Conducted scuttlebutt and secondary research on Pathology labs industry.

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Research Report
Pathology Industry
Prepared by
Salman Mohammed Shiras
Santhana Gopalakrishnan
Neha Parihar
Asha Chauhan
Sayeka Mehjabin
(MBA Financial Analysis 2015-2017)
International College of Financial Planning

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Abstract
“It is health that is real wealth, not pieces of gold and silver”. This great quote by
Mahatma Gandhi sums up the importance of health in our life. The fact that the
people of India not taking this quote seriously has led to the boom of the Indian
Healthcare Industry. This high growth in the Healthcare sector has also led to the
robust growth of sub segments like the Diagnostic service sector and the Medical
Instruments sector. In this research report, we would be covering in depth the
pathology sector, particularly, to identify how the market share of the pathology
sector would be in the upcoming years which has recently seen the entry of many
organized players. This is primarily done by scuttlebutt research along with the
secondary research on the key determinants of this sector (patients, labs & doctors).

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I. Industry Analysis
1. Overview
With the Indian Healthcare Industry growing at a CAGR of 12-14% the Indian
diagnostic industry is expected to reach 585-616 billion INR in the next 3 years.
The diagnostic sector can classified into two major sub segments- pathology labs
and radiology or imaging labs. Pathology or Invitro is a method of diagnosis of
diseases through the analysis of tissues, cells, blood, urine and other body fluids.
The pathology sector constitutes about 72% of the entire diagnostic sector. The
pathology sector is expected to grow at a CAGR of 16-18% and is expected to
reach 400-500 billion INR in the next 3 years.
This high expectation about the future are due to the following reasons:
1. High disposable income- With a real GDP growth rate at an estimated 7.4%
in the year 2014-15, India is one of the fastest growing economies in the
world. This increase in GDP has led to an increase in the per capita income to
an estimated US$5,900 in 2014. The increase in per capita income has led to
wealth creation and coupled with increased healthcare awareness has led to
the development of pathology sector.
2. Increased healthcare awareness- The need to diagnose the disease before the
treatment and the need to identify pre-existing diseases have been a major
demand driver for the pathology sector.
3. Shift in diseases profiles- With rising income levels and changing lifestyles,
the disease profile in India is shifting away from infectious diseases and
towards chronic or lifestyle diseases. The increase in chronic diseases has
resulted in increased demand for diagnostic tests, including biochemistry
diagnostic tests for blood sugar, cholesterol and lipid profiles.
4. Increase in health insurance coverage- In 2013-14, only about 17% of the
Indian population subscribed to health insurance. The penetration of health
insurance in India has increased over the recent years, but remains low overall.
Therefore, there is potential for growth in the health insurance sector which
would in turn lead to the development in the pathology sector. Insurance
penetration is measured as the percentage of insurance premium to GDP.

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CRISIL Research estimates that per capita healthcare expenditure in India in
the fiscal year 2014-2015 amounted to ₹3,871 (or US$63). Over the next three
fiscal years, CRISIL Research estimates that per capita healthcare expenditure
in India will grow at a CAGR of approximately 10-12% to reach ₹5,194-5,481
(or US$82.9-87.5) in the fiscal year 2017-2018. Under-penetration of the
Indian healthcare industry is also evidenced by the low per capita healthcare
expenditure in India.
Urban vs rural demand
According to World Bank in the year 2014-15 approximately 32% and 68%
of the Indian population lived in urban and rural areas respectively. This 32%
of the urban population contributed to 67% of the revenues earned by the
diagnostic industry. These are due to better access to healthcare facilities, high
disposable income and advanced healthcare facilities in urban areas.
Wellness and preventive diagnostic services
A major trend that was visible due to the development of diagnostic industry
was the wellness and preventive diagnostic services. Wellness and preventive
diagnostic services are aimed at identifying pre-existing diseases or the likely
risk of particular diseases before the onset of actual symptoms. It is expected
that it will assist people in to more accurately identify risks so that they can
take corrective or precautionary measures before any chronic condition
substantiates. The CRISIL Research Report estimates that the wellness and
preventive diagnostic services segment accounted for approximately 6-8% of
the aggregate diagnostic services market in the fiscal year 2014-2015. It is
expected that this segment will grow at a CAGR of close to 25% over the next
three fiscal years.
Section 2 of the research will look into the various market trends prevailing
in the pathology sector and section 3 would cover the scuttlebutt research that
we have done.

