Estimated at $5.7 billion at present, which is roughly 5% of the total healthcare market, the diagnostic sector is definitely an essential part of the overall scheme of all things health related.

The Indian healthcare industry has witnessed significant growth in the past few years. The sector, worth about $80 billion in 2012 is expected to reach about $160 billion by 2017. The healthcare industry is divided into various sectors, viz: hospitals, diagnostic, pharmaceutical, medical device manufacturing and pharmacy stores.

The diagnostic sector is an integral component in the healthcare delivery system. This market is estimated at $5.7 billion at present, which is roughly 5% of the total healthcare market. There are around 60,000 diagnostic labs in India, which serve about one million patients per day, but the market is a highly fragmented one. 90% of the sector comprises of unorganized players in the form of standalone diagnostic clinics, work facilities in nursing homes, and small testing centres, while the organized market is composed of corporate chains like Metropolis, Thyrocare, SRL, Dr. Lal PathLabs, etc., which represent just 10% of the sector. The organized market is however growing at a significant pace of around 25% p.a.

Growth Drivers

What are the drivers responsible for the growth of the diagnostic sector? Income levels of middle class Indians are rising, resulting in much higher disposable incomes and spending capabilities. Better healthcare has resulted in a higher life expectancy and a higher proportion of senior citizens in the population. Increasing urbanization, higher stress levels, and changing food habits have resulted in an increasing prevalence of certain lifestyle conditions. Increasing health awareness and various government initiatives have resulted in a higher penetration of health insurance and thus higher affordability of medical treatments. Further, today’s doctors are placing more emphasis on evidence based medication due to medico-legal problems, thus increasing the requirement for more diagnostic procedures. Furthermore, the fast and accurate diagnosis of various diseases is possible today, thanks to technological improvements.

Pathology and Radiology

The diagnostic market can be broadly classified into pathology and radiology. The pathology market in India is about $4 billion, while the radiology market is about $1.7 billion.

Clinical pathology is a medical specialty that is concerned with the diagnosis of disease, based on the laboratory analysis of bodily fluids such as blood and urine, as well as tissues, using the tools of chemistry, clinical microbiology, hematology, and molecular pathology. The market segment is mainly dominated by immunology, which constitutes 38% of the market. In second place is the biochemistry segment, which accounts for 24%, followed by hematology – 18%, urine analysis – 9%, and microbiology – 6%. Two kinds of pathology labs exist in India. The first category includes high-end machines provided by multinational companies. They are automated and have moderate capital investment requirements. The second category comprises of low-end systems, which are manufactured by local players and are semi-automated. This segment is low on capital investment requirements and highly price-sensitive. Overall, the entry barriers are low and the regulatory policies not stringent (although the scenario is changing rapidly).

Radiology is a medical specialty that uses imaging to diagnose and treat diseases seen within the body. Radiologists use a variety of imaging techniques such as X-ray, ultrasound, computed tomography (CT), nuclear medicine, and magnetic resonance imaging (MRI). The market segment is dominated by ultrasound, which generates 29% of the revenue, followed by X-ray – 23%, MRI -19%, and CT -10%. Overall, the capital expenditure requirements, (and hence the entry barriers) in this sector, are higher than the pathology segment.

Unorganized Market

Unorganized labs are typically set up by pathologist(s)/radiologist(s) on a standalone basis. Their success depends upon the skill of the owner-doctor in terms of hiring efficient manpower, offering quality service, and creating a strong referral network among local consultant doctors. The fees charged by these unorganized labs vary widely and depend upon the locality and the owner-doctor’s reputation.

Organized Market

In the past few years, a number of organized players like Metropolis, Thyrocare, Super Religare Labs (SRL), Dr. Lal PathLabs, etc. have entered this market. They have taken service quality to new level by using high-end technology and observing uniform standards across centres. Their success depends less on the referral network of consultant doctors and more on direct branding efforts among end consumers. They also earn a significant portion of their revenue from corporate clients and insurance companies through their tie-ups for pre-employment and pre-insurance health check-ups. Most of them also offer home visits for sample collection, thereby increasing their customer reach. They mostly operate on the ‘hub and spoke’ model. The small collection centres represent spokes, while large processing labs represent hubs. Normally, hubs enable the players to establish their first presence in a new geography, while the spokes facilitate their expansion and increase their reach to the smaller towns within that geography.

