Jio redux: Reliance's entry into diagnostics industry may lower prices

With bigger players making inroads, share of organised sector to increase in a fragmented market

With Reliance Life Sciences (RLS) considering a foray into India’s $9.6-billion diagnostics testing industry, established players feel it could bring down prices, in turn, resulting in better volumes.

A Velumani, promoter, chairman, managing director and chief executive officer (CEO) of diagnostics player Thyrocare, felt RLS’ entry into the diagnostics space could follow a disruptive pricing model like their telecom venture of Reliance Jio. “If they bring down the prices, other laboratories would have to follow. This would definitely boost volumes,” said Velumani.

At present, around 95 per cent of the laboratories are working under capacity, with machines lying idle, claimed Velumani. Capacities are under-utilised in the diagnostics industry. With big players entering the arena and patient volumes going up, it would benefit the industry at large. He felt that in the next 10 years, the dynamics of the entire industry could change.

Thyrocare and RLS had tied up in 2003 to offer DNA technology-based testing services.

According to a recent Goldman Sachs report, there are 100,000 diagnostic labs in India, of which only 1,076 are National Accreditation Board for Testing and Calibration Laboratories accredited. The current average cost of a pathology test is in the range of Rs 280 and Rs 350 ($4 and $5). Around 56 per cent of the market size is from pathological tests, with the rest from radiology tests.

The market is estimated to clock 11 per cent growth rate over the next five years, with preventive tests being a major growth driver. Currently, preventive testing accounts for less than 10 per cent of the overall market and is growing at 20 per cent compound annual growth rate (CAGR).

“In a scenario where the government increases incentives (including tax breaks) towards preventative testing, we believe this segment can grow at 27 per cent CAGR (FY19E-23 estimated),” the Goldman Sachs report stated.

An email sent to RLS remained unanswered.

Sources indicated that the company is evaluating entry into the diagnostics space, but is yet to finalise its business model.

A Mumbai-based diagnostics clinic chain owner said the franchise model has not been very successful in India so far. “If Reliance tries to tap the existing small neighbourhood clinics as partners and provide them with a brand and centralised testing facilities, it would be difficult to maintain quality at the customer point of contact,” he said, adding a franchise model has not been very successful in the diagnostics sector here.

The industry, however, on the whole felt that the entry of big players only helps to increase the market size for organised players. The CEO of a north-based diagnostics lab chain said the quality standards would raise, as the organised sector share increases. Smaller neighbourhood clinics, however, would see consolidation.

The diagnostics market is highly fragmented, with around.16 per cent market share with organised diagnostics chains, 37 per cent with hospital-based centres, and 47 per cent with standalone centres, said CLSA. Given the lack of standard quality in the industry, the market has low entry barriers.

The brokerage felt that Reliance may tap into its 355 million telecom subscriber base and an offline retail network that covers bulk of the country to acquire potential customers. This massive reach could be leveraged and may limit its customer acquisition cost.

“Apart from tying up with local entrepreneurs, RLS can also utilise a portion of some of its existing retail outlets to act as collection centres for the diagnostics business,” CLSA noted.

Listed players such as Dr Lal PathLabs, Metropolis, Thyrocare, and SRL Diagnostics (subsidiary of Fortis Health) saw 13 per cent revenue and 14 per cent earnings before interest, taxes, depreciation, and amortisation CAGR over FY14-19.

Growth over the past few years was largely driven by volumes as realisations have been under pressure due to stiff competition in the business-to-business space and expansion into lower tier markets.