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2. Life Cycle Approach
An industry is said to be in growth stage it grows at a rate higher than GDP.
The Indian Pathology industry has been growing at a CAGR of 16% while
GDP growth rate was an estimated 7.4% in 2014-15.
3. Rate of change - Healthcare industry as a whole is prone to technological
changes, in terms of the equipment they use etc. With the primary
operations (conducting tests to detect diseases and analyzing it) being
dependent majorly on the equipment, the quality of technology plays a
provident role in determining the efficient serviceability of the industry.
Thus, any change in technology would impact the industry directly. The
predictability of such technology is less and the cost of such technology is
also very high making it that only few players in the industry can afford it.
4. Industry Structure
The Indian Pathology industry is 264 million INR industry as of 2014-15.
The industry is highly fragmented, mostly dominated by unorganized
players. Standalone laboratories and hospital based laboratories both
forming the unorganized sector. In 2014-2015, approximately 48% of the
revenue generated by the pathology sector was contributed by standalone
laboratories.
The organized sector consists of private diagnostic chains that operate out
of one center, offers pathology services, uses hub and spoke model, latest
technology, modern logistics and information management systems to
operate their network.
Diagnostic chains can be further categorized into large pan-India chains and
regional chains. Currently, there are approximately seven large diagnostic
chains in India, based on their revenues. Regional chains are diagnostic
chains with centers concentrated in a single city or state in India.

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4. Market Trends
Diagnostics Industry in India, in the recent past, has noted a structural and
a technological shift. This has made the sector to grow at a tremendous
pace, as mentioned earlier, and also is expected to grow at an excellent pace.
The entry of organized players in the pathology sector have led to a series
of trends over the years. These trends are basically related to the method of
operations that these labs use, strategies used by these labs to expand their
operations and the increased use of technology and innovation in their
operations. Few of the notable trends which contributed to the growth of
this industry are:
1. Traditional to lifestyle Diseases
As per IRDA Report about 50% of the healthcare spending is done on in-
patient beds, are for lifestyle diseases. Lifestyle disease are majorly those
disease which is caused due to the modern living style wherein most are
prone to drinking alcohol, smoking, high BP, Cholesterol etc, leading into
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
2014-15 2017-18E
MARKET SHARE
Standalone diagnosticcenters Hospital based diagnostics Diagnostic chains

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the emergence of new disease. This has outpaced the then existing
traditional diseases. This shift has led to the requirement for specialized
servies, though hospitalization service, the base of which is screening what
type of disease it is, has inturn led to the growing need for diagnostic
service.
2. Emergence of Telemedicine
Telemedicine is basically the extension of low-cost consultation and
diagnostic services which can reach out to even the remotest of areas
through telecommunication and internet. This would help in bridging the
gap between geographically diversed urban and rural market, thereby,
making sure the similar service is available to all at an affordable cost.
3. Increasing Penetration of Health Insurance
The penetration level of health insurance was low at a decade before. But
with the changing times and the increasing awarness amongst the people
the healthcare Insurance is able to reach out to most of the people. The
healthcare insurance premium expanded at a CAGR of 26% during
FY2008-2013(as per IRDA). The momentum is expected to continue with
the penetration levels increasing rapidly.
4. Technological Impact
To curb down the cost of diagnostic services and to enhance the service
quality at a standardized level many of the major players have focussed on
technological advancements wherein few of such technologies which came
in handy are maintenance of Electronic Medical records, mobile
healthcare, etc. To enhance the patient satisfaction and to widen their
choice base PRACTO has come up with its technology which basically
assists in choosing amongs the alternatives,comparing the prices and lots
more, simply like how zomato does it for choosing between the restaurants.
5. Government Initiatives
Few of the notable policy support by the government came in at a crucial
time where the sector is doing good. Though the policies confine mostly
to healthcare service as a whole if you dig deep there are few policies
which has a direct impact on the diagnostic service segment too. The PPP
model is an initiative by the government which is basically a public private

