India’s online pharmacy sector is on course to reduce operating losses¹ to below 10% next fiscal from over 30% in fiscal 2023, by sharpening focus on high-margin product segments and operational efficiencies.

Cash losses, though on the decline, will continue for the next two fiscals due to high operational costs and intense competition.

While the sector will see steady revenue growth, securing timely equity funding will be essential for two key reasons: one, to secure the capital needed to maximise growth opportunities arising from under-penetration; and two, to effectively manage cash burn while supporting credit profiles during the expansion phase.

A Crisil Ratings analysis of e-pharmacies accounting for over 80% of the online segment indicates as much.

Revenue of India's retail pharmacy sector is estimated at ~Rs 2.4 lakh crore last fiscal. The unorganised sector dominates with ~85% share, while the organised ones, including e-pharmacies, account for ~15%.

Compared with 22-25% in developed countries, online pharmacies comprise only 3-5% of the Indian market. The under-penetration indicates its strong growth potential.

Says Poonam Upadhyay, Director, Crisil Ratings, “E-pharmacies are eyeing sustainable growth by diversifying into high-margin segments such as wellness products² and medical equipments, which are expected to comprise ~40% of sales next fiscal, up from about 30% now and under 15% in fiscal 2023. Players are also moving away from aggressive discounting to reduce key operating costs (discounting, delivery, distribution and employee - or DDDE) from around 65% in fiscal 2023 to below 35% next fiscal, which should help narrow losses and accelerate the move to profitability.”

The e-pharmacy sector is in the early growth stage and faces significant operating losses due to high initial investments in technology, large inventory and supply chain inefficiencies. Attracting customers in a fragmented market also entails substantial spending on marketing and discounts, leading to high customer acquisition cost.

Given the focus on profitable growth, e-pharmacies expect revenue growth of 9-11% over this and next fiscal, following nearly doubling of revenues during the Covid-19 pandemic between fiscals 2020 and 2023. This aligns with retail pharmacy trends and is driven by factors such as online ordering convenience, increased internet access, digital adoption, and steady expansion across Tier 1 and Tier 2 cities.

Says Naren Kartic. K, Associate Director, Crisil Ratings, “Ongoing operating losses highlight the need for continued support from promoters, private equity investors and venture capitalists, as bank funding will be limited to working capital. As e-pharmacies expand operations and aim to reduce losses, they will still incur cash losses and likely require additional equity funds of ~Rs 2,300 crore over this and next fiscals, following over Rs 9,200 crore already secured since fiscal 2020.”

Securing bank loans at attractive interest rates is challenging due to evolving regulations³ and high customer acquisition costs, affecting profitability. However, banks are seen providing working capital finance to e-pharmacies, especially those with strong promoter support.

All said, inadequacy in funding support amid ongoing cash losses, or regulatory uncertainties and potential changes in government guidelines may impact e-pharmacy operations and will require close monitoring.

¹ Operating losses at the Ebitda level, where Ebitda is earnings before interest, taxes, depreciation and amortisation
² Wellness products refer to various health, dietary and fitness supplements
³ The Ministry of Health and Family Welfare published draft Rules on 28th August 2018 to amend the Drugs and Cosmetics Rules, 1945, aiming to regulate the online sale of medicines