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Legacy diagnostics players find the going tough, with no respite ahead!

Growth seems to be eluding the diagnostics chains in India. The post-Covid growth for the base business is currently 6–10 percent on a two-year CAGR basis, well below the pre-Covid trajectory of 13–14 percent. By comparison, hospitals continue to grow at 14–15 percent.

Competitive intensity has increased. Q2 and Q3FY23 results revealed declined revenues, contracted EBITDA margins, QoQ driven by negative operational leverage, and contracted gross margins on account of currency impact on raw material prices.

With two-pronged competition, one from online aggregators & e-commerce players and another from hospital chains & pharma companies, pure-play diagnostic companies struggle to sustain growth. The lucrative diagnostics sector has attracted investor interest. Over the last couple of years, new entrants, including Adani Health Ventures, RIL-Netmeds, Healthians, PharmEasy, Lupin Diagnostics, MedPlus, Tata 1mg, and Torrent Diagnostics have not only disrupted the market with technology, they have also resorted to aggressive pricing and volume discounts. Large hospitals as Apollo Hospitals, Max Healthcare, and Aster DM Healthcare have also grown the diagnostics aspect of their business.

With most tests being commoditized, it is the unorganized players that are more price competitive. Last-mile execution and doctor penetration remain a challenge. Salaries and ESOP costs due to professional management too have risen this year.

On the global front, in 2022, the volume of diagnostics company deals was about 23 percent lower than in a very robust 2021, amid the slump in the value of public companies. Another factor was the gap between the expectations of sellers and what buyers were willing to pay. Deal volume for diagnostics companies dropped from 272 strategic investments and 110 financial investments in 2021 to 203 and 90, respectively, in 2022. While they have largely gone through the cash generated by peak Covid-19 testing, most companies are still generating adequate revenue to fund deals. Small deals and partnerships aimed at innovation were also completed and announced.

2023 is expected to see a rise in deal volumes, even as companies grapple with recession, inflation, and the high cost of capital. Strategic partnerships will likely predominate, outpacing large consolidations and small strategic tuck-ins. Investments in wide-ranging areas – from digital pathology to liquid biopsy – will help shape diagnostics manufacturing. The impact of post-pandemic demand for innovative, decentralized diagnostic testing appears to be in its earliest stages and is likely to have a lasting impact.

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