VOX: The march of Russia’s medical lab services business

VOX: The march of Russia’s medical lab services business
Private medical services are growing at least 15% a year in ruble terms.
By Ben Aris in Berlin April 4, 2019

Russia has many flourishing sectors like oil, retail and agriculture, but the expansion of the middle class has given rise to increasingly sophisticated services aimed at the population.

The state is obliged to provide every Russian with free healthcare but increasingly Russians are turning to the private sector for care, where the service is better, the treatment more sophisticated and the wait for treatment is shorter.

Private medical services took off with pre-natal, maternity and child care as everyone is prepared to pay for their children’s health, but now other niches are opening up.

bne IntelliNews editor-in-chief Ben Aris talked to KDL’s CEO Yuri Leonov, who runs one of Russia’s largest privately owned medical laboratory service companies.

While the state is obliged to provide free health care to everyone, Russians are willing to pay for better service and more sophisticated results. The European Bank for Reconstruction and Development (EBRD), Capman and UFG Private Equity invested in the company in 2012 and now it is a top two player with $75mn of turnover, and growing at over 30% a year. But the sector is in no way consolidated as the race is on to capture market share before the inevitable M&As and IPOs start.

bne: Russia is a big country and has the largest population in Europe. Do you cover the whole country?

YL: KDL is one of the leading laboratories in Russia and we are in almost all the large cities with more than one million in population – 13 locations in all with the main hub in Moscow.

We have almost 200 blood collection points across Russia and we cover three channels: B2B, B2C and B2G. B2C is more than half of our business while B2G is rather small – about 1.5%.

We have 1,800 employees and service over 200 routes every day to blood collection points and customers. Altogether we service more than 2,500 customers across Russia and every day there are 50 flights delivering bio-material to our central lab in Moscow.

bne: What do you do with the blood you collect?

YL: It is not only blood but other bio-materials, which we analyse. We provide a diagnostic of your health.

A half of the business (55%) is B2C. This is our bread and butter. These are physical people, private individuals. The service does differ from other countries like the UK. In Russia any person can go to a medical centre and give a sample of bio-materials easily, without needing a referral from the doctor.

Anyone can go and have a test, but this is our core competence – a laboratory service provider. The patient has a choice: to go to the private hospital or a government one, or come to us and have the test and take the results to doctor. The people come because we provide a faster, better service and wider range of tests.

bne: Despite the fact that the government is obliged to provide health care for every Russian, the private sector has been growing fast. What is driving this growth?

YL: The government is obliged to provide everyone with health care but there is a growing trend of the middle class turning to the private sector for its better service and higher quality.

A few segments attract more customers and private investment. 80% of stomatologists [dentists] are private and there has been significant private investment going to child services.

The private lab business is maybe 40% in value and 20% in volume so it is still significantly owned by the state.

The market grew last year by 10-14% in ruble terms but we don't expect any significant growth rate increase in the coming year.

But KDL's growth rate is significantly faster. Last year we grew by 27% in the last quarter and this year in the first quarter we will finish with a growth rate of 30-31% year-on-year. We are growing faster than the market. The reason is our organic expansion. We have done no acquisitions for the last five years, but we aim to.   

bne: In other sectors like retail there was a race that went for many years to grab as much market share as possible followed by a period of consolidation. Where is the medical services business today?

YL: We haven’t seen any significant consolidation so far. The leaders are growing organically by increasing the number of blood collection points across Russia.

The private diagnostic sector is growing because we are stealing some market share from the public sector. There are different players that could consolidate the market and could be acquisition targets. First there is the small regional players then the federal players who want to be acquired.

We are talking to them but we are in the phase when there is no significant need for any players to exit the market – everyone is still growing. There is no significant pressure on the P&L and they are trying to evaluate their assets significantly higher than we are willing to pay.

bne: So how far away is the market from being mature?

YL: I believe we are still 3-5 years away from fulfilling the potential of the market if there is no significant interventions from the regulator, from the state.

We are still in the fast growth phase. As a company we are already focusing on being operationally effective. We have not expanded into the regions we are not already in as it is quite expensive.

At the same time we are trying to increase our market share in the regions where we are already present and this allows us to be very financially healthy.

For the last couple of years we have significantly increased our profitability and we are facing the choice of how to invest our cash – either M&A or entering new regions of Russia.

Our competitors are doing it a bit differently. They are trying to open as much as possible and I believe this is a significant burden on their P&L, whereas we are generating two or three times more revenue per collection point than our competitors.

bne: Will the government start to subcontract to the private sector?

YL: We can see the market which is now owned by the state is big. We also see significant inefficiency in the hospitals and the public system. We expect that sooner or later that the local authorities would want to change and open the doors for private business to come in. It will become a trigger for private business to enter and a significant source of growth.

The state is already opening some small options for the private sector to service public health needs. But still they have not opened the whole market.

bne: How have the crises impact your business?

YL: The biggest factor which influences our business is the purchasing power of the population. If the purchasing power falls it decreases traffic and the average bill. But on the other hand we have positive factors of growth. We take share from the public sector and we are more efficient versus our competition. We managed to mitigate the negative effect of sanctions and the falling purchasing power of people. We keep growing in ruble terms.

bne: How would you characterise the state of the Russian health service?

Of course if you compare Russia with a country like Germany then the average level of health care in Russia is low. But as a player on the market I can see an improvement. Private business is trying to upgrade the equipment and investing in doctors’ education. I don't believe there is no future. There is a future and it is going in the right direction.

This interview originally was broadcast as a podcast. Listen to the full interview here

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