Last week, Pharmeasy proposed a merger with rival Medlife to create a unicorn, soon followed by Reliance’s acquisition of Netmeds to cap off an intense fortnight for e-pharmacies. 

The Pharma Cat’s is in the Business School Bag

Dharmil Sheth had been bitten by the entrepreneurial bug straight out of business school.

Having started Ekagrata, a non profit to help underprivileged kids, Mr. Sheth decided to also start a marketing platform for retailers. 

The company would be called 91streets Media. 

Around the same, another unlikely candidate in business school, Dr. Dhaval Shah, would be starting his career as a blue eyed management consultant. Having taken a sharp turn from a career as a doctor, Dr. Shah was completing business school at the same time as Mr. Sheth.

The paths of the two school friends would soon cross, for good.

As Mr. Sheth struggled to get his startup off the ground, he reconnected with Dr. Shah. After ideating and sparking conversations around healthcare, they began to form a mission.

Their mission was that patients with chronic diseases should have easy and convenient access to medicines. 

The duo noticed that while many startups provided healthcare services across wide ranges, there was no platform which provided home delivery of medicines to patients.

This simple premise set Dr. Shah’s pivot from consulting and Mr. Sheth’s pivot from marketing into motion.

91streets Media Private Limited would launch a medicine aggregator seeking to disrupt pharmacies. PharmEasy’s punny name was an explicit announcement of who their target was.

But right at the start, PharmEasy and peers faced stiff opposition from their target with fears that their business would erode. 

The chemists, united by economic force, regulatory advantage and fear of disruption were a force to reckon with.

Archaic laws dating back to the 1940's still governed the pharmacies market in India in 2015.

It went without saying that online players were also operating in the regulatory grey area as there were obviously no e-pharmacies in the 40s.

Give Pills Free or Die

Aside from the regulatory hurdle, which would arise in a big way as the players scaled, e-pharmacies had another bigger problem to confront. 

Consumers would not provide proper drug prescriptions due to which e-pharmacy players struggled to convert orders to sales. PharmEasy was losing as much as 45% of business due to this single reason.

Getting consumers to buy medicines online meant a behavioral shift. A large chunk of the investments for the new players was being spent to improve patient awareness on proper prescriptions.

PharmEasy tackled this by informing consumers on the right way to upload prescriptions from the comfort of their homes. 

In its hilarious cum sarcastic take, it told consumers not to trick it with fake prescriptions or take selfies with prescriptions. Yes, seriously. 

Ironically, during the funding winter e-pharmacies retained their ‘midas touch’ attracting investor attention. The reason behind this would be a mix of demographic, lifestyle factors and rising digital penetration.

Online pharmacies were expected to capture 5-15% of total pharma sales over the next few years. For a market upwards of $10Bn, and growing at 20% annually, 15% of the market would be a multi-billion dollar market for the taking.

Large markets, massive inefficiencies and the digital shift meant that the medicine purchase and delivery market was ripe for disruption. 

As telemedicine, e-prescription sectors witnessed strong growth, people would increasingly complete the digital loop to order medicines online. 

More promisingly, India’s golden age of demographic dividend would last for the next 40 years to 2055. 

As it ended, the share of ageing population (individuals aged 50+) would increase from 16% in 2014 to 31% by 2055. India had 65M diabetic people in 2015 which was expected to almost double to 109M by 2035. 

With the highest number of diabetic patients, India had a chronic diabetes problem. Annual sales of just anti-diabetic drugs are as much $3Bn as explained in one of our earlier piece.

Opportunity spelled competition and as many as 60 e-pharmacy startups cropped up in 2014 and 2015.

High Prices, No Más

By Dec 2015, Pharmeasy raised its Series A round of $5M.

Over 1 lac users were shopping on the app every 45 days with an avg. ticket size of INR 1,500. As PharmEasy was an aggregator, it could exponentially increase volumes for its pharma partners. 

Why the model disrupted the chemists would be clear if you delved deeper into the e-pharma supply chain.

Medicines would be sourced through pharma companies, like Cipla, and distributors. These would be stocked and managed at a central warehouse by an epharmacy company.

