Are we witnessing a fundamental paradigm shift in the path-lab and diagnostic business model, which was earlier completely dependent on doctors prescriptions but is now increasingly becoming consumer-centric by evolving a culture of reaching out directly to consumers and offering comprehensive packages at discounted prices
The truth is that branded chains are still striving for this paradigm shift. It may have happened at an advertising and marketing level, wherein the intent of branded chains is to move towards the concept of wellness and to woo healthy people for tests. But, even today, 90% of the business for diagnostic chains is generated through doctors prescriptions. This could change once insurance penetration deepens and medical rights are legally more enforceable here. For instance, in the US market, where the cost of both diagnosis and treatment is borne largely by insurance players and medical liabilities could burn a deep hole in pockets, doctors prescribe on an average 12 tests to be safe. In India, where the patients pay out of pocket, and legal liabilities for medical professionals are limited, doctors on average recommend 3 tests.
We see an explosion of small and diverse experiments in the diagnosis space. Some even entail medical technology players setting up health kiosks for diabetes testing. Are medical technology firms somewhere directly eating into diagnostic chains business
This is an interesting and recent development. Hospitals and medical equipment makers, who are typically also our vendors, are vying for a slice of the diagnostic pie by directly reaching out to consumers. There is a realisation that there is immense latent demand in the Indian market and decent margins to be booked in this largely recession-proof business, if managed well. But there are many nuances to running a path-lab or diagnostic chain, which is best managed by a player for whom this is a core competence. For instance, in this sector, our customer is different from our consumer, a bit like the pharma industry. While the customer is the doctor who writes prescriptions, the consumer is the one who is taking the tests.
Considering there were not many precedents, why did you decide to enter the diagnostic business
Till 2001, my father, Dr Sushil Shah, ran a R9 crore practice of a single path-lab in Mumbai. That was around the time I had come back to India after completing my business management in finance from the US. My father had been toying with the idea of creating a pan-India chain since 1994, but hadnt been able to figure out how he could do it. We didnt hail from a business family. So it was my fathers vision and a bit of my execution skills that made us conceive a corporate diagnostic chain. And this year we are about to post close to R450 crore in annual revenue. In a decade, we have created 100 labs, 650 collection centres, a national presenceoverseas presence in Africa, Middle East and Sri Lankaand while doing all this, we have largely remained debt-free and financed the expansion through internal accruals. And strangely, when people ask me what keeps me awake at night, I tell them the cash reserves I am sitting on. I am constantly thinking how to extract better returns on the surplus cash.
And what is that one key strategy that has worked for you After all, there are pan-Indian diagnostic chains that are struggling to make money.
One key thing is the way we have managed our acquisitions. We must understand that healthcare is a very local subject and pathologists who have built years of reputation in their cities are very instrumental in shaping the course of business in their areas. So, we acquired and partnered with local city-based path-labs and diagnostic chains by typically buying 60-90% in their business. We began this by acquiring Lister in Chennai as we had great relations with the owner. We opted for a co-branding arrangement and grew our footprint in other cities of Tamil Nadu by sticking to Lister Metropolis. Now we have developed similar structure in many cities. For instance, we are Golwilkar Metropolis in Pune, Sanket Metropolis in Ahmedabad, Gokula Metropolis in Bangalore and so on. Through our model, the sense of ownership remains intact for the local partner. More importantly, every decision is taken by joint consultation and if differences arise, it is my local partners word over mine in his area because he is the critical local link in the ecosystem.
Could you run us through the financials of Metropolis along with targets and aspirations of the firm Also, could you indicate the levels of profitability in the business
At a company level, we have been growing at a CAGR of 40%. Profits are sizeable, provided you manage the business well. For the industry, Ebitda is in the range of 20-30%. If the companies are debt free, profits before tax (PBT) would be on similar lines as the Ebitda. As far as turnover goes, Metropolis has been doubling sales on an average of every three years. A target of R1,000 crore by, say, 2017 seems perfectly within reach. But I personally measure the evolution of the company on other indicessuch as number of patients we are serving and valuation. This is because valuation can tell you two storiesthe health of a companys bottomline and the quality of business. In the next four to five years, we are aiming for a valuation of $1 billion.
Are there plans of listing in the future Are you looking to diversify and hunting for more overseas buys
Listing some time in the future is on our minds, but I cannot today answer when. At present, we have a PE stakeholder in Warburg Pincus who replaced ICICI Venture in 2010. So, we will see how things pan out from here. On future plans, I can tell you we are currently scouting for acquisitions in the international marketsEast and West Africa to be specific, considering we are already present in South Africa. Africa is a market that respects Indian people and loves Indian products and brands. This is unlike some other emerging markets, which have a fixation with all things European and American. We also have plans to diversify into related ventures in healthcare. We haven't yet zeroed in on the verticals but are looking at a range of services, which could be day-care, dental, primary healthcare or ophthalmology. But nothing has been finalised yet.
But the biggest challenge for the industry today remains reaching the bottom of the pyramid.
We are experimenting with five to six pilot projects to see how can we can cut costs and offer services in best possible no frills models to the poorest of the poor. It is a formidable challenge, but our goal is to offer services at 50% of current MRPs. It's not easy; we are exploring various permutation and combinations by trying out several ways such as building smaller capacities, using Indian machines and indigenous technologies , keeping the capex low, not spending much on marketing and sales. We are trying it out in smaller centres of Tamil Nadu and Maharashtra among other states, but are yet to arrive at a perfect model that we can be scaled up commercially. And the government must create some form of incentives for us to serve regions that are not otherwise lucrative.
What about other challenges such as over-dependence on imported equipments and technologies and human resource crunch
Absolutely, dependence on medical technology multinationals is close to the tune of 80%. That really does drive up the costs. Having Indian alternatives of comparable quality would have really helped us slash cost of services, especially when we talk of penetrating to the bottom of pyramid. As far as the human resource crunch goes, we have a serious supply side issue, mainly because 90% of our employees are skilled labour. The problem is that the pathologists and technicians fresh out of college have only studied theory and are not job-ready. A fresher in that sense may require a year of trainingon which of course we investto become fit for the jobs. Add to this very high attrition rates in the industry, and retention of talent has emerged as a huge challenge.
So how many of those who leave start their own labs
There are not many such cases. It is mainly industry-level poaching or better prospects. In case our employees express their keenness to start a venture of their own, more often than not, we offer to fund them and they run it as an entrepreneur on a profit sharing basis.
How would you rate the play of ethics in a business like diagnostics
Ethics should be the key word in healthcare, but sadly there is no regulation in the country and entry barriers in this business are so low that a small player could be running a lab right from his kitchen. Even today, branded chains command only 11-12% of the market share of this hugely fragmented sector wherein a total of over 100,000 players are said to be operating across the length and breadth of the country. There are no mandatory standards in quality; even HIV-AIDS could be getting tested through a certain spot test that has a 50% margin of error. So you can well imagine, if you are a false negative, or false positive even, the kind of distress one might have to go through. In the industry, the routine urine test is jokingly referred to as the sink test, implying that the sample could be going straight down the drain and the report fudged. But these references are not funny and indicate the state of affairs. We have been trying to steer a National Accreditation Board for Testing and Calibration Laboratories (NABL) accreditation drive under the auspices of FICCI in small towns. But it is still a challenge to convince the standalone labs in smaller centres on how adopting a voluntary quality accreditation would actually prove good for their business.