Diagnosing India’s Pathology Market
Metropolis. Thyrocare. Dr Lal PathLabs. It’s never a good occasion when somebody breathes their name. These pathology chains would be called upon by the recommendation of your doctor — who thinks you either have a disease or has suggested a preventive checkup. For context, Pathology is the study of the causes and effects of disease or injury. The word pathology also refers to the study of disease in general, incorporating a wide range of bioscience research fields and medical practices. While those of us residing in tier-1 cities would never have faced an access issue — the same can’t be said for the country at large. The redemption for those in tier-2 and tier-3 cities is the number of smaller diagnostic chains that have popped up across the country.
That being said, there are about 6,000 doctors in the country with a degree of MD in pathology while the number of labs in the country is estimated at over 3.2 lakhs. Total technicians working in the labs, on the other hand, are estimated at nearly 38,000. This is a potential medical hazard that is only inviting negligence — and indeed there have been several cases of misdiagnosis all across the country.
Thus, on the 12th December 2017 in the matter of North Gujarat Unit of Association of Self Employed Owners (Paramedical) of Private Pathology Laboratories of Gujarat versus North Gujarat Pathologists Association — the Supreme court clearly stated that a Laboratory Report can be countersigned only by a registered medical practitioner with a post-graduate qualification in pathology. But in a not so shocking turn of events, the Medican Council of India’s Board of Governers (MCI-BOG) has advised the Union Health Ministry to allow even non-doctors, with relevant degrees, to issue reports but without offering any medical opinion or interpretation.
It has said that those with a masters degree in medical microbiology and medical biochemistry and Ph.D. in relevant subjects can sign lab reports without offering any opinion. Why is this not so shocking? It’s because this is (arguably) the lesser of the two evils. In a nation that is devoid of even basic access, a result is better than no result. The earlier 2017 verdict was impractical, to say the least. With the supply of pathologists constrained, and it being something that could take years or decades to fix, this is the equilibrium.
So where do we go from here? While the predicament of the rural class may discourage them to voice their concern against this issue — there still exists a large enough business opportunity which involves dishing out a much needed service to the masses of our country. So where should the smart money go? In simple words, if somebody wants to make a buck on India’s pathology market, where should they invest?
As of August 2019, the Indian diagnostics market was valued at $4 Billion by Edelweiss. The top 5 companies by revenue; namely Dr Lal, SRL, Metropolis, Neuberg and Thyrocare together clocked in a revenue of $433 Million in the year 2018. This accounts for only 10.8 percent of the entire market. The unorganised sector which comprises of small — regional laboratories accounts for 70% of the market. The remainder of the market includes small to medium sized laboratories.
The scope of my analysis will include the three publicly listed companies i.e. DR Lal, Metropolis and Thyrocare. Let’s begin by understanding their commercial model. As of March 2020, Dr Lal Path Labs has 216 clinical laboratories scattered across (mostly) tier 1 cities across the country. They follow a hub and spoke model wherein they have 216 “hubs”, and “spokes” in the form of patient service centers and pickup points. They have 3095 service centers, and~7000 pickup points across the country. The pickup points — as the name suggests are for the pickup of samples. The service centers aggregate the workload, and the final analysis of the sample is done at the laboratory itself.
Even though a share of Dr Lal’s (and Metropolis’) revenue is generated through B2B channels — where sourcing of orders is done from doctors, hospitals, or other clinics, the bulk of their business lies in catering directly to consumers. Unlike countries such as the US — where almost all tests require a prescription by a doctor, Indians are allowed to simply walk into a clinic and request a test. Indeed, both Dr Lal and Metropolis have capitalised on this huge opportunity and thus built out a well-oiled network to ensure that the consumer demand is met. Dr Lal even ensures to declare their logistical might on the home page of their website.
In contrast to this, Thyrocare registered 77% of its revenue through B2B channels — and has its focus set on expanding its revenue from such sources. The strength of its network lies in the breadth and depth of its partnerships with other healthcare providers across the country. Thus, it has a minimal focus on building out its own logistical network. Additionally, it has only 12 clinical laboratories across the country; one fully automated Centralised Processing Laboratory (CPL) and 11 Regional Processing Laboratories (RPL).
Despite the fact that Dr Lal has 18 times the number of laboratories as Thyrocare — they only have ~3 times the revenue. Dr Lal closed 2020 at Rs 1,38,540 Lac of revenue, while Thyrocare closed at Rs 44,000 Lac. This means that each of Thyrocare’s labs is at least 6 times as efficient as each of Dr Lal’s. Indeed, while Dr Lal boasts its logistical prowess on its website, Thyrocare flaunts the array of instruments it uses to automate its laboratories. The efficiency with which it runs its labs is a testament to the outcome of this automation.
A look at these companies’ financials provides proof of their differing methodologies. While Thyrocare’s revenues are 6.14 times their assets (I am referring to a very specific asset labeled as “laboratory equipment” in the balance sheet of these three companies), Dr Lal and Metropolis have the same number at 19.40 and 21.16 respectively. Indeed, it is the denominator at play, as despite its smaller scale Thyrocare has laboratory equipment on their books worth more than what Dr Lal and Metropolis have. To compensate for this expenditure, Thyrocare saves on the cost of personnel as they do not need to have as many lab technicians, pathologists, etc. operating their labs; they also save by not having as many supply chain and delivery executives on their payroll. This is reflected in each company’s employee benefit expenses as a percentage of their revenue. As of March 2020, this figure stands at 22%, 17.5%, and 11.1% for Metropolis, Dr Lal, and Thyrocare respectively.
