Build or buy?

It’s a choice all businesses face in their expansion journey. But for PharmEasy, India’s highest valued healthtech startup, the choice was clear right after the initial iteration years. This won’t be apparent when its draft red herring prospectus drops in the next few weeks but it’s worth knowing where the company narrative of “integrated health play” comes from. After all, PharmEasy wants to raise $1 billion from the Indian public markets on the back of a business model that’s hard to crack, and a story that’s harder to understand.

In mid-2019, PharmEasy, which also dabbled in distribution through its retail pharmacy business, merged with Ascent Health and Wellness, a pure-play pharmaceutical distribution company and majority shareholder in PharmEasy. The two also had a common backer—private equity firm Everstone. In the year ended March 2019, Ascent’s revenue of Rs 1,310 crore ($176 million) was over 3.5X that of PharmEasy’s revenue.

When we wrote about the likely merger in July 2019 and the company’s hunt hunt The Ken Read more for a unique selling proposition, PharmEasy co-founder Dhaval Shah said the company was “very much a distributor”, with its own warehousing and distribution.

A few months later, in November, PharmEasy raised $220 million in a round led by Temasek and Canadian Pension Fund CDPQ; the dominant narrative was of an e-pharmacy.

A private equity investor who had evaluated the company two years ago says Shah and Dharmil Sheth’s business plan was, well, an acquisition plan. “It made no sense. It was all a fifty-thousand-feet view of how [acquired] companies would work.”

Acquisitions and amalgamation followed thick and fast, starting with the addition of some 20 pharma distribution companies.

When the startup raised its next round of $350 million in April 2021, the narrative shifted from e-pharmacy to integrated health. Soon after, it bought fellow e-pharmacy startup Medlife, not the best business in town, and Thyrocare, one of the four pan-India diagnostics chains, at a scarcity premium of 40X EV/Ebitda EV/Ebitda Enterprise Value/Earnings before interest, taxes, depreciation, and amortisation Ebitda is ameasure of a company's overall financial performance and is used as an alternative to net income in some circumstances .

Merging distribution and e-pharmacy, even though two very different businesses, made sense because together they could capture 30-35% of the value chain compared to competitors like NetMeds and 1mg that only capture 20%, according to a September report from the brokerage Sanford C Bernstein.

Indian pharmacy, in general, is an extremely fragmented market. So far, online-only pharmacies have captured 7% of the $25 billion domestic pharma market. Around 81% remains in the unorganised sector dominated by 800,000 retailers and 60,000 distributors.