A few years ago, a doctor had doubts about the accuracy of the blood test report furnished by a neighbourhood pathology laboratory. He devised a test: he sent a sample containing red ink, marked as a patient’s blood sample. The report shocked him. It stated that the patient was hypothyroid as his thyroid stimulating hormone (TSH) level was above normal! Not only did the lab fail to detect that it was not a blood sample at all, it incorrectly diagnosed the condition of above-normal TSH as hypothyroidism when, actually, the diagnosis should have been hyperthyroidism.
“This is not a joke, it actually happened,” says Sanjeev Vashishta, chief executive officer of SRL, India’s largest diagnostics company. “This is the state of affairs in India’s unregulated, highly fragmented and localised path lab industry, with more than one lakh labs.”
In India, anyone can start a path lab: get a licence under the Shops and Establishments Act from the local administration and hire people with a diploma in medical laboratory technology — a three to six-month course.
Even though pathology reports are crucial for diagnosing diseases, there is, surprisingly, no regulator for this healthcare segment. Ideally, labs should be monitored by agencies under the Union and state health ministries.
In this unregulated environment, enter a handful of organised private chains — together accounting for 15 per cent of the Rs 10,000-Rs 15,000-crore path lab market. They have managed to transform the industry in the 4-5 years that they have been around. Consequently, diagnostics has become the most sought-after sector, among the gamut of healthcare services, for private equity investors. Valuations of path lab market leaders are well above Rs 2,000-Rs 2,500 crore — they were worth a third of their current value a few years ago. The upswing in fortunes has led to some path lab chains contemplating listing on the stock markets.
The Big Four
Market leader SRL Diagnostics began as Specialty Ranbaxy in 1995, a joint venture between US-based diagnostics major Specialty Laboratories and Ranbaxy Laboratories. In 2004-05, Ranbaxy’s promoters, brothers Malvinder and Shivinder Singh, bought out their partner’s stake in Specialty Ranbaxy to form SRL Ranbaxy. The company was rechristened Super Religare Laboratories after Ranbaxy Laboratories was sold to Japanese multinational Daiichi Sankyo. In 2012, the company was renamed SRL Diagnostics.
“In 2006, our revenue was nearly Rs 60 crore; in 2013-14, it soared to Rs 746 crore, a compound annual growth rate (CAGR) of 18 per cent, even as the earnings before interest, taxes, depreciation and amortisation (EBITDA) grew at over 45 per cent in the last four years,” says SRL Diagnostics managing director Dr Sanjeev K. Chaudhry.
In 2010, SRL acquired the Ajay Piramal-promoted Piramal Diagnostics, having 107 laboratories, for Rs 600 crore, to become India’s largest diagnostics company with 170 laboratories and 1,500 collection centres. Today, the SRL network has expanded to include 12 reference laboratories, 280 laboratories and 5,800 collection centres.
Metropolis, another major in diagnostics focusing on pathology, started out as a south Mumbai lab — Dr Sushil Shah’s Pathlab — in 1981. In the early 2000s its turnover was Rs 6-7 crore. Then Ameera Shah, the promoter’s daughter, returned from the US after her studies and joined the business. She made the lab into a pan-India, and international, chain and thus Dr Sushil Shah’s Pathlab became Metropolis.
“In the last 11 years we have grown from just one lab to 125 laboratories and 750 collection centres,” says Shah, the managing director and chief executive officer of Metropolis. Last year’s turnover was Rs 550 crore. Shah claims Metropolis has grown more than 300 per cent in the past four years.
The growth story of Dr Lal Pathlabs is not too different. Post-Partition, in 1949, Dr (Major) S.K. Lal migrated from Rawalpindi to Delhi and started a pathology laboratory. The Gurgaon-based chain claims to have become the world leader in tissue pathology, overtaking Mayo Clinic of the US, by testing more than 750 biopsy samples every day for the past two years. Overall, it gets 35,000 samples a day. “We have 160 laboratories and 2,500 collection centres,” says chairman and managing director, Dr Arvind Lal, who has been heading the chain since 1977. “We have been growing at over 25 per cent for the past few years and revenues this year should be in the region of Rs 650-Rs 700 crore.”
