This is an audio transcript of The Morning Brief podcast episode: Co-founder Prescribes New Course For Ailing PharmEasy​

BG Sound 0:01
This is the morning brief from the economic times.

Siddharth Shah 0:10
On a lighter note, I have proven that my time of the market is very bad. So I never want to comment on the timing of the market... kab accha hoga kab buraa hoga Its fundamentally a profitable business. If you build a great product and a great service consumers will come to you. As you continue to grow your scale and improve your services and get this operating leverage. I think the business continues to demonstrate inherent strength basically, I think there are so many rumors in the market ke hum thyrocare bhech rahe hai, yeh bhech rahe hai bhai nah bhech rahe hai bhai humco AGM mein bola tha kuch nahi bhech rahe hain if you ask me what headline please let it be that we are not selling Thyrocare.

Mugdha Variyar 0:47
That was Siddharth Shah the Chief Executive Officer of healthcare company pharmeasy, accepting misjudgments highlighting renewed plans for the company's future, and also denying any plans of selling off the crown jewel of the company. And while his statement about being bad at timing the market was on a lighter note. The harsh truth is that the market downturn has left the company battered. This time last year Pharmeasy's parent company API holdings, which also runs diagnostics business thyrocare, had filed draft papers for a 6250 crore rupees IPO. The company was on a strong footing as it had closed a pre IPO funding round at a $5.6 billion valuation. One year down, the scenario has completely changed. As money flew from markets, the slump and pharmeasy was among many to scrap its IPO plans. Since then, it has been raising debt to repay debt and asking its shareholders to put in more and more money to stay afloat. So what went wrong for pharmeasy and where does it go from here?

Mugdha Variyar 2:00
In today's episode, we bring to you a candid conversation with pharmacy CEO Sidharth Shah, who talks about how he plans to take his company to profitability, stave off competition and survive the funding winter. We also have in house guests, Kiran Somvanshi who closely tracks the pharma sector and Arijit Barman, the resident deal tracker to diagnose the many problems ailing pharmeasy. It's the 11th of November, and I'm your host Mugdha Variyar, and you're listening to our episode pharmacies bitter pill on the morning tree.

Mugdha Variyar 2:41
In the current market scenario, several startups have kept their IPOs on hold and are focusing on profitability. Pharmeasy is one such company. Founded in 2015 by five friends from Mumbai's Ghatkopar surburbs, the E pharmacy grew quickly on the back of acquisitions to surpass more than $1 billion in gross merchandise value, or GMV. In FY 21. The pandemic gave a massive boost to pharmeasy and other e pharmacy platforms. And as demand for diagnostic tests soared. Pharmeasy went ahead and bought thyrocare last year. It also saw its valuation jump 4X within a span of just seven months during the easy money party that startups enjoyed last year. But that didn't last too long. As the funding winter set in pharmacy caught a cold. It was also saddled with debt. Now with its IPO plans and cold storage, pharmeasy is looking to break even on an operating level. And Siddharth accepts that the company missed the IPO window.

Sidharth Shah 3:44
So On a lighter note, I have proven that my timing of the market is very bad. So I never want to comment on the timing of the market ke kab acha hoga and kab bura hoga. look, I think Indian equity investors especially and retail investors want to reward a company that has broken even. We've heard the market loud and clear and we understand that.

Mugdha Variyar 4:08
But how does pharmeasy look to achieve operational profitability without hampering growth.

