Early mover advantage and scale key themes for PharmEasy investors

Success depends on its ability to integrate various entities across the healthcare value chain

API Holdings, the parent of PharmEasy, has filed its draft red herring prospectus for an IPO to raise upto Rs 6,250 crore. The proceeds will be used to prepay, or repay, debt of Rs 1,929 crore, fund organic growth (Rs 1,259 crore), and allocate Rs 1,500 crore for acquisitions.

API may consider a pre-IPO fundraiser of about Rs 1,250 crore, in which case it will reduce the size of the IPO. There are no offer for sale, which means the issue is of new shares. The current investors’ list includes Prosus Ventures, TPG Growth, CDPQ and Temasek.

Revenue from operations rose to Rs 2,335 crore in FY21, from Rs 668 crore in FY20. In Q1FY22, revenue from operations was Rs 1,197 crore. The net loss in FY21 was Rs 645 crore, up from Rs 335 crore in FY20. In Q1FY22, losses were Rs 314 crore.

The pro forma gross merchandise value (GMV) was Rs 787 crore in FY21 and Rs 303 crore in Q1FY22. “Pro forma” means excluding items which may not be relevant to future outlook. The GMV includes contribution from acquisitions like Medlife, Ascent, Aknamed, and Thyrocare with the accounting assumption that these revenues came from April 2021.

API Holdings is India’s largest digital healthcare platform. It offers integrated, end-to-end solutions for healthcare, with digital tools, tele-consultation, diagnostics and radiology tests, and treatment protocols, including products and devices.

In June 2021, API bought two-thirds stake in Thyrocare Technologies, India's largest diagnostic test provider by volumes, for Rs 4,546 crore. Thyrocare had FY21 revenues of Rs 495 crore. In May 2021, it acquired Medlife, with a similar e-pharmacy model, to become India’s largest online pharmacy. In September 2021, it acquired a majority stake in healthcare supply chain player, Akna Medical, for an undisclosed sum.

VC and PE investors like it and the lack of OFS indicates confidence. In its last round, it raised $350 million (Rs 2,635 crore) in October 2021, at a valuation of $5.6 billion (Rs 42,195 crore). In April, it had raised $350 million at a valuation of $1.5 billion. In total, it has raised over $1.2 billion.

Users can go online to buy a range of medicines (Not Schedule H drugs) and healthcare services, serviced through tie-ups with 80,000-plus suppliers and shops for delivery across 1,200 cities. API offers franchisee partnerships to individuals also. It also generates revenues from ads sponsored by pharma companies –search results include sponsored suggestions. It offers discounting options.

Online pharmacies have maybe 7 per cent marketshare in a fragmented domestic pharma market. Diagnostics is also fragmented, with the largest chains controlling an aggregated 10 per cent marketshare between them. There’s obviously been a jump in interest due to the pandemic.

Given acquisitions, and inevitable complexity of structure, it’s impossible to get a concrete sense of future growth and possible margins. Given low penetration of digital healthcare and fragmented markets, there’s scope for growth.

The impression is, Pharmeasy has footholds at various links of the healthcare value chain, through its acquisitions. It needs to integrate and manage those disparate pieces well. There is a legal grey area with the draft e-pharmacy rules yet to be notified. That may hold positive or negative surprises.

Scale and early mover advantage should matter. That’s what the PE and VC investors are betting on. If you subscribe to the IPO, those are the key factors.