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partnership wherin the model focus on improving the availability of
services and providing for healthcare financing. The tax incentive of 250%
deduction on those expenditures incurred on operating technology
enabling remote radiology and healthcare services put the cherry on the
cake.
Above all the notable thing is the allocation of healthcare expenditure by
the government and the focus of strengthening the healthcare industry by
enacting strong regulations would be of advantage to the organized players
of this pathology industry as this industry basically lacks regulation
thereby leading to high amount of unorganized players.
6. Hub and spoke model
Following its success in the transportation industry, the organized players
have also started to use the hub and spoke model in order make their
operations more efficient and most importantly cut the overall costs in
running the operations.
In a normal hub and spoke model the hub will be the National/Regional
reference labs which would in most cases the headquarters of the company.
This would be located most probably in a tier-1 city. This labs would be

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equipped with the latest equipment and technology capable of conducting
any tests.
The next in the model is satellite labs. These are smaller labs capable of
conducting some tests and these act like the intermediaries.
The last or the spokes in the model are the collection centers. These are
basically centers were the blood or other body fluids of the patients are
collected to be sent to either the satellite or National reference labs for
testing.
This model coupled with a good logistics system and information
management system has helped most of the organized players in cutting
down their costs.
7. Franchising
According to CRISIL research report in fiscal year 2014-15 the rural
population contributed only 33% of the revenue of the pathology sector.
This lack of testing centers in rural and remote areas has forced many of
the diagnostic chains to adopt the franchise model to expand their network.
The franchise model tried to reduce the difficulty of people to travel long
distances to avail diagnostic needs.
The unique quality of the franchise model is that it can make the company's
presence felt in more places. Over the years in order to have a pan-India
presence most of the diagnostic chains are using the franchise model.
Before the popularization of the franchise model diagnostic chains
expanded by acquisitions and taking over brownfield projects. Since these
methods proved capital intensive they switched to the franchise model.
The by-product of the franchise model in any sector is that it helps an
individual find his or her entrepreneurial feet and with the backing of a
good brand name. Hospitals and diagnostic chains are looking for partners
who are starting out business in this sector. However, they are willing to
tie up only with those who have a basic knowledge or at least some
inclination towards healthcare. A franchise is not someone who just carries
your brand name, but also a business partner. A franchise has to have the
same value system of the diagnostic chain as they are dealing with life.
Franchising works on two different business models- franchisee-owned
and franchisee-operated (FOFO) and franchisee-owned and company

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operated (FOCO). In the FOFO model, diagnostic chains only gets a share
of revenue as royalty which could range from about 10-20 percent
depending on the territory and investments.
However, in the FOCO model they usually assure the franchisee of a
minimum revenue guarantee per month and then a percentage share of the
revenue after a certain point. The minimum guarantee varies from center
to center as it is linked to real estate prices and revenue potential in the
territory. Even though franchising is a two-way business model and both
the parties benefit from it, the large hospitals and diagnostics chains-have
more of a say because of their brand names.
Since the sector being highly fragmented, the only way organized players
can expand is using the franchising model.
8. Automation and Development of Medical Equipment Industry
The hallmark of a good medical laboratory is accurate analysis and
reporting of diagnostic tests carried out by them thereby helping the
medical fraternity to recommend proper dosages of medicines to cure the
patient. A high degree of quality control in testing therefore instils trust
and confidence in the patients. Challenges include, but are not restricted to
trained and skilled manpower in proper analysis, and use of test equipment.
This challenge has forced many diagnostic chains to install automated
equipment in their labs. Since quality is a prized procession of all the
players in this sector, every diagnostic chain tries to improve their facilities
to the modern standards.
Since automation for clinical laboratories came into existence equipment
manufacturers have been promoting the benefits of stand-alone and total
laboratory automation systems. The crux of their marketing lies in the fact
that these equipment save time, reduce manual steps and above all, remove
the human element from testing to lower the risk of errors. Even with less
manpower more tasks can be accomplished more efficiently. Moreover it
enhances the patients’ and doctors’ confidence on the test reports
generated by the diagnostic centers.
Although automation seems highly beneficial it also comes with
considerable expense. The cost of automation is huge.

