Diagnostic chains look to smaller towns

Leading diagnostic chain, Dr Lal Pathlabs, is eyeing acquisitions in western and southern India.

It has laid out an ambitious plan to scale up operations and has earmarked Rs 250 crore (Rs 2.5 billion) for the purpose.

Not far back, in 2010, SRL Diagnostics, promoted by former Ranbaxy promoters Malvinder and Shivinder Singh, acquired the diagnostic services business of Piramal Healthcare for Rs 600 crore (Rs 6 billion).

The deal allowed SRL access to network of 107 laboratories across the country.

Not to be left behind, another all-India diagnostic chain, Metropolis, acquired two brownfield ventures in Chandigarh and Jodhpur last year and has plans to invest Rs 1 crore (Rs 10 million) each in Lucknow, Bareilly and Jalandhar to set up new centres.

Diagnostics, the poor cousin of the $65-billion healthcare industry, is churning and expanding as the rise in chronic diseases and increasing awareness about preventive medicine open up new opportunities for established players in smaller cities and towns.

The sector, largely unorganised and fragmented, has around 60,000 players.

Experts believe for the few big players -- Dr Lal Pathlabs, SRL Diagnostics, Metropolis Healthcare, Thyrocare and Quest Diagnostics -- there is a huge potential for expansion in the regional market where the quality of services offered are often suspect.

“There is a huge potential in the radiology space because it is a niche area, which requires high capital investment, but offers tremendous volumes,” says Charu Sehgal, senior director of strategy and operations consulting at Deloitte Touche.

To quickly fill the gap, large players are taking the mergers and acquisitions route to expand their footprint.

Om Manchanda, chief executive officer, Dr Lal Pathlabs, says the company is much more focused on inorganic growth, and has earmarked Rs 250 crore (Rs 2.5 billion) for the purpose.

It is in buy-out talks with various diagnostic chains in Chennai, Hyderabad, Bangalore and Kolkata.

However, with only a handful of large players, companies are mainly looking at city-based players with more than one centre.

They are also merging the traditionally distinct arms of diagnostics -- radiology and pathology -- into one.

According to a recent PricewaterhouseCoopers study, the diagnostics market is estimated at Rs 18,502 crore (Rs 185.02 billion), or about five per cent of the total healthcare industry.

Of this, pathology, which includes testing of samples, accounts for Rs 10,339 crore (Rs 103.39 billion) while radiology makes up for Rs 8,162 crore (Rs 81.62 billion)

The segment together is growing at 15

per cent annually.

As of now, most leading players are focused on pathology with only a marginal interest in low-end radiology, which entails ultrasound and X-rays.

Services such as high-end imaging (computed tomography and magnetic resonance imaging) are mostly the preserve of bigger hospital chains.

“Most of the business in high-end imaging is generated through hospital prescription,” says Sehgal.

However, recent years have seen a surge in the number of patients who require both pathological and radiological tests for diagnosis, making convergence of the two arms a necessity.

A sideshow of this consolidation and convergence drive has been a shift in the marketing and business strategy of the labs.

Until now, their business was largely driven by doctors’ prescriptions, but now they are reaching out to customers on their own, selling preventive care and check-ups.

“The whole pathology business has so far been very doctor focused. Direct-to-consumer communication did not exist.

“Now, you will see hoardings of pathology labs, you will find inserts in newspapers and radio advertisement too.

“These were unheard of earlier,” says Manchanda.

Industry estimates show, company spending on direct-to-consumer promotions has increased five to six times in the past three to four years.

Rise in chronic diseases is another factor leading to the shift in marketing strategy.

“In pathology, 30-35 per cent sales are generated from chronic diseases.

These are areas where one does not necessarily need a prescription for testing. For instance, in diabetes, cholesterol and cardiovascular diseases, there is a need for regular monitoring.

So, one may visit labs frequently and may not visit a doctor everytime,” says Manchanda. To cater to this segment, companies are ramping up their infrastructure to become more consumer friendly.

Most large chains now offer home pick-up of samples and test reports online.

However, this rapid expansion is not without its challenges.

For one, not all of these new labs may be of stellar quality.

“There are absolutely no requirements for opening a lab. This is the reason that a lot of smaller labs, which do not provide quality service, are existing in this segment and eating away most of the business,” says Ravi Desai, chief medical officer, Metropolis.

According to the PwC report, growth could also be hit by higher cost of acquiring customers and competition from unorganised players.

The consolidated revenue of the major players in the sector is merely 10 per cent of the Rs 10,000 crore (Rs 100 billion), revenue annually.