air-conditioning to function helped it reach the primary health centre (PHC) level. This is the first point of care for a TB patient. Today, 225 PHCs in the southern Indian state of Andhra Pradesh use TrueNat.

It took MolBio 18 years to reach where it has. “TrueNat’s operational feasibility was first established through a study at 100 microscopy centres across 50 districts in India between 2016 and 2017,” said Chandrasekhar Nair, Molbio’s chief technology officer. It was only in October 2017 that ICMR recommended the substitution of conventional tests like smear microscopy and GeneXpert with TrueNat.

However, despite TrueNat slowly taking over the Indian TB diagnosis market, it still doesn’t have the requisite approvals to capture the global market. Currently, Geneva-based FIND (Foundation for Innovative New Diagnostics), a global health non-profit, is evaluating TrueNat on behalf of the WHO.

Sanjay Sarin, head of FIND India, explained that all new technologies need to go through an extensive in-country validation exercise. Through this, they are assessed on their performance and compared with the existing technologies for sensitivity and specificity. This will essentially certify the technology to enter the WHO supply chain. At present, TrueNat is being tested in four countries—India, Peru, Ethiopia and Papua New Guinea.

If TrueNat passes the WHO test, India would have developed a TB diagnostic test for the world

“TrueNat is undergoing global validation through a multi-country trial which is expected to contribute to WHO policy on TrueNat”

Sanjay Sarin, Head, FIND India

Ramping up

TrueNat’s rise is testament to the importance of access in diagnostics. An expert microbiologist on the TB diagnostics committee of the ICMR, who requested anonymity, says as much. Diagnostics must be available at the point of care. This is what made CBNAAT a big revolution as well—it was available close to the patient, avoiding delays, so one can know if a patient has TB or rifampicin resistance with an easy technology, the expert said.

MedGenome’s technology, however, fails on these parameters. Not only is the tech more expensive and restricted to a handful of large reference labs, but there are also training costs involved to use the equipment and a waiting period to gather enough samples. The importance of SPIT SEQ, however, is becoming more pronounced by the day.

Recently, Indian scientists discovered several mutations in the genes of TB bacteria which are causing drug resistance. The results of this four-year-long research were published in the latest issue of Frontiers in Microbiology, a scientific journal. According to the research, the TB bacteria may soon become resistant even to recent drugs such as Bedaquiline. What’s worse, the diagnostic kits used in India for drug-resistant TB cannot spot this.

This is where WGS, the tech on which SPIT SEQ is based, becomes extremely critical. “We can look at all known mutations on the genome. It’s a step towards understanding transmission. Also, some strains are more virulent than others. WGS gives them a lineage. It gives them a name and a family,” the expert microbiologist said. This allows scientists to track transmission of TB as well, the expert added.

It isn’t that MedGenome is the only WGS-based TB diagnostic tool. Five government reference labs also use WGS to understand drug resistance and track TB transmission. However, SPIT SEQ is a lot faster because it doesn’t rely on TB culture.

Leena  Menghaney, regional head (South Asia) at the Access Campaign at Médecins Sans Frontières (MSF), believes that Next-generation sequencing (NGS) tools (like SPIT SEQ) have great potential in settings with clinical reference labs. Like Mumbai, for example. However, she adds that operational/translation research projects are needed to see how they can be adapted to the needs of the TB programme.

In an ideal scenario, the government would expand access to both conventional tests that may be slow but diagnose drug resistance as well as NGS for rapid diagnoses in high burden settings like Mumbai. This sort of multi-pronged approach would go a long way to meeting India’s target of eliminating TB by 2025.

TB financing

While India has a corpus of $580 million (Rs 4,400 crore) in total for TB care in 2018, this still amounts to a 60% shortfall. India’s actual need for TB care is around $1.38 billion (Rs 10,080 crore). According to reputed international medical journal The Lancet, India should quadruple its TB budget

The government, too, has upped its spending on TB care. According to WHO’s Global Tuberculosis Report 2018, domestic funding for India’s national TB programme quadrupled between 2016 and 2018. It shot from $110 million (Rs 790 crore) in 2016 to $458 million (Rs 3,320 crore) in 2018, accounting for 79% of India’s national TB budget.

Has this translated to increased spending on TB diagnostics though? It has, said an RNTCP official. Out of the Rs 3,000 crore- odd RNTCP budget, around Rs 500 crore is spent on TB diagnostics. This figure has almost doubled from the previous year as the number of installations of GeneXpert machines has increased, said the official. 

The government’s increased expenditure on TB diagnostic machines and kits offers hope that there is a willingness to invest in newer diagnostic technologies like SPIT SEQ. For that to become a reality, though, SPIT SEQ and MedGenome must first jump the approval hurdles that the likes of TrueNat and GeneXpert have so arduously crossed.

Crunch time: Aakash’s $150-million plan to stay relevant in a digital world

Aakash Chaudhry is in a dilemma. His 30-year-old coaching institute needs a revamp. But there’s no roadmap for what he needs to do.

We’re sitting across a giant U-shaped table from Chaudhry, at the headquarters of Aakash Education Services Limited (AESL) in Delhi. As Chaudhry, the company’s chief executive officer, walks us through a presentation on the company’s growth plans, his stoic expression cracks as he says, “It’s such a complex time. I’m taking new decisions everyday without really knowing how they’ll pan out.”

It’s an odd predicament for AESL—one of India’s leading exam coaching chains. But as a digital wave sweeps through the coaching space, many legacy players have been caught unawares. Where decades-old chains like FIITJEE, Allen, and Aakash once stood topmost in the minds of the India’s students, younger, online-only players like Vedantu and Unacademy are now the talk of the town.

Unsurprisingly, one decision features prominently in Chaudhry’s presentation—the intention to take the brick-and-mortar business digital. It’s a bold move, especially when rival coaching firms—Allen, Resonance Eduventures and FIITJEE—are yet to establish a significant digital footprint, despite running “digital learning programmes” for the last few years.

Clearly, Aakash—the man and the institute—are in uncharted waters.

AESL’s shift to digital isn’t just an inevitability. In the larger context of the offline test-prep market, it’s a calculated survival strategy: stay relevant.

And it’s aware that a storm is brewing. Traditional coaching businesses are staring directly in the face of a slowdown. Owners of coaching businesses that The Ken spoke with confirm that enrollments for engineering prep courses are dipping year-on-year, with growth in metros slowing. According to the All India Survey on Higher Education, the number of students enrolled in undergraduate engineering courses has declined by 11% since 2014-15, while those pursuing Master’s have more than halved. The online test prep market, meanwhile, is expected to reach $515 million by 2021, growing at a CAGR of 64%, according to a KPMG and Google report.

With this sort of imperative weighing heavy, Chaudhry is setting lofty goals. “We want digital to be 25% of our total revenue in the next four years,” he says, a marked increase from the 3% it currently stands at. AESL’s revenues for the financial year ending 31st March 2018 stood at Rs 980 crore ($138 million), with a profit of Rs 162 crore ($22 million).Its revenues went up by 34% from a year before, while its profit shot up sharply by 165%.

TV face time

According to industry sources, AESL’s USP is its marketing. ‘Others focus on training and hiring. AESL blows big bucks on TV ads. In fact, in 2017, AESL was ‘knowledge partner’ for the uber popular game show Kaun Banega Crorepati.

While it has offered a digital product in some shape or form since 2012, it was only last year that the company made a conscious effort to take the digital leap. For starters, Aakash Digital—with its three products iTutor, Live and PracTest—was spun-off as a separate entity within AESL and has ramped up hiring across verticals like product design and engineering.

Growing a digital arm from scratch is not just a personnel challenge for AESL. Founded by Chaudhry’s father JC Chaudhry in 1988, AESL grew from 12 students in a single west Delhi classroom to 189 centres across India. According to information shared by the company, a total of 218,379 students enrolled in AESL courses in 2018, up 13% from the previous year. 

AESL has had a good run in India’s hyper-competitive coaching industry. In the old, offline world order, the company knows its competitors inside out. Their turf wars included poaching each other’s teachers and students, undercutting prices whenever they could.

“AESL could become like Hotstar, who really hired the best talent and pumped in the right technology to compete with Netflix. They have great cash flows. They can make it work if they’re serious about it”

Delhi-based edtech investor

But going online brings AESL a completely new set of rivals. Edtech players like Byju’s, Unacademy and Vedantu, all of whom have raised significant war-chests from an indulgent universe of venture capitalists. Solely created for the digital world, these companies don’t have an offline legacy to contend with.

The 30-something Chaudhry believes that his team has the necessary talent, content and, perhaps most importantly, brand name, to match the younger crop, if not beat it. But optimism and ambition aside, AESL’s digital transition will be anything but easy. “AESL doesn’t want to be clubbed with the old, dying coaching businesses. It wants to align with the newer edtech wave. But is the shift to digital urgent enough for them?,” says an edtech investor who asked not to be named.