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This push for automation has led to the development another sub-segment
of the Healthcare industry mainly the Medical equipment industry. This
sector is mainly dependent on imports from international players mainly
Siemens, Bayer, GE Healthcare etc. But over the years with the
intervention Government of India and opening up of 100% FDIs into the
sector Indian medical equipment manufacturers are also trying to gain their
market share. In recent years there has been joint ventures between Indian
manufacturers and international manufacturers in terms of technology and
innovation.
Looking to the future automation is gaining pace in the pathology sector.
However, there are still some disciplines like histopathology and
microbiology that are not fully automated. In the future, automation will
increase in the areas like the microbiology labs and the histopathological
labs.
Apart from these the notable trend even a layman can find about the
healthcare industry is the shift from chemical to ayurvedic medicines. But
keeping in view the fact that pathology helps in detecting a disease rather
than in curing it, this makes it a point that ayurvedic shift would not impact
the pathology industry much.

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5. Porter’s Five Forces
Threat of new Entrants
 The barriers to entry in pathology industry is very low which have
allowed lot of new players to enter the industry.
 Lack of regulations has been a major cause for the increase in the
no of standalone diagnostic centers.
Bargaining power of customers
 Customers tend to be loyal to a particular diagnostic chain even
though the no of players have considerably increased.
Competitive
rivalry (High)
Threat of
new
entrants
(High)
Bargaining
power of
costumers
(Low-
moderate)
Threat of
substitute
products
(Low)
Bargaining
power of
suppliers
(Moderate-
High)

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Threat of substitute products
 Practically there is no substitute for pathology. The only change that
can happen is in the technologies used or the manner in which tests
are conducted.
Bargaining power of suppliers
 The industry depends on 90% of imports in equipment.
 Lack of Indian manufacturers to support the industry.
Competitive rivalry
 With the entry of new private players, there has been an intense
rivalry between the unorganized and organized players.

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II. Industry Outlook (Scuttlebutt Research)
When it comes to ground level there are only two major factors which
impacts the disruption of the market share. One is the customers who are
availing that industry’s products and services, second, is the Suppliers who
offer those facilities (which is explained in many of the economic
theories). As far as the pathology industry is concerned the third factor
which could possibly be added into this is the doctors, whose say impacts
the decision of the customers directly in choosing its suppliers or the labs,
in this context.
This leads us to the need of analyzing the mindset of these patients,
suppliers and doctors so as to arrive at a conclusion of what could possibly
happen in the near future. The summary of responses were mostly in
tandem with the secondary data’s.
1. Consumers/Patients
 The above pie charts suggest that 55.4% of the respondents were aware
of preventive healthcare (Which is an ongoing trend in the healthcare
industry). But the greatest irony is that, majority considers for having
blood tests only when the doctor recommends.
 The preference over the labs is, to say, closely competing with each
other wherein the neighborhood labs and private chains are taking a

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major lead with 27% each, followed by the labs recommended by
doctors with 23.5%.
 When it comes to private labs, it is the specialized services and the
quality of service is taking a lead in attracting the patients, with 48.6%
and 44.1% respectively, followed by the price and packages having
32.4%.
 But the familiarity in the locality is what drags people to neighborhood
labs followed various other factors like the lab being recommended by
the doctors and the convenience.
 Almost 67.5% of the respondents were satisfied with their current
service providers having stating the experience of the labs as the reason
behind it. Timely delivery of results is also one key reason for patients
being satisfied with a particular service provider.
 Though many felt satisfied with their diagnostics servicers, 44.4% of
the respondents are cautious about the quality change and 27.8% feels
the availability of similar services at an affordable cost and hike in price
could move the image down thereby making them not satisfied.

