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NEW DELHI : Dr Lal Pathlabs Ltd has a storied history almost as old as independent India. Starting out as a pathology service provider and blood bank in 1949, it was incorporated in 1995, and has the bragging rights to be the oldest and leading player in the diagnostics industry. Yet, with new entrants milling the diagnostics space, and the pandemic facilitating this overcrowding, the challenge before Dr Lal Pathlabs isn’t about merely staying relevant but staying innovative. And it’s already on the job.

The challenge is real, especially in a market dominated by unorganized players. Going by Dr Lal Pathlab’s FY22 annual report, its revenue figures are robust at 2,140 crore. But the report also mentioned that only 17% of the market belongs to the organized diagnostic chains. A June 2022 report by ICICI Securities put the size of the diagnostics industry at 67,500 crore, with Dr Lal Pathlabs having a 3% market share. It shows just how fragmented the market is. And this limited space itself is seeing a lot of traffic, driven largely by the pandemic.

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Several new players from the pharma industry (Lupin, Torrent Group, Mankind Pharma), hospital chains (Apollo Hospitals) and digital start-ups (Tata1mg, Healthians) are making inroads. Even corporate biggies are sniffing potential in this space.

Lupin Diagnostics, which set up its National Reference Laboratory in Navi Mumbai, is looking for franchise partners and is aiming at a slot among the top five players. Tata Group launched its own diagnostics wing, Tata Medical and Diagnostics, in 2020 and also acquired e-pharmacy 1mg a year after. Reliance Group has acquired e-pharmacy Netmeds, which is expected to bolster its diagnostic business. Pharma retailer MedPlus is another serious entrant while there has been much buzz over Adani Group and Apollo Hospitals eyeing a stake in Metropolis Healthcare.

Amid this churning, Dr Lal Pathlabs knows that while it can bank on its brand value, it can’t be complacent either.

“The competitive intensity is much higher than what it was a couple of years ago. We have to accept that brand awareness for many brands has gone up. We don’t want to lose on top-of-the-mind recall," says Om Prakash Manchanda, the managing director.

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The company has upped its spend on marketing and digital growth. The ad spend went up from 31 crore in 2021 to 37 crore in 2022.

Price wars

Another game changer, or rather irritant for players like Lal Pathlabs, has been the price wars. It’s a situation akin to the big telecom battle when Jio disrupted the industry with its price cuts. According to the ICICI Securities report, Tata-backed 1mg offered four routine tests (Thyroid, Lipid, Diabetes and Liver profiles) at flat 100, when the industry average was 500-600 per test. Though these tests were offered under a limited period promotional scheme, it posits a much larger question. In a price-conscious country like India, will the corporate biggies eventually hold sway in terms of pricing?

Manchanda begs to differ. “You cannot compare telecom with diagnostics. It is not a high-frequency contact business where price elasticity matters. You don’t go to a diagnostics lab every month or even year. People care for quality more than the money when they have to get medical tests done," he says.

Yet, the company has re-strategized its pricing without taking the race right to the bottom. It has shifted focus on cost-effective offerings. Like the Swasthfit plan, which is a bundled product in different packages. The product contributed 21% to its revenues, up from 15% in 2020.

“Assume there are two queues. One is moving slowly, but offering a service at a discount. The other one is moving faster but charging a premium. We are in the second queue. We won’t charge 2,000 premium when others are charging 100, but our pricing will be comparatively higher along with more value," says Manchanda.

There is a niggling concern in the market too whether such price cuts are sustainable. “Thyrocare or Metropolis have been active in Dr Lal’s home markets for 15-20 years now. They are much cheaper than Dr Lal, but haven’t been able to snatch its market share," says an analyst who requested anonymity.

Manchanda agrees that prolonged increased competition will impact its business, but believes the pie will get bigger as the shift happens from the unorganized to the organized space. The company may not have slashed prices but has kept them static for the past few years.

Interestingly, IIFL Securities, in its Q1FY23 earnings review report, has observed that while the competitive intensity has been severe for the past 12-18 months, it hasn’t manifested into any pricing pressure for Dr Lal Pathlabs as evidenced from the company’s gross margins sustaining at 77%, similar to that of pre-covid levels.

Moreover, turnaround time, accuracy and quality of diagnosis matter more than pricing, says Rakshit Ranjan, portfolio manager at Marcellus Investment Managers. Ranjan says the diagnostics sector can be divided into two main segments: one, where testing is done related to an illness, which is 90% of the market; and second, testing related to wellness (preventive measure) which is 10% of the market.

One can’t take chances in the illness segment. In the wellness segment, though, low-cost packages and discounts may influence decision-making. “This is where most of the competitive intensity is being felt. But, Dr Lal mainly operates in the illness segment where pricing is a less relevant parameter," says Ranjan.

A logistics business?

Meanwhile, new entrants face a formidable challenge—logistics.

While Dr Lal Pathlabs is a diagnostics firm for the consumer, its distribution network makes it a logistics firm.

