The alchemy of growth in diagnostics

Many healthcare companies today are faced with a big question. Is the business of diagnostics in India an opportunity or a challenge?

By all means, most CEOs and business leaders would state self-evident opportunities such as growing demand for diagnostic services in India, expanded access to such services, increased insurance penetration and more. Experts believe that the industry is expected to grow at a CAGR of approximately 16 per cent accounting to approximately 802 billion ($ 12.3 billion) in the financial year 2020. Within the diagnostics market, the pathology segment is estimated to contribute approximately 58 per cent of total market, by revenue.

Interestingly, the sector’s landscape is undergoing a rapid shift with private equity (PE) capital enabling subscale players to become more aggressive in the market, and the hospital chains/corporate houses seeding diagnostics ventures. According to various reports, players such as Core, iGenetics, Healthians, Vijaya Diagnostics, and Suraksha have raised huge funds to aggressively expand their businesses. New entrant Neuberg, itself is fast bulking up and has already acquired controlling stakes in five labs — Anand Diagnostic Laboratory, Supratech Micropath, Ehrlich lab, Global labs and Minerva Labs, present in Karnataka, Gujarat, Tamil Nadu, South Africa and the UAE respectively. The company has pumped in ` 400 crore and is now looking to invest another ` 500 crore over the next 24 months to grow its fledgling business, both through organic and inorganic routes. Existing hospital chains like Max India, Apollo Hospitals and Thumbay, along with corporate houses like Mankind and Dalmia, are also seeding similar businesses.

On the other hand, the big brothers of the industry, Dr Lal Pathlabs, and Thyrocare went public in 2016. Metropolis Healthcare has also announced its IPO scheduled early this year.

Despite the positive backdrop, there are certain financial instabilities that are currently haunting most diagnostics providers as well as changing the economic status quo of the sector. Take the example of larger chains that dominate the market by around 30 per cent, Dr Lal Pathlabs, Metropolis Healthcare, SRL and Thyrocare even after some of these being listed a couple of years ago are only growing at a CAGR of around 8-12 per cent only. Although, most of these companies follow the business-to-consumer (B2C) model, which offers greater value and profit, some indsutry analysts reveal that their growth isn’t very impressive.

Moreover, if we closely analyse this highly fragmented market, the growth rate of the overal l sector is around 10-12 per cent excluding the radiology market segment. Almost all diagnostic providers face trouble delivering and demonstrating value in under-pressure market conditions, says a report by KPMG, which could reflect a stunted growth in the future, despite many opportunities that lie ahead. So, is the sector reaching stagnation? And can the opportunities of the future, override the challenges? Let’s see what opinion industry experts hold.

Optimistic growth

Dr Om Manchanda, CEO, Lal Pathlabs is very certain that the opportunities can outdo the issues. “Diagnostics is certainly a big opportunity. 70 per cent of medical decisions are based on diagnostics. Testing is further playing a key role in preventive health checks, personalised medicine and monitoring the progression of diseases especially life style diseases. However, there is an overhang of aggressive competition and external environment that could affect further investment in this space,” he maintains.

“There is ample amount of opportunity for the overall diagnostic sector to grow. The overall market for wellness and preventive diagnostics was 7 to 9 per cent in the financial year 2018. It is expected that this segment will grow at a CAGR of approximately 20 per cent over the next three financial years. Higher literacy levels are expected to increase awareness of preventive and curative healthcare and in turn boost the demand for diagnostic services. Also, the corporate sector is focussing more on the well-being of their employees, promoting them to undergo preventive and wellness tests. This will further support the growth of preventive and wellness segment and the diagnostic sector as a whole. Diagnostic chains have been able to maintain rapid growth by opening more collection centres, which has helped them to improve their asset utilisation. In the last few years, there have been quite a few acquisitions in this space with larger players buying smaller players in order to gain market share. All these will lead to diagnostic chains continuing to acquire market share of standalone centres,” shares Ameera Shah, MD, Metropolis Healthcare.