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2. Labs/ Suppliers of Service
 Unorganized players have also started giving discounts and packages
following the entry of organized players.
 Organized players have started franchising with unorganized players as a part
of their expansionary plans.
 In standalone labs per day tests are about 10-20.
 In hospital based labs it is twice that of standalone labs.
 Only few of the unorganized players are able to offer more than 1000 tests
while the basic no of tests offered by hospital based labs are around 10000+.
 Organized players the number is extremely high that is mostly in lacs.
 In our analysis only 2 out of 35 labs has accepted the fact that they are losing
their market share due to the entry of organized players.
 Almost 95% of the labs concluded that their majority of the revenues comes
through doctor’s references.
 The cost per test in an unorganized sector is dependent on various factors
such as doctor’s commission, no of tests, transportation costs since majority
are collection centers not technology oriented labs.
 When it comes to hospital based labs there is minimum technology to carry
out basic tests which are taken frequently, thereby reducing the
transportation cost comparatively.
 Most of the labs prefers hand in reports while few amongst those also have
e-mail and courier facilities.
 Though there is a high competition every lab feels that their market share is
more or less unchanged because of trust and loyalty of customers.
 Most of the organized and hospital based labs and few of the unorganized
labs also provide additional service by giving a first opinion on the test
through their own in house pathologists/doctors.

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3. Doctors
 In South India the commission is about 10-15% of the test price.
 Mostly doctors have tie up with a minimum of at least 2 local labs.
 When it comes to basic tests like sugar, cholesterol etc., they will suggest their
patients to labs which they have tie up with.
 Only in cases involving complex tests or special cases they suggest their
patients to private chains or any hospital based labs which has that facility.
 All the doctors working in hospitals are bound to send their patients to their
own network labs. (With slightly modifying the-to be taken tests with
available tests).
 Some doctors also look into the financial capability of the patients before
suggesting for tests and treatments.
 Family doctors mostly suggest private chains.
 Specialized doctors doesn’t not suggestions but gives options to their patients
regarding where to take their tests.

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ANALYSIS
The above mentioned data’s are classified into two major categories, namely:
 On consumer front
1. Based on the income level
2. Based on age groups
 On Labs front
1. Local Labs
2. Hospital Based Labs
3. Private Chains
On consumer front
Based on Income Level
The above were the income level of various respondents which will be further used
for categorizing preferences on the basis of different groups.

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What drags someone into private chains ?
0
10
20
30
40
50
60
70
80
Less than 3 Lakhs 3-8 Lakhs More than 8 Lakhs
Income wise Analysis
Private Chains Neighbourhood & Labs Rec by Doc's Hospital based Labs

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Based on Age Group:
Age wise Analysis
Less than 30 30-55 Years Above 55
0
10
20
30
40
50
60
70
Less than 30 30-55 Above 55
Age wise Analysis
Private Chains Neighbourhood & Labs Rec by Doc's Hospital based Labs

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On Labs Front
0
10
20
30
40
50
60
No of Tests per day
Private chains Hosp based Labs
Local Labs
Revenue Source
Private Chains Hosp based Labs Doctors Recommendation Others

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Below is a price mapping that have been done between two private diagnoostic
chains and a local diagnostic center:

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INFERENCES
We strongly belive that, through the above analysis, there are high chances that the
market share disruption is possible in the near future and would benefit , in
particular, the organized players.
In terms of income distribution, where the per capita income and personal disposable
income is expected to increase in our economy it is expected that there would be a
shift from one level to the other. ( ie., from humble to mid income level etc).
When we combine this with the above analysis chart of income levels, we can infer
that there can be a significant transformation from local labs to private chains.
This sector in itself is a sensitive sector whereby a minor problem would lead the
consumers to change the service provider.
Our analysis also suggest that 70% of the respondents have already changed their
service providers.

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The frequency of the change is also dependent on the efficiency of the service which
was discussed earlier, having stated the sensitivity aspect of the industry.
We have also seen from the lab aspect that the Level of Technology available with
the local labs are incomparable to those of organized players. This increases the
chances of service quality being bleak which inturn effects in the transformation.
Some of the unorganized players have also started feeling the heat of the entry of the
organized players, though they say that their share hasn’t been effected we could
sense the heat wherein even 2 players have started franchising with the organized
players. ( Franchising model was explained in the previous notes).
Who would benefit from this market change ??

