Diagnosis of the Pharmeasy DRHP

The online pharmacy platform Pharmeasy has submitted its draft Red Hering Prospectus (DRHP) to raise Rs.6,250 billion in its upcoming IPO. API Holdings Limited, the PharmEasy Group’s holding company which controls 26 subsidiaries including Aknamed, Docon, Retailio and Thyrocare, will also raise Rs 1,250 billion through private placements in a pre-IPO round.

It is important that the planned IPO breaks with the recent trend of “New Age” companies with exclusive new issues and zero secondary sales by existing owners.

According to the DRHP, Pharmeasy will use Rs.1,929 billion to prepay or repay all or part of certain outstanding loans that the company draws. In addition, the company will use Rs.1,259 billion to fund organic growth initiatives, including marketing and promotional activities, improving the supply chain and expanding technology infrastructure.

Another Rs.1,500 billion will be used for inorganic growth through acquisitions and other strategic initiatives, with the rest for general corporate purposes.

The Mumbai-based company has acquired five major healthcare and pharmaceutical companies to date during FY20-FY21 including Ascent Healthcare, Thyrocare, Aknamed, Margin ERP and Medlife International. These strategic acquisitions have helped the company grow its business scale from Technology solutions, pharmaceutical distribution and diagnostic solutions.

The increase in magnitude is evident in the company’s operating income, which increased 3.5 times to Rs 2,335.3 billion in FY21, from Rs 667.5 billion in FY20. Pharmeasy also benefited from selling drugs through its online platform during the lockdowns caused by Covid. The sales channel business for the delivery of medical and wellness products to pharmacies and institutions (hospitals and pharmacies) stood out as the company’s largest sales branch.

PharmEasy

PharmEasy raised Rs 1,315.5 billion from the channel business, which accounted for 56.3% of its sales in FY21, while that industry did not exist in FY20.

Retail product sales raised Rs. 966.1 billion, while diagnostics delivery, pharmacy direct service, and technology fulfillment services raised Rs 21 billion for the company in the fiscal year. Pharmeasy also has other operating income of Rs 27.7 billion and Finances Revenue of Rs 25.4 billion for the fiscal year ended March 2021.

PharmEasy

In terms of expenses, the cost of raising the trading stocks was the largest for the company, accounting for 72.2% of annual expenses. These costs increased in line with revenue and GMV following the Ascent and Medlife acquisitions and increased 3.4-fold in FY21 from Rs 641 billion in FY20 to Rs 2,152.4 billion.

Pharmeasy’s workforce eventually grew after several acquisitions and the increase in the size and payments of benefits rose 97% to Rs. 270.3 billion in FY21 from Rs.137.2 billion in FY20. Significantly, sales promotion and marketing spend remained relatively constant, totaling Rs 135 billion in FY21.

PharmEasyPharmeasy’s annual cost increased 2.8 times in FY21 to Rs 2,981 crore from Rs 1,084.4 crore in FY20. At the unit level, it spent 1.27 rupees to generate a single rupee in revenue, up 22% from 1.62 rupees spent on the same rupee in FY20.

At first glance, it appears that the company burned more money in the past fiscal year as annual losses rose 91.3% to Rs 641.3 billion in FY21 from Rs 335.3 billion in FY20. But its EBITDA margin improved significantly from nearly -43% in FY20 to -23.04% in FY21, even after more than tripling its operational size.

It is important that the above figures for fiscal year 21 do not include the revenues of the listed diagnostics giant Thyrocare, which was acquired by Pharmeasy in June of this year. It controls 71.22% of the shares in the diagnostics company after paying Rs 4,895.3 billion as the purchase price. Thyrocare’s results for the first quarter of fiscal 22 showed sales of Rs.164.6 billion and earnings of Rs.75.3 billion for the period.

As part of the DRHP, Pharmeasy has also released its quarterly results for the first quarter of FY22, which posted operating sales of Rs 1,197 billion for the three month period with an annual maturity of Rs 4,788 billion. It spent Rs 1527 crore in the first quarter and lost almost Rs 314 crore. The company had recently raised $ 217 million in a pre-IPO round last month at a post-money valuation of $ 5.7 billion. It added a revenue multiplier of 17X to the private placement round taking into account the latest financial results.

Similar to many of the recent IPOs of digital-first companies from various sectors, Pharmeasy also has few comparable publicly traded competitors, making final market valuation difficult. The market has stunned most people with the high ratings of the Zomato and now Nykaa, even after what was viewed as aggressive pricing. On the other hand, Paytm’s IPO failed with no significant involvement of a category like mutual funds, suggesting a continued evolution in perception and risk appetite among institutional buyers.

At least in the healthcare sector, which Pharmeasy encompasses, we’ve listed companies in the various segments in which it is present. So it will all come down to the premium it seeks for its digital strengths as the underlying businesses are well understood. It remains to be seen whether this will lead to a moderate pitch in the ratings or, from the examples above, to an even more aggressive pitch.

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