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Research Report

Pathology Industry

Prepared by

Salman Mohammed Shiras

Santhana Gopalakrishnan

Neha Parihar

Asha Chauhan

Sayeka Mehjabin

(MBA Financial Analysis 2015-2017)

International College of Financial Planning

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Abstract

“It is health that is real wealth, not pieces of gold and silver”. This great quote by

Mahatma Gandhi sums up the importance of health in our life. The fact that the

people of India not taking this quote seriously has led to the boom of the Indian

Healthcare Industry. This high growth in the Healthcare sector has also led to the

robust growth of sub segments like the Diagnostic service sector and the Medical

Instruments sector. In this research report, we would be covering in depth the

pathology sector, particularly, to identify how the market share of the pathology

sector would be in the upcoming years which has recently seen the entry of many

organized players. This is primarily done by scuttlebutt research along with the

secondary research on the key determinants of this sector (patients, labs & doctors).

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I. Industry Analysis

1. Overview

With the Indian Healthcare Industry growing at a CAGR of 12-14% the Indian

diagnostic industry is expected to reach 585-616 billion INR in the next 3 years.

The diagnostic sector can classified into two major sub segments- pathology labs

and radiology or imaging labs. Pathology or Invitro is a method of diagnosis of

diseases through the analysis of tissues, cells, blood, urine and other body fluids.

The pathology sector constitutes about 72% of the entire diagnostic sector. The

pathology sector is expected to grow at a CAGR of 16-18% and is expected to

reach 400-500 billion INR in the next 3 years.

This high expectation about the future are due to the following reasons:

1. High disposable income- With a real GDP growth rate at an estimated 7.4%

in the year 2014-15, India is one of the fastest growing economies in the

world. This increase in GDP has led to an increase in the per capita income to

an estimated US$5,900 in 2014. The increase in per capita income has led to

wealth creation and coupled with increased healthcare awareness has led to

the development of pathology sector.

2. Increased healthcare awareness- The need to diagnose the disease before the

treatment and the need to identify pre-existing diseases have been a major

demand driver for the pathology sector.

3. Shift in diseases profiles- With rising income levels and changing lifestyles,

the disease profile in India is shifting away from infectious diseases and

towards chronic or lifestyle diseases. The increase in chronic diseases has

resulted in increased demand for diagnostic tests, including biochemistry

diagnostic tests for blood sugar, cholesterol and lipid profiles.

4. Increase in health insurance coverage- In 2013-14, only about 17% of the

Indian population subscribed to health insurance. The penetration of health

insurance in India has increased over the recent years, but remains low overall.

Therefore, there is potential for growth in the health insurance sector which

would in turn lead to the development in the pathology sector. Insurance

penetration is measured as the percentage of insurance premium to GDP.

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CRISIL Research estimates that per capita healthcare expenditure in India in

the fiscal year 2014-2015 amounted to ₹3,871 (or US$63). Over the next three

fiscal years, CRISIL Research estimates that per capita healthcare expenditure

in India will grow at a CAGR of approximately 10-12% to reach ₹5,194-5,481

(or US$82.9-87.5) in the fiscal year 2017-2018. Under-penetration of the

Indian healthcare industry is also evidenced by the low per capita healthcare

expenditure in India.

Urban vs rural demand

According to World Bank in the year 2014-15 approximately 32% and 68%

of the Indian population lived in urban and rural areas respectively. This 32%

of the urban population contributed to 67% of the revenues earned by the

diagnostic industry. These are due to better access to healthcare facilities, high

disposable income and advanced healthcare facilities in urban areas.

Wellness and preventive diagnostic services

A major trend that was visible due to the development of diagnostic industry

was the wellness and preventive diagnostic services. Wellness and preventive

diagnostic services are aimed at identifying pre-existing diseases or the likely

risk of particular diseases before the onset of actual symptoms. It is expected

that it will assist people in to more accurately identify risks so that they can

take corrective or precautionary measures before any chronic condition

substantiates. The CRISIL Research Report estimates that the wellness and

preventive diagnostic services segment accounted for approximately 6-8% of

the aggregate diagnostic services market in the fiscal year 2014-2015. It is

expected that this segment will grow at a CAGR of close to 25% over the next

three fiscal years.

