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IPO-bound PharmEasy buys Thyrocare; is it worth the price and what does this mean for diagnostic sector?

Several analysts and competitors Moneycontrol spoke to said that the deal would be a win-win for PharmEasy and shareholders of Thyrocare and more importantly for Velumani, the Chairman of Thyrocare, who will be cashing out.

June 26, 2021 / 02:55 PM IST
Thyrocare Technologies | The company reported consolidated profit at Rs 37.75 crore in Q4FY21 against loss of Rs 1.6 crore in Q4FY20, revenue jumped to Rs 146.84 crore from Rs 101.44 crore YoY.

Thyrocare Technologies | The company reported consolidated profit at Rs 37.75 crore in Q4FY21 against loss of Rs 1.6 crore in Q4FY20, revenue jumped to Rs 146.84 crore from Rs 101.44 crore YoY.

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In what was one of the biggest deals in the Indian diagnostic sector, PharmEasy on June 25 acquired a 66.1 percent stake in Thyrocare Technologies Ltd (Thyrocare) for a consideration of Rs 4,546 crore.

API Holdings Ltd (API), the parent company of PharmEasy, announced the "signing of definitive documents to acquire 66.1 percent stake in Thyrocare from Dr A Velumani and affiliates at a price of Rs 1,300 per share aggregating to Rs 4,546 crore," an official statement noted.

 The deal was announced after the market hours on Friday. Shares of Thyrocare rose 6.23 percent to end at Rs 1448.05 on BSE.


"We will provide a world-class customer experience in diagnostics, rivalling our pharmacy experience by leveraging technology, and building on top of the massive scale & truly pan-India presence of Thyrocare," said Siddharth Shah, CEO of API Holdings.

"It is our aim to deliver all outpatient healthcare products & services to every Indian within 24 hours,” Shah added.

What this means to PharmEasy


Several analysts and competitors Moneycontrol spoke to said the deal may give PharmEasy access to Thyrocare's diagnostic infrastructure and a profitable business, but still, the startup may be paying a high price.

Analysts say COVID-19 testing, which is seasonal, could be the reason for elevated valuations of diagnostic. COVID-19 testing contributed about a quarter of revenues for the diagnostic companies in FY21.

PharmEasy valued Thyrocare at 13.9x of FY21 earnings, 40x of EBITDA and 60x of profit.

Recently, Mumbai-based Metropolis bought South India-based Hitech Diagnostics for Rs 511 crore. Metropolis paid 6x of Hitech earnings in FY20.

"These nos are hard to replicate - they all got a massive one time boost due to COVID-19 testing," said an analyst tracking the deal.

Kunal Randeria, an Analyst at Edelweiss Financial Services says the valuation of Thyrocare is still reasonable, compared to its peers such asDr Lal Pathlab and Metropolis.

On June 25, the market cap of Dr Lal PathLabs stood at Rs 26,336.15 crore and Metropolis was around Rs 15,125 crore. Thyrocare stood at Rs 7,656 crore.

"Thyrocare relies heavily on the B2B (business to business) segment, where much of its business comes from referral of hospitals, clinics and doctors, the realisations are lower. It is mostly a model of low pricing/high volume," Randeria said.

The B2C (business-to-customer) segment where the customer directly gets his test without referral contributes about 10-15 percent for Thyrocare, whereas for Lal and Metropolis it is around 45-50 percent.

Randeria said PharmEasy given its consumer-centric approach, serving over 20,000 pin codes, will help Thyrocare scale its B2C share.

Another analyst says that PharmEasy will not just be getting the physical infrastructure of Thyrocare but a profitable business too.

Thyrocare revenues grew 14 percent to Rs 494.62 crores in FY21, with a net profit of Rs 113 crore and an EBITDA of 37 percent.

"If you look at e-pharmacy business, the gross margin on the sale of drugs is 25 percent, and the discounts offered to customers is around 15-20 percent, you are left with about 5-10 percent margins, that's hardly a profitable business. Thyrocare on contrary is a profitable business," said Vishal Manchanda - Pharma - Nirmal Bang Institutional Equities.

But the combination of PharmEasy and Thyrocare - makes a good fit because most of the customers who buy medicines on e-pharmacies are people with chronic diseases like diabetes and hypertension, and these are the people who need frequent testing.

PharmEasy can leverage this by offering a subscription model combining online doctor consultancy, medicines and diagnostics in one place.

IPO rationale

A competitor of PharmEasy who didn't want to be named said - the acquisition of Thyrocare will give them scale and profitability as they prepare for a possible IPO.

"It isn't going to be a game-changer of sorts," the person above said.

API Holdings has been in news about a potential public market listing with an aim to raise around Rs 3,000-Rs 3,700 crore. Private equity firms such as TPG Growth, Prosus Ventures, Temasek, CDPQ, LGT Lightrock, Eight Roads and Think Investments hold about 80 percent stake in API Holdings.

Manchanda says the diagnostic business comes with certain nitty-gritty like systems and controls that e-pharmacy chains may find challenging.

Startup buying established co

The deal is said to have happened when the dynamic 32-year-old Siddharth Shah, Co-founder & CEO of API Holdings, met with 62-year-old diagnostic services veteran Velumani, the Chairman of Thyrocare, in monsoon-drenched Lonavala over masala chai at the latter's residence.

Moneycontrol learns that the deal has been in the works for at least a couple of months.

"It's rare that an unlisted e-commerce company makes an offer of this nature for a reasonably sized listed company," said a person who didn't want to be named, but was helping with the deal.

PharmEasy was founded by Dharmil Sheth, Dhaval Shah, Harsh Parekh, Hardik Dedhia and Siddharth Shah. The online pharmacy has managed to pull a second big deal in less than a year after merging with smaller rival Medlife.

The Indian e-health sector is expected to become a $16 billion opportunity by the financial year 2025, growing from $1.2 billion at a compounded annual growth rate of 68 percent, according to RedSeer.

For Velumani, the first generation scientist-turned-entrepreneur, who began operations with a single focus on thyroid testing and later expanded into other tests, this was a decent cashout.

"There were problems on who is next after Velumani, he tried to bring in professional management by appointing a CEO, but somehow it didn't work, and the CEO stepped down, so it's a nice way to retire with a large bank balance," one of the people cited above said.
Viswanath Pilla is a business journalist with 14 years of reporting experience. Based in Mumbai, Pilla covers pharma, healthcare and infrastructure sectors for Moneycontrol.
first published: Jun 26, 2021 01:53 pm
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