Indian E-Pharmacies: Clash of Titans

“View health as an investment, not an expense” – John Quelch CBE

India is a sick care market instead of a preventive healthcare market. The ongoing pandemic has exposed wide gaps in the country’s healthcare infrastructure. The entire nation has been brought to its knees by the second wave. But, amidst all things wrong and all the chaos, the pandemic has brought a ray of hope to correct this. More Indians than before have become conscious about health and hygiene, realizing the criticality of wellness and prevention. With social distancing being the new buzzword, and people getting confined to their homes, more and more people are turning to health tech businesses like teleconsultation, e-diagnostic and e-pharmacies.

Indian Pharmacy Market

In India, the pharmacy retail market’s revenue has been valued at ~US$ 20Bn in 2019. The market is expected to reach ~$ 37.7 Bn by 2025, with a CAGR of 11%. Even though the market has demographic factors in its favor, it is still dominated by unorganized local players who had a 92% market share in 2019. The organized segment consists of 25+ offline players like Apollo Pharmacy, Wellness Forever, Fortis Healthworld and new-age online retail players like 1mg, Pharmeasy, Netmeds. The online retail players are giving intense competition to unorganized local players. The online retail segment is expected to grow at ~44% annually during the 2020 – 2025 period, owing to improved digital infrastructure.

Before diving deep into the world of e-pharmacies, let’s take a look at the broader health tech market.

Indian Health Tech Market

The overall health-tech market was ~$1.8 Bn in 2020, growing at a whopping 39% CAGR. E-pharmacy and B2B HealthTech are the two largest segments accounting for ~37% and 32% of the market share respectively of the overall HealthTech market. E-diagnostic and teleconsultation are the fastest-growing subsegments, growing at 66% and 73%, respectively. In 2020 the health tech sector recorded 77 deals raising $455 Mn in funding compared to $512 Mn funding in 62 deals in 2019.

As per FICCI, the number of households using e-pharmacies grew 2.5X during the pandemic, rising from 3.5Mn to 9Mn. 50% of the households added during Covid19 came from non-metro cities. This trend is only going to get stronger. E-pharmacies are further expected to penetrate 70mn households by 2025.

E-pharmacy in India only represented 2-3% sales in 2019 and is projected to reach $4.5 bn by 2025, to represent 10-12% of pharma sales in 2025.

e-Pharmacy Players

In April 2021, the online pharmacy segment got its first unicorn as Pharmeasy. Nearly two weeks after Pharmeasy’s parent entered the Unicorn club, the second-largest player in the health-tech industry in India, 1mg, got capital infusion in the form of debt-money from Tata. Tata Digital is also in the final stages to acquire a controlling stake in 1mg. The transaction raised the valuation of the firm to $240 million, which caught our attention.

Tata Sons is building its super-app platform: an e-commerce gateway for its consumer products and services ranging from beverages to jewelry and resorts. Tata has also acquired a majority stake in BigBasket. With BigBasket and 1mg under its control, Tata’s platform will compete with the ambitious plans of Ambani, Amazon and Walmart-Flipkart to tap the nascent market of more than 1 billion consumers. Amazon’s entry into this space with Amazon Pharmacy last year has made things more interesting.

The high-profile entries of big conglomerates and internet giants will intensify the competition in the consolidated space where the top 4 players (Pharmeasy, Medlife (acquired by Pharmeasy), 1mg, Netmeds) have >80% of the market share. Pharmeasy’s entry into the unicorn club, Netmeds, with Reliance’s deep pockets and disruptive track record and Amazon’s dominance in e-commerce, leaves the second inline player, 1mg, with a question mark.

The 1mg Story

1mg was originally launched in 2013 by Prashant Tandon, Gaurav Agarwal, and Vikas Chauhan as HealthKartPlus, a Wikipedia for medicines. The idea was born when they started receiving traction for their medical information. Users started asking them why couldn’t they sell medicines if they had so much expertise in the field. As a result, 1mg was created in 2015 with an aim to make medical products more accessible to the general public at the best costs.