Once an order was placed by a customer on their app/website, it would be delivered to the customer's doorstep by a fleet of delivery partners owned or outsourced by the epharmacy.

Cutting out intermediaries, i.e. the chemists, meant that PharmEasy could offer a flat 20% discount on the medicines. This model was also followed by its competitors 1mg, Netmeds and Medlife. 

They could then benefit from higher discounts from their distributors in the range of 27-28%. Around 20% savings on the MRP would be passed on to the consumers. 

But as competition heated up, and there was a clear lack of differentiation, some of its peers started a subscription model. 

In response, PharmEasy offered dosage reminders and medicine refill services. To create a competitive edge, it started offering diagnostic test suggestions based on the medicines a consumer ordered.

By Jul 2016, it was present in seven cities with plans to expand to 20 more cities by 2017. With plans of rapid expansion in place, it aimed to grow its business 5x in 6 months and was looking to raise $20-25M

It was also rapidly scaling its team adding 100+ team members in just 2 months between Jul-Sep 2016. With a 200-team strength, it planned to more than double to 500 in 6 months and further grow 10x over the next 2 years.

As PharmEasy blitzscaled, it was aware of the challenges in the ecosystem and worked to solve them.

Face Off with the Chemists

The pillars of scale were consumer education, abuse prevention and medicine authenticity.

To do so, it also had to comply with myriad regulations, some of which made it tougher to operate an e-pharmacy than a chemist store. 

In order to comply with the Drugs and Cosmetics Act of 1940, PharmEasy managed its processing by an offline partner vendor which operated from a licensed premises.

The Drugs and Cosmetics (D and C) Act, 1940 and the Drugs and Cosmetics Rules 1945 have recommended guidelines on sale of Schedule H and Schedule X drugs, which can be sold only on prescription.

To comply with this regulation, PharmEasy changed their ordering process to mandate a prescription whenever an order was being placed.

However, that was only the tip of the iceberg.

Pharmeasy had to comply with regulations pertaining to e-commerce, pharmacies and online pharmacies, mobile health related laws, telemedicine related laws, and cyberspace related regulations. All of these were new and ill defined. 

Another big hurdle facing the sector was around obtaining a license from the FDA in each state the player is operational in. It had to get the business registered across multiple ministries, get short-handed treatment as compared to offline retailers regarding regulatory compliances, and apply multiple laws with unclear guidelines.

Pharmeasy’s growth had poked the bear, and the chemists began to bring this regulation advantage in full force. 

AIOCD, India’s largest organization of chemists and distributors with 8 lacs+ members lobbied for a ban on e-pharmacies contending that they are hazardous to public health. Illegal drug trafficking, counterfeits, drug abuse, and potential monopoly of e-pharmacies through heavy discounting would be the other concerns listed as the association filed various court cases.

The nail in the coffin was a white paper on online pharmacies from Indian Medical Association. 

It surmised that e-pharmacies could encourage substitution of cheap and spurious drugs through online stores and affect the doctor-patient confidentiality. The medicines could change in transit which could be spurious and threaten patient health.

The pressure of compliance, offline competition, combined with unprofitable economics at the start continued to pile. 

Of the 50 pharmacy aggregators that started in India a few years back, many started to fold and consolidate with the larger players.

Rising like Walter White’s Phoenix

The larger players, of which Pharmeasy was one, continued to attract capital.

In March of 2017, PharmEasy raised a $17Mn Series-B round getting further backing from its existing three investors. 

Their objectives were to improve the supply chain, technology & customer reach, effectively growing to 15 more cities by the end of 2018, with some of them being tier-2 towns. At this point, they had already partnered with over 100 offline retailers.

Growing at a rate of 15% MoM, the team improved its processes cutting down the number of steps taken in placing an order from 8 to just 3.

The fewer e-pharmacies also began to form a group to fight the incumbent chemist’s body, in a remarkable show of camaraderie in a fiercely competitive market. 

India Internet Pharmacy Association being headed by a competitor company’s CEO only worked to further the interest of the sector helping PharmEasy’s case as well.