The company’s home collection business saw a spike from 5-6% of total sales pre-covid to 11% currently. Customer convenience is at the heart of any business—but stuff such as home collections require an efficient distribution network. In the diagnostics space, the samples collected from patients have to reach the lab in time for accurate results. The cost of processing a sample also matters.

“You cannot build a distribution network overnight. It has taken decades for us to reach this level," says Manchanda.

One big asset for the company is its 40%-plus franchisee business. The ‘Hub labs’ model could be the next. Hub labs are not as big as centre labs, yet not as small as the satellite labs. A wide range of tests can be done here that helps the company foray deeper into tier II and tier 111 towns.

“A hub lab in Lucknow can process the samples collected in, say, Sitapur or Kannauj instead of taking them to Delhi, thereby trimming operational cost. We are also improving our logistics network to reduce processing costs," says Manchanda. The company has opened 35 hub labs so far.

That’s where Dr Lal Pathlabs has a clear head start over its rivals. The newbies will at some point face the same hurdles that Dr Lal did in scaling up. Even pharma companies with their wider reach and backing of doctors may not be able to scale up that easily. “Pharma companies have the advantage of doctor connect, but they have no experience in running a supply chain. Executing pharma at the ground level is totally different from running a pathology lab. They don’t enjoy an obvious advantage," says Ranjan of Marcellus Investment Managers.

A growing portfolio

Moreover, new players are mainly active in the metros. Any talk of competition will be irrelevant if the unpenetrated market in smaller towns isn’t accounted for. Whoever can attract business from this segment will grow its market share. Dr Lal has an impressive geographical reach, with 277 labs, 4,731 collection centres and 10,599 pick-up points across India.

“About 15 years ago, Dr Lal was only NCR-oriented. In the following five years, it became a dominant player in the North organically. Over the last five years, it has focussed on North-East and East starting with Kolkata," says Ranjan.

In November 2021, the company acquired Suburban Diagnostics to expand its footprint in the West region. With 38 labs and 177 collection points in Maharashtra and a strong presence in Mumbai and Pune, Suburban provides Dr Lal Pathlabs a wide playground to expand.

Besides, the company is charting its own flight path by widening its tests menu, offering 5,000 pathology and radiology tests. The competitors will need time to create such a comprehensive portfolio.

Then there is the all-important question of money. Dr Lal is sitting pretty on a net cash of 344 crore. With 20% CAGR in revenues and return on capital employed at 44%, its finances are reasonably sound.

While low entry barriers make it easy for new players to set up shop, the question is, do they last? In 2003, Pathnet India, a joint venture between Gribbles Pathology Laboratory of Australia and Dr Reddy’s Laboratory, began diagnostic operations in India. The move was heralded as ‘corporatizing’ the diagnostics industry, and giving tough competition to the likes of Dr Lal. Within two years, Pathnet was acquired by Metropolis. In 2006, global player Quest Diagnostics entered India but quit a decade later. Its India operations were acquired by Strand Life Sciences, which in turn sold it to Oncquest Laboratories in 2020. Last year, pharmacy start-up PharmEasy acquired 66.1% stake in a large player like Thyrocare.

Caution is the mantra at Dr Lal. “You need to keep acquiring new customers to sustain in this business. We will carefully choose our battles as a higher level of competition awaits the industry," says Manchanda.

Vinay Bafna, research analyst at ICICI Securities, says the noise over large conglomerates entering and disrupting the industry is exaggerated. “I believe their strategy is a multi-year one and with time they wish to establish themselves across the whole healthcare system, diagnostics, hospitals, pharmacies and so on."

New path

So, what’s next for Dr Lal Pathlabs?

“We are focused on super specialty segment and within that autoimmunity and gynaecology are key areas," says Manchanda. Genomics is another area of focus. To that end, it has started Genevolve, a division focused on genetic testing and next generation sequencing. “We have established India’s first centre of excellence for autoimmune diseases. This, combined with a focus on specialized tests, including genomics, has contributed to our growth in the first quarter," says Bharath Uppiliappan, chief executive officer of Dr Lal Pathlabs.

Also on the radar are specialized tests like molecular diagnostics, flowcytometry, histopathology/immunohistochemistry, digital pathology and artificial intelligence.

“When I say trust, it is not just about diagnosing accurately but also early. These specialized tests and segmentation will help us to do so," says Manchanda.

Yet, like any industry, lack of skilled manpower is a worry in the diagnostics space too. “Talent acquisition will be a key growth driver," says Manchanda. The employee cost for Dr Lal increased from nearly 13% in Q1FY22 to 18% in Q1FY23.

On the digital front, the company has a slew of initiatives, including datatbase creation. “Lot of diseases run in a family. Such a database will help doctors find patterns," says Manchanda. Also, on the drawing board is building a patient community where patients or their caretakers can interact with each other. “It is not happening in an active way but is a possibility," he adds.

For a company that has been at the forefront of helping diagnose people’s health, Dr Lal Pathlabs is, for the moment, well placed to analyse its own and forge ahead.

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