How consolidation is sweeping through fast-growing online pharmacy sector

Reliance swoops on Netmeds; sector expected to hit revenues of over $3.6 bn by 2022

Consolidation is sweeping through the fast-growing online pharmacy sector. Reliance Industries, through Reliance Retail, bought a 60 per cent stake in Netmeds on Tuesday for $83 million.

Elsewhere in the sector, PharmEasy is reportedly looking at merging with Medlife to create an entity valued at $1.2 billion, according to analysts. If it goes through, it will provide scale for PharmEasy.
 

Based on July 2020 figures from SimilarWeb, PharmEasy currently has over 1.79 million visits on its app and PC (not daily average users). Merging with Medlife will help it become a formidable player, doubling the number of visits to 3.6 million.

The online pharmacy market, which was worth about $512 million in 2018, according to Frost and Sullivan, is growing at a CAGR of 63 per cent and is expected to hit overall revenues of over $3.6 billion by 2022.

E-pharmacy could account for 15-20 per cent of pharma sales in the next 10 years, up from the current 2-3 per cent. Currently about 75 per cent of its business comes from the metros.

According to Morgan Stanley, Netmeds has revenues of only $1 million and a loss of $8 million in FY’18.

 

However, Netmeds is present in over 670 cities and towns and offers over 70,000 prescription and lifestyle drugs. This will provide Reliance with a huge advantage as it would take years to build such a distribution system from scratch.

Along with agritech and edutech, Reliance has identified online pharmacy as a key area of growth. It is a relatively new entrant with JioHealthHub and the latter has one weakness: while it provides health check-ups, fitness trackers, lab tests and consultations online, it does not have an e-pharmacy business; this is the main generator of revenues.

The acquisition of Netmeds will fill this vacuum. It will also make Reliance an integrated player with doctor consultations, diagnostics, and fitness to e-pharmacy, enabling it to lock horns with 1mg and Practo.

The lack of an online pharmacy business has also been a constraint on the numbers of subscribers JioHealthHub could garner. According to data from SimilarWeb for May 20, it only had 10,000 daily average users and one million downloads.

In contrast, Netmeds, with over five million downloads, is the largest e-pharmacy player with a 30 per cent market share, says a BoFa report. In acquiring Netmeds, Reliance is expected to shoot up to the top slot in this business in no time.

However, it is not clear whether Reliance will pursue Netmeds’ plan to set up 20 physical retail pharma outlets or stick to the online model. Many analysts say it might go for a combination, as it has done in other areas of retail business.

The acquisition is certainly well-timed, just when Reliance Retail is poised for a battle in the e-commerce space with Amazon. A few days ago, Amazon announced it was launching its own online pharmacy business.

Sources close to Reliance say that in the e-healthcare space, the group is looking at leveraging its technology with its offline presence (it has hospitals). It plans to tap its large mobile customer base of over 400 million to use its online healthcare services.

It should be noted, though, that this is a crowded business with online pharmacies having to pass on huge discounts to woo customers. One key problem is that the pharma supply chain is highly fragmented: about 85,000 distributors with the largest distributor not owning more than a 2-3 per cent share of the market. Retailers typically depend on 30-40 distributors for sourcing products.

E-pharmacies are trying to narrow this gap and simplify the structure as they feel the winner will be the one with the deepest supply chain capabilities that can drive scale benefits. In that respect, Reliance is expected to shake this space up.

“E-pharmacy is not typically a pricing game alone. This is a services space and not a winner-takes-all market. Everything matters — the experience, the service delivery, the quality,” said Prashant Tandon, co-founder, 1mg.

The sector also faces regulatory challenges. Last November, the DCGI ordered all states and union territories to ban the sale of medicines on unlicensed online platforms until the draft rules in this area are put in place.

However, most online pharmacy players said the move wouldn’t affect them as they transact with customers through licensed offline pharmacies.

In September 2018, draft rules were introduced for online pharmacies under which they are not allowed to distribute, sell, stock, exhibit or offer drugs for sale until they are registered. There has been no update on the final rules by the government.

E-pharmacies follow the model where they operate through a licensed medicine retailer partner to service a prescription or order that they have generated through their online platform. The Drugs and Cosmetics Act of 1940 does not mention electronically generated prescriptions. This is the loophole offline retailers have used to challenged the e-pharmacy model legally.

“The e-pharmacy model is covered under regulatory purview by the IT Act 2000 under the concept of intermediaries. But we are awaiting the pending e-pharmacy rules to come as we need to have comprehensive guidelines. This will boost investor confidence,” said the promoter of a leading online pharmacy.