Inside the Lab Industry: Ailing Domestically, Quest Diagnostics Makes Major Move in India

While Quest Diagnostics has been challenged in the United States in recent years to grow its business, there is one part of the globe where it will soon be expanding rapidly: India. Earlier this month, Quest Diagnostics’ India subsidiary announced a dramatic expansion of its oncology testing market. It plans to open 25 cancer service centers in various parts of the country, including major cities such as Mumbai, Bangalore, and Kolkata, the nation’s first-, third-, and seventh-most populous cities, respectively. Quest already has a significant collection and testing network in Delhi, the nation’s second-largest city and its capital. Delhi was the site of a pilot program for cancer testing prior to the announced expansion. “The incidence of cancer cases is on the rise in India. Today, patients and the treating physician need accurate and reliable diagnostic insights in order to make the right treatment decision,” said Mukul Bagga, whom Quest recruited from pharmaceutical giant Novartis to head its Indian operations. In the last entry of a blog Bagga wrote about the pharmaceutical sector before he joined Quest last spring, he described the transition from pharmaceutical to laboratory services as a culture shock. “You have a menu of over 3,000 tests and you need to sell this as a service!” he mused, adding that market research reports for the lab sector in India are virtually nonexistent. Overseas Markets Provide Some Promise Despite the dearth of hard numbers on market potential, the once skeptical view of India as a source of growth for the company appears to be turning. John Macko, executive vice president in charge of strategy for MiraMed, a health care consulting company based in Jackson, Mich., noted that overseas markets may be the best option for publicly traded enterprises such as Quest these days. “The Quests and Labcorps of the world, I don’t believe they have a choice from a financial perspective,” he said. “The market [in the United States] is fairly saturated, and they’re getting less per test.” In 2013, Quest revenues declined 3.2 percent from 2012, to $7.1 billion. For 2014, the company is projecting revenues to be flat to down 2 percent, continuing a trend that began in 2012. Two years of declining revenue for a publicly traded company is usually more than enough for it to aggressively seek revenue growth, whether from mergers and acquisitions—which Quest has also undertaken—or by entering new markets. In addition to India, Macko cited Singapore, South America, and China as other potentially huge markets for U.S.-based lab companies. Quest is no stranger to India; it began investing in the country about a decade ago. It built a 65,000-square-foot laboratory in Gurgaon, an affluent, centrally located city of about 900,000 located 25 miles south of Delhi. That lab was certified by the College of American Pathologists in 2008. In a nation where there are literally hundreds of thousands of laboratories—most of which are little more than mom-and-pop operations—only a handful have any sort of official certification. Aside from India, Quest’s international presence is fairly limited, with some testing operations in Puerto Rico, Mexico, Brazil, and the United Kingdom. LabCorp has limited testing operations in Puerto Rico and Canada, but the vast majority of its business is in the United States. The decision to move into India was made by the predecessor of current Quest Chief Executive Officer Steve Rusckowski, Surya Mohapatra. An Indian native who was educated both there and in the United Kingdom, Mohapatra came under heavy criticism for the business decision. It likely contributed to his exit under pressure from the company in 2012, after eight years as CEO and more than a dozen as a Quest executive. Amanda Murphy, an analyst with William Blair & Co. in Chicago who covers Quest, confirmed that the Indian strategy did not initially bear fruit. “It didn’t go well, and really didn’t take off,” she said. But she added that the environment may have changed. “There is definitely an opportunity for Quest internationally,” Murphy observed. Cancer May Be Growth Engine Apparently, Bagga and his executive team have latched onto cancer as the new engine for growth. According to data cited by Quest India, there were just under 1 million cases diagnosed in the country in 2010. That number is projected to reach 1.1 million cases by 2020, Quest said. About 556,000 Indians died from the disease in 2010. Those numbers are almost certainly underreported. In the United States, about 1.7 million cancer cases were diagnosed in 2013, according to the American Cancer Society. There were about 580,000 cancer-related deaths last year. The U.S. population is 314 million—a fraction of the 1.2 billion people who live in India. Economy Is Growing Rapidly Although hundreds of millions of Indians live in poverty and the per capita income averages only about $100 a month, the economy is growing rapidly, often 6 percent or more annually in recent years. Per capita income is expected to reach an average of $350 a month by the end of the decade and, perhaps more significantly, represent nearly $13,000 a year in equivalent purchasing power in the United States, according to the International Monetary Fund. The nation also has a rapidly growing segment of urban upper and middle classes who have the income to improve and monitor their health and will likely take aggressive medical measures should they become ill. And while India does not have a government-run health system, it has a rapidly growing health care services sector that includes hundreds of privately run clinics and hospitals, many of which are on par in terms of the quality of care provided by facilities in Europe and the United States. According to Macko, that the United States has been using India’s white-collar labor force to outsource a variety of tasks such as Web site design and legal services has created an expectation among those workers that they can patronize American businesses. “Those people now need health care services and lab tests, and telemedicine is really changing the way that works,” he said. Indeed, Quest’s oncology diagnostics strategy appears to be leveraging both that demographic growth and long-distance communications. Although its tests are priced accordingly for Indian pocketbooks, it also provides a digital platform to share test results with clinicians in the United States to provide their opinions about potential treatment options. Sending test results abroad for interpretation can mean a premium of up to 30 percent above the original test price, Bagga recently told the Hindustan Times, an English-language newspaper in India. In addition to basic testing for breast, cervical, prostate, soft tissue, and bone cancers, Quest’s India operations are also offering esoteric testing for certain types of hematological cancers, as well as an assay for detecting mutations in the ROS1 gene, which can help determine certain care pathways for patients with lung cancer. However, Quest did not want to provide any financial specifics regarding its overseas market, citing its upcoming release of earnings for the fourth quarter of 2013, according to company spokesperson Wendy Bost. “We continue to regard India as an important market and look forward to extending our cancer services to patients in the country,” Bost said. Takeaway: Faced with flat revenue and declining reimbursement in the United States, Quest Diagnostics may have to begin opening markets overseas far more aggressively than in the past.