It has been a tweet that has unleashed a tidal wave of renewed discussion within the Indian diagnostics industry on where it is headed. The tweet was about an advertisement by Tata 1mg labs offering a range of diagnostic tests for just Rs 100 each as against around Rs 600 that many others in the industry charge at the moment. “Interesting. New game starts,” concluded A Velumani in his tweet that hot mid-May Sunday morning. He should know, having attempted a somewhat similar “disruption”, as he likes to call it, albeit in a B2B setting.
Velumani, the founder of Thyrocare, a leading and listed Indian diagnostics major, is known more as the man who created and then exited Thyrocare after divesting his stake for a whopping sum close to Rs 5,000 crore.
A downward dive in prices for medical diagnostic tests is certainly a welcome development for patients. However, the concerns within the industry stem more from the timing. Questions abound around how well equipped are the players to tolerate a turning tide in pricing when most seem to be just about limping back from reliance largely on COVID tests to a yet-to-gather steam routine non-COVID testing revenues. That this happens at a time when newer players are entering the space and existing ones trying to consolidate their presence seems to only add to the woes.
Financial Express online spoke to Velumani on the picture he sees emerging. On where he sees the sector headed with this price war with many players already beginning to respond to this price competition? Where it could all settle? While price cuts augur well for consumers of the diagnostics services, could these be at the expense of quality? What can it all mean for the financials of players in the industry, especially the smaller players? Who can sustain this and how is the Indian diagnostics landscape changing?
Labs To Collection Centres
In his signature style of speaking from personal experience and peppering his narrative with pithy quotes in Hindi, Velumani says, “today, there are 100,000 laboratories in all. These in every five years will lose one zero and finally it will get to 100 players.” However, rest of the players who are unable to sustain will not disappear but will become collection centres, he feels.
Seeing the Indian diagnostics market all set of a replay of the Indian telecom story that saw sharp price cuts, market consolidation and market expansion, he says, “not just the diagnostics market but every sector where there are unorganized players will see a replay of the Indian telecom story.” Today, there are no entry barriers for offering diagnostic services.
Price reduction, he argues, “will increase volumes, expand market this should normally result in higher profitability if it is matched by greater efficiencies in the business model.”
But then, there is need to closely look at the business model in the diagnostics space with some having local testing labs spread across the region while others seek centralized labs for greater efficiency, the latter found more favour with Velumani in his days at Thyrocare.
Need a 7-Eleven & a Walmart
Explaining the approaches to the two major components of diagnostic tests– for acute illness (like cold, cough, fever) and chronic illness (like diabetes, hypertension, cancer, stroke among others), he says, “for acute we need to deliver results faster so you need to have a solution (local lab model) in each city. But for the chronic illness you need to centralised labs. So, you need to have a 7-Eleven (with limited menu but quickly accessible) and also a (more central and bigger) Walmart model.”
“Price war,” he says, “is already happening. Today if the price is (400 to) 600 for lipid profile it is because that is the rate at which all are doing it. However, if someone were to reduce this further, others will follow suit and because they reduce the price their volumes will increase and thereby eventual higher profits.” Price war, he argues, usually results in a huge market and volume expansion. “This was the story we saw unfold in the telecom sector,” he reminds.
But then, if volumes expand and business grows then why are the financials of diagnostics players under pressure? To this, he says, “I charged the least and enjoyed the highest EBITDA in the industry.” In other words, arguing that it is feasible provided the service providers have efficiencies built into the operations, as he says, he managed and ended up enjoying the fruits of it.
But then, on the point about current scene per se, he says, “today, the reasons why this is not getting reflected in the financials of some of the leading players is because there are several other factors also at play such as the transition of business from COVID to non-COVID which has disturbed the normal routine and is taking longer than expected to generate revenues. Then, there is entry by new players with all equally keen to make profits like the bigger players.
Growth & Competition
Then, there is the dimension of market structure and its growth pattern. “While the market is growing at 15 per cent year on year, the competition – number of newer players entering the field (largely smaller players), who may eventually get disrupted — is growing at 25 per cent year on year and this is because there is no entry barrier.” This, he reminds, is apart from the larger size new entrants with many among them attempting to disrupt the market.
Despite the imminent pain, he says, the market expansion trend is currently the case because brand consciousness has not seeped in deep but then over a period of time big players will become dominant – either regionally or nationally – and the market will see consumers opt more for branded players.
Fixing Inefficiencies
Turning to the telecom industry for an example for right pricing and why he sees higher prices more as an off shoot of inefficiencies than of an intent to cheat, he says, “once upon a time MTNL was charging large sums for an STD call, say from Mumbai to Delhi but today it is down to just about one paisa per second, it does not mean MTNL was looting but it is only reflective of an inefficient system.”
Question him on a model where a small laboratory having a pathologist personally viewing all test samples versus a large setting that relies on digital signatures given the large volumes, he counters it by asking, when an ATM dispenses cash how many branch managers verify? None! Similarly, when a well calibrated instrument in a lab is delivering results then in 99 per cent of cases it is perfectly normal and in only 1 per cent of cases is it likely to be manually released and therefore there are lot of myths on this that need to be dispelled. “It all boils down to efficiencies that can be built into the system.” he says.
On the picture in five years: In five years there will be part disruption but for full disruption to happen it will take about 20 years (by that he means hitting the net lower number of just about 100 players), he says.
The move from unorganized to organized will, in his view, happen with the weakest and the smallest being the first to find it hard to sustain. Those with annual turnover of less than Rs 25 lakh annual turnover will be the next to feel the heat. They would be followed by those with less than Rs 1 crore annual turnover. Then, there would be those with less than Rs 10 crore revenues. Finally, those with less than Rs 100 crore annual turnover will not find it easy to compete against players who are several multiple times bigger than them.
Seeing price reductions as something that is bound to happen, he sees it all leading to what he calls an optimal rate of Rs 199 for a thyroid test and just about the same for also lipid profile and for liver profile too. “That is a profit-making rate, what has however been announced at the moment is a market-garnering rate,” he says.
Volume Play
For a test priced at Rs 199, he says, the volumes should be in the region of 100,000 tests a day. “Today, small labs get 10 a day, medium size players get 100 a day, bigger guys get 1000 a day, some of the listed players about 10,000 a day.” Apparently, there is still a long and arduous road ahead while the journey has only just begun.
