Hyderabad-based Vijaya Diagnostics Centre Ltd. made a muted debut on stock exchanges in September 2021. This was unusual as Indian stocks were on a road to recovery after the Covid-19 crash the previous year and diagnostic business was perceived to be thriving due to rise in testing for Covid-19 and related complications. Within a month, the stock went up from the upper end of the initial public offer price of ₹531 per share to ₹672.5, only to touch a low of ₹374.65 on February 24, 2022. On April 1, it was at ₹442.60. Vijaya is not alone. In fact, shares of all listed diagnostic laboratory service providers have been on a roller-coaster ride. Dr. Lal Pathlabs’ 52-week low as on April 1 was 56% below its high of ₹4,243. For Metropolis and Thyrocare, it was 49% lower. On April 1, 2022, their shares ended the day at ₹2,601.65 (Dr. Lal Pathlabs), ₹2,091.65 (Metropolis) and ₹789.3 (Thyrocare), closer to 52-week lows—their market caps crashing from peaks of ₹34,375 crore, ₹16,409 crore and ₹6,745 crore, respectively, to ₹20,780 crore, ₹10,036 crore and ₹4,457 crore, respectively.

Covid-19 has impacted every industry over the past two years. But few have seen their fortunes fluctuate like diagnostic companies. As with almost every other sector, their revenues also crashed during the first Covid-19 wave. This was followed by a huge spurt during the second wave in March 2021 and again during the third wave in December 2021. Market capitalisation of the companies yo-yoed as well (see How Stocks Moved).

Now, the question is, once Covid-19 cases fall, can the sector retain investors’ new-found interest? The recent correction in shares of listed players suggests otherwise, but the ₹67,500 crore diagnostic services sector, especially the bigger players, says Covid-19 has triggered a paradigm shift in the way business and revenue will move in coming years. They say dip in Covid-19 revenues will be more than compensated by expansion of diagnostic and pathology services. They say greater insurance penetration, ageing population, rise in chronic and lifestyle diseases and increasing awareness about benefits of diagnostic tests will ensure that the growth phase lasts longer than expected.

The Covid Windfall

Since March 24, 2020, when India declared the first Covid-19 lockdown, the fortunes of India’s diagnostic industry have been linked to the pandemic. The companies lost non-Covid business during initial months of the lockdown with Covid-19 tests alone keeping them afloat. After some months, relaxations in restrictions and increase in Covid-19 testing got them more Covid-19 business. This was followed by a gradual increase in non-Covid-19 revenues. Each spike in cases triggered a surge in Covid-19 testing volumes, though not always leading to a proportionate increase in revenue per test due to price caps. The revenue trend was uneven. “Last year, in April and May, there was a huge Covid-19 wave. Our turnover during that quarter was over ₹600 crore as against ₹450 crore on average. There were close to ₹200 crore Covid and related sales in the quarter. That was a sudden surge as, in next quarter, the numbers fell, and a few months later, stabilised,” says Om Manchanda, managing director, Dr. Lal Pathlabs, India’s largest diagnostic chain by revenue. He says Covid-19 tests were an opportunity but not a sustainable one. “A company like ours does not want to depend on Covid-19 as a major source of revenue. Our focus is on non-Covid-19 business. Covid-19’s contribution to our revenue in last four quarters would have been roughly 20%,” he says. A look at quarterly numbers of listed diagnostic firms (see Uneven Quarterly Revenues) shows Covid-19 revenues have been far less than non-Covid revenues, which in some months have been as high as 85-90%. While contribution of Covid tests must have been higher for regional players, in some cases even up to 50% during peak Covid-19, for national chains, it was 15-20%. Given that the industry has been growing in mid-teens, this meant one year’s extra growth, assuming non-Covid revenue growth reached pre-Covid levels.

“By October of 2020, we came back to pre-Covid levels. Non-Covid tests got affected only during the peak. Otherwise, they have been steadily going up,” says Anand K., CEO of SRL Diagnostics, a standalone subsidiary of Fortis Healthcare. “Going ahead, Covid will be 5-10% of our revenue, as these tests will be continued to be used to screen people for hospital admissions, even travel-related requirements. So, some testing will continue.” Metropolis, another key national player, echoes this. “The contribution of Covid-19 business in first two quarters of FY2021 was 15-20%, which gradually reduced to 10% due to price capping,” says Ameera Shah, managing director, Metropolis Healthcare Ltd. In FY2021, Metropolis conducted 20 million tests, of which 2.73 million were Covid-19 tests.