Indeed, just staying ahead in the $6.6 billion offline coaching market is hard. Over 30 years, AESL has carved out a 5% market share for itself. So, straddling both offline and online will be a Herculean feat to pull off. AESL does have one ace up its sleeve, the involvement of PE firm Blackstone Capital, which bought a 37% stake in the company for $150 million in 2018. Blackstone’s strategic input, could be the difference in whether AESL reincarnates as a consummate brand or leaves behind a legacy of half-measures.

Fight to win

It’s crunch time in the offline coaching world.

Even Pramod Maheshwari, founder of coaching chain Career Point, thinks so. Like AESL, Career Point, too, has digital aspirations. Through e-Career Point, Maheswari hopes to stem the decline he sees coming to offline enrolments. “It isn’t just the digital wave. Engineering isn’t as lucrative a career option anymore. We saw a drop in enrolments this academic year,” he adds.

According to two education experts The Ken spoke to, the average ticket size for a year-long JEE course has stayed flat at Rs 1.5 lakh ($2,107) for the last five years. This is troubling for an industry that, according to insiders, saw a year-on-year growth of around 8-10% in course fees until 2012-13. And if a slowing enrolment rate and stagnating ticket size weren’t enough, there’s also the constant threat of competition, which will only intensify as the tier-1 market plateaus.

In such an environment, one metric counts above all else—results. “Ranks are limited. If one coaching institute doesn’t get them one year, students will flock to another,” says a coaching industry veteran. It’s a fickle market, and expanding to tier-2 and -3 towns is even tougher. “Any location outside the North has been a challenge for us,” admits Chaudhry.

Kerala, for instance, was a really hard geography to crack, where everything from language to preferred class timings was different. The language and culture in this southern Indian state are completely different from AESL’s comfort zone in Delhi. To establish a market fit, Chaudhry claims it had to hire and train local talent, than make do with north Indian tutors.

“We could have multiplied the number of cities we are present in. But availability of good teachers is a real challenge. We have tried to find a solution through our solid faculty training programme”

Partha Haldar, Centre Head at FIITJEE

To carve out new territories for itself, AESL has introduced new programs, changed languages, hired local teachers and created a curriculum for each state-level engineering entrance exam. It has also had to convince tier-2 and -3 audiences that all subjects can be covered well at one institute, and break the pattern of students attending multiple coaching classes after school. New centres don’t come cheap either, costing anywhere between Rs 1.5-2 crore ($210,000-280,000).

But all their best efforts could be in vain if the average course fee of Rs 1.5 lakh ($2,107), is still too expensive for students from smaller towns like Kanpur, Solapur or Bulandshahr. Local IIT graduates often seize this opportunity to offer the same coaching at half the cost of the pan-India brands. Without regulations and cheaper rental costs than metros, the entry barriers are negligible.

Bottom line: expanding offline is a hard task. With its back to the wall, AESL must take the digital bull by its horns.

Digital deus machina

Online expansion allows for the control of factors like quality, discipline and pedagogy. This is catching on with other traditional coaching chains as well. “We have been consciously growing our digital business because we feel that the return on investment is much better. The faculty can be anywhere and we don’t need to invest in fixed assets such as real estate,” says Sujit Bhattacharya, co-founder of test-prep chain CL Educate. 

However, in its short life, AESL’s digital run hasn’t been stellar.

Back at  AESL’s boardroom, Chaudhry charts Aakash Digital’s timeline. In 2012, AESL launched iTutor, a CD-based series of recorded lectures. “We hardly sold 50 in the first year,” admits Chaudhry. Online live tuitions weren’t popular yet, and the Byju’s super successful tablet model was just beginning to catch on.

From CDs, content moved to SD cards. But with more interactive content available online, AESL also had to refine its game. The chalk-and-talk setting of the old videos was gradually replaced with interactive smartboards. As the market moved towards live tuitions, with edtech companies like Vedantu and Unacademy launching test-prep packages, AESL too launched Aakash Live—its online tutoring product—in 2016.

“Growing the classroom model is hard. 75% of enrollments from Aakash Digital come from beyond the metros. From towns and cities where we won’t ever plan to open centres,” says Chaudhry. Its digital products—especially Aakash Live—cater to those students who can’t access a quality coaching institute, because it’s either too expensive or too far. While Chaudhry didn’t go into the details of the price differential between its offline and online products, he mentioned that iTutor would cost 60% of its offline equivalent, with Live cheaper still.

110

The highest rank, so far, to come out of Aakash Digital’s online classes

The use-case is clear. But how does AESL actually acquire these customers?

“We have a really low customer acquisition cost. A large portion of the leads are in-bound. Our branding helps attract customers,” says Chaudhry. AESL spent $13.49 million on branding and marketing in the year ended March 2018. This spend, according to industry sources, is the highest among offline institutes, and represents a nearly 30% jump in two years for AESL.

“In our online business we have positive EBITDA. Because of our brand name, we hardly have any customer acquisition costs,”

—Aakash Chaudhry, Director & CEO, AESL

AESL has the benefit of building its digital play on the strength of its brand. But as the coaching veteran points out, branded curriculum is only half the story. What matters is analysing the learning gap of a student without being there in person. “This is where superior Artificial Intelligence and Machine Learning kicks in,” he adds. Companies like Vedantu, Unacademy and Byju’s have invested tens of millions of dollars developing such backend technology, as The Ken has previously reported. 

Chaudhry claims that AESL has pumped in Rs 30 crore ($4.2 million) last year—both to upgrade its tech and bolster its staff—to achieve its digital mandate. For instance, a large part of Aakash Digital’s product engineering team, including its chief executive officer, come from a mix of e-commerce startups and edtech firms like Unacademy, Snapdeal, Uber and LinkedIn. Out of Aakash Digital’s a 290-member team, 140 recruits work on product and sales, while only 70 teach. The rest comprise of operational staff and senior academicians.

New tricks

Technology like facial recognition—to track if a student is paying attention in an online class—is now one among many hi-tech tools. “It’s easier to make interventions in a physical class. I can pick up on physical clues. Online, I need to develop facial recognition, do pop quizzes and constantly send feedback to the students on their performance,” says Anuj Tiwari.

Most of the team is young, with the on-screen faculty younger than the average AESL tutor, according to Anuj Tiwari, the head of Aakash Digital. This is because younger people are more tech-savvy and easier to train on tech tools than veteran offline tutors.

AESL is keen to get a seat at the edtech table. But even a cursory comparison of Aakash Live with a live class from any of the other online incumbents shows a clear gap in quality and sophistication of the graphics. Efficacy though, doesn’t necessarily lie in optics. According to data shared by the company, one in every four Aakash Live students qualified in the JEE last year. 

Brand and butter

Tiwari isn’t nearly as concerned about the content or design of the product. He is fixated on developing a unique brand identity for Aakash Digital and quickly producing top-ranked students from his online classes. The distinction in format is clear, but branding has been a double-edged sword.

On one hand, the brand name has created a wide funnel for potential leads. Students from remote areas calling in to find out about Aakash coaching are directed to the digital team. It’s also allowed the Aakash Digital team to work like a startup, but with the ample resources of an established institution. 

It’s exactly this kind of interdependence that’s made it difficult to launch Aakash Digital as a separate brand. It’s been difficult to rebuff the latent advantages of the parent brand.

AESL’s online rivals believe the company’s not actually serious about pivoting to tech. “It’s not a cost issue. It’s about focus. Even Byju’s had to de-prioritise its offline centres to build its online brand,” says the founder of an edtech firm, who wished not to be identified. 

200,000 vs 21,000

Aakash Digital is at the foot of its online summit. It aims to have 21,000 enrolments by the end of this year. The number pales in comparison to the number of students who annually join its offline coaching centres

This divided focus is visible when it comes to Chaudhry’s plans. Despite tapping into a new audience with its online products, AESL’s still aiming to grow by 10-15 centres every year. Tiwari, too, reveals that his growth tactics for Aakash Digital also rely on 70-odd AESL franchises across the country. “First comes Live, then iTutor and finally the online test-prep series,” says Tiwari, describing the AESL sales pitch. 

For its edtech rival mentioned above, this massively complicates things. Why would a centre in-charge, who’s tasked with meeting a certain number of target enrolments, bother with pushing a digital product, he asks. Instead, education experts claim this dual identity could end up curtailing the growth of Aakash Digital. 

AESL’s refusal to take its eyes of the offline ball, though, could be the consequence of the company’s research— “Our research tells us that a student will always prefer going to a classroom, if there is a good one within reach,” says Chaudhry.

IPO ready?

It wouldn’t be wrong to assume that a large part of the Blackstone fund raise will go towards these digital growth plans, alongside other expansion efforts. Chaudhry, however, insists the company didn’t need money. “We felt our financials were strong enough to raise money from the public market,” claims Chaudhry.

In an ideal world, this is where an initial public offering (IPO) comes in. But previous education listings have been, to say the least, disastrous. Take CL Educate, for instance, which was the last education company to be listed. Back in 2017, the MBA test prep firm’s IPO priced at Rs 502 ($7.05). It listed at a 20% discount at Rs 398 ($5.59). CL shares currently trade at Rs 80 ($1.12).

