The following is the excerpt of a scuttlebutt discussion I had with a doctor who owns two pathology labs (block and district level) and has been an investor in Kilpest.
- During Covid we saw that many Indian and Asian manufacturers of Covid kits emerged after the initial days and the space got commoditised. This makes me question – how much of a scientific moat is there for a molecular diagnostics-based kit maker like Kilpest? As the MD market grows in India, will this space get more and more crowded thus presenting a growth and ROCE challenge for Kilpest?
– Nothing like moat in PCR kit, USP is handing small volume orders efficiently. When covid type demand exists, where co is not bothered about selling small quantities and finding buyers, many can jump in due to scale but handling multiple SKUs (tests) with small quantities is not an attractive proposition for many. MNCs are themselves a crowd, but with higher pricing points than 3bbb, so 3bbb won’t be affected much
- What are the key drivers of demand in molecular diagnostics space in India?
– Mainly demand is derived from two sources with roughly equal split (not entirely sure about split)
*o Govt actively using MD in TB, HIV, Hepatitis B/C *
o Private diagnostics labs mainly using it in oncology and NGS (We can say NGS is a multiple PCR running simultaneously in one test – a different machine is needed for this). 3bbb is mainly associated with oncology and private part. Now govt is also coming up with oncology labs and hospitals, so Govt may also start driving this demand
- Given Kilpest has no capability for making PCR machines and apparently no intention to go into machines, what is the effective market size for Kilpest within the 3-3.6k Cr reagents/kits space? Is this market size shrinking by the day as closed systems gain share or is it expanding?
– I don’t think closed systems can gain market share in a big way besides the CBNAAT (PCR) Molbio. I don’t understand why govt is using Molbio type machines at district level hospitals. Closed system machines are for lower volume of patients at block level hospitals but Govt. is using them for district level hospitals too. Open system big machines are more favourable and I trust them more as a doctor
- Can you help me understand a little what is the actual scientific value addition that Kilpest does? Which of the components of PCR testing – nucleotides, primers, polymerase, DNA isolation, RNA to cDNA – is made in-house by Kilpest? What chemical/biological material does Kilpest buy from its suppliers and which kind of companies supply them? (Is it enzymes? Do companies like Laurus Bio supply to Kilpest?). Is there any scope/logic/possibility for Kilpest to backward integrate into chemicals/biological materials that it buys from suppliers?
– PCR is used to identify a particular target genome available in sample or not and then it can quantify it too in terms of concentration in the sample like per cubic ml, per cubic ul etc. I think Kilpest makes only buffers in house. One possibility is that, it is making sequences of nucleotides (reverse of the target RNA for binding) by itself by buying nucleotides separately and then using own PCR machine to amplify them. This is a very remote possibility however and there is no moat in doing this. Kilpest is mainly an assembler. Usually cos like Syngene, Laurus Bio make these biological entities/enzymes by fermentation which uses e coli and other bacteria to replicate needed sequences, called recombination techniques, a biotech subject about which I have no in-depth knowledge. The cloning of foreign DNA in Escherichia coli episomes is a cornerstone of molecular biology. The pioneering work in the early 1970s, using DNA ligases to paste DNA into episomal vectors, is still the most widely used approach
- Kilpest is talking about scaling up their PCR business in UK. What is your outlook about that business and its growth possibilities? Will Kilpest be the lowest cost producer/importer there? What drives contract wins in UK – is it cost and quality driven or are there other factors like certification etc. which act as barriers to entry?
– I think 3bbb will gain some market from MNCs in these export markets if they are able to maintain qualities like low false results, cold chain etc.
- Speaking to long term investors in Kilpest gives me the impression that management is either unwilling or incapable of taking the required steps to expand this business meaningfully. With its current strategy, can Kilpest grow its molecular diagnostics revenues from 50Cr to 200Cr in 5 years (30-35% CAGR)? If that is not possible, what needs to change in Kilpest for it to grow at that rate?
– I am aware that people have suggested to promoters to investigate closed systems-based hormone machines to test for Thyroid, Vitamin D, Beta HCG, PSA, HbA1c and other hormones at block level as logistics from block to district takes its own time (6-10 hours) and patients are always in a hurry and are ready to pay some premium for instant reporting. But management doesn’t seem too keen to tap into such opportunities, perhaps its too much to expect a company of Kilpest’s size and capabilities to be this agile or ambitious. The PCR based oncology market in India seems to be growing at 25-30% CAGR. But the kind of growth you are suggesting can only happen via exports if they can provide cheaper but and at the same time, high quality PCR testing alternatives to MNC kits for diagnostic labs and hospitals in UK and other geographies.
Disc: Invested recently, trying to form a view on long term potential.
