Ankur Gupta, Associate Partner, Singhi Advisors in an interaction with Express Healthcare highlights that the diagnostics equipment and reagent sector is likely to witness a consolidation drive for gaining a crucial competitive edge over large MNC players who have economies of scale and are in a far better position to offer advanced services and better schemes
What are the factors driving large-scale consolidation in the Indian diagnostics space?
The Indian diagnostics market was estimated to be around Rs 800 billion in 2020 and is growing at a CAGR of 16.5 per cent. It is estimated to grow to Rs 1085 billion in 2022. The diagnostics sector has been one of the fastest growing service segments in the Indian healthcare space. With India witnessing 3 waves of the COVID-19 pandemic and the fact that people with existing comorbidities were at a higher risk of dying from the pandemic, there was a phenomenal rise in demand for diagnostic testing. Emerging self-care trends are driving a large number of persons to go for preventive checks on a periodical basis. This phenomenon is likely to continue over a longer period of time as people become more cautious and increasingly receptive to the need of having regular health examinations. On the supply side, the ease of getting diagnostic tests done from home has also improved significantly with trained technicians coming for home sample collections, now offering better coverage and TAT. With organised diagnostics players also shifting their focus to tier 3 and 4 cities and small towns, consolidation activity in the sector has accelerated. The diagnostics equipment and reagent sector is likely to witness a consolidation drive for gaining a crucial competitive edge over large MNC players who have economies of scale and are in a far better position to offer advanced services and better schemes.
Could you quote recent examples of big-ticket diagnostic chains taking over smaller players?
The COVID-19 pandemic was a key factor in driving consolidation and enhanced investor interest in the Indian diagnostics space. There has been a flurry of consolidation activity in the sector. Dr Lal Path Labs (LPL) acquired Suburban Diagnostics in October 2021 at an enterprise value of Rs 925 crore in an all-cash deal. A part of an inorganic growth strategy aimed at creating long-term sustainable businesses, diagnostics chain Metropolis Healthcare has completed 22 acquisitions in 15 years. Metropolis acquired Dr. Ganesan’s Hitech Diagnostic Centre Pvt Ltd at an enterprise value of Rs 625 crore in January 2021. DocOn Technologies Pvt Ltd acquired Thyrocare Technologies Ltd at an enterprise value of Rs 6,857 crore in June 2021. A number of players are thus leveraging the consolidation route to maintain business sustainability in an environment that is becoming hyper competitive.
With the diagnostics sector witnessing phenomenal deal activity, how will it impact asset monetisation and pricing?
The peak of margins in the sector has already been achieved. Now it is normal business for a majority of the players. There has been a rationalisation in the pricing structure of COVID-19 test kits which now cost a fraction of the earlier price levels of Rs 1500-2000. The tests for COVID-19 may not happen in a regular manner but tests for diseases like diabetes and other ailments may be needed to be carried out in a cyclical manner. When market penetration of any business increases, it becomes sustainable leading to a rise in the price of the asset.
Is there a need to put in place a strict checks and balances systems to control the entry of deal participants in terms of quality and quantity?
The barrier to entry in the diagnostics space is not very high for small players. However, the acceptability of the diagnostics chain depends on key parameters like quick delivery of reports and their accuracy. This is because future treatment course and outcomes will be based on the reports. The smaller diagnostics players become part of the larger chain through acquisitions or by way of becoming channel partners. The barrier to entry does not lie in opening a diagnostic center but lies in getting customers to trust the center. That is why people prefer to go to large diagnostic chains who have a pan-India presence and have higher levels of trust and credibility. However, within the sector the 4-5 large players will be cooperative enough to ensure that the prices of diagnostics do not go up. When there is enough delta
How is the diagnostics space evolving in India?
The diagnostic sector in the country have still not fully penetrated tier 2 and 3 cities and small towns in the country. The next level of penetration will take place in the hinterlands of India. The rise in ability to collect samples, becoming channel partner with a large chain or being part of a hospital chain will facilitate deeper market penetration. When there is still delta available to grow deeper in a smaller town, that will have enough market available to grow. Having said that, will this benefit small players? Not necessarily. The smaller players will become part of larger diagnostic chains. The real business gain will happen in the reagents segment which are diagnostic kits.
Do you foresee the deal momentum sustain in the near to medium term?
The deal momentum will sustain more on the reagent and supply chain side unlocking more value in the diagnostics services space. It is quite possible that we may witness the emergence of specialised logistics companies who will make use of their supply chain to pick customers’ blood and supply to the deficient. This is a delta where the efficiency is not that high, which can be exploited by help of M&A in this area, which can unlock greater value than just M&A focussed on consolidation of labs. Nevertheless, M&A in the diagnostics services sector though slow will continue, given that the market is still highly fragmented, underserved and underpenetrated. A decent pace of M&A activity will be witnessed in the laboratory segment with a large number of new players looking for consolidation targets.