With a similar view, Vikrant Ghai, Principal – Consulting Services, IQVIA India explains, “Despite high levels of fragmentation in the industry, proliferation of new entrants and significant competition driving low pricing is bringing margins under pressure. There is still scope of driving value to the customers. Opportunity lies at two ends of the spectrum, one end being expansion in under-penetrated areas, which will still require some disruptive thinking and the other being the high-end testing that is still not available to us in India. The established players as well as some new startups are constantly driving this endeavour to bring newer and more personalised tests to the country. The other factors which will drive growth are constantly increasing health awareness in the rising middle class leading to proactive health checkups. This will also be driven further by the innovative packaging customised to the customer needs, affordability of testing, POS testing, improvement in collection logistics and e-delivery
mechanisms.”

While lab chains see immense growth propellers, genetic testing players which are increasingly establishing their businesses in India are also bullish of the market. “The diagnostic business is indeed an opportunity as there is a huge gap of quality players especially in tier II, III, IV markets. There is scope to record high growth rates in both routine and specialised segments. The consumer behaviour in the country is shifting towards convenience and quality. Convenience has driven the home collection and online reporting practices in the industry, and quality has created the needs for service providers who can ensure accurate results with a quicker turn-around time at a reasonable price. Increasing regulations will drive further consolidation in the space,” Arunima Patel, Founder and MD, iGenetic Diagnostics brightly says.

Similarly, equipment manufactures too have a compelling view on the growth. Vivek Kanade, Executive Director, Siemens Healthineers, India opines that in the next decade the diagnostic lab market will continue to grow at an average CAGR of around 10-12 per cent. The same will be for provider companies. This will be the era of automation within the IVD segment.

“We see a lot of consolidations happening within the sector and as the market gets more consolidated and is taken over by corporate chains, more and more use of automation is on the card,” he believes. He also informs of the growing number of start-ups in this segment that focus on preventive care and some on more specific tests. But there is a catch to these opportunities, warns Kanade.

“We fear the manner in which this growth could be achieved. India is a price sensitive market. Ayushman Bharat on the other hand is going to disrupt price strategies further. This scheme will drive down cost and can raise the biggest concern of quality compromise,” Kanade shares his concern.

“Healthcare in India is reactive. Patients and clinicians resort to medical investigations only when they have to, not because they want to. The idea of proactive and preventive health care has not yet become as popular or as widely practised as it should be. The reasons for this are varied — lack of awareness, lack of funding and the fact that most medical expenses in India are out of pocket. Our approach has been that while we address the illness segment, we also remain invested in the wellness segment and to be the most preferred preventive healthcare company. This area is yet to reach optimum potential for us. But this is also the opportunity for the future,” adds Dr Sanjay Arora, Founder and MD, Suburban Diagnostics.

Changing dynamics

Dr Ajay Phadke, Centre Head, SRL Dr Avinash Phadke Labs feels that every industry comes with a set of pros and cons. But what matters is how people align their business to the growth of the industry to ensure growth and profitability. Indeed, Dr Phadke has made a very important point here. Successful businesses are based on strong business models, there is no real alternative to those hence those companies with an innovative model are here to stay. It all depends on how well they utilise them.

“Customer experience is as important as in any other industry and sometimes more so, since we are so customer-connected. Hence, services like home blood collection, technological advancements that drive quick and accurate reporting of several diseases, especially infectious diseases, molecular testing, etc., have created customer value, and hence a positive business impact for us. These offerings have helped us enable trust amongst our consumers and thus building our reputation in the industry. Our oldest lab in Shivaji Park, Mumbai caters to over 1000 walk-in patients a day. This has built up over decades. Our expertise in diagnostics has also allowed us to expand our services into established hospitals, where efficient diagnosis can ensure appropriate and timely treatment of a large number of patients. Increasingly, hospitals have tied up with us to set up in-house labs for testing, with an aim to drive convenience and faster turnaround time for reports. A hospital may have the funds to invest in the necessary equipment in the labs, but finding skilled manpower and doctors for reporting may not be an easy or a financially viable option. At the same time, increasing competition in the industry demands competitive prices as well as the best possible services. Unfortunately, the best in class technology comes at a high price, which tends to be borne by the lab itself. Additionally, to deliver quality and accuracy, the teams operating the labs must be at the top of their game. This adds some degree of pressure, especially to a lab like ours, where we consciously invest into technology towards ensuring quality, accuracy and speed. Lastly, the growth of unauthorised lab proliferation leads to a negative image, impacting the overall industry,” he elaborates.