The story of Thyrocare founder and chief executive, Dr A. Velumani, is one of overcoming adversity. Son of a landless farmer from a village on Coimbatore’s outskirts, he got a Ph.D in radiology and worked as a scientist with Bhabha Atomic Research Centre in Mumbai. In 1995, he quit his cushy job and started a diagnostics lab with an investment of Rs 1 lakh from his voluntary retirement benefits. The initial days were tough with Dr Velumani doubling up as a marketing executive by day and a sample-testing expert by night. Also, he failed to attract capital to the business. Now, 19 years on, investment bankers are lining up to invest in his company. “Our turnover last year was Rs 160 crore and we are growing at a CAGR of 20 per cent for the past few years and an EBITDA of 47 per cent,” he says.
Besides these four, only Apollo Hospitals, among the country’s largest hospital chains, has an organised chain of pathology laboratories. Apollo’s path labs are embedded in its clinics and hospitals and are not a separate business. “About 8,000-10,000 of the path labs in the country are embedded in hospitals,” says Dr Chaudhry.
Multinational firms are yet to make a mark in India’s path lab market. Quest Diagnostics, the $9-billion US-based world leader, entered the Indian market in 2008 with a 65,000 sq. ft laboratory in Gurgaon, offering testing services in cardiology, gynaecology, endocrinology, infectious diseases and cancer. Quest’s operations now extend to 25 cities, but it has been unable to scale up the way the Indian chains have in the past five years.
Some regional players are looking to emulate the organised chains, but are still too small in terms of size of operations compared to the big players. Vijaya Diagnostics Centre with 14 centres in Hyderabad and a few more elsewhere, Dr Dang’s Lab in Delhi, Jaipur-based Dr B Lal Clinical Laboratory, Bhilai Scan & Research, with more than a dozen centres in central India, Chennai-based Medall Healthcare with about 60 centres in south India, Suraksha Diagnostic in West Bengal with 10 centres and Star Imaging and Pathlabs in Delhi are some of the regional players of note.
The PE Rush
“It is a highly localised and complex business and scaling up inorganically is a big issue,” said Piramal Group chairman Ajay Piramal in an interaction with BW | Businessworld a few months ago when asked why he sold Piramal Diagnostics. “Regional chains with a good track record and infrastructure are few in number,” he added.
“I have to make 250 business plans for 250 cities every year to survive and grow,” says Shah. She adds that creating awareness among doctors and patients about quality, testing facilities and consistency of service are key to tapping new geographies.
“There are few quality players,” says Vashishta. “Of the one lakh path labs in India, only about 400 are approved by the National Accreditation Board For Testing and Calibration Laboratories and less than 20, by the College of American Pathologists.”
Despite these difficulties, private equity companies are making a beeline to invest in the organised chains. One of the reasons for this eagerness, says Dr Lal, is that, over the years, the industry has been growing at 20-25 per cent, with profit margins varying between 10 and 25 per cent.
The return on investments is also quick — two-three years at the most for operational break-even. A KPMG-CII report found that the diagnostics and pathological lab testing market in India has the potential to grow at a CAGR of over 18.9 per cent.
No wonder PEs want to invest in organised chains with a solid business model for growth. Take the case of Thyrocare. As its business grew, former Citigroup executive Ajay Relan-led CX Partners bought a 25-30 per cent stake in Thyrocare for around Rs 190 crore in 2010 on a valuation of about Rs 700 crore. Two years later, NVP invested Rs 120 crore for a 10 per cent stake, valuing the company at Rs 1,200 crore. ICICI Venture also bought close to a 3 per cent stake from CX Partners. “Now we should have a valuation of around Rs 1,800 crore to Rs 2,000 crore,” says Dr Velumani. He is planning a Rs 400-crore initial public offer by February next year to help PE investors, who hold nearly 40 per cent stake in Thyrocare, exit.
The valuation growth story is the same for other players. WestBridge Crossover Fund and TA Associates jointly invested $44 million in Dr Lal Pathlabs in February last year, valuing the company at about Rs 1,500 crore to Rs 1,700 crore.
“My company is worth anywhere between Rs 2,500 crore and Rs 3,000 crore,” says Dr Lal, who is working out the details and timing for going public.
