Exclusive: Suburban Diagnostics in sale talks with Dr Lal Pathlabs, Metropolis, PharmEasy, others

Mumbai: Pathology services provider Suburban Diagnostics is in talks with Dr. Lal PathLabs, Metropolis Healthcare, PharmEasy, and a clutch of private equity funds for a complete sale, said people close to the development.

The Mumbai-based diagnostics chain, backed by Sequoia Capital, has received bids ranging from Rs 800 crore to Rs 1,200 crore for the buyout, said two people in the know, as the industry sees high interest due to the Covid-19 pandemic.

“Both Dr. Lal PathLabs, Metropolis, which are bigger in size compared to Suburban, are interested and have offered Rs 1,000-1,200 crore. The company is also talking to online pharmacy startup PharmEasy…,” said one of the people on the condition of anonymity as the deal talks are private. Another person said that a few mid-sized PE funds have also been approached and bids have been submitted.

Suburban Diagnostics has seen a jump in business since the coronavirus outbreak last year. While other pathological tests saw a decline, Covid-19-related testing and home collection of samples have registered a spike, said another person with knowledge of the company’s plans.

In response to ET's query, a company spokesperson said, “Suburban Diagnostics and Sequoia Capital have been great partners for the last 7-8 years and we are in the process of giving them an exit. In the process, we are speaking with several investors for the sale of Sequoia's stake. Suburban Diagnostics is currently on a high growth journey having exhibited a 60%-plus growth last year.”

Sequoia Capital had in 2012 first invested Rs 40 crore in the company, and has been drawing up an exit plan for a few years now. Suburban has explored several options including an initial public offering (IPO) in the past, said people with knowledge of the development.

Ripe for consolidation

There is a renewed interest in this diagnostics sector among investors, both strategic and financial, said people tracking the industry.

According to data shared by data intelligence platform Tofler, Suburban Diagnostics clocked revenues of Rs 170.22 crore for the financial year ended March 31, 2020, as against Rs 149 crore a year ago. The company’s post-tax profit stood at Rs 7.55 crore in FY20.

In comparison, Dr. Lal PathLabs earned Rs 1,330.4 crore and Metropolis Rs 856.4 crore in FY20. Apart from these two companies, SRL Diagnostics and Thyrocare Technologies dominate the organised market.

Consolidation is imminent in the market as these larger diagnostic chains will look to acquire smaller peers in order to fuel their growth ambitions.

Attractive play

The diagnostics industry has emerged as an attractive play in India's growing healthcare sector, and is one of the fastest growing service segments in the country.

The domestic industry is estimated at $9.5 billion and expected to grow at a compounded annual growth rate (CAGR) of around 11% over the next five years — largely driven by increase in healthcare spending by an aging population, rising income levels, and greater awareness of preventive testing, among other reasons, HDFC Securities said in a March 2021 report.

The segment is currently dominated by high volume and low-cost testing activities.

“The market share is categorized as: unorganized (47%), hospital-based lab (37%) while the remaining (around 16%) is with the organized players,” the HDFC Securities report stated. Doctor referrals constitute a large part of this business. This includes commission payments to doctors in lieu of referring to a diagnostics lab. Further, currently, the illness diagnosis segment is more prevalent than wellness segment in India.