As experts explains the reasons for this optimism and share their fears, it is also important to keep in mind the changing economic status quo of the sector which is driven by health policies, transformations in business models and technological advancements.

Pricing pressures and its impact

As Kanade pointed out that India is a price sensitive market, and the Indian government is now determined to regulate the sector in order to bring the one lakh odd labs all under the purview law and order. The introduction of Essential Diagnositcs List (EDL) is a step towards it. Industry experts feel that EDL will bring in price cap for diagnostics which is a much needed regulation in order to ensure price standardisation.

In a conversation with Dr A Velumani, CEO, Thyrocare, he had shared his views on EDL and said that according to EDL, these tests should not be charged more than the listed price. Unfortunately, stake holders have no knowledge or control on them. Contrarily, Dr Avinash Phadke, opines that EDL allows for a key development: Amplification of the importance of pathology testing. It creates a setup that promises changes in the right direction. 70-75 per cent of all clinical decisions are taken as a result of pathology testing. Without diagnostics, the identification of ailments is impossible.

Consolidation and integration to build a better business environment

The next thing that impacts immensely is the rapid change in business models. Today, many diagnostics players are looking at home collection services and more in order to expand their customer base. These services provide a value add and help in increasing volumes. Secondly, consolidation, integration and outsourcing is another area that larger players are exploring. They believe that it can create a better business environment and help in organising this highly fragmented growth.

“As medial research advances, newer tests constantly keep getting added to the repertoire of diagnostics. That’s how the test menu of a lab evolves. Obviously, it may not be possible for every lab to keep pace with these additions and have every test on its menu. But a great way to ensure that the test menu of the lab remains comprehensive and updated is to outsource the tests not being processed in-house. This holds especially true in case of those tests for whom testing volumes don’t justify in-house processing, from a quality and commercial standpoint. Consolidation and integration catalyse the process of smaller labs joining hands with bigger ones. This allows more comprehensive test menus, increases the reach and accessibility of services, ensures better standardisation of services and allows greater cost benefits to be passed on to patients. This also allows newer tests to be offered at affordable price points with consolidation of volumes,” informs Dr Arora.

Dr Ajay also feels, “Consolidation will continue to take place and will end up at around 25-35 per cent of the market in the next 10 years especially in metros and larger cities. There will still be a large chunk of labs in the unorganised sector many of which are not run by pathologists. Outsourcing will continue since some tests will shift to smaller labs, hospitals and doctor clinics while central labs will end up doing the high-end , technically complex tests. Making sure the line remains patient centric is key and this involves better service, quicker reporting, a wide test menu and quality control.”

Similarly, Ghai infers that with the current levels of fragmentation in the industry, consolidation is the way to go, however, it will be driven by value fishing and synergistic or complementary of value propositions, given the valuations are already high. He further goes on to say, “This consolidation is likely to be a slow process and may be spread over the next decade.

Integration post consolidation is the follow through for success, which will take place. However, another aspect of integration will be that of hospital interest in labs leading to integration and embedded systems.”

While pricing policies and developing business concepts are some aspects, the industry currently is betting big on technology and automation. So, how will this trend evolve business models further and how will it add value to profitability, cost efficiencies and quality?

The tectonic shift

Kanade informs that consolidation in diagnostics has also given rise to utilisation of automation. This automation wave brings in efficiency, increases volumes and improves quality. He informed that Thyrocare has one of the largest automated centre of around 92 metres. This system has facilitated the company to increase the volumes of tests humongously.