Chaudhry, despite his confidence that AESL’s Rs 4,000 crore ($563 million) valuation would’ve been well received by the public market, says not listing was a blessing in disguise. Apart from the cold reception his competitors received from the market, the market crash post the IL&FS debacle further vindicated its choice. “We took this as a blessing that we didn’t go public this year,” says Chaudhry. 

More importantly, though, an IPO would have only led to a funding, while the Blackstone deal also gives Aakash strategic direction. In addition to that, “it’s the access that global PE funds have in terms of technology and talent, that’s going to really help us,” says Chaudhry.

“The Chaudhrys are savvy. They’ve been in market to raise funds because they saw the sector heating up. They saw this as an opportunity to take some money off the table”

PE Investor

With Blackstone in house, an expansion to the diaspora marketing in the middle east and acquisitions for Aakash Digital,  may also be on the cards. AESL’s use for Blackstone is evident, but why did the PE firm choose Aakash? FOMO, says an investment banker, who wished not be identified. His theory is that since Blackstone missed out on the opportunity to participate in Byju’s and Unacademy, it now wants to create a challenger digital brand through Aakash. That may be true. Byju’s has Carlyle, another bulge bracket PE as one of its investors.

For now, AESL has found a comfortable wedge. Before Chaudhry heads back to the public market though, it’s clear that his bet on digital has to pay off. The brand must reinvent itself in a manner that’s elastic enough to contain both its offline legacy and its fledgling online business.

If he can pull this off, Chaudhary would’ve achieved something no one has yet: the first-ever offline-to-online model for the test-prep market in India.

India’s bootless vaccine plans in the face of HLL’s divestment

In Chengalpattu, about 70 km from the southern Indian city of Chennai, is a cluster of buildings spread over 100 acres. These house manufacturing lines, quality-control lines and other units, all set up to manufacture vaccines. This is the Integrated Vaccine Complex (IVC)—the Indian government’s one-stop solution to be self-reliant in producing vaccines to feed its national immunisation programme. A plan into which it has pumped about Rs 600 crore ($84.28 million) so far.

Only, IVC has not produced a single vaccine. In seven years.

Before we get to why, let’s go back over a decade. To January 2008.

Three Indian public sector undertakings (PSUs) were closed after the World Health Organisation questioned the quality of the vaccines produced at these centres. Following a hue and cry over the absence of a national vaccine maker, the government in 2012 announced a plan to set up a state-of-the-art unit in three years. The IVC was to be the nodal centre for supply, research and manufacture, and the supplier of 585 million doses, or three-fourths of the national immunisation programme’s vaccine requirement.

India, in 2017, under its Rs 9,451 crore ($1.44 billion) national immunisation programme, allocated approximately $25 per child for vaccines and operational costs. Children born in India are vaccinated for 12 diseases—tuberculosis, diphtheria, pertussis, tetanus, polio, measles, hepatitis B, diarrhoea, Japanese encephalitis, rubella, pneumonia, and meningitis. Of these, the vaccines the government requires the most are Oral Poliovirus vaccine (130 million doses) and Tetanus vaccine (110 million doses). The private vaccine industry estimates that, on an average, the government has a requirement of 120 million doses of each vaccine based on a birth cohort of 28 million and number of doses. A birth cohort is a group of people born during a particular period or year.

The plan for an IVC made sense then.

Except the government’s choice to carry out this ambitious plan was…a condom-maker with no experience in making vaccines. State-owned HLL Lifecare’s vaccine unit, HLL Biotech Ltd (HBL), was entrusted with constructing the IVC in three years. This despite protests from political and public parties.

Upsetting mood

HLL Lifecare is popular as the maker of MOODS condoms. The Indian government in the past purchased condoms for its social programmes from the company but stopped doing so a few years ago after which the company went into losses

An epidemiologist with Shimla’s State Institute of Health and Family Welfare, Dr Omesh Kumar Bharti, who has worked on anti-rabies vaccines, said, “The IVC was opposed by many people. The government shouldn’t have undermined indigenous manufacturing in PSUs, and yet, it went ahead with it,” he said.

The vaccine PSUs had research, manufacturing capabilities, skill and manpower. HBL has none of these, remarks a scientist with the National Institute of Science, Technology and Development Studies, Council of Scientific and Industrial Research (CSIR-NISTADS). “The IVC that was set up with so much money has been reduced to a packaging firm. If the IVC were to come into a public private partnership, vaccine PSUs will die,” the scientist added.       

The IVC was to make five vaccines to guard against nine diseases—diphtheria (a nose-and-throat infection), pertussis (whooping cough), tetanus, hepatitis B, Hib (a bacterial illness), tuberculosis, measles, rabies, and Japanese encephalitis. 

But, seven years later, it’s still incomplete. Meanwhile, HBL’s losses have risen year-over-year, surging nearly ninefold to Rs 42 crore ($5.9 million) in the year ended March 2018 as expenses piled up. Revenue rose 58% to just under Rs 32 lakh ($45,000). To top that, HBL’s auditor said the losses were understated.

HBL’s only activity of any note, which came last year—and this may sound anticlimactic—has been to act as a consultant to restart the three vaccine PSUs. It also partnered with a private firm—that too only as a tester and seller for two vaccines. All this in a failed bid to win a government tender. 

No shortcuts

There has been little development and only sporadic news since. The latest was a few weeks back when the Prime Minister’s Office asked the health ministry to speed up the separation of HBL from HLL Lifecare. This had less to do with making HBL functional and more with the government hastening a two-year-old plan to shed its stake in HLL Lifecare as part of a wider plan to disinvest in some PSUs.

Divestment targets

The Indian government has a target of raising Rs 1,05,000 crore in FY 20 but has managed to raise only Rs 12,357 crore so far. The PMO directive comes in the wake of this sluggish pace of divestment

For over a decade now, the government’s immunisation programme has been reliant on private players such as Serum Institute of India (the world’s largest vaccine maker), Bharat Biotech, Shantha Biotechnics, Panacea and Biological E—the firm with which HBL partnered. The relationship between the cost-conscious, public health-oriented government and the profit-minded firms has been tenuous to say the least. 

The three PSUs producing essential vaccines such as DPT, BCG (TB vaccine) and TT have resumed operation, but they are hardly making any contribution to the Government’s Universal Immunisation Programme (UIP), with private sector accounting for over 90% of the requirement.

The three restarted PSUs have had little impact, as The Ken has reported. The IVC was to be the white knight, with a government agreement to buy 75% of the vaccines it produced. 

With that in mind, the government took the fate of the IVC in its own hands roughly two years back, when it decided to sell its stake in HLL Lifecare and take full control of HBL. “HBL is going to be demerged from HLL and be a central public service unit. Previously, it was a wholly-owned subsidiary of HLL. Running the IVC is the only purpose of HBL,” additional health secretary Arun Singhal said over the phone. He declined to comment further. A questionnaire sent to Singhal, health secretary Preeti Sudan, and joint secretary Dr Mandeep Kumar Bhandari received no response.

Meanwhile, the delays, including a year’s worth due to what HBL calls “local agitation at the site”, had a cascading effect on other activities and has resulted in cost overruns. HBL’s revised project cost of Rs 710 crore ($100 million) was rejected in 2017. In July 2018, it sent a revised estimate of over Rs 904 crore ($127 million), with a plan to start commercial operations in March 2020, according to HBL’s 2018 financial statement.

HBL was expecting the funds when the government’s second term started in June this year, CEO V Vijayan told The Ken, but it is yet to see even one rupee. “We qualified, validated and kept the facility ready. But the funds didn’t come through. We expect the funds to be released in two more months and the pre-qualification and certification to take four more months,” Vijayan said.

“We are looking at how to take the project forward, and how to strengthen HBL. We will do everything to sustain it”

Ashwini Kumar Choubey, Union Minister of State for Health and Family Welfare, during his August visit to Chennai

Even if the funds do come through, it will be years before production starts in full swing. And that after the government has poured in about Rs 600 crore over seven years into a project whose fate first lies in a disinvestment plan. A project that has only enriched the coffers of private vaccine makers.

Taking shortcuts

These private firms attribute the delay and cost escalations to the government’s misjudgement of time and costs, and a flawed project concept. Its choice for an implementing agency had taken many in the industry by surprise.

A senior executive of Bharat Biotech requesting anonymity said that HBL was chosen because it was the poster boy of Indian PSUs. “In late 90s, when the country was in the clutches of Japanese Encephalitis, HBL was used to procure Chinese vaccines, bypassing all trade channels. That is how it came into the picture,” the executive said.

Now, years later, the HBL’s vaccine complex is not producing anything despite housing four units—bulk vaccine production, formulation, quality control, and utility and engineering services—needed in the manufacturing process. What it lacks is an R&D unit, which is a basic requirement to start production. After R&D come clinical trials that can take five to six years. Then the vaccine needs a nod from the WHO, a pre-qualification, before it enters the global supply chain. All said, a fully-functional producing plant is years away.

