Price rationalisation, consolidation likely in Indian diagnostic space

India’s Rs 55,000-crore diagnostic sector - largely dominated by unorganised players - is set for a shift in dynamics. This is possible largely due to the entry of online aggregators backed by companies with deep pockets.

Price rationalisation and consolidation are two key trends that will shape the industry in the years to come. From 15 per cent share, the share of organised players is likely to rise to 25 per cent in three to five years, observe analysts. Industry players beg to differ.

Ravindra Kumar, vice-president and head, Lupin Diagnostics, says consolidation will happen, albeit over a longer horizon.

There is also likely to be a distinct move towards ‘consumerisation’ of diagnostics. Consumers will pick off-the-shelf wellness packages or routine tests/check-ups. Online players are likely to dominate the area of ‘budget wellness’. National offline large laboratory (lab) chains will control the prescription diagnostics play.

Most players and analysts agree that prices will remain competitive with the entry of new players. Lupin has established its own chain of diagnostic labs. Tata acquired online pharmacy (e-pharmacy) 1MG and launched its own diagnostic wing.

After shaking up the telecommunications sector with Jio, Reliance entered the world of diagnostics. Its acquisition of e-pharmacy Netmeds may well be that booster shot.

Thyrocare was bought by healthtech start-up PharmEasy. Medplus (a pharmacy retailer) has now become aggressive in diagnostics. ICICI Direct analysts say large hospital chains have announced aggressive investment plans to seize the opportunity.

“The modus operandi for them has been predatory pricing to grab volumes quickly,” says the brokerage.

SRL Diagnostics’ Chief Executive Officer (CEO) Anand K, however, points out that price differential has always existed. “Had price differential been the only criterion to choose a lab, the lowest-priced pathology lab would have had the largest market share,” says Anand.

Competitive pricing, however, is here to stay, feel analysts and some industry insiders.

Rahul Guha, managing director (MD) and CEO of Thyrocare Technologies, which has largely been a business-to-business (B2B) player, says online diagnostic players will continue to offer competitive prices to corner volume share.

“We have decided to retain Thyrocare as our B2B brand, while PharmEasy will be our business-to-consumer (B2C) play in diagnostics. We have PharmEasy Labs now. We don’t want to play this price game,” says Guha. He says the company will instead focus on enhancing consumer experience.

The top 10 cities in the country account for nearly 50 per cent of the diagnostic business in India, says Guha, adding that consumer-facing packages are likely to do well in cities. ICICI Securities says that pricing pressure will remain in the near term, and incumbents can either offer high discounts to secure volumes, maintain their pricing or lose some volume.

“This will impact near-term growth. This approach will be limited to high volume routine tests and will target the preventive segment, which is around 8-10 per cent of the total industry,” it adds.

Large offline players feel that online aggregators are affecting the smaller players more. Ameera Shah, MD and promoter, Metropolis Healthcare, says, “Diagnostic test aggregators are affecting the smaller players and not so much the larger ones.”

“They are attacking the budget wellness business and altering its dynamics. They are acquiring a consumer and hoping he/she will order drugs online or sign up for telemedicine. Somewhere this cost of acquisition will be amortised,” analyses Shah.

Guha agrees somewhat. He says acquiring diagnostics online costs around Rs 2,000-2,500, while acquiring a customer for e-pharmacy is around Rs 700-800 per patron.

“We can then cross-sell our diagnostic products, white labels, etc to the e-pharmacy customer. Aggregators will have a clear advantage here,” he adds.

Where aggregators have a problem is to break into the prescription diagnostic space, says Guha.

Smaller labs will increasingly find it difficult to survive in this environment. They will either end up closing down or getting acquired by a large player — online or offline. Kumar, however, points out that acquisition targets may not come at the right price.

“The expectations are 15-16x the earnings before interest, tax, depreciation, and amortisation, and at that price, it may not be worth it. We have to also see if the collection centre has the automation, robust processes, and quality assurance,” he says.

Lupin has chosen to take the franchise route for expansion. It targets 1,000 collection centres in the next four years and 100 labs across the country. Quality compliance is a scoring point for large labs. Anand explains that of the 100,000 labs in India, only 1,000 have the National Accreditation Board for Testing and Calibration Laboratories (NABL) accreditation.

“During the Covid-19 pandemic, this had gone up to 2,500 labs. But many may not renew their NABL accreditation,” he adds.

Kunal Randeria, analyst with Edelweiss, feels that from a 15 per cent share currently, the share of organised players is set to rise to 25 per cent within the next five years.

“The shift from unorganised to organised started eight years back,” says Randeria.

The market is growing 12-13 per cent by volume every year, he says. With the entry of more corporate players vying for a slice of this pie, the market-share volume will be divided. Subscription and loyalty bonuses are another trend likely to emerge.

“While margins are low in the subscription business, customer acquisition cost, too, is low,” adds Randeria.

Share prices of listed diagnostic players have corrected 50-60 per cent from their all-time highs (around the second quarter of 2021-22). While near-term pressures will remain, specialty tests and B2C expansion will fuel growth, add analysts.

• Online players target budget wellness segment
• Large offline lab chains have edge in the prescription diagnostics biz
• 15% of the Rs 55,000 crore diagnostic sector is organized
• Share of organized players likely to go up to 25% in 5 years or so
• Price rationaliszation likely for volume market share