DO OR DIE

A debt-fuelled spree
that led to $5.4B
PharmEasy’s Catch-22
Relentless acquisitions, 24 loans, and an IPO U-turn
later, the healthtech startup has found itself in a
dicey situation. Justifying its valuation while raising
funds to take on Tata-1mg and Reliance-backed
Netmeds will be a hard sell

Gaurav Tyagi, Maitri Porecha,

26 Aug 2022

Pharmeasy grew relentlessly riding on the back of venture-capital

money over the last few years

Until the markets turned choppy and its IPO was put on hold and
later withdrawn by the company

The company still had to repay debt worth ~Rs 2000 crore, so it
borrowed more to repay previous loans

Now it has put the brakes on acquisition and tempered growth to

achieve profitability

Healthtech startup PharmEasy had high hopes when it

filed for an initial public offering (IPO) of up to INR
6,250 crore (US$781 million) back in November 2021.
And if wishes were horses, it would have put its
unicorn status to good use. 

But on 20 August—within six months of getting a nod

from the Securities and Exchange Board of India
(Sebi)—the company decided to take a U-turn by
withdrawing the Draft Red Herring Prospectus
(DHRP).

PharmEasy, valued at $5.4 billion in its pre-IPO round,

cited “market conditions and strategic considerations”
as the reason behind the move. Now, the company’s
plans to go public will take a backseat for at least a
year, according to industry experts closely watching
the space.

Also on hold in the near future will be any acquisitions

by PharmEasy. That’s a huge deal for a company that
owes its valuation partly to its ability to gobble up its
peers through acquisitions, such as diagnostics chain
Thyrocare, software solutions company Marg, and
medical supply chain company Aknamed.

But with the acquisitions that were already finalised

came 24 loans with interest rates ranging from 9% to
12.5%. PharmEasy’s largest purchase was that of
Thyrocare in June 2021. To partially fund this, it
picked up debt from multiple entities, including Kotak
Mahindra Bank. 

The company paid over 40X Thyrocare’s revenue for

the acquisition, which industry watchers and analysts
said was expensive. 

Tumbling down

Thyrocare’s stock value has decreased from Rs 1,283

($16) to Rs 632 ($8) per share since the acquisition. In the
same period, the share price of its rival Dr Lal Path Labs
also saw the stock price drop to Rs 2,585 ($32) from Rs
3,861 ($48).

PharmEasy had planned to earmark Rs 1,929 crore

(US$241 million) from the net proceeds of the fresh
issue to pay off the loans. But the listing never came to
pass and the deadline for repaying nearly Rs 2,000
crore (US$250 million)—in August—was approaching.
The company was in a bind. 

Enter Plan B: repay the previous loans by taking a new

loan. 

On 26 June, the American investment bank Goldman

Sachs, through its Indian arm, gave PharmEasy a loan
of Rs 2,280 crore (US$285 million) at an interest rate
of 3%. The Ken confirmed this through the documents
filed by PharmEasy parent API Holdings with the
Ministry of Corporate Affairs.

But before all of this, the company was running on

steroids. Between April and October 2021, it raised
$700 million across two funding rounds. Its valuation
soared 4X within seven months. 

Then came the global economic slowdown and public

markets began showering tough love on loss-making
businesses. Tech stocks, in general, lost some sheen.
Meanwhile, API Holdings’ annual losses surged  to
~Rs 1,500 crore (US$188 million) in the year ended
March 2021. And the company continues to be in the
red, according to estimated results of global brokerage
firm Sanford C Bernstein’s February 2022 report. 

PharmEasy is now trying to course-correct by setting

an EBITDA – breakeven target for the year ended
March 2024. The company’s hopes rest on raising
funds via allotment of compulsory convertible
preference shares (CCPS) to existing shareholders.
This was part of a communication sent from the
company to its investors. 

And as a confidence-building measure, the company’s

five founders are together putting in ~$1 million
(between Rs 7-10 crore). Interestingly, this comes
nearly a year after the directors, founders, and select
employees received Rs 333 crore (US$42 million) as
one-time performance bonus.