1mg had an imposing start achieving 160% growth in monthly active users and 220% growth in Net GMV, with numerous accolades and awards. After the launch of the e-pharmacy business in 2015, the company soon added e-consultation and e-diagnostics services, realizing the need to provide a one-stop patient-care tech platform. 1mg has a very diversified portfolio ranging from e-pharmacy, e-diagnostics, e-consultation to private label products and B2B offerings, competing with startups like PharmEasy, Medlife, and NetMeds in online pharmacy and Lybrate, mFine, DocsApp, and Practo in the e-consultation sectors, respectively.

1mg improved its margins with scale. 1mg was able to reduce its CAC to less than 17% of GMV with an industry trend of more than 25%. Since 1mg started as a content platform, it took content seriously as a strategy. Till 2019, 1mg stood as a poster boy for e-pharmacies and a leader in the segment.

But nothing lasts forever…

As it was getting traction, 1mg also faced cut-throat competition in the industry where players started pouring money to acquire customers. During the first half of 2019, 1mg’s market share by transaction volume fell significantly to 18% from 23%, whereas Pharmeasy maintained its leadership with a 29% share. Pharmeasy also replaced 1mg in terms of monthly frequency of purchase by users.

Fast forward to today, Pharmeasy has surpassed everyone in terms of valuation. With the acquisition of Medlife by Pharmeasy, it commands a combined revenue market share of >50% becoming a force to reckon with. 1mg’s market share has reduced to 18%. In fact, Pharmeasy has emerged as the leader in the majority of other metrics such as MAU it serves, order frequency by customers, and average order value.

“It’s not a winner take all market.” – Prashant Tandon, CEO & Co-founder, 1mg

Our battle will be legendary

E-pharmacies are trying to become full-length e-health players as all the significant players are diversifying and integrating e-consultation and e-diagnostics into their offerings, bringing players from these fast-growing segments into the competition as well.

To see what lies ahead for the e-Pharmacy sector, let’s take a look at what has happened with the broader e-commerce and food-tech sectors. E-pharmacy is still at a nascent stage both in terms of adoption as well as size if we compare it with the journeys taken by the other two sectors. As these sectors started gaining scale, the industries started consolidating. Both e-commerce and food-tech are left with two major players (Amazon-Flipkart and Swiggy-Zomato), with other players shut down, acquired or pushed to a niche. Hence, it seems unlikely that more than 2-3 players will survive in the e-pharma space despite the impressive CAGR and industry projections.

The push from Covid19 and increasing adoption has raised the heat and prepared the ground for an intense fight. With the entry of Amazon Pharmacy, there is no space for complacency for the incumbent major players (Pharmaeasy, Netmeds, 1mg). Similar to Swiggy-Zomato, the industry can witness a prolonged price war, which is already getting flack from the offline retailers worried about their future.

To survive the short-run heat, the players will need access to the deep pockets. And all four players have prepared for this scenario. This seems nothing short of a proxy war. Reliance with Netmeds, Tata with 1mg, Amazon with its own pharmacy and the newly minted unicorn – Pharmeasy.

1mg-Tata deal is a win-win for both players. Tatas are aiming to build SuperApp – similar to their diversified empire which touches each and every aspect of Indians. 1mg will strengthen Tata’s e-commerce initiatives. For 1mg, a strategic investor like Tata can potentially bring much more than capital. The possibilities seem endless with options from management expertise, human resources, synergies with existing businesses such as Tata Health and the SuperApp platform’s unfolding and industrial expertise for 1mg’s private labeling offerings.

As seen with Netmeds and Reliance, realizing these synergies will not be a cakewalk. Reliance acquired Netmeds, faced losses in income by 44% in FY20, contrary to its peers, despite industry tailwinds and the push from Covid19. We might be too soon to comment, but it certainly lays a challenge for Reliance to replicate Jio’s success story and a lesson for Tata to proceed with caution and plan.

This is very much like a covid vaccine, the side-effects of which are unknown, but it is the need of the hour. So, the ball can roll either way for 1mg. Meanwhile, we’ll be waiting to see which company overdoses on capital and which survives.

This article is co-contributed by Krishma Gupta