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The poll suggested that Dr Lal Pathlabs is the highly known diagnostic service
provider among the respondents capturing 63% followed by thyrocare having
captured 35% (since many respondents are aware of multiple Service providers).
But before we comment on the final impact on organized players there is still a factor
or to say, a key determinant apart from the customers and service providers has to
be looked into.
Doctors are the one who impacts customers decision even if he/she wants to change
their current diagnostic service providers.
This data supports the above statement having said that 37.7% of the respondends
follow doctor’s advice while choosing a service provider/ lab.
Now, the entire market depends on two factors, one is

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Dependend on the labs entirely, who can offer convenience with a good service
quality, at a cheaper price and deliver the results in a good pace.
The other one is the doctors who impacts the decision directly, while the former one
is little easy to predict compared to the latter.
Why we believe Thyrocare would benefit from the expected
change ?
 The business model of the thryocare is a cost effective model wherein the
mission is to service 50% of the industry at 50% of the cost.
 The above price mapping can also be indicative in this regard, wherein, the
prices and packages offered by thyrocare is considerably very less compared
to other organized players and even the local labs.
 Since siemens( who is the market leader in medical equipment industry) is
directly associated with thyrocare we believe the business would have good
technology and advancements.
 One of the research blogs states that 30% of the revenues for Dr Lal and SRL
comes from franchising whereas for thyrocare it is 60%, which is double the
average of the organized players, which can overcome the above mentioned
hindrance of doctor’s reference to local labs due to tie ups.
 The business majorly depends on the cargo( used for transporting the sample)
and efficiency in Cargo management by the company also suggest that there
wouldn’t be delay in arrival of results. These convenience, price and timely
arrival of results is considered as key requirements of patients which we hope
can be well provided by Thyrocare.

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Street Expectations
In the recent past, two of the organized players of the diagnostic industry got itself
listed with the stock exchanges and the price offered in the market were extremely
high with a premium of 50% and 49% for Dr. Lal PathLabs and Thyrocare
technologies respectively. This is given the higher potential for growth opportunities
and margins. According to major brokerage firms like CRISIL and IIFL the industry
is expected to grow at a CAGR of 16-18%.
Increasing awareness, preventive treatment, ability to pay, rising share of chronic
diseases and preference for evidence-based treatments, all remain in favour of high
growth rates for organised players. The high-end testing is where their forte lies and
is also likely to keep their margins elevated. Their business models, too, support the
margins. Expansion through the franchise route helps in controlling overhead costs.
With core business remaining asset-light, balance sheet and cash flows remain
robust, reflecting positively on return ratios. This has been already explained in the
previous sections.

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Sources and References
1. Thyrocare prospectus
2. Blogs- Stalwart Advisors
3. CRISIL Research Report
4. http://businessworld.in/article/Aggregating-The-Fragmented-Diagnostic-
Sector-In-India/09-05-2016-97780/
5. http://www.business-standard.com/article/companies/lack-of-regulation-
haunts-india-s-test-labs-114041400536_1.html
6. http://ehealth.eletsonline.com/2011/12/%E2%80%9Cthe-indian-diagnostic-
industry-needs-regulation%E2%80%9D/
7. http://www.financialexpress.com/article/healthcare/diagnostic-special/no-
rules-to-the-game/116862/
8. http://www.financialexpress.com/article/healthcare/cover-story-
healthcare/make-in-india-or-make-for-india/62118/
9. http://www.espicom.com/india-medical-device-market.html
10.http://economictimes.indiatimes.com/industry/healthcare/biotech/healthcare/
indian-medical-device-industry-can-grow-to-7-billion-by-2016-
usibc/articleshow/48213378.cms
11.http://www.financialexpress.com/article/pharma/lab-next/driving-
diagnostics-with-automation/5976/
12.http://tribune.com.pk/story/58062/benefits-of-hub-and-spoke/