HEALTHCARE: Online Pharmacies – Just a click away!

Launched just a few years ago in India, E-Pharmacies have grown from strength-to strength and have re-hauled the drug-dispensing business in the country. Through this note, we take a deep dive into the Indian pharmaceutical network to understand how online pharmacies have reshaped India’s retail medicine-distribution landscape.

–      The Indian pharma trade channel is transforming, thanks to the advent of online pharmacies and consolidation of distribution network, which we believe is a win-win combination for manufacturers and patients. Currently, E-Pharmacies have ~17m registered customers; of this, ~3.8m are already active and making purchases. The number is estimated to grow exponentially in the coming years.

–      Online pharmacies provide real-time detailed data, which will reduce opaqueness in the current system. Data analytics helps manufacturers to forecast demand more accurately and to understand target customers better.

–      Further, even distributor consolidation has significant benefits, such as (a) economies of scale driving margin improvement of 80-100bp, and (b) reduction of working capital days by at least 10-12 days.

–      While this may not alter the demand perspective, it would enable profitability improvement for manufacturers due to improving efficiency in supply-chain management.

Digital India – To sharply improve tracking system for manufacturers

The current system of analyzing revenue uses secondary sales data and information relayed by medical representatives (MRs). For instance, 50-60% of sales happening in the last week of the month and frequency of sales force visits of ~1-3/month per stockist creates difficulty in differentiating demand between doctor promotions and sales push. Real-time detailed data – in terms of doctors prescribing brands, retail outlets selling the brand and re-ordering by customers – would not only give a strong boost to distributors but would also enhance the quality of demand analysis and better MR productivity.

Chronic business shifting toward online pharmacies

Unlike acute diseases, demand for chronic diseases is not ad-hoc as requirements are not time sensitive; they can be pre-planned. Further, according to estimates, the number of patients falling under the chronic category is set to expand, thanks to changing lifestyles and increasing share of the 25-69 years age category (from ~50% in 2015 to an estimated ~57% by 2035). Therefore, online pharmacies have a strong advantage while dealing with chronic disease patients by way of home deliveries v/s their offline counterparts. However, offline pharmacies are expected to maintain their ground when it comes to delivering medicines for time-sensitive diseases.

Consolidation of distributors to reduce inventory days

Our interaction with industry experts indicates that inventory days are higher for small distributors (annual sales ~INR200-300m). Small distributors’ inventory days typically fall between 35-40 days v/s large distributors’ (+INR1b) 20-25 days – this can be attributed to the quantum of business and efficiency of distributors. Also, small distributors have to provide a higher credit period to retailers to gain greater wallet share despite limited product offerings. Further, this effect is intense in metro cities compared to non-metro cities due to steep competition. We believe that distributor consolidation would not only improve working capital management but would also expand product portfolio, leading to better negotiating terms with manufacturers.

Pharma Trade channel less efficient than FMCG trade channel

The parameters like supply-chain cost (as % of sales) and inventory days of distributors are higher in the case of the pharma trade channel (~95days) v/s that of the FMCG trade channel (~70 days). Also, the process of estimating demand and planning supplies is superior in case of FMCGs. While inherent nature of the business in each category (Pharma/FMCG) may not allow the exact matching on all parameters, there is enough scope to optimize the pharma trade channel to build a better ecosystem.

Profitability to further improve for pharma producers over medium term

While demand parameters remain fairly stable, further improvement in efficiency of medicine distribution, better mapping of doctors (key influencers) prescribing medicines as well as regional analysis would enable optimum utilization of resources (MRs/manufacturing operation efficiency). Subsequently, it would drive profitability for manufacturers over the medium term as more number of patients access online pharmacies.

(Report By- Motilal Oswal Insitutional Equities)