However, the extensive lobbying finally started bearing fruits when, in 2017, the government finally started acknowledging the online pharmacy sector and, at least in principle, agreed to give a serious hearing to their demands.

In addition to finding a mention in a report by NITI Aayog, the draft pharmaceutical policy released by the government served as a validation and acknowledgement for e-pharmacies in India.

As the attempt to gain a large market share while fighting regulatory uncertainty became a day to day affair for Pharmeasy, one respite was it’s simple business model where they gain more with scale and show a path to profitability. 

This helped them attract big investors.

By 2018, Pharmeasy was growing fast. A 200% growth YoY is high even from an early stage startup standard but Pharmeasy managed to deliver these astonishing numbers.

PharmEasy’s revenue more than tripled in FY18 to ₹116 crore from about ₹33 crore in FY17. 

As the revenue grew, the profitability got worse for Pharmeasy. 

I See Your Profits

Pharmeasy’s losses widened to ₹97 crore in 2018 from ₹48 crore a year before.

The reason for this was the company’s negative unit economics.

While a traditional pharma retailer makes a good 15-20% margin on sales, e-pharmacy in India is still new and their unit economics need time to evolve. 

To understand this, let’s look at how unit economics for fulfillment of any epharmacy looked like in early 2018

But the reason why investors continued to back the company was the potential profitability once it was optimized. 

Over time, the average order value (AOV) across the sector continued increasing as the unit economics began to look more attractive. PharmEasy’s AOV was up to Rs 1,200 with customers ordering on average 10 times per year. 

It made ample sense as most of their consumer base consisted of chronic patients (~80%) and to counter for the high order cancellations. 

The beauty of this model, though, was the high lifetime of customers.Once acquired, they had won the doorstep of the customer to keep making money.

Pharmacy retailers made 10-15%, while distributors made 25-30%. Assuming a 10% margin for a drug that sells for INR 100, an e-pharmacy makes INR 10. Assuming a spend of 200 INR to acquire a customer, it needs 20 purchases before a customer breaks even.

Like any business which is at a nascent stage, epharmacy also loses money as they try to capture the market and stay relevant in a competitive market where customers are spoiled by discounts and cashbacks. 

Pharmeasy is no different and had to play the game by the rules or maybe they defined the rule as they were amongst the top-4 players in this market and arguably the largest.

On the supply chain side, there was an opportunity to integrate vertically. This also became an option as talks for Pharmeasy’s merger with Ascent Health and Wellness Solution picked up heat.

With such rapid growth and high cash burn, Pharmeasy had to ensure they keep the investor interest going and raise money from all possible sources. That’s exactly what they did.

Pharmeasy raised a mix of venture debt and equity rounds in 2018.

An Open House

In early 2018, Pharmeasy raised close to Rs.200 crore as a starting tranche of their Series C round of funding. This was closely followed by a venture debt round of Rs 40 crore.

Fuelled with money to keep them growing, Pharmeasy was now looking to move towards profitability and improving their unit economics.

Potential and reports were in their favour as the market was growing rapidly.

According to Frost & Sullivan, the e-pharmacy market in India, which was estimated to be around $512 million in 2018, was expected to grow at a compound annual growth rate of 63 percent to reach $3.6 billion by 2022.

Soon, Pharmeasy also started capturing this high value segment with personalised packages for old patients suffering from diabetes, cardiac issues etc by offering them convenience as well as value in terms of money to grow the segment.

Innovation was happening not only at growing the epharmacy business and improving the unit economics, but the battle was also shifting towards building a healthcare ecosystem.

By 2019, each player in this sector started taking ministeps to pilot or scale one or more of the related services apart from the online delivery of medicines.

Pharmeasy also moved ahead and started working on lab tests at home segment. It leveraged on the huge customer base of more than a million who bought medicine to cross-sell full body checkups and much more.

Coming into 2020, the stage was set for the industry to undergo some major changes.

Like any industry which is fragmented and has clear benefits to scale (more distributors / aggregators fall into this bucket), consolidation was more of a “when” rather than an “if”.

This trend was only accelerated by whispers early this year that Reliance, Amazon, and Flipkart were all circling the e-pharma industry like hawks, searching for a vantage point to enter.

