Regulatory woes torpedo PE/VC deals in e-pharma sector, shows data

Focus on profitability, and less options other reasons behind the slowdown seen till May this year

With regulatory uncertainties clouding the future of online pharmacies, deals in the space are showing signs of slowdown, as also fresh investment from private-equity (PE) firms and venture capitalists (VCs).

The data from Venture Intelligence shows so far in 2023 (as of June 13) there has been one deal with PE-VC funding. In 2022 there were four, a sharp fall from the 12, totalling $1,520 million, the sector had attracted in 2021. (See chart) Among the major names, PharmEasy had attracted multiple investments in 2019 and 2021 from TPG Growth, Kotak Investment Advisors, Temasek, Eight Roads Ventures and others in four funding rounds.

Mergers and acquisitions (M&As) involving e-pharmacies too have slowed. In 2022 there was no major acquisition whereas in 2021 there were five. Industry sources say there are not too many options for investors in the sector now. A senior executive of a leading online pharmacy told Business Standard: “Things are stable and calm in the sector. Only PharmEasy is looking to raise external capital whereas the rest have strategic capital.”

The person said VC interest in general was down, given the huge emphasis on profitability, and this was across sectors.

According to reports earlier this month, PharmEasy has been unsuccessful in raising equity of around Rs 1,000 crore. It had raised high-cost debt from Goldman Sachs last year. The company had earlier postponed its initial public offering.

Bhavesh Shah, managing director and head of investment banking, Equirus, told Business Standard, the slowdown in deals began last year ever since there was liquidity tightening and the interest rates moved up.

This factor was more potent than regulatory challenges, he said.

“Funds from PEs declined to around $60 billion in 2022 as against around $70 billion in 2021. There has been a reset in deal making the investors have been adapting to, including an overhaul of the orientation to invest,” he explained. Shah further said from investing “flush funds” to burning equity to create growth, the mindset was to invest “tight money” in companies where there was solid conviction and profitability was visible.

As such, talks between e-pharmacies and the Centre are on regarding matters related to regulations.

The Centre wants to tread cautiously when it comes to e-pharmacies, given that there are wider implications. It is about tracking medicines sold, data-privacy issues, etc.

Sources indicate India is concerned about data privacy because online pharmacies have patients’ medicine use and even diagnostic test data. There is a possibility of misuse there.

On top of it, offline retailers have protested that online pharmacies go for predatory pricing. There are more than 800,000 offline pharmacists in the country. The government is likely to take into account the impact e-pharmacies have on shops. On the issue of data privacy, sources in online pharmacies say those are easy to comply with. A parliamentary panel had asked the health ministry last month to finalise draft e-pharmacy rules and implement them without delay.

The committee, headed by Abhishek Manu Singhvi, recommended in its report the health ministry formulate comprehensive guidelines in consultation with stakeholders. The pharmacists represented that online pharmacies should be permitted to sell medicines on the basis of e-prescription. They said online players should not be allowed to sell habit-forming drugs, anti-tubercular drugs, and higher antibiotics. 

On February 8, then Drugs Controller General of India (DCGI) V G Somani asked online pharmacies to explain why action should not be taken against them for selling and distributing in contravention of the law. 

In May and November 2019, the DCGI sent notice for action and compliance to state drug controllers, quoting a December 2018 Delhi High Court order that restrained e-pharmacies from selling medicines without licence. This confused the pharmaceutical industry because in January 2019, a Division Bench of the Madras High Court had stayed an earlier single-judge order banning online sales of drugs.

In the draft Drug, Medical Devices and Cosmetics Bill, 2022, the Centre has made provisions for regulating e-pharmacies.

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