Section 2 of the research will look into the various market trends prevailing

in the pathology sector and section 3 would cover the scuttlebutt research that

we have done.

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2. Life Cycle Approach

An industry is said to be in growth stage it grows at a rate higher than GDP.

The Indian Pathology industry has been growing at a CAGR of 16% while

GDP growth rate was an estimated 7.4% in 2014-15.

3. Rate of change - Healthcare industry as a whole is prone to technological

changes, in terms of the equipment they use etc. With the primary

operations (conducting tests to detect diseases and analyzing it) being

dependent majorly on the equipment, the quality of technology plays a

provident role in determining the efficient serviceability of the industry.

Thus, any change in technology would impact the industry directly. The

predictability of such technology is less and the cost of such technology is

also very high making it that only few players in the industry can afford it.

4. Industry Structure

The Indian Pathology industry is 264 million INR industry as of 2014-15.

The industry is highly fragmented, mostly dominated by unorganized

players. Standalone laboratories and hospital based laboratories both

forming the unorganized sector. In 2014-2015, approximately 48% of the

revenue generated by the pathology sector was contributed by standalone

laboratories.

The organized sector consists of private diagnostic chains that operate out

of one center, offers pathology services, uses hub and spoke model, latest

technology, modern logistics and information management systems to

operate their network.

Diagnostic chains can be further categorized into large pan-India chains and

regional chains. Currently, there are approximately seven large diagnostic

chains in India, based on their revenues. Regional chains are diagnostic

chains with centers concentrated in a single city or state in India.

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4. Market Trends

Diagnostics Industry in India, in the recent past, has noted a structural and

a technological shift. This has made the sector to grow at a tremendous

pace, as mentioned earlier, and also is expected to grow at an excellent pace.

The entry of organized players in the pathology sector have led to a series

of trends over the years. These trends are basically related to the method of

operations that these labs use, strategies used by these labs to expand their

operations and the increased use of technology and innovation in their

operations. Few of the notable trends which contributed to the growth of

this industry are:

1. Traditional to lifestyle Diseases

As per IRDA Report about 50% of the healthcare spending is done on in-

patient beds, are for lifestyle diseases. Lifestyle disease are majorly those

disease which is caused due to the modern living style wherein most are

prone to drinking alcohol, smoking, high BP, Cholesterol etc, leading into

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

2014-15 2017-18E

MARKET SHARE

Standalone diagnosticcenters Hospital based diagnostics Diagnostic chains

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the emergence of new disease. This has outpaced the then existing

traditional diseases. This shift has led to the requirement for specialized

servies, though hospitalization service, the base of which is screening what

type of disease it is, has inturn led to the growing need for diagnostic

service.

2. Emergence of Telemedicine

Telemedicine is basically the extension of low-cost consultation and

diagnostic services which can reach out to even the remotest of areas

through telecommunication and internet. This would help in bridging the

gap between geographically diversed urban and rural market, thereby,

making sure the similar service is available to all at an affordable cost.

3. Increasing Penetration of Health Insurance

The penetration level of health insurance was low at a decade before. But

with the changing times and the increasing awarness amongst the people

the healthcare Insurance is able to reach out to most of the people. The

healthcare insurance premium expanded at a CAGR of 26% during

FY2008-2013(as per IRDA). The momentum is expected to continue with

the penetration levels increasing rapidly.

4. Technological Impact

To curb down the cost of diagnostic services and to enhance the service

quality at a standardized level many of the major players have focussed on

technological advancements wherein few of such technologies which came

in handy are maintenance of Electronic Medical records, mobile

healthcare, etc. To enhance the patient satisfaction and to widen their

choice base PRACTO has come up with its technology which basically

assists in choosing amongs the alternatives,comparing the prices and lots

more, simply like how zomato does it for choosing between the restaurants.

