The Indian diagnostics sector is coming of age

Diagnostic majors are wary of growing organically in India and would prefer to enter the country through a partnership. An insight by Manoj Patkar, Executive Director & Partner, 7i Capital Advisors

India has been one of the fastest growing diagnostic markets over the past few years, with an increasing share in the global in-vitro diagnostics (IVD) industry. The past decade has seen emergence of organised pan-India laboratory networks like Dr Lal Path Labs, SRL Diagnostics, Metropolis Healthcare and Thyrocare as well as regional players, like Suburban Diagnostics, Medall Healthcare, Vijaya Diagnostic Centre and Suraksha. However, it’s still a long way to go for the Indian market to get consolidated and dominated by these organised players. Mid-sized and small individual labs with a presence in metros, towns and rural hinterlands, dominate the industry, as they hold estimated 85 per cent of the market share of the Indian IVD market. On the other hand, in most markets across the globe, the industry is dominated by large organised laboratory chains. This stands as a striking difference between the Indian and global markets.

Also, in the developed markets, the diagnostics business is of a B2B kind. The touch point for patients is primarily the hospitals, which in turn outsource their test processing requirements to the laboratories. In India, the diagnostics business is of a B2C kind, as patients here directly approach the pathology labs to get themselves tested. At times, tests are also conducted without a doctor’s prescription.

Further, there is a lack of necessary regulations and structure due to absence of an authoritative central body that would overlook the activities in the healthcare diagnostic sector. For example, it is estimated that less than 1 per cent of the labs in India are accredited by National Accreditation Board for Testing and Calibration Laboratories (NABL). This hampers the quality and standards that should be maintained by the labs.

The expectations of the patients too have sky rocketed, and customer service has witnessed a paradigm shift. Earlier, patients would wait for days to receive their test results. But in today’s time and age, patients want immediate and reliable results. Home visits to collect blood samples are becoming routine as the ‘friendly’ neighbourhood pathology labs, attempt to survive in the by-lanes of this country; and if their market share is anything to go by, they are certainly doing exceptionally well.

All the above nuances make Indian market quite differentiated from its global peers. Hence most global majors are wary of growing organically in India and would prefer to enter the Indian market through a partnership or an acquisition.

Nevertheless, many aspects in the diagnostics space in our country remain untouched and provide huge growth opportunity. One example would be esoteric tests like prenatal testing and genomic diagnostics. These tests have a huge scope, but are still at their nascent stage in India. If the government introduces child care related regulations like compulsory prenatal and neonatal screening for a few critical diseases in line with some of the developed markets, then it can be a great shot in the arm to such esoteric testing markets. There are some IVD players like Lilac Insights which have positioned themselves in the esoteric testing space and betting high on the exponential growth opportunities in these areas.

Another area which shows a huge potential for growth in the near future is Point of Care Testing (POCT). Due to unique structure of the Indian market, the POCT products have applicability in diagnostic labs in the hinterlands, local doctor clinics and pharmacy stores as initial screening devices, unlike globally where they are positioned as home use products.

Further, supplies to the Indian diagnostic labs have traditionally been dominated by global majors like Roche, Siemens and Abbott. However, in the recent years, host of Indian players have emerged as quality suppliers of IVD products which are customised for the Indian laboratory requirements.

Indian IVD product companies are focussed on mid-sized and small labs, unlike their global counterparts, that places focus on big labs and reference labs. Most of the Indian IVD product companies have grown significantly higher than the market average in the last two years, while maintaining high profitability. This is because the mid-sized and small labs market is still under-penetrated with only a handful quality players supplying to these markets.

India is the only developing country in Asia (other than China) which has the expertise and resources of manufacturing IVD products. While many Indian companies have already developed strong capabilities of manufacturing high quality IVD reagents and kits, some of them have also developed expertise in instrument assembly and manufacturing operations. If the right incentives are provided by the government, India will have an immense scope of transcending to a manufacturing hub (under the ‘Make in India’ campaign) for the production and export of IVD products to markets like Middle East, South East Asia and Africa.

Many foreign strategic as well as PE funds are actively looking to tap on this opportunity by identifying and investing in right IVD targets in India. Recent acquisitions of Tulip Diagnostics by PerkinElmer of US and Lilac Medicare by Tosoh Corporation point towards a trend, which is likely to continue further in the next few years.