Is Diagnostics Headed For Price War The Telecom Way?

Hyper-competition. Price wars. Disruption. Consolidation. Sounds like India's telecom sector. Only this time, it's diagnostics.

On May 16, the Tata-owned online pharmacy 1mg announced flat prices of Rs 100 for popular lab tests including thyroid, liver function, lipid profile and diabetes screening in Bengaluru. Even A Velumani, founder of Thyrocare diagnostics chain, retweeted the offer.

"Customer demand is the key to bring scale efficiencies, and we have been witnessing great response so far," Prashant Tandon, chief executive officer at Tata 1mg, told BQ Prime.

India's fragmented industry for conducting blood tests to X-ray imaging bet on increased awareness after the pandemic and the government's increasing spending on healthcare to drive growth. A Crisil report cited in Krsnaa Diagnostics Ltd.'s IPO filing estimates to close in on Rs 1 lakh crore in this fiscal. Online pharmacies have taken the plunge, crowding the market. But that means a risk for incumbents.

Following Tata 1mg’s announcement—even though it was city-specific—shares of Dr Lal PathLabs Ltd. and Metropolis Healthcare Ltd. fell to 52-week lows. That comes when they already face margin pressure. Dr Lal PathLabs' fourth-quarter profit fell 27% year-on-year and margin narrowed to 25% from 28%.

"Competition is real, but (the idea that) prices (of diagnostic testing services) will immediately crash is more of a noise, as healthcare is not as price elastic as one tends to assume," Om Manchanda, managing director of Dr Lal PathLabs, told BQ Prime during an earnings interview.

But, he said, healthcare is a trust-driven business and companies do not want to play the pricing game and bring down fees to a low price point. According to him, these charges are not sustainable price points.

Dr Lal PathLabs has tried discounted pricing in some of the cities and centres but it has not yielded results, the managing director said.

Crowded Space

The diagnostics industry has drawn a horde or new health-tech players. 1mg is backed by the Tata Group, Netmeds is backed by Reliance Retail Ventures Ltd., and private equity-backed online pharmacy Pharmeasy has acquired Thyrocare. The Adani Group recently entered the medical diagnostics segment with Adani Health Ventures Ltd.

Even drugmaker Lupin Ltd., which has a strong network and access to doctors who recommend tests, is setting up diagnostic laboratories.

Lower Prices

At 1mg, achieving efficiencies due to volume would help deliver quality and trust at competitive prices, Tandon said.

The right pricing with the highest quality standards can be delivered close to 30-40% lower than the current diagnostic test prices in the market, and "if volume response gets better, further lowering of prices could also be possible".

1mg has around nine labs and plans to come up with 20-30 more over the next 18 months all across the country, from metros to tier 2 and 3 cities, said Tandon.

Large players in the space enjoy around 80% gross margin and Ebitda margin in the range of 30-35%, and therefore, reduced prices still provide room for sufficient margin, he said. He said 1mg expects a "strong double-digit margin".

And as big companies join the fray, consolidation is likely to heighten competition.

"Competition would drive the shift from unorganised (diagnostic) player to organised,” Om Manchanda said.

Dr Lal PathLabs targets to be more cost efficient to match competition, he said. It plans to expands to tier 2 and 3 cities and build more “hub labs" collection points with a centralised testing centre. The company is open to acquisitions to capture more market share, and it sees partnership with an aggregator as the way forward to reach people.

Brand Name, Relationships Matter

Aditya Khemka, fund manager, InCred Healthcare Fund, does not expect price wars to impact the diagnostic services providers.

“Historically, too, despite lower pricing, there have been some companies with similar proposals which did not manage to outperform the competing pathology," said Khemka. That, he said, indicates that diagnostics may not merely be a pricing game, but also how brand name and doctor-diagnostic service provider relationships are significant.

Bundled testing services are already provided at discounted prices by various service providers, and if three-four tests are recommended together, the patient might continue to choose the lab recommended by the doctor, Khemka said.

According to Nirmal Bang's pharma analyst Vishal Manchanda, undercutting of prices to a great extent may lead to a situation similar to the telecom industry, where other service providers may be compelled to follow suit, causing them to incur losses which may not be sustainable in the long-run.

Pricing war unleashed by Reliance Jio Infocomm Ltd. caused losses in the the telecom sector, and drove several firms out of business.

Likewise, Manchanda said he is sure whether the offered test price by some diagnostics service providers "even adequately covers the cost of sample collection".

With economies of scale coming into the picture, there is a possibility of profitability, but competition may always remain a factor to watch for.

Customers will benefit though. At least, till the offers last.