5. Government Initiatives

Few of the notable policy support by the government came in at a crucial

time where the sector is doing good. Though the policies confine mostly

to healthcare service as a whole if you dig deep there are few policies

which has a direct impact on the diagnostic service segment too. The PPP

model is an initiative by the government which is basically a public private

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partnership wherin the model focus on improving the availability of

services and providing for healthcare financing. The tax incentive of 250%

deduction on those expenditures incurred on operating technology

enabling remote radiology and healthcare services put the cherry on the

cake.

Above all the notable thing is the allocation of healthcare expenditure by

the government and the focus of strengthening the healthcare industry by

enacting strong regulations would be of advantage to the organized players

of this pathology industry as this industry basically lacks regulation

thereby leading to high amount of unorganized players.

6. Hub and spoke model

Following its success in the transportation industry, the organized players

have also started to use the hub and spoke model in order make their

operations more efficient and most importantly cut the overall costs in

running the operations.

In a normal hub and spoke model the hub will be the National/Regional

reference labs which would in most cases the headquarters of the company.

This would be located most probably in a tier-1 city. This labs would be

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equipped with the latest equipment and technology capable of conducting

any tests.

The next in the model is satellite labs. These are smaller labs capable of

conducting some tests and these act like the intermediaries.

The last or the spokes in the model are the collection centers. These are

basically centers were the blood or other body fluids of the patients are

collected to be sent to either the satellite or National reference labs for

testing.

This model coupled with a good logistics system and information

management system has helped most of the organized players in cutting

down their costs.

7. Franchising

According to CRISIL research report in fiscal year 2014-15 the rural

population contributed only 33% of the revenue of the pathology sector.

This lack of testing centers in rural and remote areas has forced many of

the diagnostic chains to adopt the franchise model to expand their network.

The franchise model tried to reduce the difficulty of people to travel long

distances to avail diagnostic needs.

The unique quality of the franchise model is that it can make the company's

presence felt in more places. Over the years in order to have a pan-India

presence most of the diagnostic chains are using the franchise model.

Before the popularization of the franchise model diagnostic chains

expanded by acquisitions and taking over brownfield projects. Since these

methods proved capital intensive they switched to the franchise model.

The by-product of the franchise model in any sector is that it helps an

individual find his or her entrepreneurial feet and with the backing of a

good brand name. Hospitals and diagnostic chains are looking for partners

who are starting out business in this sector. However, they are willing to

tie up only with those who have a basic knowledge or at least some

inclination towards healthcare. A franchise is not someone who just carries

your brand name, but also a business partner. A franchise has to have the

same value system of the diagnostic chain as they are dealing with life.

Franchising works on two different business models- franchisee-owned

and franchisee-operated (FOFO) and franchisee-owned and company

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operated (FOCO). In the FOFO model, diagnostic chains only gets a share

of revenue as royalty which could range from about 10-20 percent

depending on the territory and investments.

However, in the FOCO model they usually assure the franchisee of a

minimum revenue guarantee per month and then a percentage share of the

revenue after a certain point. The minimum guarantee varies from center

to center as it is linked to real estate prices and revenue potential in the

territory. Even though franchising is a two-way business model and both

the parties benefit from it, the large hospitals and diagnostics chains-have

more of a say because of their brand names.

Since the sector being highly fragmented, the only way organized players

can expand is using the franchising model.

8. Automation and Development of Medical Equipment Industry

The hallmark of a good medical laboratory is accurate analysis and

reporting of diagnostic tests carried out by them thereby helping the

medical fraternity to recommend proper dosages of medicines to cure the

patient. A high degree of quality control in testing therefore instils trust

and confidence in the patients. Challenges include, but are not restricted to

trained and skilled manpower in proper analysis, and use of test equipment.

This challenge has forced many diagnostic chains to install automated

equipment in their labs. Since quality is a prized procession of all the

players in this sector, every diagnostic chain tries to improve their facilities

to the modern standards.