Ghai expounds, “Cutting-edge tech like ML and AI is finding its use in the diagnostics industry as well. Most notably, where there is the need to analyse huge data and refine outcomes with every test being added to the repository, the outcomes could be made more predictable and sharpened to deliver higher accuracy. In today’s time both, hardware and software tech provide this capability, though for a small niche. The industry is at the cusp of growth and is witnessing ever increasing demand for complex testing such as molecular diagnostics and genetic testing. The application of AI in this area is likely to change the way treatments are identified and delivered to patients, a step forward in personalised medicine. As we will see, the increasing use of such technologies will bring diagnostics closer to the masses over the next few years.”

Dr Ajay talks about how the technology is the backbone for his company. “Lab automation is constantly improving and has helped reduce TAT, errors as well as allowed us to manage workload more productively. Not just workforce efficiency, technology has also made optimum utilisation of space. Molecular diagnostics is one such example, which has now become easier to perform without requirement of a three room concept. In future, technology like AI can have a huge impact in the field of histopathology and can aid the pathologist to work more efficiently. The business model will have to take into consideration the numerous innovations in the sector along with a strong focus on on-ground consumer connect such as home blood collections and other B2C growth avenues. AI and big data hold a strong potential to revolutionise the future of the industry.”

Likewise, Patel testifies for her genetic testing company that thrives on technology. “Online technological developments have transformed our business in the following ways

• Online reporting is now an integrated part of offering
• Innovative tests being offered to provide better diagnosis
• Pricing pressure will benefit the scale players

The consumers select players who offer convenience of home collection, have high quality standards and accreditation like NABL, and offer attractive pricing, therefore the technological developments are helping us to meet consumer expectations in these respects.”

Being future ready

All through the time, industry experts have been very idealistic on the bright future for the sector. Yet, it is paramount that organisations look beyond the horizon to invent and reinvent strategies to ensure sustainability.

“Labs should focus and commit themselves towards building credibility within the medical fraternity. The lab is an integral and vital component of a doctor’s clinical practice and both need to function coherently and in perfect harmony with each other to ensure accurate diagnosis. Labs need to be not just service providers but extended arms to clinicians. Laboratory personnel will have to inculcate the culture of proactively reaching out to clinicians and discussing critical values. Understanding the patient behind the test sample will assume more and more importance as we move ahead. The bottom-line, however, remains that every lab needs to work with the ‘patient’ at the centre-stage and continue to remain relevant to clinical outcomes. Labs, though their efforts in research and data analytics, can also take leads in creating knowledge sharing platforms for the medical fraternity,” suggests Dr Arora.
Dr Manchanda further recommends that organisations need to keep a sharp focus on building concentrated scales of testing, and reach out to patients as much as possible to enhance service levels without compromising on quality.

Equivalently Shah prescribes, “For any ambitious organisation aiming to become a success in this rapidly growing diagnostic laboratories market, the best move at the moment is to plan to invest in Tier II and Tier III cities of India. The companies should expand their network by collaborating with more health institutes and increase their collection centres in India resulting in widespread reach and more access for the masses.”

“There is a lot to be achieved through pathology in the future. Labs must focus strongly on ensuring they are tech-strengthened while being consumer focussed, to influence the patient journey for the better. Technology already drives the lab to the patients’ bedside, and it’s time the experience was made richer. Ease of booking appointments, speed in reporting and engagement with an expert are all elements that are available at the click of a button. Hence, home blood collection and point-of-care are going to become more prevalent in future. Additionally, hospitals will become key to the journey of pathology and diagnostics players, with stronger partnerships delivering value through collaborative trust and expertise. Having said this, it is imperative that all players — big and small, be aware and aligned with regulatory changes and shifts, to ensure ethical growth,” sums Dr Ajay.

As the sector continues to mature further, there will be increased competition. Staying relevant in the market will be significant. Companies will need to strike a balance between profitability and responsibility to outdo the challenges and adopt practical approaches to initiate, achieve, and sustain profitable growth for the future.