A No Rough Stuff Type of Entry

The 800 pound gorillas made their move amidst the surge in demand that e-health saw in the 2nd half of 2020.

This was driven in no small part by the ‘forceful’ disruption and adoption that came with COVID-19. In early August, Amazon India launched ‘Amazon Pharmacy’ in Bangalore, with an eye on similar pilots in other parts of the country. 

Driven by the early values of customer obsession and a passion for execution, it would not be surprising if Amazon can bring the scale and operating leverage that they have in package delivery to the healthcare space.

For those who have followed Amazon’s journey from delivering books to being an “everything store”, an entry into e-pharma is not surprising. In May 2019, they took the buy vs build approach to acquire PillPack in the United States, giving them a foothold in the $500Bn US prescription medication market.

As Amazon grows but expectations from stakeholders for growth continues to be high, capturing a piece of the exploding yet relatively young Indian e-pharma market likely fell into the category of a ‘Bezos No-Brainer’ (yes, we just coined that term).

Not to be left behind in any race let alone one in their backyard, Reliance Retail announced soon after that they had acquired a majority stake in NetMeds.

Instantly, Reliance gets access to more than 20,000 pin codes in India and over 5.7 million customers in more than 670 cities. 

NetMeds sells over 70,000 prescription drugs for chronic and recurring ailments apart from lifestyle drugs and over-the-counter products for wellness, health, and personal care. 

For Reliance, who through Jio is trying to enter every single Indian household, NetMeds presents the opportunity to gain a recurring, predictable base of customers who will receive a Reliance-based product in their home every week/month.

Separately, Flipkart (the yin to Amazon’s yang) also announced that they are exploring developing their own service or considering partnerships with major players like Pharmeasy to get a seat at the table.

All of this brings us to this week’s big news from PharmEasy - their merger with Medlife.

Winning in Full Measure

Very apparently, the rationale of the merger makes sense. 

On a combined basis, PharmEasy and Medlife are worth over $1Bn, even before you account for the revenue and cost synergies that come with putting the two platforms / distribution systems / supply chains together.

Further, Medlife gives PharmEasy a stronghold in the South. The Bengaluru-based company does Rs.100CR in gross merchandise value (GMV) per month and delivers medicines to 29 states, 4,000 cities and 20,000 pin codes in India.

Finally, in addition to distribution economies of scale, Medlife also brings to the table improvements in the product. Whether product or distribution matters more is a regular debate topic among the AJVC team, but we’ll leave that for a different article.

Medlife, over the past few years, doubled down on technology to improve efficiency across the board, with a primary focus on its customer facing app, using artificial intelligence and machine learning to forecast inventory more accurately and improve its subscription models along with its product mix. The PharmEasy/Medlife dynamic duo will be formidable competition in India’s e-pharmacy wars, especially fighting against large and deeply capitalized competition.

Zooming out, this wave of consolidation and ‘competition everywhere’ is something that we saw with food delivery just recently.

There were the upstarts who came, tried, and withered away (think FoodPanda, TinyOwl, etc). The foreign gorillas (think Uber Eats) who tried to break in and make an impact but just couldn’t arrive at a profitable, sustainable model. 

And then there were the gladiators who remained (Zomato and Swiggy) after the industry matured.

Our prediction is similar for e-pharmacies.

Given the size and tailwinds of the market, there’s a good chance that it’s winner-takes-most rather than winner-takes-all. There is room for multiple players, but it will not be a surprise if 3-4 years down the line, there are only 2-3 players left.

As an early mover, with deeper understanding of the category than Amazon or Reliance, Pharmeasy looks set to be the gladiator that stands. 

As India grows older, wealthier, and technologically mature over time, convenience is the service that e-pharma will provide. Amid regulations, supply chain vicissitudes, and business model labyrinths -- the path to winning is anything but easy. 

But with the wind in their sails, PharmEasy has all the ingredients in place to become the guardian angel for India’s sick.

Written by: Abhinay, Aviral, Keshav, Rohan, Shiraz

Audio Version: Behind the Scenes with AJVC

As usual, we have done a behind the scenes format with the writers and host Mazin

Spotify Link