Facing the harsh realities

Semiconductors, and their integrated circuits, act as the brain for millions of medical devices – about 50 percent have a semiconductor. However, these once inexpensive and plentiful silicon chips have been in short supply for more than 18 months. The MedTech companies are suddenly competing with virtually every other manufacturing sector for the limited inventory. And manufacturers have, over the last year, grown more pessimistic. Some are likely to implement new, and often more expensive, strategies to keep their production lines moving. Hospitals and health systems are looking into alternate products, new usage strategies, or treatment options.

Shifting gears, the listed hospitals have recently announced their respective financial results for Q1FY23. Apollo Hospitals saw an increase in revenue by 6.6 percent over Q4FY22 and 0.7 percent over Q1FY22. Narayana Hrudayalaya saw an increase in revenue by 9.6 percent over Q4FY22 and 20.2 percent over Q1FY22. For Max Healthcare, the corresponding increase was 13.9 percent and 7 percent, and for HCG it was 10.2 percent and 19.5 percent. Post the Omicron-led disturbances in Q4FY22, hospitals were structurally well placed and Q1FY23 was driven by higher in-patient volume and, thus, higher in-patient conversion. Major contribution was from incremental elective surgeries, improved international patient mix amid optical initiatives like tele-consultation, digital app-based drives for treating patients at remote locations, and zoning of patients, besides higher focus on insurance and out-of-pocket payees. Also, hospitals continued to maintain cost rationalization drives.

The lab chains, on the other hand, saw a quarter, when non-Covid pathology revenue improved, while Covid sales contribution sharply declined; as a result, total revenue fell sharply. Sharp fall in margins due to aggressive expansion and discounting added to the fall. Revenue and profit-after-tax in Q1FY23 declined for Dr Lal PathLabs, Thyrocare, Metropolis, and Vijaya Diagnostics, to name a few, over Q4FY22 and Q1FY22. While intensified competition is likely to weigh on realizations in the near term, changing revenue mix in favor of specialized tests will provide support. And with awareness about health and lifestyle-related diseases on the rise, the laboratories can expect to see a fair bit of growth for the next few years. Strong brand equity in the organized diagnostics market, an experienced management team, and continuing financial growth across parameters will help the large labs command premium valuations.

No doubt, India is currently experiencing an increase in the number of Covid cases, but with the caseload mostly comprising sub-lineages of Omicron rather than any other variant, the MoH&FW is of the view that Covid-19 is no longer a pandemic but moving toward endemicity.