ICICI Venture invested Rs 35 crore in Metropolis in 2006 for a 20-25 per cent stake. This was sold to Warburg Pincus, which invested close to $85 million (then about Rs 392 crore) in 2010, say sources. “We are meeting a majority of the fund requirements from internal accruals and do not require big external funding for growth in the near future,” says Shah, who values Metropolis at Rs 1,700-Rs 1,800 crore.
Like other organised path lab chains, fundraising was never an issue for SRL Diagnostics. Fortis Healthcare, a listed company, holds a majority stake in SRL. SRL raised Rs 100 crore ($17.9 million) from Avigo Capital Partners in April 2011 and around Rs 50 crore ($8.9 million) from Sabre Capital in May 2011. A year later, Jacob Ballas Capital India — a private equity firm with more than $600 million of funds under management — and IFC, along with the investment arm of the World Bank, invested Rs 370 crore ($66 million) in SRL. This takes the total PE investment in SRL to nearly Rs 1,000 crore, with the promoters now holding about 55 per cent.
Different Models
“Two unrelated developments in India changed my business — the spread of computers (technology) and opening up of the aviation sector,” says Dr Velumani. Thyrocare has only one centralised lab in Navi Mumbai, but it is among the largest in the world in terms of capacity. Samples from its collection centres around the country are flown to this lab. Results are delivered or emailed by the next morning. SRL’s strategy is to have samples reach its labs within six hours. It has set up 12 referral laboratories in various states, besides the lab network for routine tests.
While SRL claims to offer over 5,000 tests, Metropolis can perform over 4,000 and Dr Lal Pathlabs around 3,500. While most of the chains offer both pathology and radiology services, Metropolis is trying to create a niche by concentrating on pathology services. It invests directly in most of its laboratories, unlike the other chains that rely on a mix of franchisees and partnerships. SRL also invests heavily in its own laboratories and network, with only 10 per cent of the labs in the hands of franchisees.
Eyeing opportunities in geographies outside India, these chains are tapping developing countries with market dynamics similar to India’s. Saarc countries, the Middle East and Africa are some of the sought-after destinations. SRL, which has five referral labs and 50 laboratories outside India, will soon open its fifth lab in the Congo. It plans to start at least 40 laboratories in Nigeria. “We anticipate that international revenues will contribute about 10 per cent of the revenues on a larger base within the next five years, from the current 2-3.5 per cent revenue from outside operations,” says Dr Chaudhry.
Metropolis, one of the early movers, has 16 labs in Sri Lanka, four in the UAE and five in Africa. “Nearly 25-30 per cent of our revenues are from international operations,” says Shah. While Thyrocare is yet to look at international operations, Dr Lal Pathlabs is content with collection centres in these markets.
The biggest challenges are logistics and maintaining the accuracy of results, say experts. “About 149 parameters, such as the correct mixing of reagents, the correct usage of injection needles, equipment and sample bottles, transportation at the right temperature, etc., have to be observed to get the correct results,” explains Shah.
The quality of machines and technology is another factor. For HIV tests alone, there are five different technologies — ranging from a normal Rs 100 spot test to a Rs 700-plus molecular imaging test that can gauge the number of viruses that have penetrated a gene. Accuracy levels vary from 50 to near 100 per cent, depending on the technology.
Availability of manpower and expert pathologists is another issue. The country has only around 5,000 doctors who specialise in pathology. With the chains expanding rapidly, 300-400 pathologists are required every year, but the availability is not more than 150-200. The attrition level is 18 per cent. “We give constant training across the entire chain to nurture and create adequate quality manpower,” says Vashishta.
“If the states are ready to strictly implement provisions of the Clinical Establishment Act, which aims to regulate all healthcare-related facilities, including pathology laboratories, half the issues in this sector will get resolved,” says Dr Lal.
Despite these challenges, the chains are aiming for rapid growth. Metropolis is looking to spend Rs 60-75 crore on acquisitions alone in the next few years. SRL is planning to add 150 collection centres and 40 labs, besides specialised referral labs, annually in various geographies and in virgin markets like Mozambique, CIS countries and Vietnam, with Rs 450 crore lined up as investment. Dr Lal Pathlabs is planning a big expansion with a capex of Rs 500 crore-Rs 800 crore in the next 4-5 years.
(This story was published in BW | Businessworld Issue Dated 12-01-2015)