Clearly, while Thyrocare has chosen the path of automation, the others still rely more on their workforce to get the job done. Bottomline on top — Thyrocare’s profits after tax (PAT) for the year 2020 stands at 20.1% of its revenue, while the same figures for Metropolis and Dr Lal stand at 14.7% and 16.4% respectively. Additionally, while the latter two have achieved scale — Thyrocare’s path to scalability seems less cumbersome since it involves tie-ups with existing small and medium sized labs all across the country.
Thyrocare has had two additional focus areas — preventive health care and low cost diagnostics. Albeit, today most large providers have a focus on preventive healthcare — Thyrocare has pioneered it since their inception in 1996. In a post-Covid world where the person is more conscious of their overall health, preventive healthcare will only gain in popularity. Even globally, 60% of healthcare expenditure is directed towards preventive healthcare. In India, the number stands at a pitiful 11%. Undoubtedly, efforts are being made to move towards the global trend — and Thyrocare is well positioned to cash in on the same. In terms of costing, the popular thyroid test in Thyrocare is priced at Rs 300, as compared to other players charging in the range of Rs 600–1,200. Similarly, other players charge Rs 2,000 for vitamin D tests as compared to Rs 400 charged by Thyrocare. This gives them that edge that is always up for grabs in a super price sensitive market like India.
The pricing itself is a product of their commercial model; in fact, it becomes possible to execute owing to:
a) their focus on B2B sources for generating demand — thus not having to spend on manpower, sales and marketing etc. and,
b) their ability to automate their laboratories — again saving on manpower cost, and increasing efficiency of each lab
Their are several positive externalities of the above mentioned points:
a) It allows Thyrocare to work with the government, which is increasingly stepping in and subsiding tests for the general populace. But this requires labs to be able to offer tests at a cheap rate and still not run into losses — a checkbox that Thyrocare ticks
b) It allows them to collaborate instead of compete with the stockpile of labs mushrooming all across the country, and
c) for the final consumer, it ensures a higher level of service.
As we already discussed — the latest court hearing does not mandate that each test report be reviewed by a qualified pathologist. Additionally, the low barrier to entry & cash rich nature of this industry has only ensured supply of diagnostic services, but does not account for the quality of it. Indeed, only 1 percent of diagnostic labs across the country have NABL (National Accreditation Board for Testing and Calibration Laboratories) accreditation. Needless to say, Thyrocare’s labs pass NABL’s standards. Thus, any resident of a tier-2 or tier-3 city can visit his local diagnostic lab but expect his sample to be processed and reviewed by a high quality diagnostic center (if they have tied up with Thyrocare). This way, the B2B model ensures a higher level of service for the final consumer.
We started off this piece by asking how an investor could profit off the current market scenario. Clearly, I have picked my horse. But, even the B2C model followed by Dr Lal and Metropolis has its own merits. For one, it allows for higher gross margins — owing to not having to split the profit with partner labs. Scale can also be achieved at one’s own pace — since you are less reliant on other labs to feed you with samples. Also, while Thyrocare focused on automation, Dr Lal and Metropolis have digitized the entire user experience; all the way from a consumer booking a test to finally receiving their results. Installation of Lab Management Systems have further optimized proccesses within the labs itself.
Given that these three companies are public — the market has had a say as well. From the 1st of April 2020, Thryocare, Dr Lal and Metropolis’ share price have surged by 127%, 68% and 56% respectively. If anything, I have offered my justification for Thyrocare’s surge in stock price. Each company’s management of the COVID crisis would also have influenced its stock price; since each company’s COVID related revenues have increased, but Non-COVID related business has plummetted. Additionally, the three are currently trading at a Price to Book ratio of 18.5x, 14.2x and 18.8x — with Metropolis topping this list, followed by Dr Lal and Thyrocare respectively. By any standards, the stock price seems severely overvalued — given that a P/B ratio under 3x is considered to be of good value (although this number would vary industry to industry). Just for context, Quest Diagnostics, which is the USA’s largest diagnostics player is currently trading at a price to book ratio of 2.64.
As a venture capitalist, I would be remiss not to mention that startups can also be an avenue for investment in this market. A notable example is Sigtuple — a company that has raised $45 Million, and touts its AI powered device for the automated analysis of blood, semen and urine samples. Unfortunately, being a venture backed company, it was not given enough time for R&D/product development. This led to their hardware devices going mostly unused in India’s laboratories — since they were not able to offer additional value over existing commercial hardware devices (like those manufactured by Siemens). The creation of a deep tech startup in healthcare necessiates a long gestation period, since people’s lives are at stake — which should be kept in mind before making an investment in this domain.
While private markets may not be for everyone, public markets are well understood and explored. My concluding advice on the matter would be to wait for the share price of the three diagnostic players to correct to their post COVID normal — and then make an investment in Thyrocare. Since the need gap is still sizeable, and Thyrocare’s model is most suitable to India’s market, one will hopefully see handsome returns on this investment.
Thank you for taking the time out to read this piece. I would love to engage with the readers to know where I might have gone wrong, or what I could talk about in future pieces. You are free to reach out to me at akhil.vohra1897@gmail.com.
