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Focus
Diagnosing Growth
The Indian pathology industry is all geared up to become
the most successful growth story in the Indian healthcare industry. Sonal
Shukla explores its future potential
 Just
browse through any industry expert's opinion on the Indian healthcare growth
story and you are bound to hear them enthusing about the pathology market. And
why not? This sector's fast-paced growth is too apparent to be ignored. The
diagnostic giants are expanding their presence not just in India, but also in
overseas territories like the Middle East Gulf and the US. The spectrum of their
test menu is expanding in the areas of genetics, cancer, endocrinology, infectious
diseases and molecular diagnostics. They are trying an interesting mix of business
models to penetrate not just tier I but also tier II and tier III markets.
According to a CII and Cygnus report, the Indian pathology sector is worth about
$1 billion and is growing at 15 per cent per annum. A tremendous unmet market
need for all healthcare services is said to have given a fillip to this growth.
Factors like rising income and wealth are changing attitudes towards healthcare,
and an increase in lifestyle diseases such as hypertension, diabetes and acute
cardio-vascular conditions is creating a need for diagnostics testing. India
has emerged as a global R&D hub for the pharmaceutical industry, and, as
a result, is a strong market for clinical trials and central lab services. There
is also a shift in focus from the treatment of illness to wellness and prevention,
and an emerging opportunity in women's health services as well.
Dr Sanjeev Chaudhry, CEO, SRL Ranbaxy opines, "People have begun to realise
the importance of accurate diagnosis before they begin treatment. Secondly,
healthy people's desire for preventive and maintenance health check-ups has
increased."
Dr A Velumani, MD, Thyrocare Technologies, adds, "For every diagnosed patient,
there are nine undiagnosed patients and since most others are busy in and focussed
on the sick care market, it is worthwhile to work on preventive care. If possible,
we would love to lead that segment."
The Buzzword: Outsourcing
 "Since
market is focused on sick care, it is worthwhile to work on preventive care"
- Dr A Velumani
Managing Director
Thyrocare Technologies
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 "Hospitals
still feel that
diagnostics is one of the most profitable areas, but they are unable to
manage it themselves"
- Girish Mehta
President & Strategic Business Unit Head, Piramal Diagnostics
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 "People
have begun to realise the importance of accurate diagnosis before they begin
treatment"
- Dr Sanjeev Chaudhry
CEO, SRL Ranbaxy
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Outsourcing laboratory management in hospitals to external
referral laboratories is a relatively new phenomenon in India, but it has given
the diagnostic industry the much-required impetus. Experts observe tremendous
potential in the concept of Hospital Lab Management (HLM) and big corporate
lab players like Metropolis and Hindlabs have already entered this space. HLM
enables hospitals to offer patients diagnostic care without diverting their
focus from core healthcare services. Today, Metropolis is managing 25 laboratories
inside hospitals across India. MS Ramaiah Hospital in Bangalore and Mallar Hospital
in Chennai (recently acquired by the Fortis Group) are two of its important
clients. Recently, Metropolis tied up with Shanti Mukund Hospital in Delhi.
"While labs are a cash cow for the hospital, they are also highly capital-intensive
with high technology redundancy risk. A specialised player such as Metropolis
can take over this non-core function of the hospital, and effectively manage
it," explains Yuti Dalal, Senior Research Analyst, Health Practice, Frost
& Sullivan.
According to Girish Mehta, President and Strategic Business
Unit Head, Piramal Diagnostics (formally known as Wellspring), the mindset of
the hospital has to change. "Hospitals still feel that diagnostics is one
of the most profitable areas, but they cannot manage it themselves in most cases-especially
small hospitals with 200-250 bed strength," he points out. On the other
hand, specialised players can leverage economies of scale. Wellspring has recently
collaborated with Goa's Victor Apollo Hospital for all its radiology and pathology
tests.