V Vijayan, CEO, HLL Biotech Ltd

“The project was conceived almost a decade back and we are constantly updating it in terms of foreign portfolios, techno commercial status, and strategic partnerships. The project is suffering because of the delay. We have escalated the matter to the health minister. Now that the minister is involved, we expect a decision to be taken in two months”

HBL wanted to start production, Vijayan said, with the pentavalent vaccine. This vaccine costs a little under a $1, but is the costliest in the national immunisation programme. It targets five diseases, namely diphtheria, pertussis, tetanus, hepatitis B and Hib.

But the lack of an R&D unit has put those plans on indefinite hold. In that case, how did HBL sell two vaccines—pentavalent and one for Hepatitis B?

It did this via a loan-licensing arrangement with Hyderabad-based Biological E. The private company produced the two vaccines, while all HBL did was test, label and sell them in the retail market in Tamil Nadu and Kerala. A far cry from what the vaccine complex was intended for—to produce from scratch, mainly for the government.

The two companies tied up in July-August last year, when the government called a tender for the pentavalent vaccine. But they lost. Hyderabad-based Indian Immunologicals Ltd won a contract to supply 60% of the requirement, while the rest was shared by four others, including Biological E who had also participated in an individual capacity.

HBL getting the vaccines manufactured at Biological E has irked the private vaccine makers. After all, the government had committed to buying 75% of HBL’s production. It was nothing but a shortcut, a former executive of Serum said on condition of anonymity, as HBL didn’t have the infrastructure and manpower. “So who’s doing the basic activity? Biological E. So what is IVC doing? Testing at their plant and selling it to the Indian government. Is that what the government had desired?” the executive asks. Serum took up the issue officially on behalf of the private players.

However, HBL CEO Vijayan says the tie-up was merely for “market sensitisation.” He did not explain the need for sensitisation of a vaccine made by Biological E and tested and labeled by HBL. Biologicals E said it does not speak to the media, while Indian Immunologicals did not respond to questions.

Eventually though, that tie-up didn’t last either. The partnership was discontinued for want of funds.

Too big to fail?

It’s not as if HBL was standing still. HBL has entered into long-term supply and technology license agreements with vaccine makers, like the one with Institute of Immunology, Zagreb, Croatia, in 2013 for the manufacture of measles vaccine in India. Under the deal, for the first two years, IMZ would supply the bulk of the vaccine to HBL who would formulate and fill them.

It has also been loading up on property, plant and equipment, which totalled Rs 291.2 crore ($41 million) in the year ended March 2018, skyrocketing from Rs 2 crore ($281,000) the previous year. That led to depreciation and related costs jumping to Rs 14 crore ($1.9 million) from Rs 41 lakh ($58,000), propelling a ninefold-rise in HBL’s losses. While long-term borrowing nearly doubled to Rs 244 crore ($34 million), some of the loss came from the financing costs clocked in at Rs 7 crore ($986,000) versus zero in the year ended March 2017.

Moreover, the auditor’s report for the previous year notes that HBL has not accounted for the leasehold land of 100 acres, on which the IVC is built, at its fair value of Rs 10.1 crore ($1.4 million) nor for the sub-leasehold land of 3.38 acres. This, the auditor notes, understated liability by an equivalent amount, capital work-in-progress by nearly Rs 56 lakh ($79,000), and loss by nearly Rs 42 lakh ($59,000), beyond the Rs 42 crore that it reported. Their financial results for the year ended March 2019 are not yet available.


Now, why HBL was buying plant, machinery and other equipment at that rate when it did not have a production license yet is anybody’s guess. The rise in long-term borrowings can perhaps be explained by the lack of government funds, plus it has to keep paying its bills. HBL has 120 employees.

“IVC has been a flawed project from day 1. Making India self-sufficient in vaccine procurement is easier said than done. It will take five years to six years to do that. They will need 1,500-2,000 employees including scientists,” said the former Serum executive. The person does not consider HBL competition for private companies yet. 

As an SPV (special purpose vehicle), HBL will be isolated from the financial risks of its parent company HLL Lifecare which is loss-making. Its legal status as a separate company wholly-owned by the Indian government will make its obligations secure, even if HLL Lifecare was to go belly up.

However, public health activists like Chinu Sreenivasan, co-convener of the All India Drug Action Forum, is batting for the IVC. “Having come this far, the government should not lose interest in the IVC. It should not shut it down like the vaccine PSUs 10 years back. The IVC should be given additional funds,” Sreenivasan said.

The government seems to have no choice but to continue procuring from private vaccine manufacturers as plans for long term self-reliance is stuck in limbo due to the government’s own doing. Public health activists have stopped tracking the status of the project due to inordinate project delays and lack of accountability of government officials in the public domain, especially the media. 

Sunil K Bahl, who retired as the director of Business and Regulatory Affairs at Serum, says that just like Indian hospitals have achieved an important position in the global market, the IVC can also do the same in the global supply chain. After the rigour of trials and research and development. Vijayan, meanwhile, is hesitant to put a timeline on the completion of the project. He’s cautiously optimistic that once funds come through, IVC can launch commercial operations.

Exit in sight, Gates Foundation hopes India will foot the vaccine bill

On 25 September, Indian Prime Minister Narendra Modi was felicitated with the Global Goalkeeper Award by the Bill and Melinda Gates Foundation (BMGF). On the surface, it was recognition for the PM’s Swacch Bharat Abhiyan scheme—a programme that sought to eliminate the practice of open defecation. But there was a lot more riding on this award. It was the culmination of a years-long effort to make an ally of a man seen as critical to BMGF’s continued success in the region.

Instituted by BMGF in 2017, the Global Goals Awards are meant to recognise champions of United Nation General Assembly’s sustainable development goals (SDGs). Enshrined in 2015, these serve as a blueprint for a sustainable future without poverty, hunger and preventable child deaths. For Seattle-based BMGF, which has worked towards preventing child mortality since its inception in 2000, the SDGs are something of a north star.

This sort of focus made India a key proving ground for the Foundation. In fact, with the country accounting for just under 1 million child deaths a year—a fifth of the global child mortality burden—BMGF set up an office in India in 2003, just a few years after the charity’s conception. 

Since entering India, BMGF has also learned of three situations unique to the country. First, unlike countries in, say, Africa, where the Foundation is particularly active, the Indian government can afford to provide a decent standard of public health but doesn’t. For a developing country with a growing GDP, India is one of the lowest per capita spenders on health—with only around 1% of GDP spent on healthcare compared to the global average of 6%.

Big spender

With $47.9 billion in assets, BMGF spends about $5 billion annually across the developed and developing world. It is also the single largest donor to the World Health Organisation


Second, India’s massive population blunts the impact of direct grants. Although BMGF spent more on India—$282.5 million—in 2017 as compared to any other country, the per person spending came to 21 cents (Rs 15). In Uganda, where it spent only $34.9 million, the per person spending was closer to 85 cents (Rs 59).

Lastly, it has understood that it can’t just foster innovation, affordability and access. It needs the Indian government to adopt whatever it sets in motion and take things forward.

All of this made it clear to the Foundation that there was only so far it could go without having the Indian government decidedly onside. So, for the first iteration of the Global Goals Awards, the leadership of BMGF was sold on the idea of Narendra Modi being one of its inaugural awardees. The idea, however, was scrapped after internal protests at the highest level, said a former senior BMGF executive on condition of anonymity. BMGF neither confirmed nor denied this.

This didn’t stop the Foundation from expressing its appreciation for Modi. Bill Gates publicly lauded Modi and his government for everything from the Swachh Bharat campaign to financial inclusion and the Ayushman Bharat healthcare scheme. In lieu of the 2017 award, these statements from the left-leaning Bill Gates himself were part of a conscious decision to gain the Indian government’s support, says another former BMGF executive.

But after the Modi-led BJP won the mandate of the people for a second time running in mid 2019, BMGF realised that it needed to go the extra mile. Modi was here to stay and BMGF had to be close to him. Thus, despite various groups protesting against Modi’s chequered history on human rights, as well as one BMGF employee resigning in protest, the Foundation bit the bullet. Narendra Modi was made part of its latest cohort of awardees. BMGF has also stopped funding one of its long-term partners—Rajiv Gandhi Mahila Vikas Pariyojana (RGMVP), which has ties to the BJP’s arch-rival, the Indian National Congress.

Modi, BMGF is hoping, will help it execute the second part of its philanthropic strategy—the exit.

Exit, stage left

BMGF espouses what The Economist calls philanthrocapitalism—using philanthropy to fix market failures like the lack of purchasing capacity of buyers or small margins for producers. And for the Foundation, time is of the essence. It wants to create the maximum impact in the shortest possible time. With this in mind, BMGF places a great emphasis on vaccines since research funded by the charity shows that vaccines offer the greatest return on investment in terms of health.

Consequently, of the $1.8 billion BMGF spent in 2018 on global development, more than 50% was spent on eradicating polio using vaccines and vaccine delivery overall.

In India, too, the Foundation has worked extensively to fix the vaccine market. In an emailed reply to The Ken, BMGF’s spokesperson wrote that one of the reasons India is important for the foundation is that it is a leading source of solutions to the challenges facing not only its poorest citizens but poor people everywhere. And that vaccines developed by Indian companies constitute 70% of vaccines used in low- and middle-income countries. 

