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

"Since market is focused on sick care, it is worthwhile to work on preventive care" - Dr A Velumani Managing Director Thyrocare Technologies

"People have begun to realise the importance of accurate diagnosis before they begin treatment" - Dr Sanjeev Chaudhry CEO SRL Ranbaxy

"Hospitals still feel that diagnostics is one of the most profitable areas, but they are unable to manage it themselves" - Girish Mehta President & SBU Head Piramal Diagnostics

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

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

"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

"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

"The fragmented diagnostic market in India would soon witness consolidation" - Ameera Patel Executive Director Metropolis

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."

New Avenues: Tier II and III Cities

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