Diagnostic chains have reported record revenue and value during the Covid-19 waves. Are they able to deal with the ebb to keep investors interested?

In September, Hyderabad’s Vijaya Diagnostics Centre Ltd. was a quiet debut on the stock markets. This was not typical, considering that Indian shares were on the path to recovery following the Covid-19 crash the year before. The diagnostics business was believed to thrive because of the increasing tests for Covid-19 and other related issues. Within one month, the stock increased from the top part of the public offer price of Rs531 to Rs672.5 and then to the minimum, Rs374.65, on the 24th of February 2022. On April 1, it was at Rs442.60. Vijaya isn’t the only one. Indeed the shares of all the listed lab diagnostic service companies have experienced a rollercoaster ride. The Dr. Lal Pathlabs’ 52-week lowest as of April 1 was 56% less than its record high of Rs 4,243. The same was true for Metropolis and Thyrocare. It was lower by 49. As of the 1st April 2022, their shares closed the day with Rs2,601.65 (Dr. Lal Pathlabs), Rs2,091.65 (Metropolis), and Rs789.3 (Thyrocare), close to 52-week lows. Their market caps plummeted from Rs34,375 crore, R16,409 crore, and Rs6,745 million, respectively, in the range of Rs20,780 crore, Rs10,036 crore, and Rs4,457 lakh the, respective.

Covid-19 has profoundly impacted all industries over the last two years. However, not many have experienced earnings volatility similar to diagnostic firms. Like almost every other industry, their profits also plummeted in the Covid-19 wave that first hit. Then, they experienced massive growth at the beginning of the second Covid-19 wave of March 2021 and later during the third wave in December 2021. The market capitalization of the companies that yo-yoed also increased (see the chart below for how stocks moved).

The question now is, if Covid-19 case numbers are dismissed, will the industry keep investors’ renewed enthusiasm? The recent decline in the shares of listed companies indicates otherwise. However, the diagnostic services sector, particularly the more prominent players, believes that Covid-19 is triggering an essential shift in how business and revenue are expected to change in the coming years. The income from Covid-19 will be offset by an increase in the diagnostics and services for pathology. They believe that greater insurance penetration with aging populations, a rise in lifestyle and chronic illnesses, and a growing awareness of the advantages of diagnostic exams will make sure the growth phase will last longer than anticipated.

The Covid Windfall

As of March 24, 2019, the day that India announced the first lockdown on Covid-19, India’s diagnostics industry’s fortunes have been tied to the pandemic. Companies have lost non-Covid business during the first few days of the lockdown, but the tests for Covid-19 alone kept them going. After a few months, changes in restrictions and an increase in Covid-19 testing led to more Covid-19-related business. Then came an increasing growth in revenues from other sources. Every spike in cases led to an increase in testing, but it was not always the case that they resulted in a rise in revenue per test because of price caps. The trend in revenue was not uniform. “Last year, there was a major Covid-19 wave between May and April. The revenue we earned during that quarter was more than 600 crore, compared to an average of Rs450 crore. The company had close to 200 million Covid as well as related revenue during the period. It was an unexpected increase and, the following quarter, sales declined but a couple of months later, the numbers stabilized.” claims Om Manchanda, who is the managing director of Dr. Lal Pathlabs, India’s largest diagnostic chain in terms of revenue. The tests conducted by Covid-19 were an opportunity but not a long-term one. “A business like ours would not want to rely on Covid-19 as a primary income source. We are focusing on other businesses. The contribution of Covid-19 to our revenues during the last four quarters would have been around 20 percent,” he says. An examination of quarterly figures of diagnostic companies that are listed (see the Uneven Quarterly Revenues) illustrates that Covid-19 revenue has been significantly lower than those of non-Covid companies that in certain months were up to 85-90 percent. Although the contribution to Covid tests could be more for regional players and in some cases at 50% in the peak of Covid-19, for national companies, they were between 15 and 20 percent. Since the industry is growing to mid-teens, this means an extra year of growth if non-Covid revenue growth reaches pre-Covid levels.

“By Oct. of 2020 we had come back to levels pre-Covid. Tests that are not Covid were affected only in the peak. However, the tests have been increasing steadily,” says Anand K., the director of SRL Diagnostics, a standalone company part of Fortis Healthcare. “Going forward, Covid will be 5-10 percent of our earnings since the tests will continue for screening individuals to be admitted to hospitals and travel-related needs. Therefore, certain tests is expected to continue.” Metropolis, another critical national player, confirms 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, Director of Operations, Metropolis Healthcare Ltd. For FY2021, Metropolis carried out 20 million tests, including 2.73 million Covid-19 tests.