Indeed,  it has ‘fixed’ the supply side of the market by doling out grants to every major vaccine producer. This has even helped make India the leading vaccine supplier to the world. Some of its grantees call BMGF the SoftBank of Indian healthcare, after the Japanese VC giant. However, unlike SoftBank, BMGF isn’t in it for the long haul. Once it establishes a system, it demands an exit so it can move on to new innovations. Bill Gates, after all, calls himself an “impatient optimist”.

This is where India poses a unique problem—BMGF’s 21-cents-per-capita approach isn’t enough to fix demand, i.e, buy vaccines as well. Now, it needs a buyer for a country with the world’s largest birth cohort—some 25.7 million babies each year. Something only the Indian government is capable of. But while India has expanded its immunisation programme to partially include some of the vaccines that were developed through BMGFs grants over the last four years, it still isn’t sold on the Foundation. 

BMGF understands the importance and difficulty of an exit in India only too well. It entered the country at the turn of the century to assist the Indian government curb the spread of HIV.  “It was unprecedented with large prevalence, the government was unprepared and it was expensive to treat. So the Gates foundation jumped on it. The foundation came to India as an HIV funding agency,” said development economist Amir Ullah Khan. Khan was deputy director and policy advisor to the BMGF from 2011 to 2015.

While The Foundation pumped $338 million into the National Aids Control Programme, the effort was only partly successful. The government wasn’t convinced with the programme’s effectiveness and it took over only a part of BMGF’s programme. “We told them you can’t create a huge number of assets and then just leave and expect the government to take over everything,” Sujatha Rao, the head of the National Aids Control Organisation (NACO) at the time, claimed in a 2009 Forbes story

In the same piece, Ashok Alexander, who led BMGFs operations in India, laid out its philosophy: “We are not perpetual funders. We try to be catalytic…In five years we would hope the HIV/AIDS epidemic is contained enough that we will no longer have to be involved.” This is true of the Foundation even today.

Khan believes that this experience taught BMGF to invest in projects with measurable impact and a clear exit strategy. Its efforts to fight polio—which began in 2007 with BMGF earmarking $3 billion to eradicate the virus globally—has seen success in India. The last case in India was detected in 2011.

Changing sides

By this time, says Khan, BMGF had established two sets of strong relationships in India. On one hand, it was the darling of vaccine makers, who benefited from its grants. In 2001, for instance, BMGF gave a large part of the $6.25 million to the largest vaccine manufacturer—Pune’s Serum Institute—to develop an affordable meningitis vaccine for Africa. BMGF even partly funded clinical trials that cost about $37 million. The result was a vaccine sold at $0.50 per dose (Rs 35). By 2015, it saw a market of 50 million doses annually.

BMGF had also developed a strong rapport with the Congress-led Indian government. The foundation even gave a grant to Rajiv Gandhi Charitable Trust (RGCT), which functions primarily in Amethi—until recently a bastion for the Congress’ Gandhi family. 

When the BJP-led government came to power in 2014, however, BMGF no longer commanded the same support, according to the former executive with BMGF quoted above. Initially, the government recognised its importance. In 2015, the Modi-helmed government awarded Bill and Melinda Gates India’s third-highest civilian honour—the Padma Bhushan. 

The government even included the Rubella, Japanese Encephalitis, Rotavirus and Injectable Polio vaccine—all of which had either direct or indirect funding from BMGF—in the government’s immunisation programme in 2015.

But in the following years, this budding relationship has soured.

Shortly after the Modi government announced demonetisation—where it declared 86% of the nation’s currency invalid—Gates addressed the government’s policy think tank, Niti Aayog. While he avoided the topic of demonetisation, a press release claimed he’d endorsed the policy. Gates cleared the air by stating he had no opinion on demonetisation the following day, a move that antagonised the government. 

Shortly after, in March 2017, the government took control of funding for Immunization Technical Support Unit (ITSU) from BMGF-supported Public Health Foundation of India (PHFI). ITSU provides strategy and monitoring advice for the government’s immunisation programme. Just two months later, though, the government prohibited PHFI from receiving foreign funding altogether.

Side effects and ethics

BMGF has been criticised for ignoring the side effects of its vaccine against diarrhoea. The vaccine introduced in India has a high risk of intussusception—a potentially fatal side-effect of rotavirus vaccines, in which the intestine folds into itself, causing abdominal cramps, bloody stools, nausea and vomiting. In addition, a 2009 BMGF-funded clinical trial led to the deaths of seven Indian girls. A panel appointed by the Indian health ministry in 2010 noted a number of shortcomings and alleged ethical lapses in the trial.

According to reports, some of this was motivated by the Swadeshi Jagran Manch (SJM), an affiliate of the Rashtriya Swayamsevak Sangh (RSS), the BJP’s ideological mentor. 

“The news of friction from the government started coming from various programmes over the last three years. People were taken aback and an internal debate began on how do we work with the government? The earlier model of being in the background was not not working. In states like Uttar Pradesh and Bihar, people did not see BMGF, they saw PHFI or Care (both funded by BMGF). Our work model used to be in the background. Now, the question was how do we have a voice?” said the former executive with BMGF.

The award in September was one answer. BMGF also went out of its way to stop funding long-term partner in UP—Rajiv Gandhi Mahila Vikas Pariyojana (RGMVP). The organisation, which is associated with the Congress’ Gandhi family, stopped receiving funds earlier this year, said the former executive. The Ken did not get to question BMGF on this as the organisation backed out of a pre-arranged meeting the day before publishing.

The urgency comes as BMGF realises it is racing against the clock.

Private Party

While BMGF helped vaccine makers fix the supply side of things, on the demand side, it relied on Gavi (Global Alliance for Vaccines and Immunisation). It donated to Gavi, which, in turn, helped create demand in regions where governments cannot or do not want to pay the initial price of vaccines. Up until now, India has relied on Gavi to introduce the new vaccines to the immunisation programme. 

2017, in fact, saw Gavi’s spending in India reach an all-time high even as the government’s finance was just 79%, the lowest in the last five years. Moving forward, the government expects the expenditure on vaccines to increase from Rs 8,764.36 crore ($1.2 billion) in 2018 to Rs 12,364.31 crore ($1.8 billion) in 2022 as it seeks to scale up both rotavirus vaccine and pneumococcal conjugate vaccine from 2018 onward. In the same period, the government’s share of the vaccine burden would have to go from 79% to 97% (see chart) as Gavi’s $500 million support to India is expected to run out by 2021.

Gavi funding has thus far been crucial to India’s vaccine makers, most of whom are BMGF-funded. The assured demand at a particular price, even if it is lower than market price, gives better clarity, explains a senior executive with Serum Institute. 

With India’s Gavi tank running dry, BMGF-funded suppliers of vaccines like Serum Institute and Bharat Biotech need the Indian government to foot the bill for the entire birth cohort. The way BMGF chooses its grantees, however, has left the Indian government less than convinced about buying from BMGF’s chosen few.

There is no specific rule that decides who gets funding from BMGF. Or even what sort of support they receive—equity or a grant or volume guarantee or all of it— said the former BMGF executive quoted earlier. The Foundation’s intent is to lower mortality, but is it always completely fair and entirely right? I’m not sure, says the former executive. 

Rationale for investments

BMGF’s portfolio of grantees in India includes most vaccine makers, think tanks like Public Health Foundation of India, industry bodies like FICCI, large NGOs including Care India and PATH, among several others. It also has another strategic investment fund that offers equity investment, debt and volume guarantees. All told, it has over 60 companies and not-for-profits combined in its portfolio

The lack of a clear, rule-based approach for who gets BMGF funding has led to some distrusting the organisation’s motives. One member of the National Technical Advisory Group for Immunisation, which advises the government on new vaccines, accuses BMGF of a bias towards private sector over their public counterparts. 

The former senior executive who was with BMGF in 2013 says that Gavi did try to negotiate a memorandum of understanding which preferred private sector vaccine manufacturers. However, the Indian government resisted and the clause does not exist in the final partnership document signed between India and Gavi. 

Despite this, the arrangement with Gavi has hurt public vaccine makers. The Ken has reported that three vaccine-producing PSUs were unable to compete in government vaccine tenders since they produce DPT while Gavi endorses the Pentavalent vaccine. Hyderabad-based Biological E—funded by BMGF through Gavi—which produces the pentavalent vaccine, has been selling the vaccine to the government since 2015. An executive with Biological E agreed that a grant from BMGF helped the company compete in government tenders for pentavalent vaccines.

Harish Iyer, senior advisor of scientific programs at BMGF India, insists that the foundation does not discriminate between public and private companies. It simply cares whether they meet the World Health Organisation’s benchmarks for quality and can therefore export vaccines, too. None of the Indian public sector companies have met these benchmarks.

Capitalism over charity

The second and more thorny criticism of BMGF’s funding choices comes from Medecins Sans Frontieres (MSF), one of the largest health charities in the world. MSF is one of the few not-for-profits in global healthcare who have not accepted money from BMGF. MSF is opposed to Bill Gates’ support of patenting vaccines, which results in reduced access for the poor. The Ken has reported on how Indians are unable to access TB medicines—Bedaquiline and Delamanid—since they are patented.

