Diagnostics and Testing stocks see sharp correction

When the post-COVID recovery in the markets started around March 2020, the 2 sets of stocks to show the maximum traction were the pharmaceutical stocks and the stocks in the diagnostic and laboratory testing segment. However, with the intensity of COVID waning over time, it has been a return to reality for many of these diagnostic and laboratory testing stocks in the stock market. A quick look at four stocks viz. Thyrocare, Dr. Lal Pathlabs, Krsnaa Diagnostics and Metropolis Healthcare would give you most of the cues.

In the all the above cases, we shall look at how much the stocks corrected from their 52-week highs. Since peaking at Rs.1,465 in Jun-21, Thyrocare has corrected -40.2% to Rs.876. Similarly, Dr. Lal Pathlabs touched a high of Rs.4,246 in Sep-21 but fell -36.6% to Rs.2,692. The stock of recently listed Krsnaa Diagnostics fell -45.9% from a high of Rs.1,100 to Rs.595. Finally, Metropolis Healthcare fell by -42.9% from Rs.3,580 in Dec-21 to Rs.2,042.

A quick glance at the numbers above would tells you the story of a sector that has seen a median fall of around 40% in value over the last 3-6 months. Clearly, the listed clinical laboratories in India are eagerly looking for new sources of growth to fuel investor interest. The COVID story was a robust story, but that rally is done and dusted. As the intensity of COVID progressively reduces, that will eventually stop being a trigger for these stocks.

Most of these diagnostic and clinical testing stocks found themselves in a sweet spot between 2020 and 2021. There was a surge in demand for services of pathology firms during the pandemic. That story is more less over and these gains have started to gradually fade. Many investors who had bought these relatively risky stocks have opted to shift to the relative safety of traditional pharma stocks and established healthcare stocks.

There were also a slew of missed earnings estimates in the latest Dec-21 quarter and that has only added to the pressure on these laboratory and testing stocks. The last few quarters have been disappointing. In the latest quarter, Thyrocare, Metropolis Healthcare and Dr. Lal Pathlabs missed analyst estimates of profits. These set of disappointing profits and lower than expected sales numbers were also one reason for their tepid stock performance.

There is also a problem of excess capacity in most of these laboratory testing stocks. For instance, even as India managed to control the spread of the outbreak, companies had aggressively expanded their testing capacity. Most of this capacity expansion were done through mergers and acquisitions. The result is that most testing companies are not only left with excess slack capacity but also the spill-over effect of the cost of this expansion. 

Interestingly, this trend is not just India-specific but is rampant around the world. Vaccine manufacturers like Moderna, Pfizer, BioNTech and Novavax corrected up to 20% in the past one month. In fact, Moderna is down more than 70% from the highs of August 2021. Analysts are now increasingly questioning if vaccines and testing laboratories can be a viable business model at all in the future. That seems to be the billion dollar question.