The expanding use of technology is changing the way many industries operate. The specialized health diagnostics industry is seeing itself rapidly transformed with digitisation. The efficiencies and cost advantages this gives some players can lead to rapid consolidation, with the end result just a few companies with a national digital reach.

This consolidation process has already started.

The pandemic threw the diagnostics industry into the limelight, and testing for Covid-19 played a vital role in identifying cases and controlling outbreaks. Lockdowns and limitations on movement forced diagnostic companies to rework their models, and build digital platforms for patients to book appointments online via websites and app-based solutions, and book slots for home collection of samples. Technology was leveraged to fully integrate and automate processes ranging from registration and billing, tracking of specimens and their analysis, to reporting of test results. Both companies and patients were forced to adapt to new digital-only processes.

The diagnostics industry comprises two types of tests. First is pathology testing or in vitro diagnosis involving the collection of samples in the form of blood, urine, stool, etc., and analyzing them using laboratory equipment and technology to arrive at useful clinical information that assists in the treatment of diseases.

Second is imaging diagnosis or radiology which involves imaging procedures such as X-rays and ultrasounds that help determine anatomical or physiological changes inside a patient’s body. It includes more complex tests such as CT scans, MRIs, and highly specialised PET-CT scans. Pathology tests account for 70% of the volume of tests and imaging tests constitute the rest. While pathology tests are typically low-margin tests, specialized imaging tests contribute higher margins for diagnostic companies.

The diagnostics industry is fairly fragmented with individual laboratories and hospital-based chains having a large share of the market. Diagnostic chains form 16% of the total diagnostics market, with 10% being regional chains and only 6% of the market is served by pan India chains. With the increase in digital reach by diagnostic companies, the next few years could see pan India chains gain a bigger share of this pie.

There has been a lot of action in this space over the last couple of months. In Q2FY22, two more companies, Krsnaa Diagnostics, a pan India chain, and Vijaya Diagnostics, a regional chain, got listed on stock exchanges. This took the total number of listed diagnostic companies to five. Out of these, one company changed ownership as online pharmacy PharmEasy bought out Thyrocare’s promoters in June 2021 with the objective of adding diagnostic services under its platform. Thyrocare is the third-largest listed diagnostic company, and its takeover by a digital platform signals more consolidation by digital platforms in the future.

Online pharmacies set to change the game

Many online pharmacy platforms, apart from delivering medicines, also offer consultations and appointments with doctors. They have tie-ups with laboratories and offer online booking of diagnostic tests, as well as home collection of samples to widen their service portfolio. A few players have started their own laboratories with diagnostic services for patients on their e-pharmacy platform. 

Reliance Industries bought out online pharmacy NetMeds in August 2020. NetMeds too offers a suite of diagnostic services. Not to be left behind, the Tata Group took over a digital pharmacy 1mg in June 2021. 1mg also offers diagnostic services. Even Amazon India launched ‘Amazon Pharmacy’ on a trial basis in Bangalore in 2020.  

The Indian diagnostics industry is estimated at Rs 65,000 crore. Although the Indian diagnostic market is still small compared to those in developed countries, it is amongst the fastest-growing segments in the healthcare market. This segment is currently dominated by high volume/low-cost testing activity by most players.

Online pharmacy players are seeking synergies with diagnostic chains whereby platforms are a means for patients to gain access to the physical infrastructure of a diagnostic centre, expanding their market share of the overall market.

Testing for Covid-19 in FY21 increased the scope of services and added to the profitability of each company. While the costs of Covid tests were controlled by the government, the sheer volume of tests made it a favourable proposition for most companies. In FY21, most companies were able to grow their revenues from non-covid tests as well.

According to the latest report by Crisil Ratings, revenues of diagnostics companies are set to rise 17-20% in FY22 as a surge in revenues from regular tests will offset a moderation in revenues from Covid-19 tests because of the price caps progressively imposed since last fiscal. 

The report further states that in FY21, higher volumes and realisations from Covid-19 tests had driven revenue growth, while regular tests were fewer because of lockdown. But in FY22, with the pace of vaccination increasing, revenue from regular tests will recover strongly, while that from Covid-19 tests will get impacted by price caps.

Different models followed by each diagnostic chain

Each player has a differentiated business model, in the type of tests offered and segments that it focuses on.

Dr Lal Path Labs has a robust hub and spoke model (centralized diagnostic testing and clinical laboratories), especially in the north and east markets, as it has strategically positioned its clinical laboratories, patient service centers (PSCs) and pick-up points (PUPs). The business model is asset light and scalable as most of the patient service centers (collection centers) operate under the franchisee model and most of its diagnostic equipment is sourced through reagent (chemicals required for testing) rental agreements. Dr Lal Path Labs has a higher contribution from the B2B segment.

Metropolis Healthcare also works on an asset-light model with around 90% of its centers and 16% of its lab network being leased. The 'laboratory on lease’ model enables the company to lease out the space of other standalone private laboratories and also use the diagnostic equipment. The laboratory is operated according to  Metropolis’ standards, and revenues are shared between the parties involved, while daily operations costs are borne by Metropolis.

Vijaya Diagnostics is the largest integrated diagnostic chain in southern India, The company offers a one-stop solution for pathology and radiology testing services to their customers through an extensive operational network in 13 cities and towns in the states of Telangana and Andhra Pradesh. Nearly 93% of its revenues are driven by B2C or walk-in customers. The risk in such a large percentage of B2C clients comes with potential adverse events denting the credibility of the company.

Krsnaa Diagnostics’ business is focused on providing diagnostic services to the mass segment, particularly in tier II and tier III cities and towns in India, in addition to metros and tier I cities. Its patient base includes large segments of government employees and their families covered under the National Health Scheme. It is almost completely dependent on contracts by different state governments under the PPP model.

The company operates a large teleradiology reporting hub in Pune, which is among the largest in India and equipped with sophisticated equipment and operated by a panel of experts and qualified radiologists that enable it to serve patients in remote locations where diagnostic facilities are limited.

Pan India expansion is a challenge for existing players

Only three diagnostic companies currently have a pan India presence, Dr Lal Path Labs, Metropolis Healthcare, and Thyrocare. This is characterized by strength in the region of their origin. Dr Lal Path Labs is headquartered in Delhi and has more than 50% of its business in north India. Similarly, Metropolis Healthcare began its operations in Mumbai and the western region contributes to 54% of its business. Thyrocare, with its origins in Mumbai, generates one-third of its revenues from western India.

From the newly listed players, Krsnaa Diagnostics has a pan India presence, but this has more to do with its contracts with various state governments under the PPP model (public-private partnership), while Vijaya Diagnostics has a presence in eastern India and more than 90% of its business is done in two southern states.

Thyrocare has built its business on basic wellness tests and specialising in cost-effective pathological biochemical testing. With the change of ownership at Thyrocare and the new management in place, investors are keenly watching the next moves of Thyrocare. This might be a template for other online pharmacies to follow.

While the existing players have either expanded their presence by entering new geographies or acquiring other players, this process is long drawn out, and it takes a few years to build a significant national presence. Setting up labs is a capital-intensive process with break-even periods of up to five years. The technology involved in testing equipment also keeps changing and upgrading technology is a major expense.

The online pharmacies are in a position to consolidate many individual labs under their platform quickly as they can sign agreements with numerous existing individual labs and offer multiple services in each region depending on the testing facilities of these labs. There is no capital expenditure involved for both parties and one can expect many developments over the next few quarters.

For an industry growing at a rapid pace and aggression by online pharmacies to capture market share in diagnostics, the current battle will be in building a large digital footprint and pan India domination, before the competitors can.