In this blog, we will discuss an important topic that is in minds of every investor – Competition in the Diagnostics Industry. Do not miss out my previous blog on the expected value migration/consolidation expected the Diagnostics Industry in future.
(Featured image credits: https://www.pexels.com/photo/battle-board-game-castle-challenge-277124/)
Brief Background of this Blog Series
Diagnostics Industry was of interest to me since 2017. However, I could spend dedicated time only during 2021 to study this industry. The contents that you see in the coming blogs were mined from Annual Reports, Concalls, RHP, Management interviews and a few Twitter spaces by Mr Aditya Khemka and Dr Velumani.
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Overview of Competition in the Diagnostics Industry
The present industry landscape:
- Diagnostic chains
- Listed Pan India Diagnostics chains
- Listed Regional Diagnostics chains
- Unlisted Regional Diagnostics chains
- Huge number of unorganized players (Standalone centers + Hospital based chains)
There are new types of competition entering this industry over the last few months. They are:
- Online players
- Pharma companies
The online players have made few disruptive moves i.e. Throw away prices for few tests, and have raised the eye brows of the public, investor community, medical community and even the Diagnostics companies. In general, Diagnostic chains are well established, enjoy a good brand image and less threat from unorganized. The competitive landscape between the organized and unorganized segment is fairly predictable. The entry of the new types of competition have tilted the competitive landscape. In this blog we deep dive on the impact of new type of competition.
Competition that the Diagnostics companies face can be seen at 4 levels.
- Diagnostics chains
- Unorganized segment
- Online Players
- Pharma companies
Each competition is unique and let us understand it in detail.
Analysis of Different Kinds of Competition
Diagnostics Chains
Context: Competition between the Diagnostics chains.
The is less competition between diagnostic chains. Even if competition exits the nature of competition is very benign. They companies operate in different segments. Thyrocare is more into Preventive/Wellness diagnostics, Dr. Lalpath and Metropolis are into illness/Prescriptive diagnostics, and Krsnaa diagnostics is more into PPP/B2G model.
In the views of management…
“I believe that there is no competition in the Indian health care industry, it is only miniscule, that too presumed, assumed. The market is so big with a billion population and 10+ Thyrocare can comfortably smile and do business. The competition is not between 4 or 5 organized players – The competition is between the organized (15%) and the unorganized (85%). No worry about competition atleast till 2025.” – Dr. Velumani, CEO, Thyrocare
“Thyrocare is more on wellness space and therefore we do not land up competing much with each other.” – Ameera Shah, MD Metropolis
One obvious theme that is coming out is that the companies would not be competing with each other. Instead, they compete with Unorganized segment. Since more than 80% of industry is still with the Unorganized segments, it makes a perfect business case for these Diagnostics chains to compete with Unorganized segment.
Unorganized Segment
Context: Competition between Diagnostics chains and Standalone labs/Hospitals in the unorganized segment.
- Diagnostics chains face competition from a huge pool of unorganized laboratories that offer variety of low-priced testing options to patients. However, it is restricted to routine and lesser complex test.
- Hospital-based diagnostic centers have the advantage of a captive patient base (both in-patient and outpatient).
- Three key areas where Diagnostic Chains have an edge is (1) standalone centers may have limited test offerings, (2) The perceived quality of testing may be less when compared to a diagnostic chain, (3) Unavailability of complex tests with the unorganized players and (4) Low cost structure.
Thus, in the next few years, it can expected that the Diagnostics chains will capture greater market share from the unorganized segment. You may need to read my previous blog to understand the advantages that Diagnostics chains have over the players of the Unorganized segment.
Online Players
Context: Competition between Diagnostics chains and new Online players
- In the last few months many online companies have entered this industry.
- The have published advertisements with disruptive test prices. (Infact, the stock prices of the listed Diagnostic companies fell sharply on the day the advertisement was published. This was somewhere in 2022-Q3.)
- Key draw back of these players is that they do not have much exposure to healthcare business. The Healthcare industry is not like other industry where one can bring money and disrupt the current players. It needs trust of medical community and patients. This does not happen overnight, but over years.
- Their advantages are access to funding and technology edge that helps to create platforms.
Views from the Diagnostics Chains
The best understanding of this competition and why it can’t be a threat (atleast in immediate future) is well answered by Ameera Shah, MD Metropolis in their concall held in May 2022. (The link to the transcript)
“In health care, it is important to understand that trust, science and consistency of reports and test play a very critical role. In diagnostics, the doctor’s medication to a patient is based on the basis of a scientific correct lab report. A liver function profile that 1 lab is not the same as another. So, a simple price comparison is difficult when the ingredients are not the same. Doctors understand these nuances, although patients don’t. And this is where we believe pricing disruption will be lower in the illness space because doctors who are the biggest influencers in diagnostics value chain are more concerned about the quality of the lab and the consistency of the report rather than only pricing, especially in situations of moderate to critical illness.