The Opportunity

Stock broking firm HDFC Securities, which initiated coverage of the diagnostics sector in the middle of the pandemic, sees Covid-19 scare in a different light. In an investor note in March 2021, it said Covid-19 is set to change the mindset of Indian customers. “An increasing number of customers will now label diagnostic chains as ’Covid-19 capable’ and ‘non-Covid-19 capable’. With these tests becoming the norm, market share is expected to shift towards labs offering Covid-related tests. The pandemic is helping organised players build brand value and goodwill, which will attract patients,” it said. The companies included in HDFC Securities’ coverage are Dr. Lal Pathlabs, Metropolis Healthcare and Thyrocare Technologies.

Major players corroborate this view. “About eight lakh new customers experienced services of Metropolis for the first time due to Covid tests,” says Ameera Shah. SRL’s Anand has an equally interesting insight. “We found that 50% of those who took Covid test at SRL had never been to a lab before. Now that they have got exposure to the labs, they will start going for more tests. Earlier, they would have chosen a neighbourhood lab, now they will go for quality, having seen the facilities we have,” he says. This can add customers, both Shah and Anand say. For a market that is so fragmented—with standalone labs having 47% market share—this will mean further consolidation and emergence of big and new diagnostic chains. The trend is already visible. SRL has acquired Kerala-based DDRC, Dr. Lal Pathlabs has bought Suburban Diagnostics, Mankind Pharma has launched PathKind Labs, Manipal Healthmap has acquired Hyderabad-based Medcis PathLabs…,the list is long. The obvious gainers will be organised players that account for 16% of the country’s diagnostic business (hospital-based labs are another 37%). If Covid makes doctors prescribe more tests, and if more people opt for wellness and preventive care tests, organised diagnostic centres are looking at a huge long-term opportunity.

“Diagnostics has been part of the overall healthcare ecosystem. There is continuing investor appetite for the healthcare space irrespective of growth trajectory of companies and demand-supply gap. Diagnostics being a core component of the healthcare delivery ecosystem, pathology more so than radiology, there will be interest. Going ahead, we are likely to see consolidation because there are many regional diagnostic chains which are well recognised both by the clinical community and consumers,” says Vishal Bali, executive chairman, Asia Healthcare Holding, the single speciality healthcare delivery platform backed by TPG Growth.

“I also see a degree of specialisation driving the sector. Obviously, genetics is one. There is a lot of realisation around whether there should be more targeted therapies for certain diseases. Also, we are seeing emergence of healthtech players, whether it is 1mg or PharmEasy, and diagnostics is a core part of their offerings. This means higher penetration on the back of these companies. That will also create the next wave of market opportunity and growth. Diagnostics, being a profitable business, will continue to attract investor interest,” says Bali.

The Future

With Genevolve, a genomics division that offers tests related to oncogenomics, neurogenomics, rare diseases, etc, Dr. Lal Pathlabs is positioning itself as a future-ready firm. It has research collaborations with institutions like Jawaharlal Nehru University and CSIR Institute of Genomics and Integrative Biology for development of diagnostic kits and acquisition of knowhow for diagnostic assays. It also leverages digital technology at every stage of operations to improve customer experience and safety and accuracy of test results.

SRL’s Anand says his company has started utilising the molecular testing facilities it had ramped up for Covid-19 to conduct tests for other infectious diseases too. “Covid has improved our RTPCR, molecular testing, screening and genome sequencing capabilities. All pandemic testing systems and protocols we have put in place will also work for other infectious disease outbreaks in future,” he says. SRL is also introducing new technologies, adding tests in reproductive genomics, onco-genomics, inherited disorders, etc, and working closely with experts in the area of personalised medicines.

The company also points to a change in consumer behaviour with more and more people using digital channels to avail its services. “Our app downloads have gone up three times from pre-Covid levels. In last one year, we have had about 1.2 million downloads. Customers are booking home tests (online), they are downloading results, so to that extent, there is a change in their behaviour. We are continuing to grow both digitally and physically. We have almost 2,500 touch points across the country,” says Anand. Metropolis says preventive health checkups, expansion of home testing business, digitalisation and opportunities arising out of private sector-government collaboration under Ayushman Bharat Digital Mission will drive growth in the near future.

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