Siddharth Shah 4:14
So I think there are four fundamental changes which are happening. First, like we had said in 2020, 100% of our revenue was coming only by the sale of products. Today 12% of our revenue comes by giving services. As a result of that our contribution margin has gone up from 2% to north of 6%. Right now, step number two, we've clearly laid out a scenario where in our best cities on product itself, we are making a 4% margin. This 6% overall contribution margin is a mixture of average 2% on products and 4% on services, but in my best cities 4% is coming from products. And if the service mix is the same then you're actually looking at an 8% margin in your best cities. We are given an example of how our supply chain has gone up From 35 cities to 75 cities over the last one year and we are expanding into 125 cities over the next call it 12 months or so. So we are very clear in terms of our growth investment. So that's the second point being getting our best in class unit economics and products, which we have today in leading cities because of our density, control of infrastructure, and more importantly, capacity utilization. The third thing is what we already again spoken about is our significant focus on improving our share of private labels and our share of diagnostics and our share of surgicare. Our understanding is that on an ARR basis, by December our private label business will actually cross 100 crore rupees. And last but not the least, as you look at all of these three, right, there is a significant operating efficiency which is coming about right we've already spoken about our operating leverage, you would have seen even through our financials that our fixed cost our employee cost or our cost of GNA are all more or less fixed. In fact, as you consolidate and as you grow these come down. If you look at our adjusted EBITDA board number last year, it is about 850 - 860 crores which is what is already disclosed as part of our proforma financial. We've already spoken as a part of our AGM, that in the first six months of this year, we brought down our bond by more than half, we've significantly improved. And in all of these times, you would have never heard that oh somebody saying, oh phareasy ka service bhigad gaya ke phareasy ne bandh kar diya oh its dwindled out right we are talking of growing and we are talking about doing this and it is just like I said back to the basics its fundamentally a profitable business. As you continue to grow your scale and improve your services and get this operating leverage. I think the business continues to demonstrate inherent strength basically, we are not coming to the market saying oh I'll become EBITDA breakeven not grow and not put any money in growth right we are still putting money in growth. We're still growing right so it's it's not like a tick in the box the idea is to become EBITDA breakeven in a genuinely sensible in a sustainable manner.

Mugdha Variyar 7:00
I decided to analyze this with my colleague Kiran Somvanshi. So Kiran we heard Siddharth speak about how pharmeay is on a path to profitability, and that it will not come at the cost of growth. And in fact, he says that it is fundamentally a profitable business. Do you agree Do you think this profitability can be sustainable?

Kiran Somwanshi 7:22
So Mugdha as far as pharmacy is concerned, like if I have to give a perspective in terms of numbers for financial year 2022 For a top line of you know 5700 Odd crore rupees, pharmeasy made a net loss of nearly 4000 Odd crores. Even at the operational level, the company has an adjusted EBITDA margin of minus 13.6%. Now, when you compare this with other pharmacy players, especially the listed one, like med plus, so that's one of the largest omni channel pharmacy player Medplus earned and EBITDA margin of 4.6% from a top line of 3700 Odd crore rupees for the same period. And for the country's largest healthcare player Apollo, the EBITDA margin from its pharmacy and digital health business was at 7.6% earned from revenues of 5300 Odd crore rupees. In fact, Apollo has set a target for its omni channel digital healthcare platform that is Apollo 24/7 to achieve $3 billion of GMV. That is gross merchandise value in the next three years. So we see that it's easier for an established profitable player to become digital, rather than for a loss making digital startup to acquire physical footprint through organic or inorganic expansion.

Mugdha Variyar 8:39
So profitability isn't easy. And an equally big challenge is raising capital. Pharmacy was left with a bitter pill to swallow when it came to raising funds. This year, the company was looking to raise over 6000 crore rupees through an IPO mainly to pay off debt of 2000 crore rupees to Kotak Bank, which it had taken for its acquisition of diagnostics company thyrocare. When the IPO fell through Siddharth and his team approached multiple investors to raise equity capital, but they didn't get the valuation. They were looking for the company then to capital from Goldman Sachs, that was debt plus equity structure. Is pharmeasy going down the spiral of a debt trap? The CEO doesn't think so.

Sidharth Shah 9:26
The intent from our end was always to raise capital from equity in the form of IPO and pay down the money. Now when IPO is not happening, we didn't want to be in a situation where we default on any one of our obligation, right? I mean, in a lot of ways, credibility is built not in good times and in bad times. If you look at it the other way we've regained our credibility that money that was due to somebody in September you repaid that in in June, right you actually repaid somebody three months before time. Now we could have like i said we could have stationed till the last day and literally waited till the very last day and say, let's see what happened, right? I don't think that way credibility is built. Second thing, whatever money we raised from Goldman has two parts, right there is a part which is a pure pure debt and there is a part, which is like a preference equity. Right. And again, we had spoken about this as a part of the DISP. I can tell you that this capital, I know, there is a lot of speculation that we borrowed at some exorbitant rates, I can tell you, it's nowhere close to kind of numbers that people are speculating, there is a component of the initial, which is a preference equity, where we've actually offered them an opportunity where there is some kind of an equity kicker, right? If it goes there, but in terms of the debt component, it is actually extremely low, right. So we, to put it the other way, we've actually now come to a structure where something which was a pure debt is now a combination of equity plus debt. Right. And, therefore, the coupon and the debt obligation is significantly better than, you know, what is being speculated.

