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The e-pharmacy sector in India has been witnessing a lot of startup activity. More than 200 start-ups have sprung up in this space, and some of them have gained considerable resources. For example, 1mg has raised more than $50 million in seed funding from American private equity firms. Medlife, which is a similar start-up has raised over $30 million in order to expand its network and last mile connectivity. PharmEasy, which is a relatively new entrant, has also been able to obtain $17 million in venture funding. The e-pharma start-up space appears to be really heating up. Experts are predicting that some mergers and acquisitions activity might take place to reduce the increasing number of startups that are entering this line of business.
In this article, we will have a closer look at some of the fundamental issues that are affecting the e-commerce industry.
Legality Issues: The pharmacy industry in India, i.e., the sale of medicines to end consumers has been estimated to be worth more than 1.2 lakh crore rupees. The e-pharma industry is a very small segment which has started flourishing now. The combined revenue of these online startups is less than 1000 crore per annum. Hence, e-pharma is at a very nascent stage because it does not even constitute even 1% of the total pharma market.
This is largely because of the legality issues facing these companies. India has a complex regulatory environment for the sale of medicines. Consumers are not sure whether these startup companies are able to comply with these regulatory norms. Also, counterfeit medicines are very common in India. Due to the deep discounts being offered by these e-pharma companies many consumers suspect that they might be selling counterfeit medicines. The pharmacy companies have started registering all suppliers and manufacturers. This is being done to eradicate the suspicion that e-pharma firms are selling counterfeit goods.
The government is skeptical about e-pharma firms. This is the reason they keep a close watch on these firms. It is widely believed that giving a free hand to e-pharma firms might lead to drug abuse. This is because these firms are likely to sell habit-forming drugs without the correct prescription.
This is the reason why e-pharma firms are very careful about the drugs that they sell. About 45% of the orders placed by the customers are rejected due to the lack of a valid prescription. This is not the case offline where the same consumers are able to buy these drugs. Since e-pharma companies reject orders on such a large scale, their growth rate is quite slow. However, it is better to grow at a slow rate than to jeopardize the existence of the entire industry.
E-pharma startups want to expand their business all over India. This will give them the necessary scale wherein they can negotiate with the suppliers to get better discounts. However, the rules and laws put in place by the government are very strict.
At the present moment, e-pharma companies must obtain a separate license for every state that they want to sell medicines in. Also, they are required to have a physical presence in all states. This leads to increased costs for online retailers whose business model is dependent upon avoiding physical presence to keep costs low.
With so many rules in place, e-pharma companies find it difficult to build an efficient supply chain which can bring down the cost of medicines and therefore add value to customers. Inter-state supply chains are a distant dream as of now. However, since the market has so much potential, a lot of these startups have been lobbying the central government. They want to be able to operate with a single license that allows them to distribute medicines all over India. Also, they want to able to build interstate supply lines.
E-pharma companies have tried venturing into related businesses like diagnostics and lab testing. However, there are regulatory hurdles here as well. There are several laws which make it difficult for e-pharma companies to have such vertical or horizontal integration.
These restrictions are likely to have a severe impact on the valuation of these firms. Investors are well aware that they do not have any wriggle room. Their operations are being straitjacketed. They are only allowed to sell some medicines to a certain group of customers. If they try to expand their customer group or the medicines they are selling, they face regulatory hurdles. Similarly, if they try to enter a new line of business, they face hurdles again. This lack of flexibility translates into lower valuations.
A lot of these laws are actually counterproductive and should be repealed. However, there is a very strong offline pharmacist lobby. Since their turnover is much higher than then online pharmacies, they can lobby the government just to let things be the way they currently are.
The problem with e-pharma companies is that they have to comply with multiple laws. There is the IT Act as well as the Drugs and Cosmetics Act. Sometimes the provisions of these laws contradict each other. This creates ambiguity as well as more litigation costs for the e-pharma firms.
The bottom line is that e-pharma firms have a lot of potential in India. However, they face opponents who are well connected and who have deep pockets. Also, the regulatory mechanism is not in their favor.
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What the Current Wave of Protectionism and Populism mean for the Future of Globalization and Free Trade
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