From planning for Rs. 6250 crore IPO in July 2022 to opting for a rights issue at a 90% valuation cut in July 2023, PharmEasy’s fate has taken a rough turn. It has become India’s first Unicorn startup to raise a down round this funding winter.
With deep debts, breaching loan covenants, shelving of IPO, high burn rate and increasing competition, PharmEasy has joined the likes of BYJUs and other startups doing everything possible to survive.
But what went wrong at this unicorn startup? Let’s find out.
Why is PharmEasy in such deep trouble?
PharmEasy, an Indian online pharmacy and healthcare services company, raised over $1.5 billion two years ago and found itself amongst India’s highly noted unicorn startups. While it took off as a promising startup, several wrong decisions and external market conditions took a toll on the startup’s way forward.
Here are various factors that together have led PharmEasy to such a deep crisis:
High burn rate
With investments flowing in, the startup went on an expansion and acquisition spree instead of improving operational efficiency for the funding winter ahead. It spent over $865 million in mergers and acquisitions and added Medlife, Thyrocare, aknamed and Marg to its belt.
Instead of sticking to one or two business models, PharmEasy went bullish on the entire stack—B2C epharmacy, B2B pharma supply, franchise stores, SaaS for pharmacy management, diagnostics and telemedicine—becoming the master of none.
The startup also spent considerable funds on marketing, salary, employee benefits, rampant hiring and other advertisement and promotional activities, shooting its expenses by 3x from FY21 to FY22, as reported by Inc42 in its recent article.
High debt
To fund its ambitious acquisitions, PharmEasy chose debt financing as the feasible option. It took a loan of Rs. 2280 crore from Goldman Sachs to acquire Thyrocare Technologies, a multichain diagnostic lab.
While the Thyrocare acquisition was a strategic move, allowing PharmEasy to expand in the diagnostic testing market and bring in Thyrocare’s large customer base and expertise, the mismanagement of Thyrocare after the acquisition led to its profits falling to FY19 levels.
Loan covenant breach
Goldman Sachs lent Rs. 2280 crore to PharmEasy on certain loan covenants (agreements), one of which was to raise a minimum of Rs. 1000 crores in equity within one of taking the loan. PharmEasy breached the covenant by failing to raise the required equity.
PharmEasy had to shelve its plans of Rs. 6250 crores citing uncertain and down markets, and it failed to raise funds from other investors in the ongoing funding winter. While it raised Rs. 750 crore through convertible notes in October last year, the majority of the funds were used to repay debt.
The loan covenant breach now allows Goldman Sachs to demand immediate loan repayment, foreclose the company’s assets or sell the company’s share.
Inefficient internal management
While PharmEasy has five founders looking after its various verticals, there has been inefficient management within the startup. There was a serious lapse in its franchise operations as PharmEasy changed commissions mid-way and reduced support to its franchise customers.
Inc42 also reported the mismanagement, which led to the fall of Thyrocare’s profits after the acquisition.
Employee layoff
To cut costs and improve operating profits, PharmEasy laid off 400 to 500 employees this year, leading to a shortage of customer support and tech staff.
Inc42 reported that there were hardly any employees left in PharmEasy’s tech team to build new products. As a result, most of its products are in maintenance mode.
Valuation cut
Globally renowned PharmEasy investors, Neuberger Berman and Janus Henderson, have cut PharmEasy’s valuation by 21% to $4.4 billion and by 50% to $2.8 billion, respectively. This was a significant reduction from its original valuation of $5.6 billion in October 2021.
Increasing competition
Apart from the internal mishaps, PharmEasy is facing tough competition from big players in the market, like Tata (1mg), Reliance (Netmeds), Amazon (Amazon Pharmacy), Apollo and Flipkart (Flipkart Health).
These companies have huge budgets, strong brand presence, large customer bases and super apps, making it extremely difficult for PharmEasy to increase its market cap and gain investor trust.
Tightening of regulations
The Indian government has made several regulatory changes in the health sector, especially in the epharmacy space, in recent times. Its moves to regulate and tighten the online healthcare space and ensure patient safety have negatively affected PharmEasy.
The restrictions and regulatory changes have made it challenging for online pharmacies to operate in the country, as they’ve to heavily invest in compliance and customer experience to stay afloat.
Macroeconomic conditions
PharmEasy is also stifled by current economic conditions—increasing inflation, likely global recession, funding winter and whatnot.
How is PharmEasy planning to save its neck?
The board of directors at PharmEasy have initiated talks to offer a rights issue to help PharmEasy stay afloat. The proposal is to raise Rs. 2400 crores through rights issue at a 90% discount from the previous valuation. It means PharmEasy shares will be available to existing investors at Rs 5 per share, which were previously priced at Rs 50.
Existing investors, TPG Growth and Temasek Holdings are leading the rights issue. Rajan Pai, the chairman of Manipal Group, is expected to invest Rs 1000 crores for an 18% stake in API Holdings (PharmEasy’s parent company) and join the company board, MoneyControl reported.
Furthermore, existing investors are expected to contribute around Rs 1500 crores in the rights issue, the report said.
While the raised funds will help PharmEasy repay its debts and survive another day, the steep valuation cut of 90% has taken the market by storm.
How will the valuation cut impact PharmEasy investors?
The 90% valuation cut will have a greater impact on investors not taking part in the rights issue as they will see a significant dilution of their ownership at PharmEasy. The investors re-investing at the discounted price will have a lesser impact.
The valuation cut is less likely to affect the voting power of investors who have anti-dilution rights at PharmEasy. Anti-dilution rights protect shareholders’ ownership of the company by giving them the right to purchase new shares at a discounted price.
Overall, all investors will see a decrease in their investments and portfolio, as a 90% valuation decline is a huge number.
What will be the consequences for PharmEasy founders and employees?
PharmEasy founders and employees with employee stock options (ESOP) will be greatly affected by the rights issue, as they don’t have the right to buy shares at the discounted price. The issue will lead to a high dilution of their ownership at PharmEasy.
Inc42 reported that PharmEasy’s investors and board have mutually agreed to issue new ESOPs to founders and other employees to compensate for value erosion due to the rights issue. However, there’s no guarantee of such options and their impact.
Ashneer Grover, former Bharat Pe cofounder, claimed the new funding round will bring sudden death for the company’s founders, reported Business Insider. He says that this rights issue will result in investors taking over the company, leaving founders with a 0.001% stake in the company.
What do experts say about PharmEasy’s rights issue and its current situation?
PharmEasy’s rights issue received mixed reactions from experts and other investors.
Some experts have positive views and believe it to be a good opportunity to buy PharmEasy shares at a discounted price. They think the issue will help PharmEasy expand its reach and benefit from the growth of the online healthcare market in India.
However, other experts are sceptical of the issue. They believe discounted rights issues to be a sign that investors are losing confidence in the company’s future. They feel the discount to be too steep, and the company is not worth investing in at its current valuation.
Parting words
PharmEasy is in a difficult state right now, and it remains to see how the proposed rights issue will help it navigate the deep waters. While the funds raised from the issue can help repay the debt, how the company carries forward its operations with reduced valuation and trust from investors isn’t clear.