Since automation for clinical laboratories came into existence equipment

manufacturers have been promoting the benefits of stand-alone and total

laboratory automation systems. The crux of their marketing lies in the fact

that these equipment save time, reduce manual steps and above all, remove

the human element from testing to lower the risk of errors. Even with less

manpower more tasks can be accomplished more efficiently. Moreover it

enhances the patients’ and doctors’ confidence on the test reports

generated by the diagnostic centers.

Although automation seems highly beneficial it also comes with

considerable expense. The cost of automation is huge.

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This push for automation has led to the development another sub-segment

of the Healthcare industry mainly the Medical equipment industry. This

sector is mainly dependent on imports from international players mainly

Siemens, Bayer, GE Healthcare etc. But over the years with the

intervention Government of India and opening up of 100% FDIs into the

sector Indian medical equipment manufacturers are also trying to gain their

market share. In recent years there has been joint ventures between Indian

manufacturers and international manufacturers in terms of technology and

innovation.

Looking to the future automation is gaining pace in the pathology sector.

However, there are still some disciplines like histopathology and

microbiology that are not fully automated. In the future, automation will

increase in the areas like the microbiology labs and the histopathological

labs.

Apart from these the notable trend even a layman can find about the

healthcare industry is the shift from chemical to ayurvedic medicines. But

keeping in view the fact that pathology helps in detecting a disease rather

than in curing it, this makes it a point that ayurvedic shift would not impact

the pathology industry much.

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5. Porter’s Five Forces

Threat of new Entrants

The barriers to entry in pathology industry is very low which have

allowed lot of new players to enter the industry.

Lack of regulations has been a major cause for the increase in the

no of standalone diagnostic centers.

Bargaining power of customers

Customers tend to be loyal to a particular diagnostic chain even

though the no of players have considerably increased.

Competitive rivalry (High)

Threat of new

entrants (High)

Bargaining power of

costumers (Low-

moderate)

Threat of substitute products

(Low)

Bargaining power of suppliers

(Moderate-High)

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Threat of substitute products

Practically there is no substitute for pathology. The only change that

can happen is in the technologies used or the manner in which tests

are conducted.

Bargaining power of suppliers

The industry depends on 90% of imports in equipment.

Lack of Indian manufacturers to support the industry.

Competitive rivalry

With the entry of new private players, there has been an intense

rivalry between the unorganized and organized players.

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II. Industry Outlook (Scuttlebutt Research)

When it comes to ground level there are only two major factors which

impacts the disruption of the market share. One is the customers who are

availing that industry’s products and services, second, is the Suppliers who

offer those facilities (which is explained in many of the economic

theories). As far as the pathology industry is concerned the third factor

which could possibly be added into this is the doctors, whose say impacts

the decision of the customers directly in choosing its suppliers or the labs,

in this context.

This leads us to the need of analyzing the mindset of these patients,

suppliers and doctors so as to arrive at a conclusion of what could possibly

happen in the near future. The summary of responses were mostly in

tandem with the secondary data’s.

1. Consumers/Patients

The above pie charts suggest that 55.4% of the respondents were aware

of preventive healthcare (Which is an ongoing trend in the healthcare

industry). But the greatest irony is that, majority considers for having

blood tests only when the doctor recommends.

The preference over the labs is, to say, closely competing with each

other wherein the neighborhood labs and private chains are taking a

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major lead with 27% each, followed by the labs recommended by

doctors with 23.5%.

When it comes to private labs, it is the specialized services and the

quality of service is taking a lead in attracting the patients, with 48.6%

and 44.1% respectively, followed by the price and packages having

32.4%.

But the familiarity in the locality is what drags people to neighborhood

labs followed various other factors like the lab being recommended by

the doctors and the convenience.

Almost 67.5% of the respondents were satisfied with their current

service providers having stating the experience of the labs as the reason

behind it. Timely delivery of results is also one key reason for patients

being satisfied with a particular service provider.

Though many felt satisfied with their diagnostics servicers, 44.4% of

the respondents are cautious about the quality change and 27.8% feels

the availability of similar services at an affordable cost and hike in price

could move the image down thereby making them not satisfied.

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2. Labs/ Suppliers of Service

Unorganized players have also started giving discounts and packages

following the entry of organized players.