Mugdha Variyar 11:02
I wanted to ask my colleague, Arijit, about pharmeasy's funding troubles, Arijit, is pharmacy getting into a debt trap.

Arijit Barman 11:10
If you have to take debt to repay another debt. It's beginning of a debt trap. Right. And mind you, Goldman Sachs is coming in at a very high cost. Firstly, its debt which is structured, B, it has enormous amount of interest rates, and why did they take the debt from Kotak in the first place, they took the debt to acquire Throcare. So you take loans, you take debt, to buy another company, then you can't repay the debt, you take another debt to repay that, interestingly, is part of the contract with Goldman, there is a clause which says the existing investors will also put in more money 70 million ballpark. So now, when they failed to raise money from external investors, they have to do a rights issue. And the day they bought Thyrocare, I knew it was trouble. Why? Because look at the valuations, they bought Thyrocare at 40X operating profit. It was one of the most expensive acquisition at that point in time. And what did that lead to API holdings, which is the parent of pharmeasy, their net debt to equity ratio as on March 2020, before the pharmacy acquisition was 83%, already The net debt to equity ratio dropped to roughly 13%. That's because there was an equity infusion that happened and it dropped even further to 5.3%. But it did not account for the additional debt financing that came on board because of the acquisition of thyrocare and then back to back ultimate. So therefore, the company is desperate what I believe to minimize cash burn and focus on profitability. Even though the sector is growing. The pharmacy market is growing at a robust 21% Plus CAGR. But individual companies unless you have an unending supply of cash or capital, it's going to be very, very, very tough.

Mugdha Variyar 13:35
Yes, absolutely. This has definitely been a tough year for players like Pharmeasy as a capital has been hard to come by. And of course, there were a lot of talks that they've had with VCs over the last few months, but there was a clear indication of a down round. Now you have cracked and covered these discussions over recent months, the kinds of investors they were speaking to etc. So what according to you was the valuation mismatch?

Arijit Barman 14:00
Oh, it was massive. People were not even interested to come in at a valuation, which was slashed by half. They did a five and a half billion pre IPO around last year. Right. IPO got shelved. Even at two and a half billion 2.7 billion mark. They were struggling to raise money. And they were they were unsuccessful. Look at their cap table. There are already marquee names. There is Naspers or process, which is the largest shareholder if I'm not mistaken. There is Temasek. There's TPG TPG growth to be specific and there is ADQ from Abu Dhabi. So there is already a very marquee prestigious cap table existing. Often what happens is that if you have such names in the league table, a year back just by FOMO others would join the bandwagon. Those days are gone. Period. So, they went to players who are far more mature or you know who invest across the spectrum. So they went to KKR. Someone who invests in mature companies, buyouts, leveraged buyouts and even early stage companies. They failed. They spoke to the Canadians, which is CPP Investment, They are a pension fund. The guys who are into byju's and several other startups failed. They went to ADIA because their sister concern ADQ were there didn't work out. So every body said the same thing. Forget about the valuation that you originally envisaged, even at 50% of that value. I don't call it a down round. I call it bloodshed. People were not buying into the story. And that's the reality of today. Show me the money show us the profits. Only then would we be keen.

Mugdha Variyar 16:08
But profitability isn't easy in a segment that has seen increasing competition. Pharmeasy now has competition in the Reliance group and the Tata Group, which bought Epharmacy players netmeds and one mg respectively. Ecommerce majors such as Amazon and Flipkart have also entered the fray. In fact, during the festive sales, recently Flipkart offered aggressive discounts on medicines does such deep pocketed competition mean more trouble for pharmacy.

