E-pharmacy startups boomed during Covid. What’s ailing them now?

Theirs is not a typical 3 Idiots story. This trio went to IIT Delhi, completed their studies, and went their separate ways only to come back together to create what is today India’s top online pharmacy platform. That’s the story of Prashant Tandon, Gaurav Agarwal and Vikas Chauhan.While Tandon and Agarwal were batchmates, Chauhan was their senior. In 2011, Tandon and Chauhan founded HealthKart. The idea was to raise awareness about general healthcare and medicines. In 2013, Agarwal joined in. HealthKart separated its generic drug search business, HealthkartPlus, and rebranded it as 1mg in April 2015. With that, Netmeds, India’s first online medicine delivery platform founded in 2010, got some competition in a market which was still stranger to buying medicines online.But by 2020-21, amid the darkness of a deadly pandemic, the e-pharmacy business found its light among Indian households. Big corporates and venture funds, waiting on the fence till then, entered the ring.In 2020, Reliance acquired 60% stake in Netmeds’s parent company at a valuation of ₹620 crore.Next year, PharmEasy, also founded in 2015, entered the unicorn club at a $1.5bn valuation with a fundraise of $350mn led by Prosus Ventures and TPG Growth.In June that year, Tata Digital acquired a majority stake in 1mg. A year later, in an internal funding round, the startup was valued at $1.25bn.Everything was going according to plan.The years 2020 and 2021 were also the boom period for the Indian startup ecosystem, as investors were chasing growth at any price. Some 44 startups became unicorns between 2020 and 2021. The pandemic had changed the world, and only online businesses were expected to rise and shine.The sharp rise and fallDuring Covid, online pharmacies accounted for 10-15% of the total pharmacy sales in India, shows data from market intelligence firm Coherent Market Insights. Apart from Covid-induced restrictions, deep discounts played their part.Then the tide turned.The restrictions eased. People started travelling and dining out more often. They shopped and eventually returned to offices and physical classrooms. The high growth numbers of many online businesses got a reality check. As the high growth eroded, investor focus turned to profitability. Online businesses like Nykaa and Zomato that listed on the stock exchanges in 2021 at a 90%-plus premium weren’t spared either. Be it the stock market investors or the private equity guy, everyone wanted startups to show a clear path to profitability.This has proved to be the biggest challenge for online pharmacies in particular. Early online pharmacy startups used the e-commerce playbook. Cash burn via deep discounts was a feature not a bug. “But post pandemic, the funding winter arrived, and startups were forced to tighten their purse strings. The discounts dried up and so did the customer loyalty,” says a founder of an e-pharmacy company which is chasing a unicorn status.“The unit economics of e-pharmacy in India is that these companies typically make 18-20% gross margin and of that at some point they were giving massive 20-25% discounts, and all the costs come below that — the delivery costs, the cost of customer acquisition costs, etc,” explains Vish Narain, managing partner of a private equity firm Pulsar Capital. During the heyday, the business model was simple: deep discounts will bring customers to e-pharmacies, especially in the chronic segment. Once the delivery network is established for chronic patients, the same network would be leveraged to make quick medicine delivery for non-chronic issues. Buying medicines online will become a habit. More patients buying online would help e-pharmacies get better prices from large pharmaceutical companies and possibly eliminate the wholesaler/distributor network. And the virtuous cycle would start.But the neighbourhood chemist shop turned out to be a hard habit to break, especially in the absence of deep discounts.“Buying medicines online is very complicated. Your neighbourhood [pharmacy] will not even ask for a prescription for a cough syrup or for basic painkillers or for OTC (over the counter) drugs. He will even deliver the medicine home and give a 5-10% discount,” says Raj Shah, principal consultant at Coherent Market Insights (CMI), a market-research consulting firm.As deep discounts faded, the pull towards online pharmacies ebbed. “E-pharmacies created a change in the ecosystem, and they thought the consumers would shift to them. But to address the competition from the e-pharmacy company, the brick-and-mortar stores also adapted,” he says. According to CMI’s research, the market share of online pharmacies has fallen to 5% post pandemic.For example, at Netmeds Healthcare, the revenue from operations has halved from ₹145 crore in FY23 to ₹67 crore in FY24, as per the last available financials. PharmEasy reported a 15% fall in its revenue, from ₹6,644 crore in FY23 to ₹5,664 crore in FY24. Among the big online pharmacy startups, Tata 1mg is, however, showing improvement in sales with revenues from operations at ₹1,968 crore in FY24, up 21% over FY23. Data from CMI also shows that Tata 1mg has become the largest online seller of medicines.