Discounts can give you a bump in revenue on the short-term basis, but the real question is, are you really creating a consistent, quality focused scientific approach to diagnostics for the doctors to recommend your brand to patients? Having said this, we also believe that there is a segment of business that will be influenced by low prices. And this is the segment which has a low influence by doctors, which is not illness but wellness based.”
Inference
We can expect that online players can disrupt of enter the wellness-based segment. In this segment, there is no doctor referrals and low pricing influences the purchase decision. However it is not going to be easy to disrupt the illness space given the existing relationship between the medical community and Diagnostics companies.
Pharma Companies
Context: Competition between Diagnostics chains and Pharma companies
- Large Pharma companies have entered diagnostics recently, leveraging their existing strong doctor relationships
- Lupin had announced the formal launch of its diagnostic operations in Dec-2021 through its wholly owned subsidiary—Lupin Diagnostics.
- Pharma companies have the advantage of strong existing brand and existing connection with the medical community through their branded generic formulations business
- The companies have an existing large field force (Medical representatives, salespersons, distributors etc), who connect with the doctors on a frequent basis to promote the company’s drugs.
- On a comparative basis, the size of such teams for a national diagnostic lab chain is small (in order of hundreds) compared to the pharma companies (in order of thousands).
- The pharma companies would deploy this field force to connect with the doctors to include diagnostic tests in the prescriptions for effective diagnosis. The model they could adopt is doctor referrals:
- A patient goes to a doctor, who recommends diagnostics test in a lab run by these pharma companies
- Based out the outcome of the results, the doctor prescribes the medicines, which in most case would be manufactured by the same Pharma company
- There is huge Synergy by this cross selling. Thus there is a strong business case for Pharma companies to enter the diagnostics space.
Source: Credit Suisse Report, Indian Diagnostics Sector, September 2022.
Inference
Pharma companies have low capital investment required (on labs, collection network, field force, etc.) and existing relationships with doctors, pharma companies. Thus, more Pharma companies can be expected to enter the diagnostics industry. Pharma companies may also build a B2C platform, where they can combine pharmacy, teleconsultation and diagnostics to offer it as a combination platform to consumers.
Views from Industry & Experts
Ameera Shah, MD Metropolis
The below are the views by Ameera Shah, MD Metropolis during their concall held in May 2022 (The link to the transcript) helps with a better understanding of the competition and what can be expected in future.
“The hard work, the distribution, the specialized tests and more importantly, the expertise that we have built up in health care, this is not so easy to replicate. I want you to just think through your own examples and say that tomorrow if any one of these groups just came in and said, now we are offering all services, are you going to stop going to the doctors that you trust because somebody else is offering it. I don’t think it works like that when you’re sick. When you’re sick, you want to go to people who trust, you want to go to where you feel you’ve got reassurance that you’re going to get better, that you’re going to get the right test. When you have cancer, you’re worried about treating the cancer, you’re not worried about whether you go to group A or group B. You want to go to the doctor, the lab, the treatment where you’re going to get the best treatment possible and get well soon.”
Aditya Khemka, Investor
Views from multiple Twitter spaces, compiled below.
Investors are in the wrong notion that new players will target the 15% market share and not the 85% with unorganized. They will not challenge the incumbent. It is not a war; it is business where economics have a play. New players will not fight against incumbents for their 15% market share. Instead, it would be on the 85% of the market is unorganized. There is also enough room for multiple players.
Credit Suisse Report
The below is extracts from the Credit Suisse Report, India Diagnostics Sector, September 2022.
“Pricing is a key consideration in an out-of-pocket healthcare market like India. However, the condition still would be the results must be reliable and the services adhere to basic quality standards. This is applicable in commodity healthcare services, like routine diagnostic tests, where pricing drives a majority of the decision. On the other hand, for specialized tests, the perception of quality and brand value of the diagnostic lab would have a higher precedence. As a result, the competition is mainly entering the routine and semi-specialized test segments and competing aggressively on pricing.”
To Close…
Relationship building, brand and trust is very crucial to this business. Building this takes time which the existing diagnostics company have built over the years. This is difficult for new players to replicate. However, at this point of time, there are no right or wrong answers. Only future would reveal how things pan out.
Hope you found this blog useful. Do share my blogs with your friends, peers and fellow investors.
Hi Venkat,
Very useful information.
Very well outined the Diagnostic Landscape. Very good place to kickstart the journey in diagnostic for a novice like me. Thanks a lot Venkat!