Siddharth Shah 16:39
We are not competing with Tatas and reliance, right? I think you guys are being very, very kya kehte hain very, very generous saying that we are competing, I think we are they are all legends, and we are still very young company. But all things aside, I think most importantly, look the it's again, in my view, unfair to compare us with them or them with us just because it's very, very apples to oranges. I will just give an example, today of Flipkart has already acquired 100 million customers, right? They are cross selling them medicines. Their CAC on that customer is zero as an example, but they may have to invest in supply chain. If we are spending X amount of money on acquiring retailer as an example, right? Now, that same retailer, is my partner for buying medicines to sell to his customers, that same retailer is working as a partner on selling medicines on pharmeasy and that same retailer is also using my private label. Now where will I say ki sir where have I made money have I made money in A or B or C or a consumer is on the platform, you bought a medicine, but that same customer is now using diagnostics, right? Should I say that I made money on Diagnostics, or I made on pharma because the customer is the same. And that is the case with all platforms, not just our platform it is with every platform, right? And that is why platforms value gets created saying that once you have this flywheel it continues to become better and better and better. Our network effect is very different that if you come to me, oh, you're a retailer, you are a doctor, you are a hospital, you are a consumer, you are with me, you need diagnostics, you need consultation, you need medicines, you need private label, you're with me. Therefore the only way that we continue to look at the market is Is there enough room for everybody to continue to survive and thrive? Right? You come to that scenario when they'll say Oh, I'm cutting into them and they're cutting into me and somebody is cutting into them everybody put together is also not 10% of the market.

Mugdha Variyar 18:40
Kiran, how do you see the competitive landscape in the E pharmacy as well as the diagnostic space? Because today we are seeing the likes of reliance, Tatas, and even Flipkart, Amazon all getting into the E pharmacy space, and of course in the diagnostic space. I mean, that seems to be getting very attractive. You know, we've seen the likes of Lupin Medplus torrid pharma, all announcing plans over the last year to get into diagnostics. So how do you see this whole competitive landscape here,

Kiran Somwanshi 19:07
basically, for an integrated player like pharmacy, there is competition coming from all fronts and across its businesses. So right from the traditional existing players to the business houses like reliance tatas that have entered into healthcare and also the startups that are disrupting the concept of you know, low cost medicines, other set of group has which has come in into this pharmacy spaces, players like generic Aadhaar, davaa dost Generico, which is now Zeno health, Davaa India. So, these are the players you would have heard that they have set up chains, pharmacy chains selling medicines, which are generic and not the branded ones and which are 50 to 80% cheaper than the branded ones. So they cater to a different need altogether the whole need of affordability and accessibility. So that is a different set of players which have come in and they are both online and offline. So that is again something which is happening in the pharmacy space. Now, if you look at the diagnostic space, as you mentioned, like you know several new players have made their foray in the past two years, precisely, right from the pharma companies like Lupin Torin pharma, mankind pharma, Reliance life sciences, to hospitals, so hospitals were always there in diagnostics, but they never probably looked at it as a important aspect of their business. But now they are beefing up their diagnostic divisions. So you have Apollo you have extra healthcare. All of these hospital players also beefing up their diagnostics. And besides them, we already had pure play diagnostics players like Lal path labs, Metropolis suburban diagnostics and SRL diagnostics. So these players were existing diagnostics players in the last two years, they have also kind of risen to the situation and become more and more competitive. Many of these players have acquired smaller unorganized players to kind of add on to their scale. So diagnostics have undergone a huge change in the last few years, especially when we saw COVID testing becoming a big thing for them.

Mugdha Variyar 19:59
So Kiran what has changed post the pandemic.

Kiran Somwanshi 21:09
What has happened is after the whole pandemic thing now, again, everything has come down back to the realistic pre COVID levels. So the pharmacies be it diagnostic players, they have seen a kind of so to say rationalization, or I should say normalization in their numbers, post COVID, or post the pandemic, because the exceptional growth of two years could not be kind of maintained. Now, if you look at Medplus share price, it has halved since the stock got listed in December last year. Same is the case with thyrocare stock price. It has declined by more than half since June last year when pharmeasy acquired it. So the pandemic premium commanded by all these businesses has evaporated. And now these businesses are trading at the realistic valuations. So, you know, had there been a moat or Had there been a strong, really strong advantage of you know, pharmeasy had over others, we wouldn't have seen this kind of depreciation in valuations. As far as thyrocare or any other particular part or aspect of business of pharmacy is concerned.

Mugdha Variyar 22:08
The diagnostics space has seen frenzied activity for pharmacies, parent company API holdings, diagnostics was just 10% of revenue as of last year, with a push towards mass consumer diagnostics post the thyrocare acquisition. Sidharth Shah believes that the consumer diagnostics business will in three years surpassed the revenue that listed arm thyrocare built on its business to business model over three decades.