The Boom Factor: Fragmented Market
The highly fragmented status of the Indian diagnostic market
is bound to provide opportunities for the organised players (7-10 per cent of
the total market), which include Metropolis, Dr Lal Pathlabs, SRL Ranbaxy, Thyrocare
and Wellspring. Only 59 out of the 40,000 laboratories in India today are accredited
by either NABL or CAP, which is less than one per cent of the total. Of the
59 accredited laboratories, approximately 30 have CAP accreditation and over
45 have NABL accreditation. Ten per cent of the 40,000 laboratories are inside
hospitals and only a handful of these lab companies serve multiple regions,
says the CII & Cygnus report.
New entrants in the corporate segment include global giants like Quest Diagnostics
and Hindlabs (a venture of Hindustan Latex). Then there are several large stand-alone
labs across the country like Vijaya Diagnostics, Hyderabad, Medinova and Ehrlich,
Chennai.
Consolidation on the Cards
The boom has created an increase in investments from private equity players
and consolidation of the diagnostic labs. Dalal predicts, "The consolidation
phase among diagnostics players has just begun. It will see a lot more activity
in the next three to five years. Large players with deep pockets will make it
difficult for small individual labs to survive. While standalone labs will survive
from local business, they will have to grow to succeed in the market."
Ameera Patel, Executive Director, Metropolis concurs, "The US market faced
a similar situation where it was extremely fragmented with a lot of small labs
and no consolidation. However, that has changed tremendously in the last 10
years. We can expect the same to happen in the Indian market very soon."
| The big players have largely preferred to adopt a
good mix of both organic and inorganic way of growth to build their footing
in the market.
Greenfield vis-à-vis Brownfield:
"Any growth in the diagnostics field should be by both organic and
inorganic means. The company cannot bank upon just one. We are concentrating
on both greenfield ventures as well as taking over pathology labs through
the acquisition route," states Dr Arvind Lal, Chairman and MD, Dr
Lal Pathlabs. However, according to experts, much of the growth
in the organised segment can be attributed to acquisitions and brownfield
projects rather than greenfield ventures. "In this personality-driven
business, local players have created their brand in their area, and hence
bring in visibility and business from day one, making this a relatively
smoother path for expansion-and therefore there is acceptance from day
one. Building a brand image takes a long time otherwise," explains
Dalal.
SRL Ranbaxy has also adopted a combination of both greenfield
and acquisitions routes of expansion. "When we acquire a lab it may
or may not have the quality we need. On the other hand, setting up our
own lab assures the right quality and therefore we look at combinations
of both," Dr Chaudhry reveals.
Quest Diagnostics plans to grow organically in India.
"Our focus is on risk assessment services, clinical trials and laboratory
diagnostics. We will provide tailored services to life insurance companies,
pharma/biotech companies, and physicians and hospitals to help them serve
their clients and patients. We will differentiate ourselves with industry-specific
packaged services, company-owned and operated patient service centres,
and industry-leading healthcare information technology," states Bajwa.
Mergers and Acquisitions: Wellspring has acquired 30-odd
laboratories across the country in the last five years. Mehta believes
that his group's strength lies in acquisitions and integration. "Our
parent company has done lots of acquisitions and integrations and the
same skills have been passed on to us," he says.
However, players like Thyrocare and Sneha Diagnostics
are not very keen on acquisitions as a business model. "Acquisition
of small laboratories is a costly route of expansion— this remains
my opinion. We have never approached any laboratory in the last 10 years
for acquisition. One lab, one location, one brand, one CEO, one quality,
one system assures and reassures a client with a clear solution. Though
many adopt this route, it would be not our choice of growth strategy,"
says Dr Velumani.
Mohan Raju does not dismiss the acquisition model completely
but believes that the risks should be carefully assessed. "There
are pros and cons. Most labs have a presence in just one place. There
are very few quality labs in India who have 10-15 units across different
places in India. And it becomes very difficult to negotiate with each
individual player. But if everything suits, definitely, acquisition is
the fastest way of expansion," he says.
Metropolis has emphasised on building networks through
acquisition of smaller labs across the county as well as setting up new
labs as a part of greenfield projects.
