Who will consolidate labs in emerging markets?
Outside of Brazil, India and China, the lab sector across emerging markets remains unconsolidated. But big assets in Mexico and SE Asia are coming up for sale. Who will move in?
A minority stake in ProA, one of the largest Mexican chains with 2018 sales forecast at US$230m, is up for grabs. Elsewhere, Healthscope’s lab chain across Malaysia, Singapore and Vietnam with revenue of Aus$61.7m in the year to June 2017 is undergoing a strategic review. That means it will probably be sold. Sources say that they recognise that to grow, the business needs to be able to make acquisitions. Elsewhere the grandiloquently named Great Asia Pacific Healthcare is looking for investors to consolidate the Filippino market.
On the face of it, diagnostic labs in emerging markets are a massive opportunity. Usually, payments are out of pocket. Fixed tariffs are the exception, not the norm so margins can be high – Integrated Diagnostics Holdings, an Egyptian Middle East consolidator has an EBITDA margin of 40%. But competition, as well as margins, can be high. India, in particular, has suffered from low margins as the big chains – SRL, Dr Lal and Metropolitan – compete with thousands of completely unregulated mom’n’pop shops, some of which still do sink tests (you pour the sample down the sink and make up the result).
So who will buy? ProA sources say that Quest and Synlab expressed interest but only in a majority stake. In Far East Asia the problem is that the sort of multiples that small labs expect before they will sell are too high for most listed lab groups. More importantly perhaps, is the fact that healthcare services in emerging markets are perceived as high risk. The institutional investors who back the big groups do not want to see risk. The alternative buyers would be the Indian groups, but the general consensus is that they have their work cut out in India. Another risk is that in many markets any referring doctor expects to get paid a commission. That may be difficult for a western chain on an established stockmarket to pay.
That leaves the stage clear for brave private equity. The key to success, we think, is to extend beyond the lab and to start to build a broader outpatient network, although this does risk competing with your existing clients.
We would welcome your thoughts on this story. Email your views to Max Hotopf or call 0207 183 3779.