Sidharth Shah 22:40
Obviously, our consumer diagnostics business, you would have all seen it. I mean, you can open your app right now. And check right in 60 to 90 minutes, you can get somebody to come and do your test. If the person doesn't come the test is free. This is something which is a unique proposition that nobody else nobody else has across the country. And this has led to a massive success. And like we spoke in our AGM today, our slot adherence in this is 99%, which means in 99% of the cases the person reaches your doorstep at the promised time, and the NPS in this business went from a plus three or plus four to plus 60. It is one of the fastest growing profitable on time, excellent service diagnostics business in the country. We've all seen how much time thyrocare took they took 27 years to get to this revenue. My sense is maybe our consumer diagnostic business will surpass that revenue in less than three years. Right. So what thyrocare took three decades to do, we'll do that in less than three years. And that's purely because of the kind of platform that we've built out. I think my point is very simple. If you build a great product and a great service consumers will come to you. I don't want to go into specifics, but I can tell you that even in the short span of time, more than 50% of our revenue in consumer diagnosing is coming from repeat users.

Mugdha Variyar 24:04
Siddharth also vehemently dismissed buzz that they were looking to sell thyrocare

Siddharth Shah 24:09
I think there's too many rumors in the market ke hum Throcare bhech rahe hai yeh bhech rahe hain bhai nahi bhech rahe hain hum tho AGM mein bhi bola tha hum kuch nahi bhech rahe hain hum bahut comfortable hai. ha ha hum davai bhech rahe hai hum throcare ka test bhech rahe hai Throcare ko nahi bhech rahe hai right woh bahot clear hai if there has to be a deadline please let it be that we are not selling Thyrocare.

Mugdha Variyar 24:30
So I turned to Arijit again you know there seems to be a lot of buzz about buyer interest for Throcare Arijit but of course we've heard Siddharth dismissing the news about them looking pharmacy looking to sell thyrocare as rumors but you know, there is usually no smoke without fire is what we say in our sector. So, you know, what do you have to say about this?

Arijit Barman 24:55
No, I know it's a very tough choice as things stands today thyrocare is the only profitable vertical within the larger pharmeasy Empire, if we can call it that. The focus as we know in the last few months is on profitability, and the only vertical that is profitable, makes money and has a bigger brand recognition, even entire two tier three cities is thyrocare. So, anyone who wants to get into the space or consolidate further will sense that here is a company which has acquired a larger company, which is thyrocare and is finding it difficult to digest. So who are the companies who are already in this space? There's Tatas and they have 1mg There's reliance and they have netmeds, Amazon and Apolo, they've got into this space. Mind you, Adani is another group which has been waiting in the wings, but healthcare is one green area green spot that they have identified as a new growth area, they are diversifying into newer and newer and newer and newer areas and thyrocare is an obvious target for anyone to get scaled in one shot. But if you take out thyrocare For Sidhartha, that would mean a serious hit on the consolidated profitability. Because profitability is the focus now for the company and I'm sure Siddharth over emphasized on that point when he met you.

Mugdha Variyar 26:43
Yes, he did. Profitability is definitely the North Star for pharmacy. Having missed the IPO window and with fundraising turning into a struggle, the management has had to take some tough calls. The company which has grown on the back of mergers and acquisitions has now put a pause to it. Monthly burn rate has been halved. The company may also have to settle for a cut in valuation if it looks to raise external funding. But for now, the management says the company has a runway of more than 12 months. Tough times have brought the friends don't founders closer, Sidharth says well, it has also given a reality check to hundreds of founders like him. You can catch the entire interview with the Pharmeasy CEO on et prime. That's it for today. This is your host Mugdha Variyar on the morning brief, the official podcast of the economic times.

Mugdha Variyar 27:41
This episode was produced by Vinay Joshi sound designer Indranil Bhattacherjee, executive producers Anupriya Bahadur, Anirban Chowdhury and Arijit Barman. Do share this episode if you liked it, and listen to new episodes of the morning brief every Tuesday, Thursday and Friday on all your favorite listing platforms, Amazon Music ghana.com, Spotify, Apple and Google podcast, the Economic Times website and of course, our very own audio platform et play.

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