Organized players have started franchising with unorganized players as a part

of their expansionary plans.

In standalone labs per day tests are about 10-20.

In hospital based labs it is twice that of standalone labs.

Only few of the unorganized players are able to offer more than 1000 tests

while the basic no of tests offered by hospital based labs are around 10000+.

Organized players the number is extremely high that is mostly in lacs.

In our analysis only 2 out of 35 labs has accepted the fact that they are losing

their market share due to the entry of organized players.

Almost 95% of the labs concluded that their majority of the revenues comes

through doctor’s references.

The cost per test in an unorganized sector is dependent on various factors

such as doctor’s commission, no of tests, transportation costs since majority

are collection centers not technology oriented labs.

When it comes to hospital based labs there is minimum technology to carry

out basic tests which are taken frequently, thereby reducing the

transportation cost comparatively.

Most of the labs prefers hand in reports while few amongst those also have

e-mail and courier facilities.

Though there is a high competition every lab feels that their market share is

more or less unchanged because of trust and loyalty of customers.

Most of the organized and hospital based labs and few of the unorganized

labs also provide additional service by giving a first opinion on the test

through their own in house pathologists/doctors.

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3. Doctors

In South India the commission is about 10-15% of the test price.

Mostly doctors have tie up with a minimum of at least 2 local labs.

When it comes to basic tests like sugar, cholesterol etc., they will suggest their

patients to labs which they have tie up with.

Only in cases involving complex tests or special cases they suggest their

patients to private chains or any hospital based labs which has that facility.

All the doctors working in hospitals are bound to send their patients to their

own network labs. (With slightly modifying the-to be taken tests with

available tests).

Some doctors also look into the financial capability of the patients before

suggesting for tests and treatments.

Family doctors mostly suggest private chains.

Specialized doctors doesn’t not suggestions but gives options to their patients

regarding where to take their tests.

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ANALYSIS

The above mentioned data’s are classified into two major categories, namely:

On consumer front

1. Based on the income level

2. Based on age groups

On Labs front

1. Local Labs

2. Hospital Based Labs

3. Private Chains

On consumer front

Based on Income Level

The above were the income level of various respondents which will be further used

for categorizing preferences on the basis of different groups.

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What drags someone into private chains ?

0

10

20

30

40

50

60

70

80

Less than 3 Lakhs 3-8 Lakhs More than 8 Lakhs

Income wise Analysis

Private Chains Neighbourhood & Labs Rec by Doc's Hospital based Labs

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Based on Age Group:

Age wise Analysis

Less than 30 30-55 Years Above 55

0

10

20

30

40

50

60

70

Less than 30 30-55 Above 55

Age wise Analysis

Private Chains Neighbourhood & Labs Rec by Doc's Hospital based Labs

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On Labs Front

0

10

20

30

40

50

60

No of Tests per day

Private chains Hosp based Labs

Local Labs

Revenue Source

Private Chains Hosp based Labs Doctors Recommendation Others

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Below is a price mapping that have been done between two private diagnoostic

chains and a local diagnostic center:

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INFERENCES

We strongly belive that, through the above analysis, there are high chances that the

market share disruption is possible in the near future and would benefit , in

particular, the organized players.

In terms of income distribution, where the per capita income and personal disposable

income is expected to increase in our economy it is expected that there would be a

shift from one level to the other. ( ie., from humble to mid income level etc).

When we combine this with the above analysis chart of income levels, we can infer

that there can be a significant transformation from local labs to private chains.

This sector in itself is a sensitive sector whereby a minor problem would lead the

consumers to change the service provider.

Our analysis also suggest that 70% of the respondents have already changed their

service providers.

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The frequency of the change is also dependent on the efficiency of the service which

was discussed earlier, having stated the sensitivity aspect of the industry.

We have also seen from the lab aspect that the Level of Technology available with

the local labs are incomparable to those of organized players. This increases the

chances of service quality being bleak which inturn effects in the transformation.