Most recently, MSF challenged the patent granted to Prevnar 13, a Pneumococcal Conjugate vaccine (PCV) developed by pharma major Pfizer to prevent pneumonia in infants and the elderly. Pfizer had received a subsidy from BMGF via Gavi through a unique investment mechanism called advanced market guarantee. This assures Prevnar a market. The Ken has reported how the vaccine became the first patented vaccine to enter the national immunisation programme.

Pneumonia accounts for 25% of deaths of infants. Not only does Prevnar prevent mortality, it also cuts down the use of antibiotics prescribed for subsequent ENT infections. When stacked against the Foundation’s aim of preventing child mortality, the patenting of Prevnar seems counter-productive. BMGF subsidised Big Pharma in the name of fixing the market, says Leena Menghaney, South Asia head of MSF’s access campaign.

According to a consultant with the government, BMGF tried and failed to convince Pfizer to avoid going the patent route in India. Pfizer has received BMGF investment for an injectable contraceptive as well as the market guarantee from Gavi for Prevnar.

BMGF’s Iyer says the Foundation supports tiered pricing. This means that Pfizer is offering it to the government for a lower price than what is available in the market. However, even with that being the case, Prevnar is far and away the most expensive vaccine in the national immunisation programme. It was priced at Rs 198 ($2.8) per dose, while a vaccine like BCG cost just Rs 3.68 (5 cents). Even though Pfizer’s vaccine covered just 3.4% of the birth cohort in 2017, it accounted for $82.8 million of the $149.5 million of Gavi funding used by the government for buying vaccines in 2017.

And while the Gavi funding is currently helping the government shoulder part of this burden, Menghaney wonders what happens when that funding runs out.

Further, as The Ken has reported, while the sales pitch for the PCV says that pneumonia accounts for 25% of infant mortality, most pneumonia cases are caused by a virus PCV does not protect against.

Iyer points out that BMGF is still trying to improve access by funding Serum Institute’s development of a PCV that does not use the patented process developed by Pfizer. In the past, says Iyer, BMGF has invested in the development of rotavirus vaccines by both Bharat Biotech and Serum. These vaccines, which prevent diarrhoea, are now available for about $1.

If Serum’s BMGF-funded search for a Prevnar alternative is successful, the government could have access to a PCV that it can afford even without Gavi’s aid. This has played out in the pentavalent space as well. The government initially used Gavi funding but gradually took the burden on itself as pentavalent vaccine prices dropped by 50% in three years due to competition.

The Ken got in touch with BMGF over a call on the evening of 9 October and emailed it a detailed questionnaire on 11 October. Despite initial assurances of calls and meetings, the Foundation reneged on the same and did not share details of funding in India, its strategy for investments and future plans in the country.

The chequered flag

Even as these questions linger over BMGF, the Foundation is scrambling to charm the Indian government. Convincing the Modi-led government will ultimately determine whether all its efforts over the last decade—which helped grow the Indian vaccine industry from $500 million in 2012 to $1.1 billion in 2018—sustain in the long-term.

Bill Gates, at the 2018 Global Goal Awards, said, “Those two (PCV and rotavirus vaccine] will be the greatest explanation for the drop in child deaths in India than anything that has been done in the last decade.” Will the government’s universal immunisation programme continue to vaccinate infants against pneumonia and diarrhoea even after Gavi funding dries up? If so, BMGF would have managed the impact it set out to achieve.

India lags behind in mortality

India has some of the worst health indicators. Take infant mortality, for instance. Some states in India have infant mortality rates comparable to sub-Saharan African countries. While Madhya Pradesh is at 47 deaths per 1,000 live births, Kenya sees 43, Uganda 48.7, and Ghana is at 50. At the other end of the spectrum, Kerala sees just 10 deaths per every 1,000 live births, similar to the European average of 9

But even as its immunisation mission nears an uncertain end, the Foundation has its sights set on a new challenge. Eliminating tuberculosis (TB) in the country. In an emailed reply to The Ken, BMGF recognised that after immunisation and nutrition, the third area of focus in Indian healthcare is fighting infectious diseases, especially TB. One of the top 10 causes of death worldwide, and India accounted for 27% of total TB deaths in 2017.

The Foundation has partnered with the Indian government to eliminate TB by 2025. In fact, BMGF was involved in writing the National Strategic Plan for Tuberculosis Control 2012–2017, the guiding document for TB control in India. In 2016, the government launched an initiative called “India TB Research and Development Corporation” to develop new tools—drug, diagnostics, and vaccines—for TB. BMGF is one of the initiative’s funders.

BMGF’s focus on fighting TB in India may still be nascent, but it has long championed the fight against the disease. As far back as 2006, BMGF gave a $104 million grant to TB Alliance, a New York-based not-for-profit dedicated to the discovery and development of new, affordable tuberculosis medicines. In 2014, it followed up with another grant to conduct trials for TB Alliance’s breakthrough drug, Pretomanid. It is only the third drug developed in the last 40 years to treat drug-resistant TB.

The Foundation also gave a grant to US-headquartered Cepheid to develop a product that can diagnose drug-resistant TB. Over the last five years, India has begun buying Cepheid’s diagnostic tool GeneXpert, which has 1,300 installations across India. A large number of these were purchased by India’s national TB programme and are used at the district hospital level, bringing TB diagnostics into previously underserved areas.

Pretomanid, meanwhile, is expected to reach India sometime after November 2020. Even as it tries to see its immunisation efforts across the finishing line, the wheels of BMGF’s next Indian campaign are already in motion.

Correction: An earlier version of the story called Padma Bhushan as the highest civilian award. The story has been updated. We regret the error.

What’s in store for the Gates Foundation in India?

Odds are, you and Bill Gates don’t have the same idea of what constitutes charity. No, not just in terms of the obvious discrepancy in your respective means. But in how you define charity. To most of us, it’s about the simple act of giving. Gates, however, believes in philanthrocapitalism. Not so much giving but rather investing in businesses that can have a social impact. Hopefully, a sustainable one. And as a self-described impatient optimist, he wants this change fast.

Little wonder then that the charitable foundation he started along with his wife—the Bill and Melinda Gates Foundation (BMGF)—seeks to create massive impact in the shortest possible time. And with $47.9 billion in assets and about $5 billion annual spending across the developed and developing world, the Foundation’s ability to effect change is immense.

In India, where BMGF has focused the vast majority of its efforts on access to immunisation against preventable disease, its fingerprints are there for all to see. On one side, it has given grants to multiple vaccine makers, allowing them to lower their development costs and even pouring in tens of millions of dollars to fund clinical trials.

BMGF’s portfolio of grantees in India includes most vaccine makers, think tanks like Public Health Foundation of India, industry bodies like FICCI, large NGOs including CARE India and PATH, among several others. It also has another strategic investment fund that offers equity investment, debt and volume guarantees. All told, it has over 60 companies and not-for-profits combined in its strategic investment portfolio.

And even as it enables production, it works to ensure a market for these vaccines. Through Gavi (Global Alliance for Vaccines and Immunisation), BMGF helps the government fund vaccine purchases for its immunisation programme.

It builds supply on one side and ensures demand on the other. A self-sustaining system. One executive with an Indian vaccine maker spoke glowingly of the difference BMGF can make with its investment. “You get a tag of reputation, higher brand value and an image as a credible supplier in the market. In addition, there’s the high demand created by Gavi,” he says.

The system seems flawless. But BMGF is currently fighting against the odds to ensure it keeps chugging along once BMGF inevitably removes itself from the equation.

To do this, the Foundation has been on a charm offensive aimed at Indian Prime Minister Narendra Modi. Just last month, Modi was felicitated by BMGF, with the organisation giving him an award for his campaign to end open defecation in the country. Incidentally, the Foundation passed on giving Modi the same award two years ago, as per former BMGF executives, allegedly on account of his questionable human rights record.

This time around, though, the Foundation had no such qualms. Despite the protests of multiple groups. Stop Genocide, a project of the American human rights group Justice For All, sent a petition with more than 100,000 signatures to BMGF. Three Nobel laureates wrote an open letter to the organisation. A BMGF employee even resigned in protest, later writing in the New York Times about how the organisation’s decision went against its core values.

The reason is simple—as BMGF and Gavi look to withdraw from the Indian vaccine ecosystem, the Seattle-based foundation needs the Indian government to pick up the tab for the vaccine supply BMGF has enabled. But this won’t be so easy. The Indian government is notoriously miserly when it comes to health spends.

Further stacking the deck against BMGF are various question marks that loom over the organisation. There are concerns that the Foundation has hurt public sector vaccine makers. That its support for patenting medicines—thereby lowering access—contradicts its goals. And, in addition to all this, it has a fair few blemishes on its Indian record. 