Hub and Spoke: Thyrocare has adopted the
strategy of 'one laboratory - many collection centres'. "Right now
more than 15,000 laboratories and hospitals are collecting samples on
our behalf (or for their own business) and sending them through our 600
hubs to Mumbai, every night. This is the tested, proven and the most cost-effective
model and we will continue to work on it. Of course, we are in search
of better models of delivering a bigger menu and that is a challenge,"
opines Dr Velumani.
Franchisee: Another concept being tested
is the franchisee labs. This benefits both the parties as it helps the
franchisee to increase business using a brand name, and the franchisor
in turn generates business in specialised tests and increases visibility
and reach where ROI is not justified. However, the market leaders have difference of opinion
about its usefulness. "If the franchisees don't have healthcare background,
they don't understand the important sensitivities of testing. People who
are pure business minded only go for the commercial interest and might
not understand the other aspects of healthcare. Therefore, we always feel
that if we are in control of the entire process then we can ensure that
quality and accuracy is 100 per cent," opines Patel.
Thyrocare, which is said to be the only player in the
market expanding through 100 per cent franchisee model, has total faith
in its functionality. Says Dr Velumani, "If only pathologists are
hired as franchisees, then franchisee is an ideal model to follow."
However, out of 600 franchisees that Thyrocare has all
over India, 100 are hospitals, 100 are pathologists and rest are entrepreneurs.
"For our franchisees who are entrepreneurs, we have selected the
test menu which can be done even in the absence of professionals. For
example, we have not selected microbiology or molecular biology but tests
which analysers can do," explains Dr Velumani. He also emphasises
on the cruciality of training for all its franchisees, which is done once
in a year for one week without fail.
Experts suggest all the business models have their own
benefits and a combination of all in the right proportions would be the
most effective.
Collection centres have also proven to be effective in
creating reach; however, their effectiveness is significantly less compared
to the physical presence of a lab.
Considering PPPs: Leading market players
are also considering Public-Private Partnerships (PPP) as an opportunity
to expand their presence in the market. Metropolis has recently entered
into a PPP with UP Government under which 40 primary care centres will
outsource their pathology tests to Metropolis. Dr Lal Pathlabs has entered
into a similar PPP with the Government of Tripura for the whole of Tripura
State.
Looking towards Capital Market: For funding,
leaders are exploring options like IPOs and private equities. Dr Lal Pathlabs
hopes to meet expansion needs through acquisitions and new laboratories
by internal accruals, venture fund Sequoia Capital and debt. The company
is building Asia's biggest laboratory (85,000 sq ft) in New Delhi, to
be commissioned by May 2009. On the other hand, SRL Ranbaxy is planning
an IPO to raise funds for the Group's total corporate plans. "Even the organised segment is currently too small
to go public for funds. We foresee more private equity investment in labs
as PE players bring in the management expertise required to support the
entrepreneurs with their services based focus," opines Dalal.
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New Avenues: Tier II and III Cities
 "The
fragmented diagnostic market in India would soon witness consolidation"
- Ameera Patel
Executive Director
Metropolis
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 "Our
early focus is in large cities where demand is the greatest and the infrastructure
is amenable to its services"
- Janak Singh Bajwa
Managing Director
Quest Diagnostics India
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 "We
are concentrating on both greenfield ventures as well as taking over pathology
labs through the acquisition route"
- Dr Arvind Lal
Chairman & MD
Dr Lal Pathlabs
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Besides the tier I cities, large players have observed tremendous
potential in the tier II cities as many healthcare giants aim to tap this market.
"Towns are becoming cities. In India there are 100 cities with population
worth setting up a decent healthcare institution. The opportunity is big and
growing for both healthcare and diagnostics. In fact, demographically also such
cities are more promising than the established metros where competition is more
severe," opines Dr Velumani.
Quest Diagnostics' early focus is in large cities where demand
is the greatest and the infrastructure is amenable to its services. "However,
tier II cities are growing very fast and have the potential to offer improved
healthcare services to their populations. These towns have significant opportunities
in store for healthcare from both the demand and supply sides. Also, there is
a rise in income and a demand for quality healthcare services in these cities,"
says Janak Singh Bajwa, Managing Director, Quest Diagnostics India.