“Medicine delivery business has high customer-acquisition costs, and unlike food/grocery, order frequency is lower (chronic patients refill monthly, not weekly). Gross margins are also thin versus other e-commerce verticals — there is a lot of pressure from discounting,” says Ishavasyam Dash, senior director at Antler India, one of India’s largest pre-seed investors.Beating the bluesDash believes that the funding winner will have the tough but not impossible job of making unit economics work at scale, fix the operational complexity and making it a moat, and focus on integration with broader healthcare plays.Meanwhile, Tata 1mg, after surviving the funding winter, is focused on adapting the business to cater to the changing preference of the customers. “Being a leading player in the online pharmacy business, we have to be where the consumer is,” says Tandon.The Tata 1mg CEO is in the market to raise $300mn through external investors, according to media reports. He wants to create a network of company-owned, company-operated neighbourhood pharmacy stores.Unlike store-in-store format, he wants to set up small format pharmacy stores. These stores can also offer services for quick delivery of medicine. “There’s also a very clear shift in consumer behaviour thanks to quick commerce, and consumers are seeking quick medicine delivery which is best enabled by having a neighbourhood retail store,” he tells ET Prime. All eyes will be on the valuation at which Tata 1mg raises capital. For, online pharmacies have hardly seen any investment in the last three years and the one e-pharmacy startup, PharmEasy, which raised funds last year, saw its valuation drop by 90%.Many other online pharmacy companies are also looking to go offline and partner with quick commerce companies. Last year, PharmEasy did a pilot for quick medicine delivery with Swiggy. But following this, the All India Organisation of Chemists and Druggists (AIOCD) wrote to the Drug Controller General of India (DCGI) and expressed concerns. The trade organisation has been a frequent critic of online pharmacies and has accused the latter of wrongful business practices. On the other hand, the government is yet to provide clear regulations and guidelines for online pharmacies. This regulatory hangup is also a big concern for investors.“We do see e-pharmacy startups coming to market for funding, though the bar for investment has become higher. Investors are more cautious and are evaluating fundamentals closely — including CAC (customer acquisition cost), LTV (lifetime value or the total revenue a customer is projected to generate), burn rates, and regulatory readiness,” says Milan Sharma, director at venture capital firm 35 North Ventures.The road aheadET Prime spoke to a few investors in the space and online pharmacy startups and one sentiment was echoed by all — investors are valuing startups which have a clear path to profitability. Investors also want to see e-pharmacies that have clear business moats other than just discounting. Some expect these companies to continue to diversify into other revenue streams.“Just a standalone pharmacy is a difficult business to make money. For a business to make money, you should have a 30-35% gross margin at least,” says Narain of Pulsar Capital. His firm has a portfolio company in West Asia that does deliver medicines online but combines it with tele consultation for diagnostic labs, home health, and other things. These allied services raise the gross margins of a pharmacy business.Be it building offline presence or diversifying services, online pharmacies need to find investors to unlock the next level of growth. And that’s where the Tata 1mg fundraise has the potential to set a landmark for the industry.Narain feels that the first IPO of an online pharmacy startup in the next two years is possible. “That could really change the online pharmacy sector, just like the listing of Zomato did,” he says.Over to the online pharmacies’ Zomato moment, whenever that comes — if at all.