What awaits the diagnostics sector in 2023? | The Financial Express

What awaits the diagnostics sector in 2023?

While COVID exposed the shortcomings in our diagnostic infrastructure, which in-turn brought in a lot of rhetoric for investments in this space,

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Labs with a higher workload would have much lower cost per test and can be much more competitive in their pricing. (File)

By Pranat Bhadani

The diagnostic industry has always been one with low barriers to entry. It is one of the biggest reasons why the market is still fragmented – with the unorganized players having 80%+ market share. To predict the way forward, let us go to the first principles to understand the macros of the business – What does it take to set-up and run a lab successfully?

Setting up a lab – Almost every manufacturer/distributor offers their devices at zero capex – where they bear the cost of the device and charge the lab owner only on the reagents – also known as a reagent rental model. The reagent pricing is a function of the volumes. So, labs with a higher workload would have much lower cost per test and can be much more competitive in their pricing. In-spite of a significant pricing (supply-side) advantage, then why have the large players not been able to corner most of the market share by now? To answer that, we would need to understand the demand cycle.

(Price inelasticity of) Demand – 90%+ of the market is still doctor/trust driven. Often in these cases the patient/customer doesn’t shop around for pricing. They rely on the doctor’s recommendations to choose their lab. It is this demand side behavior, which has resulted in the limited market share gains for the efficient operators and has allowed the small/inefficient players to survive (and thrive) – based on their doctor relationships. This also explains why even the established laboratory networks have found it difficult to expand organically and have often resorted to acquiring the regionally dominant player, when they decided to expand in that region – Dr. Lal acquires Suburban for entry into West; Metropolis acquires HiTech for entry into South.

While COVID exposed the shortcomings in our diagnostic infrastructure, which in-turn brought in a lot of rhetoric for investments in this space, the last year was when the euphoria died down. Looking beyond the hype and lull phases-following are the key changes expected in coming months:

Accelerated formalization of the industry – From incumbents (Dr. Lal, SRL, Metropolis, etc.) planning to enter into Tier 2/3 markets leveraging their brand, to pharma giants (Mankind, Lupin, etc.) setting up diagnostic labs and utilizing their on-ground sales

(Medical Representatives) team, to emerging startups (Redcliffe, Orange Health, etc.) building on their convenience proposition – there seems to be an unprecedented rate of setting up new laboratory infrastructure.

State governments being hands-off – The success of the various PPP (Public-Private Partnership) models in delivering quality healthcare at affordable prices has created a playbook for other states to outsource their laboratory infrastructure set-up and management to dominant private companies. Counter-intuitively, the government business is one where the moat for dominant companies (like Krsnaa Diagnostics) is the strongest, based entirely on their economies of scale – given that demand is no longer dependent on doctor relationships and is driven through the humongous crowds visiting the government hospital set-up every day.

Goldilocks phase for device manufacturers and distributors – The boost to both the public and the private healthcare infrastructure, will ensure a golden opportunity for medtech companies and their distributors for the coming few years.

Subdued M&A activity – Large diagnostic businesses are generally profitable, yet in the past, promoters who have sold their businesses have done so because of lucrative valuations offered by their acquirers. Given that the top diagnostic companies have themselves suffered an almost 50% derating in their valuations over the last 12 months – they may no longer be in a position to offer compelling valuations to companies that they would have wished to acquire. Even if these valuations are the new normal, it will take some time for the companies to change the benchmark of their valuation expectations. Hence, do not expect major consolidation to happen in the coming few months.

Distress sales will continue to happen, but they are often done just on the value of the assets alone and won’t contribute meaningfully to either party.

At-home services move from a “good-to-have” feature to a “must-have” one: Convenience services like home sample collection for diagnostic tests are getting more mainstream. During COVID, when the entire nation was forced to rely on the humble phlebotomist to visit their homes, they realized how much easier this was then navigating the traffic to visit a lab, just to give a blood/urine sample. This change is gradual yet irreversible! In all of the above, the obvious winner is going to be the customer – with increased access to quality diagnostics at affordable prices!

(The author is a President, Business Growth, SigTuple. Views expressed are personal and do not reflect the official position or policy of the FinancialExpress.com.)

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First published on: 07-02-2023 at 10:00 IST