“Does one want to simply massage the profit and loss

(P&L) books to show profitability for the sake of it?”
asked an analyst with a leading market-research firm,
requesting anonymity as they were not authorised to
speak to the media. “The IPO could have offered an
exit for early investors. The company will now have to
sacrifice growth by reducing investments.”

All of this puts PharmEasy in a precarious position,

especially when pitted against deep-pocketed rivals
such as Reliance-backed Netmeds and Tata-1mg.

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Smokescreen of debt

API Holdings scaled PharmEasy’s operations in the

years ended March 2021 and March 2022 on the back
of acquisitions. Its estimated revenue was Rs 5,574
crore (US$697 million) in the second year, according
to the Sanford Bernstein report. Besides Thyrocare,
the company used debt financing to fund several other
acquisitions—including that of Aknamed. 

Not only did the company take term loans and use
fund- and non-fund-based working capital facilities,
but it also absorbed debt from all of its acquired
companies. 

API Holdings’ net debt-equity ratio as of March 2020

stood at nearly 83%, per the DRHP. This figure
dropped to roughly 13% because of an equity infusion
of Rs 342 crore(US$ 43 million) during the year ended
March 2021. 

Three months later, the number had dropped further

—to 5.3%. But there was a catch. It did not account
for the additional debt financing and acquired debt on
API Holdings’ balance sheet post the acquisition of
Thyrocare and Aknamed. 

The company’s pro forma consolidated balance sheet

as of June 2021 shows that the actual net debt-equity
ratio was as high as 32%.

API Holdings was highly leveraged following the

acquisitions. The company had accumulated debt of Rs
2,495 crore(US$ 312 million) by 15 September 2021,
according to its IPO filings. 

The plan now was to repay or prepay a large portion

of the outstanding debt. It had even earmarked Rs
1,929 crore(US$ 241 million) from the net proceeds of
the IPO. The one-time repayment date for this debt
was set for the fourth week of August 2022. 

Recycle

A chunk of the debt had to be repaid to Kotak Mahindra

Bank. Kotak was also the lead book-running manager for
the IPO. It had also participated in the pre-IPO round and
controlled a 0.57% stake in API Holdings at the time of
DRHP filings

Naturally, API Holdings was running out of options.

The company then raised Rs 2,280 crore(US$ 285
million) via secured non-convertible debentures
from Goldman Sachs. API Holdings allotted these at a
discount of 3% to the investment bank’s India-based
alternate investment fund schemes.

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Earlier, media reports had speculated that Goldman

Sachs would invest around Rs 1,600 crore(US$ 200
million) debt and Rs 800 crore(US$ 100 million)
equity in API Holdings. But based on regulatory filings
with the MCA, we observed that the funding was
purely debt in nature.

While new funding will relieve the repayment and

interest pressure on the company, API Holding’s
balance sheet still remains highly leveraged. This is
especially after the erosion of shareholder equity due
to heavy losses (US$176 million) during the year
ended March 2022, according to Sanford C Bernstein.

Taking the blow

Riding on the wave of inorganic growth, API Holdings’

consolidated revenues had ballooned 6X year-on-year
to ~Rs 4,360 crore(US$ 545 million) during the year
ended March 2021. However, the PharmEasy parent
paid a pretty penny for this growth and lost Rs 5,870
crore(US$ 734 million) in the same period.

While additional loans will take care of the current

debt, API Holdings’ ambition of relentless acquisitions,
supply-chain expansions, and increase in spending on
marketing and promotions will take a hit.

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 The company was looking to invest Rs 1,500 crore

(US$ 187.5 million) from the net proceeds of the IPO
to expand its presence in the healthcare value chain
via strategic investments, and increase its holding in
its own subsidiaries. That will have to wait. 

Whole control

PharmEasy had acquired a 67.3% stake in Aknamed in

September 2021 and was looking to buy out the
remaining shareholders with the proceeds of the IPO

PharmEasy, which appointed movie star Aamir Khan

 as its brand ambassador in April 2022, has already
slashed its monthly marketing expenditure to Rs 15-17
crore(US$ 2 million) from Rs 20-25 crore(US$ 3
million). “The promotional activities in IPL matches
will reduce now,” said a senior executive at
PharmEasy. The executive did not want to be named
as they were not authorised to speak with the media.

