Reliance Industries (RIL) announced its arrival in the online pharmacy space on August 18 by picking up a 60 percent stake in Netmeds for Rs 620 crore. The deal values Netmeds at Rs 1,000 crore.
That is quite an impressive figure for a company that was struggling to raise funds for one year amid rising competition.
The acquisition will not only ensure further growth in the sector but also strengthen RIL’s retail unit Reliance Retail’s presence in the e-commerce space.
But is this enough to give RIL the firepower to take on Amazon, which recently launched its e-pharmacy services in Bengaluru? Rival Flipkart is learnt to be in talks to enter the segment that has benefitted from the coronavirus outbreak that has forced customers to stay home and turn to online firms in large numbers.
How did RIL acquire Netmeds?
Netmeds was founded by Pradeep Dadha in 2015 whose family ran Tamilnadu Dadha Pharmaceuticals, which was acquired by Sun Pharmaceutical in the 1990s
In 2015, Netmeds became the default industry leader when it raised one of the largest rounds by a company in the sector. It announced a tranched fundraise of $50 million led by OrbiMed, a healthcare focussed investment fund.
It raised two subsequent rounds in 2018—$14-million from Cambodian investment holding company Tanncam and venture firm Sistema Asia and $35 million from Daun Penh Cambodia Group.
But the company needed more funds as the sector was getting more competitive.
It was around this time that offline traders, a sizable vote bank, started complaining about online pharmacies. Lack of regulation and growing pressure from offline traders pushed investors away from the nascent sector.
It took the government a couple of years to come up with draft regulations but the damage was done.
By 2019, Netmeds was in dire need of funds. It was in talks to raise $100 million but lost out to rivals such as 1mg and PharmEasy.
Pushed into a corner, Netmeds opened acquisition talks with some suitors, including RIL. The coronavirus outbreak and the lockdown accelerated the process.
What does the deal mean for RIL?
To begin with, a loyal customer base. Unlike fashion or food sectors, e-pharmacy is not a leisure category where customers act on a whim.
Here customers know what they need and have dedicated funds for it. The majority of orders are for chronic and lifestyle disease medicines, which are needed regularly and customers often ask for a month’s supply in one go.
The viral outbreak has made consumers more aware of health and hygiene, which means more business.
How does RIL stack up against Amazon and Flipkart?
With more than 38 crore Jio subscribers, a large number of whom live in rural areas, RIL has a huge dormant customer segment waiting for the next wave of e-commerce. The next phase of growth is expected to come from 100 million customers residing in India’s towns and villages.
While Amazon and Flipkart have tapped the first 100 million, RIL has an edge when it comes to semi-urban and rural areas, where online drugstores can be a big business.
What are the challenges?
While most e-pharmacies have cracked the market for drugs for chronic illnesses, on-demand deliveries are yet to take off.
Over-the-counter medicines are also a huge segment but need a quicker delivery. If Reliance Retail can ace it, it would have found the winning formula. It calls for a well-oiled delivery mechanism, possibly hyperlocal, and the company can leverage its JioMart experience to expand the business.
Is the market big enough for multiple players?
There has been a major shift in demand following the viral outbreak. More than 8.8 million households started using e-pharmacy during the lockdown, a 2.5-time growth against a regular day, with increased representation from non-metro cities, says a recent “white paper” published by FICCI. Further, the sector is expected to tap into more than 70 million households by the financial year 2025.
What about regulation?
In March, the home ministry recognised delivery of medicines through e-commerce as an essential service. The government has also come up with draft rules, laying out the much-needed dos and don’ts that will go a long way in shaping the business. For the longest time, the sector was guided by the 1940 Drugs and Cosmetics Act.
Does Reliance’s entry mean more money for the sector or will it deter foreign VCs from entering the market?
In the financial year 2019-20, $700 million flowed into the sector. Investor sentiment is positive following the organic adoption of e-pharmacy during the COVID period.
According to FICCI, India has over 50 e-pharmacy companies employing more than 30,000 people. There’s a huge scope for multiple investors, as the sector is just taking off.Disclosure: Reliance Industries (RIL), which also controls Jio Platforms, is the sole beneficiary of Independent Media Trust which controls Network18 Media & Investments which publishes Moneycontrol.