Players in fragmented industry hope to grow by offering specialised tests, especially those for predicting diseases
With an expected growth rate of up to 22%, the Indian diagnostics sector is poised to touch R25,000 crore by the end of FY15. However, with an average revenue growth rate of around 18%, some top diagnostic chains in the country are still navigating a sector rife with competition from traditional standalone diagnostic facilities.
The diagnostic sector in India has historically been ruled by mom-and-pop diagnostic centres that dot every corner of the country. Mostly family-run, these standalone centres form the epicentre of the heavily fragmented diagnostics sector in India and pose tough competition for upcoming chains such as SRL Diagnostics, Metropolis Healthcare, Quest Diagnostics, etc, as referrals form a backbone of this industry.
“The sector has changed a lot but continues to be a predominantly unregulated one,” says Ameera Shah, managing director and chief executive of Metropolis Healthcare. “We compete with individual standalone pathology laboratories that, unfortunately, are not always accredited. You have good and bad players and the doctor has to discern.”
However, the trend might be changing with the entry of complex tests that require expensive equipment.
“About 15% of the hospital lab services are outsourced to independent labs,” says Utkarsh Palnitkar partner and head of advisory in global consultancy firm KPMG. “This trend is expected to further increase with hospitals not only outsourcing specific high-end tests, but also complete lab services (within the hospital premises) to organised lab players.”
However, Sanjeev Vashishta, CEO of SRL Diagnostics, feels the future of diagnostics is predictive medicine.
The company offers the service of predictive markers, where a newborn’s blood is analysed for all possible ailments it might be susceptible to. Specialised oncology tests are also on the rise. An example would be the genetic tests for identifying mutation in BRCA-1 and BRCA-2 genes, which indicates high-risk for breast cancer.
“Till a month back, this test was priced at R50,000. We have reduced the costs by 60%,” says Vashishta.
Pathology chains are also investing heavily in research and development in an effort to have an edge over competition.
For example, Thyrocare Technologies’ fiscal 2014 director’s report says the company plans to focus on strengthening its core competencies of immunochemistry and nuclear chemistry — niche services that help identify genetic abnormalities.
“Every month we are coming out with three to five tests that India has not seen,” says SRL’s Vashishta. “The R&D teams will bring down the costs to increase affordability, raise the accuracy of tests using newer platforms and reduce the turnaround time.”
KPMG’S Palnitkar says while the expected growth rate of pathology laboratories in India is 15% to 17%, the number rises to 20% to 22% for the organised sector.
“This is primarily driven by more complex tests (which can only be done by organised players), increasing awareness towards quality amongst patients and increasing existing capacity and expansion of organised players into tier II and III cities,” Palnitkar adds.
But because of the fragmented nature of the market, the chains are exploring the inorganic way of expanding.
“We have a target of opening 20 to 25 laboratories and 150 collection points every year,” says Shah of Metropolis. “We are investing about R30-40 crore in organic growth, besides acquisitions or partnerships that might happen.”
Metropolis is also looking at acquisitions in domestic and international markets, according to Shah. The company, which is debt-free, is funding the expansions through internal accruals. Private equity firm Warburg Pincus has a stake in Metropolis since 2010.
“The expansion planned by the management by exploring areas hitherto untapped continued in the year under consideration through setting up of six new greenfield laboratories,” said the Metropolis director’s report for fiscal 2014.
“Meanwhile, the greenfield laboratories launched in the past two-three years are progressing satisfactorily, with the older ones already reaching a break-even point.” The report continues to add that the decision to accelerate growth by organic expansion, instead of waiting for joint ventures with existing stand-alone players, due to the highly decentralised and unregulated diagnostics market, “has proved to be correct”, and, therefore, the company would continue on the path.
Another established player is Dr Lal Pathlabs, which was established in 1949. The firm posted a total income of R424 crore in fiscal 2013, an increase of 32% over the previous financial year, while net profit jumped 57% to R65 crore. The company has not declared its fiscal 2014 numbers yet.
However, in its FY13 balance sheet, the directors said the company has a presence in almost all major cities and plan to strengthen the brand through joint ventures, besides taking over more established diagnostic centres.