The diagnostics industry in India could see rapid moves toward consolidation and formalization, executives at major chains said, as stand-alone laboratories struggled with cash and demand for quality services following the covid-19 pandemic and the nationwide lockdown.
Unorganized labs make up around half of the roughly $10 billion market in India.
“The unorganized segment, like smaller labs, has not been operating at this time because managing staff, preventing their infection and meeting consumer expectations have been quite challenging during the lockdown,” said Ameera Shah, managing director of Metropolis Healthcare, a leading diagnostics chain. “My sense is we may see a lot of movement from small labs to larger branded players like us in markets like Mumbai.”
The lockdown has led to a severe disruption in the healthcare industry, with visits to clinics and hospital out-patient departments falling sharply in April and May. This also hit the diagnostics sector, which earns most of its revenue from pathology services that require doctors’ prescriptions.
This was reflected in the revenue and profitability of diagnostic lab chains for April-June. Metropolis’ consolidated revenue was down 30% year-on-year, while for Thyrocare Technologies, it was down by a half. Revenues of their larger rivals Fortis Healthcare subsidiary SRL and Dr Lal PathLabs were down by half and a fifth, respectively.
The slump in sales came despite the new revenue source of covid-19 testing that made up about a third of their revenues for the quarter. However, industry executives said they could sail through the tough two months because of their strong balance sheets, something that was difficult for smaller unorganized players.
“During the lockdown, revenues dried up, but no expenditure came down for the entire healthcare industry. Having said that, covid will lead to a new order. Organized will grow faster while unorganized will die faster. The entire model of brick and mortar is dying and online and digital are growing,” Thyrocare chairman, managing director and chief executive A. Velumani, said, adding that he expects greater online presence to benefit the organised diagnostic labs.
While there is no formal estimate of the size of the industry, market leader Dr Lal PathLabs in its recent annual report estimated it at ₹80,000 crore, with organized branded chains accounting for just 15% of the market and unorganized players accounting for nearly half of it. The rest of the share is hospital-based diagnostic centres.
Consolidation in the industry has been on for the last few years on sustained pricing pressure for pathological tests which are generally similar across the industry. Since the start of 2018, there have been 15 mergers and acquisitions in the industry, according to data by Venture Intelligence.
Among the prominent deals, Metropolis acquired Yash Clinical Laboratory and Doctors Clinical Laboratory last September.