Diagnostics sector in throes of consolidation

A wave of consolidation has started in the highly fragmented diagnostics sector as large players are acquiring minnows and setting up their own outlets.

At the end of it, according to estimates, there may be just half a dozen players dominating this industry, as opposed to the current 30,000-odd players.

The industry is also generating immense interest among private funds, which see immense potential in this high-margin (said to be up to 50 per cent) sector, whose annual turnover, depending on who you ask, is anywhere between Rs 3,000 crore and Rs 7,500 crore and growing at 15-25 per cent.

In recent rumblings, Nicholas Piramal has acquired labs in Mumbai, Calcutta and Jaipur. Metropolis Health Services has acquired outfits in Chennai and Kerala, rechristened Lister Metropolis and Sudharma Metropolis, respectively, and set up DCA Metropolis in Delhi as a joint venture with Diwan Chand Aggarwal, invading the territory of Dr Lal PathLabs.

Dr Lal, on its part, has acquired RDBL in Mumbai and just beefed up its war-chest by offloading 26 per cent equity to WestBridge capital for an undisclosed amount.

SRL Ranbaxy plans to set up 8-10 laboratories every year and says it is open to acquisitions in the future. It is also looking for local franchisees, such as in Jaipur.

And funds are not an issue. "All one requires is a good consolidation or expansion proposition and VCs will be chasing to fund it," says Rishi Sahai, investment principal, Infinity Venture Fund.

Dr Lal and Metropolis plan to invest Rs 70 crore and Rs 25 crore respectively over the next few years. Dr Lal is setting up a chain of satellite labs surrounded by a ring of collection centres. Ergo, expect more acquisitions.

Metropolis is combing Delhi, Jaipur, Lucknow, Kanpur, Chandigarh and Ludhiana for attractive acquisition targets. "Consolidation is inevitable," says its managing director, GSK Velu.

WestBridge managing director Sandeep Singhal sees two trends. "The market is growing at 20-25 per cent. As big players are growing even faster (by 50 per cent according to some claims), consolidation is the order of the day."

The diagnostics sector in India is expected to take the same course that it did in the US, from high fragmentation 10 years ago to just four major chains controlling 90 per cent of the market now.

Consolidation may well usher in some standardisation of procedures and rates. At present, there is none, especially in the case of the thousands of single-shop outlets that mushroomed in the 1990s.

There is a system of accreditation with the National Accreditation Board of Testing and Calibration Laboratories, under the ministry of science and technology.

But it is optional and only a fraction has bothered to obtain it. There is no licensing agreement involved to open a path lab, just compliance with the Shop & Establishment Act.

This, says a fund manager, is actually catalysing consoliation since acquiring a path lab is as simple as buying a roadside betel shop.