At the peak of the Covid-19 pandemic, the one thing that had become ubiquitous was the RT-PCR test. Scenes of swabs being thrust into the nose and throat had practically become part of regular life. What that also did was provide a fillip to the financials of diagnostic companies that were doing the tests. The possibility of a new revenue and profit stream also encouraged a herd of other entities to jump into the diagnostics fray. But now, as the pandemic wanes and RT-PCR testing peters to a trickle, the past few quarters have seen profits dip for leading diagnostic players. For example, market leader Dr Lal PathLabs, headquartered in New Delhi, recorded a 26.5 per cent dip in consolidated net profit to Rs 61.3 crore in Q4FY22 from Rs 83.4 crore in Q4FY21. Likewise, Mumbai-headquartered Metropolis Healthcare reported a 34.8 per cent decline in consolidated net profit at Rs 39.99 crore in Q4FY22 compared to Rs 61.35 crore in Q4FY21.
According to a report by Antique Stock Broking, margins reported during FY21 at the peak of Covid-19 will not be repeated anytime soon, plus there is other impact, too. “We expect negative operating leverage and return ratios such as return on capital employed (ROCE) to remain under check at 25-26 per cent for both [Dr Lal and Metropolis], a decline in comparison to the pre-pandemic range of around 33 per cent,” says the report released in September. Another report from Credit Suisse, penned by research analysts Sayantan Maji and Anubhav Aggarwal, says that high competitive intensity could halve industry ROCE. The report says: “We expect ROCE to settle down to around 20-25 per cent by FY27E, implying Ebitda margin of around 20 per cent. Ebitda margin of Dr Lal and Metropolis has already declined by 300 bps (vs pre-Covid-19) to 23 per cent, but we expect it to steadily contract by a further 300-400 bps.”
Top these challenges with rising competition from new entrants in the diagnostic market—pharmaceutical companies, online aggregators, hospital chains, large conglomerates—and pure-play diagnostic companies’ struggle to sustain growth has become a harsh reality.
The drawing board
Since the Covid-19 pandemic struck India, the fragmented diagnostics industry has witnessed very clear signs of consolidation. According to market analysts, organised players hold about 15 per cent of the Rs 67,500-crore diagnostics industry, which is growing at 8-9 per cent annually. The opportunity for growth through M&As is clear and visible. For instance, Dr Lal PathLabs acquired Mumbai-based Suburban Diagnostics in October 2021 for Rs 925 crore. It also plans to expand into south India with a reference laboratory in Bengaluru, which is a major market for rival Metropolis Healthcare. In the same year, Metropolis purchased Chennai-based Dr Ganesan’s Hitech Diagnostic Centre and its subsidiary, Bengaluru-based Centralab Healthcare Services for Rs 636 crore. Gurugram-headquartered SRL Diagnostics completed the DDRC-SRL joint venture acquisition in April 2021, enabling it to consolidate its market share in Kerala and strengthen its B2C presence.
The push for M&A deals segues into the larger plan of diagnostics companies to focus on new segments and tap new geographies. Dr Lal PathLabs is focussing on Tier II and Tier III towns especially in north and east India where it is already strong, and on expanding footprint in metros and Tier I towns in south and west India, where its rivals rule the roost. As Covid-19 testing is no more a profitable area, Dr Lal PathLabs aims to focus on wellness packages and preventive health check-up packages, among other things.
“We are identifying and focussing on clinical segments like allergy, auto immune disorders, etc.,” says Dr Om Manchanda, Managing Director of Dr Lal PathLabs. “We also want to strengthen online retail. India is a highly underpenetrated market. Post-Covid-19, diagnostics’ penetration will grow as the practice of medicine becomes more evidence-based, especially in Tier II and Tier III towns.”
Similarly, for SRL Diagnostics, major growth drivers include expanding its test menu to offer more diagnostic solutions, and expanding its network to acquire market share and new customers. For instance, in FY22, SRL added more than 1,000 centres to its network and in Q1FY23, it has added about 250 more. “These new touch points are part of our strategic growth plan. We are investing in our capabilities to offer services through digital touch points as well as reinforcing our home collection units to fulfil changing customer needs post-pandemic,” says Anand K., CEO of SRL Diagnostics.
For SRL, specialised test offerings like genomics diagnostic (analysis of genes to detect genetic disorders) solutions, proteomics (analysis of proteins and their expressions to diagnose respiratory diseases), and metabolomics (analysis of small molecules and their interactions with genes to detect type 1 diabetes and cancer) will drive the science side of the business. In FY22, the chain added close to 100 tests with a special focus on genomics in cancer, reproductive disorders, rare diseases and inherited disorders.