In the climate of rivals trying to increase their gross

merchandise volume (GMV), PharmEasy is cutting
down on growth. “PharmEasy currently captures
~35% of GMV in the crowded space where Apollo,
Tata-1Mg, and Netmeds are also jostling for servicing
orders,” said the above-quoted analyst. 

API Holdings’ biggest revenue drivers are its

distribution channels—hospital-based pharmacies and
retailers—but the company believes the revenue will
grow at a lower rate now. 

If the earlier mindset was to grow

at 80%-200% yearly, it would
now happen at 35%-40%. The
monthly cash burn of Rs 65
crore(US$ 8 million) has dropped
to Rs 35 crore($US 4.4 million)
SENIOR EXECUTIVE, PHARMEASY

In a rapidly evolving pharmacy business that already

operates on tight margins, API Holdings’ strategy to
focus on profitability will be key if it wants to hit the
EBITDA-breakeven target. 

For quicker deliveries across pin codes, PharmEasy

launched PharmEasy NXT, an initiative through which
it signs up independent pharmacies and co-brands
them. But it only has ~500 franchisees across India so
far. This needs to scale up if PharmEasy wants to
compete with Apollo’s network of 4,300+ offline
pharmacies. 

But some companies have taken the deep-discounting

path. For instance, Netmeds offers a 20% loyalty
discount to improve stickiness.

Several executives in the company said that the focus

has shifted to showing profitability on its books. To
this end, it plans to leverage Thyrocare’s diagnostic
tests on its platform and push its private labels.

Meanwhile, e-pharmacies are now entering diagnostics

services because the latter fetch better margins
(~70%) than supplying drugs (5-15%). But high
customer acquisition costs in standalone diagnostic
businesses stick out like a sore thumb. 

“Currently, acquiring a standalone diagnostic customer

costs anywhere north of Rs 2,000($25),” said Rahul
Guha, chief executive (CEO) of Thyrocare, which
contributes ~10% to PharmEasy’s revenues. “The costs
significantly reduce to Rs 800 ($10) per customer in a
cross-selling proposition.” 

Thyrocare, to gain more customers, is following the

food-delivery playbook. “Like Domino’s free-pizza
promos, we offer free tests to customers if a
phlebotomist fails to reach for blood sample collection
within the 60-minute slot. We will shorten the window
to 30 minutes soon,” said Guha.

PharmEasy is also banking on business-to-business

(B2B) distribution and marketplace to help it in the
future. But it will have to deal with Apollo’s pharma-
distribution company Keimed, which has a ~Rs 7,000
crore(US$ 875 million) topline. For comparison, API
Holdings RetailIO 1P (its distribution arm) had
revenue of ~Rs 4,000 crore(US$ 500 million) in the
year ended March 2021, according to Bernstein’s
analysis. 

Clearly, PharmEasy has its back to the wall. With a

stalled IPO and a new loan to repay an old one, it’s
scrambling to figure out its next move. The company
has planned a rights issue in September. “The hope
is that these investors will make money two years
down the line,” said the analyst quoted above.

But which of these investors will get their foot in the

door in an attempt to realise PharmEasy’s promised
value remains to be seen.

Image Credit – Alice Pasqual/Unsplash

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AUTHOR

GAURAV TYAGI
Gaurav covers the money trail around everything startups
and internet economy. A graduate from the University of
Delhi, he joined Institute of Chartered Accountants of India
before finding his way to research and journalism. Apart
from being a petrolhead, he pretends to be Ari Gold on
weekends.

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AUTHOR

MAITRI PORECHA
Maitri writes about everything health for The Ken. For close
to 10 years now, she has navigated hospital corridors in her
search for a good story. In a past life, when she was not a
journalist, she used to teach French at her neighbourhood
school. Also an avid fan of forensics, she is always up for
decoding mysteries in her free time.

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26 AUG, 22 03 AUG, 22

A debt-fuelled spree The $400M

that led to $5.4B MediBuddy’s search
PharmEasy’s Catch-22 for B2C, rural treasure

GAURAV TYAGI, MAITRI

PORECHA MAITRI PORECHA

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