Typically, organized players prefer to grow by the franchisee route. The franchisee route allows them to achieve rapid expansion, by keeping the model asset light and enabling a sharing of the market risk. The spokes are operated by franchisees, while the hubs are owned and managed by the players themselves.

Player Profiles

A brief comparison of major organized players is mentioned below:

Company

Metropolis

Thyrocare

Super Religare Labs (SRL)

Dr Lal PathLabs

 Head Office

Mumbai

Mumbai

Gurgaon

Gurgaon

 Promoters

Dr Shah and Dr GSK Velu

Dr. A. Velumani

Fortis and Religare Groups

Dr. Arvind Lal

 Business

Pathology

Pathology

Pathology + Radiology

Pathology

Number of touch points

125 labs + 800 collection ctrs

Single centralized lab and 700 collection ctrs across the country

269 labs + 11 reference labs

150 labs + 1700 collection ctrs

Income (FY14)

Rs. 2,377 mn

Rs. 1,500 mn

Rs. 4,580 mn

Rs.5,500 mn

 EBITDA (FY14)

Rs. 770 mn (32.4%)

Rs. 751 mn (50.1%)

Rs. 880 mn (19.2%)

Rs. 1,054 mn (19.2%)

 PAT (FY14)

Rs. 447 mn (18.8%)

Rs. 457 mn (30.4%)

Rs. 200 mn (4.4%)

Rs. 547 mn (9.9%)

Public-Private Partnership

In the past few years, various state governments have taken steps to provide a part of public healthcare through the public-private partnership (PPP) route, due to an acute shortage of skilled manpower and funds. PPP is a big growth opportunity for organized players. PPP projects are awarded through the competitive bidding route, where the bidding parameter is the fee charged for various diagnostic procedures. The PPP project typically involves setting up a pathology and/or radiology infrastructure within the premises of government hospitals/area hospitals/primary health centres, operating it for the duration of the concession period and handing over the equipment to the government at the end of the concession period. Often, diagnostic equipment manufacturers like Siemens, GE, etc., enter into a partnership with diagnostic service providers in PPP projects, so as to provide equipment free of cost, and getting a share in the project revenue in return. In other words, this is also referred to as the pay-per-use model.

Private Equity Investments

The diagnostic sector has been a favourite among private equity funds, mainly on account of its high growth rate, low healthcare infrastructure base in our country, and resilience to economic downturns. The investments in various diagnostic chains in the past are as follows:

Player

Private Equity Investment

Metropolis

ICICI Ventures bought 25% stake for Rs. 350 mn in 2006 and sold it to Warburg Pincus in 2010 for Rs. 3,920 mn. Warburg Pincus exited the company in 2015 by selling the stake back to the promoters.

Thyrocare

CX Partners invested Rs. 1880 mn for 30% stake in 2010. Norwest Venture Parners invested Rs. 1200 mn for 10% stake in 2012.

Dr. Lal Pathlabs

WestBridge Crossover Fund and TA Associates jointly invested $44 mn in 2013 for undisclosed minority stake.

SRL Diagnostic

acob Ballas and IFC together invested Rs. 3,700 mn in 2012 for 24% stake.

Players such as Thyrocare, Dr. Lal PathLabs, etc., are likely to come out with a public issue in the near future.

Conclusion
To summarise, the organized diagnostic sector in India is growing at a rapid pace. It has taken the diagnostic healthcare sector in India to a new level through better quality service, use of high-end technology, uniform standardization of processes across centres, and quick and accurate diagnosis of ailments. It is a recession proof investment option available for investors and has provided attractive returns.

 

Kapil Edke

Kapil Edke is a Manager with Business Development team, IL&FS Financial Services ( IFIN ), based at Mumbai
IFIN is a subsidiary of Infrastructure Leasing & Financial Services Limited ( IL&FS ), India

 


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