“This year, we are also working on co-marketing initiatives, clinical trial studies, and contract validation for kit manufacturers and technology providers, and co-development of new biomarkers (biological indicators of blood pressure, sugar or cholesterol level). All of these are new growth avenues,” says Anand.
In addition, SRL, which has prior experience in delivering large PPP projects in collaboration with governments of Himachal Pradesh, Uttar Pradesh and Bihar in providing diagnostic services at subsidised rates, is looking for more such opportunities.
Likewise, Metropolis Healthcare aims to nurture and expand the scope for oncology, pre-natal testing, transplant immunology, and infectious and chronic diseases. “We will continue to build our capabilities in different areas and will look out for more opportunities to offer ‘affordable’ testing to patients as we penetrate further into Tier II and Tier III cities,” says Ameera Shah, Promoter & Managing Director of Metropolis Healthcare. Shah is mindful that in the past two to three years, the industry has gone through several structural changes and consumer behaviour towards health has also changed. “People have become more health conscious and have proactively started investing in heath packages to keep a check on their health. Therefore, our goal will now be to focus on 100 per cent of the population, which includes chronic and wellness patients. We aim to target them through wellness packages at good price points, loyalty programmes, etc.,” she says.
New kids on the block
In recent times, the diagnostics sector has emerged as a lucrative market, considering its free cash flows, attractive return ratios and potential for expansion. The interest is evident in the flurry of new entrants into the sector, including pharma companies, hospitals, start-ups, and even large conglomerates. The Adani Group, which is strong in power, energy and edible oils segments, has also forayed into diagnostics with the announcement of Adani Health Ventures that would set up, run and administer medical and diagnostic facilities and other allied activities. In August 2020, billionaire Mukesh Ambani-promoted Reliance Industries Ltd (RIL)—through Reliance Retail—acquired majority stake in Netmeds for Rs 620 crore. Tata Digital in June last year had acquired online pharmacy 1mg for a cash consideration of Rs 720 crore, and then launched its own diagnostics wing.
There’s more action happening in this segment. In July 2022, pharma major Lupin launched its own diagnostic lab called Lupin Diagnostics, and Ahmedabad-headquartered Torrent Pharma entered the diagnostics sector by forming Torrent Diagnostics Private Ltd, as an unlisted private company in February 2022. In June 2021, e-pharmacy chain PharmEasy acquired Navi Mumbai-headquartered diagnostics chain Thyrocare for Rs 4,546 crore. Pharmacy retailer Medplus also made an entry into diagnostics in March 2022 by launching its diagnostic centre in Hyderabad. Gurugram-headquartered Max Hospitals is continuously growing its diagnostic segments. And Bengaluru-headquartered Aster DM, a healthcare company, is also one of the new entrants in the sector. Aster DM operates hospitals, medical centres, diagnostic centres, laboratories and pharmacies in six GCC countries and India. “These new entrants have not only disrupted the market with tech but also resorted to aggressive discounting to acquire volume,” say diagnostic industry analysts Monish Shah and Pranav Chawla from Antique. “Aggressive pricing is hurting the large players in their most lucrative margins business, that is, wellness.”
The Credit Suisse report says that the competition is notably from large conglomerates (RIL-Netmeds, Tata-1mg, etc.) and pharma groups (Lupin, Torrent, etc.), which would likely pour in larger investments for a longer period. The competitive activity has intensified post the Covid-19 outbreak, which ushered in a few structural changes like increased home sample collection, focus on preventive/wellness packages, etc., it says. The report further states that 58 per cent of the diagnostics industry comprises pathology, and the balance is radiology.
Even dominant players (organised) like New Delhi-based Mahajan Imaging have ventured into the field of “integrated diagnostics” by combining radiology, nuclear medicine and positron emission tomography-computed tomography or PET–CT scan (an imaging test to check the metabolic or biochemical function of tissues and organs, and it can be used in cancer treatment), pathology, genomics and an AI lab, all under one roof in its latest facility in Delhi. “We believe that this concept will revolutionise treatments resulting in optimal clinical outcomes and minimal side effects,” says Dr Harsh Mahajan, Founder of Mahajan Imaging. “Besides expanding the existing radiology business, we see an opportunity to grow our pathology business at a faster pace.”
Diagnostic industry experts believe that increasing prevalence of non-communicable diseases and chronic conditions, an ageing population, growing awareness of health, and a mindset shift amongst consumers are some of the growth drivers of the industry. “Overall, we are set to witness an unprecedented expansion in the areas of diagnostic testing,” says Dr Arjun Dang, CEO of Dr. Dangs Lab, a New Delhi-headquartered diagnostics company.
The return to the labs for diagnostic companies may not be such a bad thing after all.
@neetu_csharma
