MUMBAI: India’s diagnostics sector is set to witness disruption with new entrants offering deep discounts to grab market share in the high-volume routine medical tests segment. The industry has been abuzz recently with Tata 1mg offering routine screening — targeting the chronic segment like vitamin D and diabetes — at rock-bottom rates of Rs 199 and Rs 99, respectively. Most of these tests are discounted by about 85% to the industry average under promotional schemes.
Discounts could cause volume loss and in turn impact margins of diagnostic companies, analysts said. This comes amid a subdued performance, with revenues expected to drop during the first quarter (April-June) for major companies like Dr Lal Pathlabs and Metropolis, due to the waning opportunity in Covid testing, they added.
For now, the pricing strategy is largely restricted to entrants for grabbing volumes quickly and scale up in the preventive segment, which is about 10% of the total industry.
Competition in the sector has been hotting up over the last few months, with even large hospitals like Apollo and drug firm Lupin jumping into the fray. Other corporate biggies like Tata acquired e-pharmacy chain 1mg and launched diagnostics, and Reliance started its own diagnostics wing some time ago, and its acquisition of e-pharmacy Netmeds can boost that growth.
Last year, diagnostics firm Thyrocare was acquired by e-pharmacy company PharmEasy, while pharmacy retailer Medplus has become aggressive in diagnostics. Large hospital chains have also announced aggressive investment plans to capture the huge potential.
“We believe the industry is ripe for disruption, with high inherent margins and significant economies of scale possible, driven by technology and operational efficiency. We had a fantastic response from consumers to our campaign and will continue to experiment & innovate, and deliver world-class quality at scale. Large labs do enjoy very high margins, and we are experimenting with demand-supply cost equation — prices in this sector will have to be disrupted,” Tata 1mg CEO & co-founder Prashant Tandon told TOI.
Large players that have around 4,000 tests and an established base coupled with strong financials in their arsenal may not lower rates and absorb the impact for now, industry experts say. Hoping that the pricing strategy is a ‘temporary hack’ for customer acquisition, an industry player said the deeply discounted tests are loss-making and, if they continue, everyone may fight for revenue and bleed.
A diagnostic test at home costs at least Rs 350 for the sample collection by a phlebotomist (person who takes blood samples), testing procedure at the lab, and logistics. Anything charged less than this amount will be loss-making, the executive explained. An analyst from I-Sec said discounts & offers by new players could cause volume loss for other players, or others may follow suit and cut prices to secure those volumes, but in turn deteriorate profitability.
Dr A Velumani disrupted the Rs 67,500-crore diagnostics industry with his firm Thyrocare by slashing prices across tests. He said, “All major players would find it stressful to suddenly compromise on their margins, but if they do, their volumes will help them to compensate in balance sheet.” He added that the popular test package, Aarogyam 1.3 — which includes lipid, liver, thyroid, kidney, along with screening of diabetes, vitamins D & B12 — for as low as Rs 1,600 had a 40% ebitda (earnings before interest, taxes, depreciation and amortisation).
Large corporate labs operate with 30-40% ebitda, after giving significant margins in the channel to franchisees and other partners. So, there are genuinely very high margins possible in this space if one has the demand at scale, an expert added.
The industry has low-entry barriers, high margins, healthy return ratios and high cash flow generation. Hence, it has always been a lucrative business. But the biggest hurdle has been low awareness and a general push model (doctor-driven, preventive and wellness care — 8-10% of overall industry). Thus, the industry remains fragmented with organised players/national chains covering less than 20% of the whole industry, the I-Sec note said. Since it is more of a referral and branding play, capturing volume with discounted prices is difficult since doctors influence the highly unregulated and unorganised market to a great extent, it added.