BMGF has been criticised by Jacob Puliyel, a former member of the National Technical Advisory Group on Immunisation (NTAGI). Puliyel says that the rotavirus vaccine the Foundation introduced in India has a high risk of potentially fatal side-effects. NTAGI is the body that advises the government on new vaccines.

A BMGF-funded trial was also criticised for various ethical lapses. In 2009, BMGF-funded NGO PATH along with the Indian Council for Medical Research conducted clinical trials for a vaccine against human papillomavirus (HPV). In all, seven girls in Andhra Pradesh and Gujarat died from complications arising from the GSK and MSD-made HPV vaccines being tested.

A panel appointed by the Indian health ministry in 2010 noted a number of shortcomings and alleged ethical lapses in the trial. Its report in 2011 noted that the trial on several occasions failed to obtain proper informed consent of participants. It also revealed that trial managers did not set up a mechanism for reporting any adverse effects.

BMGF, however, is hoping that by making an ally out of PM Modi, it can get past these hiccups. And it’s really making an effort. It has allegedly ceased funding one of its long-term partners in UP—Rajiv Gandhi Mahila Vikas Pariyojana (RGMVP). The NGO has ties to the Indian National Congress, the political rival of Modi’s Bharatiya Janata Party.

Will charm get BMGF’s immunisation efforts across the finish line? Read today’s story to know more.

RedDoorz: The unlikely David to OYO’s Goliath in Southeast Asia

If you were looking for the antithesis to OYO, the controversial $10 billion giant, then RedDoorz would be it. Both are budget hotel aggregators with India-born CEOs—Ritesh Agarwal and Amit Saberwal, respectively.

The similarities, however, end there.

While OYO has aggressively expanded across the globe with the backing of VC giant SoftBank’s bottomless pockets, RedDoorz has taken a more measured approach. Founded in 2015, it raised just $25 million across the first four years of its existence, preferring to hone its business model instead. That, too, largely in its home country of Indonesia.

In fact, it wasn’t until earlier this year that RedDoorz truly made a splash, announcing a $45-million Series B round in July. One month later, it followed up with a $70-million Series C. That spree added big name investors like Japanese e-commerce giant Rakuten—which profited handsomely from an investment in ride-hailing major Lyft—newly-minted PE firm Asia Partners and Qiming, a Chinese VC that manages $4 billion across 12 funds and has over 20 unicorns in its portfolio.

Bolstered by this cash infusion, RedDoorz now stands ready to stake its claim to Southeast Asia’s budget hotel market. But while its learnings in Indonesia—the region’s largest economy and the world’s fourth-most populated country—have given the company confidence, it now has an almighty task ahead of it.

As it seeks to expand to build its budget hotel network into a bonafide brand among Southeast Asia’s 600 million-plus populace, it stands smack-dab in the path of OYO, India’s second-highest-valued tech startup. With its seemingly insatiable appetite, OYO views Southeast Asia as a key expansion market. Already, it claims to have over 1,500 hotels on its platform in the region, the same figure that RedDoorz publicises.

The battle between a deep-pocketed and ambitious overseas entrant and a wily local harkens back to the duel between US ride-hailing pioneer Uber and Singapore-based Grab. That story ended in triumph for the home team. Grab took over Uber’s transportation and food businesses, adding the US firm as a shareholder—CEO Dara Khosrowshahi sits on Grab’s board. While Uber has retrenched itself from a market far, far from its home in California, Grab has assumed a virtual ride-hailing monopoly.

Here too, RedDoorz is betting that—like Grab—it can better negotiate the complexities of Southeast Asia’s six largest markets, with their different cultures, languages and laws. By the end of 2020, it’s hoping to have increased its current inventory threefold. Already, claims Saberwal, the company’s numbers are doubling every six months.

However, with the sustainability of OYO’s business model under-fire, the viability of the budget hotel concept itself is under question. It remains unclear whether anyone can build a profitable business, let alone a challenger in a nascent market. There’s also the challenge of maintaining company culture and values as the underdog RedDoorz attempts to scale.

While the battle may not centre around taxis, the budget hotel opportunity is no less impressive. Still in its infancy, revenue from online hotel bookings in Southeast Asia is tipped to grow to $38 billion per year by 2025, according to a report jointly produced by Google, Singapore sovereign fund Temasek and Bain & Company. This is up from an estimated $13.6 billion in 2019. RedDoorz wants to ride this wave to every founder’s ultimate dream—an initial public offering (IPO).

Starting up

Saberwal is nearly old enough to be 25-year-old Agarwal’s father—his undergraduate daughter is just a few years younger than the OYO CEO. In fact, when OYO was officially founded in 2013 (a pivot from Agarwal’s original startup, Oravel), Saberwal was still employed by online travel platform MakeMyTrip (MMT), which had gone public that January.

Based out of Singapore, Saberwal headed the company’s Southeast Asia operations, successfully building out the supply side of MMT’s business in the region. Saberwal, though, couldn’t shake the urge to build something new in a region that he believed had vast potential.

At the end of 2013, on a business trip to Phuket, Saberwal bit the bullet and ended his nine-year stint at MMT. “I’m a builder by nature, MakeMyTrip was a great story and I loved every minute,” Saberwal told The Ken in an interview. “I enjoyed being at a public limited company and expat life for the first year or two, but then began to feel I wasn’t doing enough with my time.”

Saberwal’s next move was to call his friend and former colleague Kunwar Asheesh Saxena, who had left MMT nearly a year earlier. Alongside Saxena, now the CTO of RedDoorz, he brainstormed ideas in the travel sector. Seven months later, the duo launched Commeasure in July 2014. A business-to-business service, the company allowed hotels to take online bookings in July 2014. But while the business raised a $1 million seed round led by Singapore’s Jungle Ventures and grew to 450 hotels, Saberwal felt the growth “wasn’t exciting”.

More fundamentally, there was a lot of hand-holding required. Hotels simply weren’t comfortable using the system despite its considerable benefits. This sowed the seeds of what would eventually become RedDoorz, a business that goes well beyond aggregating bookings to offer standardised features and a common brand for smaller hotels. A la its Indian rival OYO.

RedDoorz CEO Amit Saberwal at a signing ceremony in Vietnam, where the company claims to be the country’s largest hotel brand based on reach

Battlelines drawn

Unlike its Indian rival, however, it took a more conservative approach to growth, focused instead on understanding the space. “Our investor Jungle had done studies on Southeast Asia, showing it was better to focus on city-by-city rather than a six-country focus. So, we went hotel by hotel in [Indonesia’s capital] Jakarta, and built our technology around the problems,” Saberwal recalls.

He did have his doubts over this conservative approach though. Especially in 2016, when competition peaked with players like Rocket Internet-backed Zen Rooms and OYO prowling the region. “I was thinking something was wrong,” he said. “We hadn’t figured out how to do business in Jakarta, let alone the rest of Indonesia or Southeast Asia.”

Still, RedDoorz stayed true to its ethos, refining its business model. Today its business is comprised of a combination of revenue-share models to suit different types of hotel owners and operators. That is typically full-lease, with revenue-share options including a split of gross revenue, or specific sharing of revenue once it passes a minimum threshold.

Saberwal said he keeps just 70% of the business model “set” because flexibility of the remainder is “what makes the difference.”

“The market isn’t a one-size fits all, that’s what makes it defensible and sticky,” he said. “Owners are different, owner psyche is different and customers are different. I can’t make a business on the dead bodies of my suppliers.”

With this degree of optionality baked into its model, the company began expanding to Singapore, Vietnam and the Philippines.

Today, RedDoorz is up there with the market leaders. The company claims to have more than 1,500 hotels on its platform, ahead of rival Singapore and Philippines-based Zen Rooms—which claims “over 1,000”—and on par with OYO, which also says it has over 1,500.

RedDoorz has focused on Indonesia, which has been its primary market since its inception. The country is the most attractive in Southeast Asia for internet companies, which are drawn by its 260-million population, and that makes for plenty of competition.

Just weeks after RedDoorz announced its Series C funding round, OYO one-upped it by stating that it would invest $100 million into the country. That’s part of a wider strategy to deploy $200 million in Southeast Asia over the next two years, another hostile announcement.

The ‘my number is bigger than yours’ tactic is increasingly common for SoftBank-backed companies. This year has seen Grab and Gojek embark on a game of one-upmanship waged through press releases announcing funding rounds and new investors. This peaked with SoftBank increasing Grab’s Series H round to $6.5 billion by pumping in an additional $2 billion. There have also been country-specific pledges. SoftBank has promised to invest $2 billion into infrastructure in Indonesia via Grab, while Grab itself announced that it will deploy $500 million to bolster its business in Vietnam.

But OYO isn’t the only competitor to worry about. Zen Rooms, also founded in 2015, is another. Zen Rooms ran into financial trouble last year after a funding round from an undisclosed Chinese investor fell through at the last minute, a source with knowledge of events told The Ken. Consequently, the company downsized its business in Thailand—having already exited several markets outside Southeast Asia. It eventually found a saviour in Yanolja, a South Korean hospitality company valued at $1 billion.

