E-pharmacies find growth pill despite regulatory worries, legal tussles

Top players focus on offline expansion plans

The online pharmacy space in India has seen a steady growth in 2018-19 (FY19) despite regulatory uncertainties and legal tussles. In fact, the sector managed to draw $175 million funding from private equity and venture capital players in calendar year 2018 — a 4.7x jump over the previous year. 

Investors have not shied away from the sector in the first four months of this year, when the total value of deals in the e-pharmacy space came in at $46 million, beating the full-year amount of $37 million in 2017, according to the data from Venture Intelligence. 

The top four players — 1mg, Netmeds, PharmEasy, and Medlife — who control nearly 90 per cent of the overall Rs 4,000-crore e-pharmacy market in India, felt that had this regulatory uncertainty not been there, they would have been able to grow at a much faster rate. 

Almost all of them have managed to grow in the range of 2-3x over the previous year, and expect more buoyancy after formalisation of the notification regulates the sector.

Tushar Kumar, chief executive officer (CEO) of Medlife, which is backed by the family office of Alkem Laboratories, said that the online pharmacy space has managed to grow its revenues 2x to Rs 700 crore in FY19. “If this uncertainty wasn’t there, we would have grown 4x,” he added. 

Medlife has not looked for external funding in FY19, but Kumar said that the other major players have been able to comfortably raise funds during the year. 

Pradeep Dadha, founder and CEO, Netmeds — that serves more than 3.7 million customers in more than 600 cities — said, “We have seen 2.5-3x growth, or 10 per cent on a month-on-month basis.” 

He pointed out that the share of mail-order pharmacy in the US, the world’s largest single-country pharma market, is about 17 per cent. “In the next five to seven years, that is the kind of numbers the Indian online pharmacy can grow towards.” The Indian pharmaceutical market is around Rs 1.3 trillion or so. 

Another clear trend is that three of these players are serious about foraying into the offline space — by opening stores. Only PharmEasy’s co-founder Dhaval Shah said it had no plans for an offline presence at the moment. 

PharmEasy, he claimed, has been growing at 300-350 per cent annually for the last four years and will continue to do so on a much larger base now. It now caters to around 3 million families across 19,000 pincodes. 

On the other hand, Dadha says Netmeds is bullish on the offline format. “We have 10 operational stores and the target is to take that number to 110-120 by the end of this financial year. In five years, we plan to have about 800-1,000 stores,” he said, adding that in five years, around 15 per cent of its overall revenue would come from offline stores.  

Healthkart, a start-up launched by Prashant Tandon and Sameer Maheshwari in 2011, had separated its drugstore business in 2015 to start a different vertical — 1mg. 

1mg’s Prashant Tandon felt that omnichannel is the long-term model. While the acute therapy prescriptions are served through the neighbourhood stores, the chronic prescriptions are best served through the centralised (dark stores) model. “We are looking at offline seriously. As of now restricted to hospital partnerships, but we plan to enter the offline space very soon,” he said. 

It is critical for these online pharmacies to have an offline presence. Medlife, for example, loses 30-35 per cent of its order volumes just because the consumer does not bring in a valid prescription. 

It now plans to have around 100-120 stores, for starters. In Mumbai, it plans to have 10 stores by the end of the year and in the long run have around 50 stores in the city. These stores, Kumar explained, would help to serve the last-mile connectivity, which is crucial for an acute therapy prescription (antibiotics, for example), where the customer needs to get the medicines delivered at the earliest. Chronic prescriptions account for nearly 70-80 per cent of the total orders received by the online pharmacies. 

Another area all are focusing on is on being an integrated player — offering services across the health care spectrum. 

1mg, for example, is an  integrated services provider — diagnostics (in 45 cities) and e-consultation with doctors, digital record tools, ambulances on call, etc are some of the allied services it offers, apart from pharmaceuticals. Around 20-25 per cent of 1mg’s revenues come from these allied services. 

Allied services are not only to have a steady revenue stream, but also to ensure customer stickiness, felt all online pharmacies. 

Tandon explained that these often offer better margins than pharmaceutical sales. “Most diagnostic companies make around 30 per cent earnings before interest, taxes, depreciation, and amortisation (Ebitda). 

In the entire health care space, pharmaceutical is the lowest margin category. Once medicines leave the factory, the entire margins in the supply chain would be in the range of 33-34 per cent or so,” he said.  Kumar felt that one could make a 10-12 per cent Ebitda in the pharmaceutical business. 

Medlife, which runs its own diagnostic laboratories, gets almost 15 per cent of overall gross merchandise volume (GMV) comes from the diagnostic lab business and it has seen much faster growth than its pharma business. “By next year, we expect 25 per cent of our GMV to come from the lab business. At an exit run rate of Rs 2,000 crore per month (in terms of GMV) next year, we expect about Rs 500 crore per month to be from the lab business,” said Kumar. 

The pharmaceutical retail space is dominated largely by the unorganised sector. India’s largest pharmacy retail chain, Apollo Pharmacy, that was launched in the 1990s, has a turnover of around Rs 4,300 crore.