However, according to Dalal, currently no big player is directly
present in this segment but only through collection centres. "The profitability
of centres in tier III towns still prevents the large players from entering
these geographies. Paying capacity is also questionable," he says. It is
also a highly underserved market, in need of basic lab services whereas facilities
are currently skewed towards urban areas. Experts are hopeful that the Government
will open up this sector through public-private partnerships.
Today, Wellspring is present in tier II cities by way of
collection centres. Dr Lal Pathlabs has penetrated tier II towns like Kanpur,
Ludhiana and Agartala, with 550 collection centres and 28 laboratories spread
across India.
Sneha Diagnostics has focused on district centres and satellite
centres at taluk level. However, it has identified many challenges in the process
of penetrating these markets. "Challenges include low per capita income
levels (where people are very conscious of the price they pay) and price competition
with local highly unorganised and 'zero quality' players. And when every local
medical practitioner has his/her own small lab where they enjoy 90 per cent
direct profit it takes more time and effort and perseverance for businesses
like us to convince the customer about the advantage and disadvantages of quality
test results," says KK Mohan Raju, Founder and Chairman, Sneha Diagnostics.
SRL Ranbaxy today has a presence in most tier II cities and considers tier III
cities as a potential market. "For instance, in Kerala we are in Trichur
which is not the largest city but is a financial centre. Now, we are looking
at expanding in Kochi and Thiruvananthapuram. The potential depends on the level
of healthcare in that city. If there are doctors, then there is business for
us," states Dr Chaudhry. Dalal agrees, "It is a highly personality-driven
business, where the doctor plays a vital role for the patient. And in spite
of labs acquired by large players, it will be important to retain the local
doctor, as business is largely driven by his name. The presence of corporates
will help in effective management."
Eyeing Foreign Shores
Market leaders see a huge potential in overseas markets like the Middle East,
Sri Lanka, South Africa, the US and the UK. Today, Metropolis has penetrated
overseas markets with three labs in the Middle East, one each in Sri Lanka and
South Africa and is planning to make a foray into Thailand and European markets
soon. "There is a huge potential for us in the Middle East countries as
these are all emerging economies, growing as fast as India," says Patel.
The management is also keen on expanding the presence of Metropolis in emerging
markets like Sri Lanka, Thailand and South East Asia through consolidations.
The company is present in mature markets like the US and Europe through Medical
Business Process Outsourcing, a concept similar to Knowledge Process Outsourcing.
Says Dr Chaudhry, "The (Persian) Gulf is the major growth market to tap
as the population is increasing and there are no big labs in that part of the
world. The samples either go to Europe or come to India so there is room for
local testing. In the Middle East, we will opt for acquisitions only as it will
give us a head start.”
The Future is Insurance
The next big thing slated to impact the Indian diagnostic industry is health
insurance. "So far, health insurance was alien to Indian healthcare and
now covers treatment and not diagnostics. Patients are still paying for tests
out-of-pocket. We are expecting this trend will change drastically in the future
because diagnostics will also come under the health insurance umbrella,"
opines Patel. Patients will not have to pay out-of-pocket and once that happens
even the doctors will feel less pressurised in prescribing required tests. Affordability
will not become a constraint for the tests patients want to get done for their
health.
According to Patel, health insurance companies would like to deal with only
a few major players across the county who can give them facilities like centralised
billing and uniform price. Metropolis is currently working with big insurance
players like ICICI Prudential Life, Birla Sunlife and Tata AIG.
Quest Diagnostics, through its agreement with Birla Sun Life, intends to bring
to India a level of expertise in health assessment, testing and related services
that has, until now, largely been absent from the country's booming insurance
market. "As India's insurance market continues its fast paced growth, we
look forward to delivering services that will enable Birla Sun Life to drive
quality and cost efficiencies in its underwriting process," concludes Bajwa.
Thus, be it the local market or foreign shores, the diagnostics market is stretching
its wings in all possible directions, making it one of the most talked about
success stories in this sunrise industry.
sonal.shukla@expressindia.com
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