Initially, Yanolja invested $15 million into Zen Rooms in July 2018 in exchange for an undisclosed “strategic non-controlling stake” with the option to buy 100% of the business. Just this month—October 2019—it followed up with a second undisclosed investment. There’s no word on when or whether a full buyout will happen. Zen Rooms said Yanolja is now its largest shareholder.

Yanolja—which recently raised $180 million from Singapore’s GIC and Booking Holdings in June—is betting that Zen Rooms can help it tap both the growing market of Southeast Asia and the strong appetite to travel to the region among its Korean users.

The Korean force behind Zen Rooms

A $1 billion-valued company, Yanolja has reshaped the concept of ‘love hotels’ in Korea. Founded by former hotel worker Lee Su-jin, it has offered a newer (and cleaner) version of short-stay hotels by making them popular with business travelers, tourists and families using OYO-like tactics such as standardised services, app-based booking and self-service with a sprinkling of robotics. (Image via Zen Rooms)

With its Korean benefactor driving it forward, Zen Rooms has gone from struggling to a position of strength with a focus on the Philippines rather than more hotly-contested Indonesia.

“Yanolja has decided to double down by reinvesting exactly one year after their initial investment,” Zen Rooms co-founder and managing director Nathan Boublil told The Ken via email.

He claims the company has quadrupled its revenues since Yanolja’s first investment. The next phase will see Zen Rooms tap the Korean firm and Booking Holdings, which operates Booking.com, Agoda and others, for technology and distribution opportunities.

Aiming high

Flush with cash from its two recently-concluded funding rounds, Saberwal is finally getting to the serious building stage. But this doesn’t mean an OYO style blitzkrieg though—RedDoorz is eyeing sustainable growth.

The next step for the company is an expansion into Thailand, which will become its fifth Southeast Asian market after Indonesia, Singapore, Philippines and Vietnam. The company is in the process of hiring a lead to handle expansion into the country.

RedDoorz has increased its headcount to 1,200—including tech teams in the north Indian city of Noida and (soon) Saigon in Vietnam. By the end of 2020, RedDoorz is looking to triple its inventory—from the present 1,500 properties to 4,500. Complemented, of course, by significant growth on the customer side.

“Our numbers are doubling every six months,” he said. “If we can grow at 2.5X in 2020, don’t do anything stupid, and just focus on the busines and raise capital at right time, there’s a chance to do 2.5-3 million occupied nights per month by December 2020.” That forecast represents a major boost from the one million milestone that he projects will happen in December 2019. If it achieves this, the company has forecast annualised sales of $500 million by the end of 2020. This $500 million, though, is total revenue across the platform as a whole, not take-home money for RedDoorz.

“By any metric, we can be a billion-dollar company,” Saberwal says. “It’s not pie in the sky now as far as I’m concerned.”

The competitive landscape is unclear on that front. While OYO is spreading through the region, it is unclear how well it has executed. In Indonesia, the company owes unpaid fees to a multitude of third-party service providers, two sources with knowledge of the situation told The Ken. There’s little doubt that the company can afford to pay these vendors back—aside from the aforementioned regional investment pledges, OYO is in talks to raise $1.5 billion, which would take its total funds raised past $3 billion.

With its expansion in the region hitting hurdles, OYO announced in August that Mandar Vaidya, a 15-year veteran of McKinsey, would head its Southeast Asia and Middle East operations. The firm is keen to dismiss any suggestion that there could be a repeat of China, where OYO is reported to have made layoffs due to “unethical practices” despite initial claims of rapid success. OYO has denied the allegations of layoffs in China.

While OYO’s issues in the region are cause for hope for RedDoorz, investors are still treading with caution. “We thought they were the best performing in that sector, particularly in terms of reducing dependence on OTAs (online travel agencies) for customers. But there was still a lot of noise and competition in the region, most notably from OYO,” a prominent investor who passed on investing in RedDoorz told The Ken on condition of anonymity.

According to one VC professional, uncertainty around the viability of RedDoorz business model put their firm off a potential deal. Despite that, the person said that RedDoorz now “has a good window of opportunity” given OYO’s broad focus on global markets.

But there’s also a wider concern around the more fundamentals elements of the business.

“By combining single hotels under one brand and using one technology stack, the budget hotel network definitely creates synergies of scale. These are hotels that would no way have mobile solution or new types of POS individually,” said Bart Bellers, CEO of Singapore-based travel, tourism and hospitality fund Xpdite Capital Partners.

“But basically they are building their own hotel, and ultimately they are stuck with long term leases. What if there is a downturn in the tourism industry? That’s a big big risk.

“Sometimes it has me wondering if this has similar high risks as the WeWork model,” Bellers said in an interview. “Scalable? Yes. Sustainable? To be seen.”

By the wayside

Tinggal, a rival in Indonesia that previously raised $1 million from one-time OYO India competitor Wudstay, is no longer around. Nida Rooms is another that was forced to make cutbacks after struggling with financial problems. Founded by ex-SpiceJet executive Kaneswaran Avili, it downed shutters despite raising some $12.2 million, according to data from company tracker Crunchbase. (Image via Mike Rasching/Unsplash)

An IPO for RedDoorz

Those concerns didn’t weigh down Asia Partners, a new growth stage fund that announced a $70 million first close of its maiden fund in June. The firm led the RedDoorz Series C deal in what was the first public investment for its fund, which is believed to be targeting a final close of up to $300 million.

Growth funds are a new trend in Southeast Asia venture capital, and this new kid on the block has serious credibility. Asia Partners is founded by ex-Sea President Nick Nash, the man widely credited for taking the Singapore-based gaming and e-commerce company public in 2017, and Oliver Rippel, whose past includes leading Nasper’s business-to-consumer and online services businesses. Rippel also served as Nasper’s representative on the board of Indian e-commerce Flipkart before it was sold to Walmart in an historic $17 billion deal.

It is early days for the firm, but its involvement–which includes a seat on the board—could give RedDoorz some crucial experience as it moves towards a potential IPO, which Saberwal said could happen as soon as 2022.

Those three letters weren’t commonly uttered alongside startups in Southeast Asia. Sea’s listing on the New York Stock Exchange—under Nash’s leadership—is very much the exception to the rule. Today, though, the region’s other billion-dollar companies like Indonesian duo Gojek (ride-hailing) and Tokopedia (e-commerce) are also eyeing public listings.

It may seem premature for RedDoorz to harbour such lofty goals, but Saberwal is typically matter-of-fact with his response. “I’m not here to build a $100 billion business,” he said. “I want to build a $2-3 billion company with decent returns for our investors that’s known across its region and is the biggest in Southeast Asia.

“We 49-year-olds make companies with good returns, but maybe we won’t change the world,” he added with a laugh.

RedDoorz hopes to draw inspiration from Sea’s 2017 IPO

It’s tough to predict startups reaching the IPO stage—just ask SoftBank, which has bet billions on WeWork and other similarly controversial companies. RedDoorz and others in Southeast Asia, however, have prevailing winds in their favour.

“For the first time, companies in Southeast Asia are able to focus on everything the region can offer,” Asia Partners’ Rippel told The Ken. “A decade ago, it was ‘This company is interesting but it is only the market leader in, for example, the Philippines or Thailand.’”

“Founders also didn’t have the ambition or perhaps skills to go regional. But that playbook has been written and now we see more entrepreneurs executing this playbook,” Rippel added. “Today, it’s common to see a company successfully penetrate at least 3-4 countries across the region. That’s exactly what RedDoorz has done.”

The RedDoorz-OYO clash might be a notable parallel to the Uber-Grab battle.

Uber’s retreat from Southeast Asia is widely acknowledged to be down to cutting losses ahead of its IPO this year, while Grab had just one focus—Southeast Asia.

Hitching a lift

OYO is yet to tap its relationship with Grab, the $14 billion company that is Southeast Asia’s top ride-railing service and an investor in OYO. Grab has steadily added travel options within its app as it evolves from transport app to super app. Adding OYO bookings to that selection would make sense for both companies.

OYO, meanwhile, has many distractions. Not only is it going after expansion in every continent bar Africa (at least for now) but its core vision of budget hotels is being stretched to cover businesses as diverse as cloud kitchens, coffee chains, event management, co-working and more. RedDoorz, however, is laser-focused on cracking Southeast Asia. According to Saberwal, Qiming, which has seen OYO’s entry and alleged stumbles in the Chinese market up close, is confident that OYO isn’t something to worry about.

And, just like Grab had SoftBank in its corner, RedDoorz has strong backers like Asia Partners and Qiming on its side. None of this, of course, guarantees that RedDoorz will manage a Grab-like victory. What it does guarantee, though, is a proper fight.

Unlike the ride-hailing war, all three of the key fighters agree the budget hotel war is not necessarily a winner-takes-all battle. So the outcome of their battle may decide the pecking order of this hotelier sweepstakes but, if the model is proven to be sustainable, then the Southeast Asian market may yet prove to be big enough for RedDoorz, OYO and Zen Rooms each to thrive.

Clarification: This article has been updated to reflect that RedDoorz is targeting 2.5-3 million occupied nights per month, not cumulatively to date. We regret the error.

Headline image via Pexels/Pixabay