Some of the unorganized players have also started feeling the heat of the entry of the

organized players, though they say that their share hasn’t been effected we could

sense the heat wherein even 2 players have started franchising with the organized

players. ( Franchising model was explained in the previous notes).

Who would benefit from this market change ??

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The poll suggested that Dr Lal Pathlabs is the highly known diagnostic service

provider among the respondents capturing 63% followed by thyrocare having

captured 35% (since many respondents are aware of multiple Service providers).

But before we comment on the final impact on organized players there is still a factor

or to say, a key determinant apart from the customers and service providers has to

be looked into.

Doctors are the one who impacts customers decision even if he/she wants to change

their current diagnostic service providers.

This data supports the above statement having said that 37.7% of the respondends

follow doctor’s advice while choosing a service provider/ lab.

Now, the entire market depends on two factors, one is

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Dependend on the labs entirely, who can offer convenience with a good service

quality, at a cheaper price and deliver the results in a good pace.

The other one is the doctors who impacts the decision directly, while the former one

is little easy to predict compared to the latter.

Why we believe Thyrocare would benefit from the expected

change ?

The business model of the thryocare is a cost effective model wherein the

mission is to service 50% of the industry at 50% of the cost.

The above price mapping can also be indicative in this regard, wherein, the

prices and packages offered by thyrocare is considerably very less compared

to other organized players and even the local labs.

Since siemens( who is the market leader in medical equipment industry) is

directly associated with thyrocare we believe the business would have good

technology and advancements.

One of the research blogs states that 30% of the revenues for Dr Lal and SRL

comes from franchising whereas for thyrocare it is 60%, which is double the

average of the organized players, which can overcome the above mentioned

hindrance of doctor’s reference to local labs due to tie ups.

The business majorly depends on the cargo( used for transporting the sample)

and efficiency in Cargo management by the company also suggest that there

wouldn’t be delay in arrival of results. These convenience, price and timely

arrival of results is considered as key requirements of patients which we hope

can be well provided by Thyrocare.

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Street Expectations In the recent past, two of the organized players of the diagnostic industry got itself

listed with the stock exchanges and the price offered in the market were extremely

high with a premium of 50% and 49% for Dr. Lal PathLabs and Thyrocare

technologies respectively. This is given the higher potential for growth opportunities

and margins. According to major brokerage firms like CRISIL and IIFL the industry

is expected to grow at a CAGR of 16-18%.

Increasing awareness, preventive treatment, ability to pay, rising share of chronic

diseases and preference for evidence-based treatments, all remain in favour of high

growth rates for organised players. The high-end testing is where their forte lies and

is also likely to keep their margins elevated. Their business models, too, support the

margins. Expansion through the franchise route helps in controlling overhead costs.

With core business remaining asset-light, balance sheet and cash flows remain

robust, reflecting positively on return ratios. This has been already explained in the

previous sections.

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Sources and References

1. Thyrocare prospectus

2. Blogs- Stalwart Advisors

3. CRISIL Research Report

4. http://businessworld.in/article/Aggregating-The-Fragmented-Diagnostic-

Sector-In-India/09-05-2016-97780/

5. http://www.business-standard.com/article/companies/lack-of-regulation-

haunts-india-s-test-labs-114041400536_1.html

6. http://ehealth.eletsonline.com/2011/12/%E2%80%9Cthe-indian-diagnostic-

industry-needs-regulation%E2%80%9D/

7. http://www.financialexpress.com/article/healthcare/diagnostic-special/no-

rules-to-the-game/116862/

8. http://www.financialexpress.com/article/healthcare/cover-story-

healthcare/make-in-india-or-make-for-india/62118/

9. http://www.espicom.com/india-medical-device-market.html

10. http://economictimes.indiatimes.com/industry/healthcare/biotech/healthcare/

indian-medical-device-industry-can-grow-to-7-billion-by-2016-

usibc/articleshow/48213378.cms

11. http://www.financialexpress.com/article/pharma/lab-next/driving-

diagnostics-with-automation/5976/

12. http://tribune.com.pk/story/58062/benefits-of-hub-and-spoke/