The Opportunity

Stockbroker HDFC Securities, which initiated coverage of the diagnostics industry during mid-air of the outbreak, views the Covid-19 scare differently. An investor’s note from March 2021 stated that Covid-19 would alter the perception of Indian customers. “An increasing number of customers now declare diagnostic services as being Covid-19 capable and ‘non-Covid-19 compatible’. Since these tests are becoming the standard, market share is likely to shift towards laboratories that provide tests that are related to Covid. The disease is helping organized players to build their brand and build goodwill which can attract people suffering from the disease,” it said. The companies included in HDFC Securities’ coverage are Dr. Lal Pathlabs, Metropolis Healthcare, and Thyrocare Technologies.

Major players support this idea. “About eight lakh new customers experienced services of Metropolis for the first time due to Covid tests,” states Ameera Shah. SRL’s Anand provides a similarly exciting analysis. “We discovered that 50% of the people who took the Covid tests at SRL did not have a visit to a laboratory before. After getting exposure to the labs they’ll be able to take more tests. Before, they would prefer a nearby laboratory, but now they’ll look for a high-quality lab after seeing the facilities we haveavailable,” Anand says. This could result in more clients and customers, as Shah and Anand claim. A market is too fragmented, with standalone labs holding 47% of the market share, resulting in further consolidation and the emergence of new and large diagnostic chains. The trend is already apparent. SRL has bought the Kerala-based DDRC. Then it acquired Dr. Lal Pathlabs has purchased Suburban Diagnostics, Mankind Pharma has launched PathKind Labs, and Manipal Healthmap has bought Hyderabad-based Medcis PathLabs… The list of acquisitions is lengthy. The most obvious winners will be organized players who account for 15% of the nation’s diagnostics business (hospital-based laboratories are an additional 37 percent). If Covid has doctors prescribing other tests and more people choose health and preventive examinations, the organized diagnostic centers could be in the middle of enormous potential for the future.

“Diagnostics is a one of the components of the overall healthcare system. There is a constant interest from investors for the health care sector regardless of the growth rate of businesses and the gap in demand supply. Diagnostics are a key element in the delivery of healthcare system and pathology is more important as radiology is bound to be a lot of interest. We could be seeing consolidation in the future since there are a variety of regional diagnostic centers that are well-known by the medical profession and the public,” says Vishal Bali, executive chairman of Asia Healthcare Holding. This sole healthcare delivery platform is supported by TPG Growth.

“I am also seeing a level of specialisation that is driving the industry. Naturally, genetics is one. There’s an increasing awareness of whether it is necessary to develop more targeted treatments for specific ailments. Additionally, we are witnessing the emergence of healthtech companies such as 1mg or PharmEasy as well as diagnostics being one of the core components of their products. This implies greater adoption on the back of these businesses. This will create the next phase of market opportunities and expansion. Diagnostics as a profitable business is expected to continue to draw the attention of investors,” says Bali.

The Future

With Genevolve, the genomics division offers tests on neurogenomics, oncogenomics, uncommon diseases, and more. Professor. Lal Pathlabs is setting itself up as a future-oriented company. It collaborates on research with institutions such as Jawaharlal Nehru University and CSIR Institute of Genomics and Integrative Biology to develop diagnostic kits and acquire expertise for diagnostic tests. The company also uses digital technology throughout operation to enhance customer service and the quality and safety of tests.

SRL’s Anand claims that his company is now using the molecular testing capabilities they had stepped up for Covid-19 to perform tests for other diseases. “Covid has enhanced our RTPCR and molecular testing screening, and genomic sequencing capability. All pandemic testing methods and protocols that we have developed will apply to other infectious disease outbreaks in the coming years,” the doctor says. SRL has also introduced innovative technology, adding tests in reproductive genomics, oncogenomics, and inherited disorders in close collaboration with experts in personalized medicine.

The company also points out changes in consumer behavior with increasing numbers of people who use digital channels to avail its services. “Our app downloads have been three times higher than before the introduction of Covid. In the last year, we’ve had approximately 1.2 million downloads. Customers are scheduling home tests (online) as well as downloading the results, in that sense, there has been a shift in their habits. The company is growing both physically and digitally. We have 2500 touch points throughout the nation,” says Anand. Metropolis suggests preventive health checks, and the expansion of home-based testing, digitalization, and the opportunities that arise from the private sector-government partnership under the Ayushman Bharat Digital Mission will increase development shortly.

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