On the edge: E-pharmacies struggle amid competition from physical stores and lack of regulatory clarity

Suppose you’re busy at work, and you receive a call from home saying that someone needs a painkiller for tummy ache. But you can’t get home on time to get it. And obviously the pain cannot wait, so what do you do?

For the past few years, a go-to option for people has been to order medicines through the various e-pharmacies that have proliferated in India. Their utility reached a peak during the Covid-19 pandemic-induced lockdowns, when the need for medicines had skyrocketed. Even the government declared their operation as an “essential service”.

But not all is calm in paradise, with the e-pharmacy sector dealing with its fair share of challenges due to the blow hot and cold regulatory regime, after enjoying a breather from the government during the lockdowns.

But now, the fledgeling e-pharmacy players, whose revenues have jumped in the past few years, are finding it difficult to achieve profitability. Sample this: the consolidated revenues of API Holdings—that operates PharmEasy—increased from `2,335.27 crore in FY21 to `6,383.60 crore in FY22. But its consolidated losses—that stood at `641.30 crore in FY21—jumped to a whopping `4,043.10 crore in FY22. The company also withdrew its pre-IPO draft papers in August 2022, nearly a year after filing it. Separately, the financials of Tata 1mg, one of the earliest entrants in the e-pharmacy space, look dire. While the company’s consolidated gross sales more than doubled to `627.09 crore in FY22, from `309.37 crore in FY21, its consolidated losses widened to `526.14 in FY22, from `314.22 crore in FY21.

And therein lies the problem. As the profitability of the segment players is some distance away, they run the risk of losing investor interest. Further, the path to profitability is exacerbated by many other challenges.

Looking for Certainty

“Due to the convenience they provide, online pharmacies witnessed a rise in popularity during the pandemic. They were able to draw customers in during the pandemic and assist many people in accessing medications remotely,” says Neha Singh, Chairperson and MD of Tracxn, a private market data intelligence firm.

The rapid rise of e-pharmacy players in India is not only helping consumers, the segment has also attracted outsized interest from corporates, private equity (PE) and venture capital (VC) players due to its high growth potential and returns. The e-pharmacy market in India, pegged at around $2.7 billion in 2021, is expected to grow at an annualised rate of 63 per cent between 2020 and 2025, per Research and Markets.

Not only that, PE/VC funds have invested over $2.6 billion in online pharmacies so far, per Tracxn. For example, Temasek Holdings, Eight Roads Ventures, Fidelity Investments have invested in PharmEasy; TPG Growth has invested in Netmeds; and Sequoia Capital has invested in Practo that also operates an e-pharmacy. Even diversified conglomerates like Reliance Industries and the Tata group have stepped into the segment with the acquisitions of Netmeds and 1mg, respectively.

“The current scenario of PE firms and corporates investing in e-pharmacies is both exciting and uncertain. On the one hand, it shows a growing interest and confidence in the potential of e-pharmacies. On the other hand, there are still many challenges and uncertainties that could impact the future of these firms,” says Prashant Narang, Co-founder of Agility Ventures.

Twin Troubles

While e-pharmacies have found currency among end-users and investors, regulators and brick-and-mortar stores are not so enamoured by these disruptive start-ups. For the past few years, the government has kept a keen eye on the segment with a view to regulate it. On top of that is the opposition from groupings of physical pharmacy stores. “Although final regulations on this sector have not yet been determined, we anticipate that the government might increase regulations to curb the misuse of such platforms,” says Singh.

For background, the government released a draft of the ‘Drugs and Cosmetics Amendment Rules, 2018,’ that proposed regulations for e-pharmacies, requiring them to obtain a licence from the Central Drugs Standard Control Organisation (CDSCO), comply with certain guidelines related to drug safety, quality, and authenticity, and maintain records of all transactions, in August 2018. Then in September 2018, the central government under the direction of the Delhi High Court issued a notification banning the online sales of medicines until a proper regulatory framework was put in place. This was revoked in December 2018 after a challenge by the e-pharmacy players. Further, in September 2019, the government released the final draft of the ‘Drugs and Cosmetics Amendment Rules, 2018,’ but the Madras High Court imposed an interim ban in December 2019 until the government notified the regulations. This ban was stayed in January 2020 by a larger bench of the court. The government finally released a set of guidelines for e-pharmacies in October 2021. But they do not carry the force of law as yet. “There are some misconceptions about the [e-pharmacy] model, where people feel that there are fake drugs or spurious medicines or drug abuse happening through the system,” says Dharmil Sheth, Co-founder of API Holdings.

In February, the CDSCO had served show-cause notices to 20 e-pharmacy players across India, asking them to explain why action should not be taken against them for selling and distributing drugs in contravention of the relevant laws. In May, the Delhi High Court granted six weeks to the centre to inform it about the outcome of consultations and deliberations with stakeholders on the draft rules. The medicines being sold by e-pharmacies, Sheth explains, are “governed by the state food and drugs authority, because the sale, in the end, happens through any of the offline stores. So there is no gap as such. It’s just that there are misconceptions that need to be addressed.”

But the government stated that a licence is required from the concerned state authority for the sale, stocking, exhibition and offer for sale of any drug. “One of the main concerns is the regulatory environment. E-pharmacies are still a relatively new concept and regulations around them are still evolving. The rules and guidelines surrounding these companies could change, potentially impacting their ability to operate and grow,” says Narang.

Tracxn’s Singh says the issues around regulation would be resolved once there is more clarity. “The government’s latest actions appear to be focussed on curbing the misuse of such platforms rather than outlawing them.”

Then there is the challenge posed by physical pharmacies. As offline pharmacy stores are directly impacted by the online stores, the All India Organisation of Chemists and Druggists (AIOCD) lambasted online pharmacies in December 2022 over the “illegal and indiscriminate” discounts being offered by them. It stated that online pharmacies are violating regulations surrounding the sale of drugs and operating a pharmacy. “The discounts being offered by these pharmacies are impacting small retailers and wholesalers across the country. These are predatory prices aimed at driving small pharmacies out of the market, to create a monopoly in the long run,” says Rajiv Singhal, General Secretary of AIOCD.

On the Road Again

Driven by a search for profitability, dealing with the regulatory void, and the challenges posed by traditional stores, new-age players are now looking at other segments to expand their services and break even. For instance, e-pharmacies such as PharmEasy and Tata 1mg are actively exploring other segments. “We operate across the e-health spectrum and are working to create a differentiated omni-channel digital health company. We believe that Tata 1mg and the broader Indian digital health ecosystem can create models that the world will learn from,” says Prashant Tandon, CEO and Co-founder of Tata 1mg. “In the next phase, we will deliver more integrated and patient-centric healthcare models.”

In a bid to prevent investors from losing interest in the sector, the platforms are working on a new formula. Firms that started as e-pharmacies are now trying to bring better access, affordability and authenticity in healthcare services through the usage of tech. “We are looking into new segments such as corporate health, cancer and specialty care. Outpatient insurance partnerships is another key area we are exploring actively,” Tandon adds.

Sheth of PharmEasy says that the e-pharmacy is just one of the business units for them now, and a platform play is afoot in the segment. “We are working on doctor consultations, medicine supplies and diagnostics, which forms the entire OPD platform,” he says. “So, yeah, we are working on multiple segments within healthcare to provide a continuum of care.” 

@neetu_csharma