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WAVE OF CONSOLIDATION IN DIAGNOSTICS SECTOR: KEY IMPERATIVES
DIAGNOSTICS
Kaustav Ganguli,Managing Director,Alvarez & Marsal and Ram Panda,Senior Director, Alvarez & Marsal explains that there are significant opportunities to deepen the adoption of quality diagnostics in lower tier towns and cities as well as support the development of specialised testing centers or centers of excellence in the hub locations
The Indian diagnostics market is currently estimated to be 700 billion as of FY22. It has been growing at 13-14 per cent CAGR driven by increase in ageing population, rise in noncommunicable diseases as well as infectious diseases, upsurge in convenience and preventive wellness categories and emergence of direct-toconsumer channels. Worldwide as well as in India, there has been a massive shift in consumer ideologies in health management after the three substantial waves of COVID-19 and its rapidly mutating virus strains. This has accelerated the consumer propensity towards proactive management of health and wellbeing.
Need to exhibit high growth to sustain premium valua-
tion: For more than a decade, pathology businesses have been lucrative to investors as this space offers significant headroom for rapid growth of organised market participants and is highly capital efficient. These industry traits meant the organised chains (listed or unlisted) were offered significant premiums on their valuations. To sustain these valuation premiums, the organised players would need to display high growth and sustainable margins over a long period of time.
Headwinds in the diagnos-
tics sector: In the last five years, the diagnostics space has witnessed multiple headwinds. One, the industry has witnessed the rapid emergence of low-cost diagnostic providers and digital ecosystem players in the industry, who are disrupting the routine testing and preventive/wellness categories with their D2C sourcing and deep discounting vs. traditional players. Secondly, in the maturing micro-markets in metro and tier 1 cities, there has been a discernible slowdown in growth. The key imperatives for traditional players to drive growth and sustain valuations are to expand beyond their core geographies, deepen the doctor network and develop a menu of specialised test offerings.
Mounting pressure on small
regional players: At the same time, small regional players who have typically had 70 per cent+ of their revenues from routine tests are also experiencing heightened competition from new-age players. Discounted pricing to compete with the new-age players, the need to offer convenience to patients through home collections and partnerships with aggregators for patient sourcing have led to pressure on both revenue and margins for unorganised labs and small-sized players. The pandemic has widened the gap even further with unorganised players struggling to operate in the first year of pandemic and large organised players benefiting from COVID-19 and related testing during the pandemic.
Factors driving consolida-
tion: Given this industry context, there are several factors that are driving the wave of consolidation in the pathology sector. The larger organised players who are cashrich and have faced challenges in driving organic growth in the recent past, are looking at inorganic opportunities to drive growth. This inorganic drive is well-timed, given the struggles of the smaller, unorganised players. It will help them eradicate roadblocks pertaining to growth, especially in lower tier markets which have not yet seen penetration by the new-age players. On the other hand, negotiating the onslaught of the new age models in leading metro or tier 1 markets will require the traditional organised players to develop deeper capabilities in specialised testing, some of which could again be acquired through inorganic routes.
Given the softening prices of listed assets and the headwinds that the sector has endured over the last 12 months, prices of smaller acquisition targets are likely to be rational and that would make this an opportune time for consolidation. Post-acquisition valuation will be contingent on the ability of the organised players to drive successful integration and value creation.
India is still a vastly undertested and under-diagnosed market in comparison to most developed nations. There are significant opportunities to deepen the adoption of quality diagnostics in lower tier towns and cities as well as support the development of specialised testing centers or centers of excellence in the hub locations. With the largescale deal activity prevalent in the diagnostics space and advent of many new-age players, penetration of diagnostics is expected to increase. We expect many unorganised players to be gradually acquired by the larger chains or become a part of their sourcing and delivery network. Organised players will have to ramp up digital capabilities and expand their play in acute and specialised segments to stay relevant in the sector.
KaustavGanguli Ram Panda
India is still a vastly under-tested and underdiagnosed market in comparison to most developed nations.There are significant opportunities to deepen the adoption of quality diagnostics in lower tier towns and cities as well as support the development of specialised testing centers or centers of excellence in the hub locations
