Data, Distribution and Discounts: E-pharmacies and Pharma

Cipla Medlife (2)

Pharma and healthcare organizations need to constantly revisit their company culture and its agility to respond to policy changes. Enabling culture to embrace such change is technology and innovation. Industry, needs to invest in and work alongside enterprising startups in order to yield strategic dividends.

One such collaboration was in the news today. Although speculative, it is expected that Cipla is in advanced talks to invest Rs. 150-170 crore into e-pharmacy chain, Medlife. A few months ago, Cipla had invested in digital therapeutics start up, Wellthy.

I find the healthcare industry to be uniquely poised at an inflection point; it is important that positive disruptions are enabled by the multiple stakeholders across the ecosystem. It is because of the potential for positive disruption that I find the possible Cipla-Medlife deal, very interesting.

One part of the pharma value-chain that is rife with inefficiencies is the distribution. Factory to pharmacy is not an easy journey for medicines and is thus ripe for disruption. New types of companies can enter this part of the market because the barrier to entry is lower. One such player on the block is the e-pharmacy.

A very defining characteristic of online businesses (e-tailers) has been the discounting structure. So much so that even giants like Amazon aren’t able to avoid it. E-pharmacies are therefore a part of the same trend.

E-pharmacies face a myriad of challenges today such as consumer inertia towards new technology, hyper-competition from a unionized drug distribution organization which holds/almost holds a monopoly, and unusual regulatory challenges.

To overcome all of this, they need to massively sway public opinion on convenience, utility and advantage of purchasing drugs online. Discounts are a proven way to convince customers to choose online purchase over traditional brick-and-mortar pharmacies.

This is made easier by the fact that the AIOCD had disallowed its members from offering discounts in a bid to undercut competitors in the neighbourhood. Since e-pharmacies aren’t members, they need not follow this rule.

E-pharmacies are consolidated large chains. Netmeds for example has 14 fulfillment centres covering 900 cities, stocking >50,000 SKUs and plans to add 12 more by 2020 while 1mg serves 800 cities and 12,000 pin codes. Medlife claims to do about 20,000 deliveries per day across 29 states in 2000 cities. Imagine the last-mile penetration that Cipla gets due to this tie-up.

The sheer size of e-pharmacies gives them both bargaining power to get better prices from suppliers as well as pass on huge discounts to their customers. These companies also have technology at their core which they deploy very well to address the glaring inefficiencies in the distribution system today.

By reducing these inefficiencies they bring down working capital requirement, inventory costs etc which they pass onto their customers as discounts. This is of course coupled with the facts that they are flush with VC money and are not publicly listed hence do not face the pressure to show profit.

Their key metric is customer acquisition and each company competes with the other on that. The philosophy of the e-pharmacy model is totally antithetical to that of the regular pharmacies who simply cannot match them either on discounts or on efficiency.

This is what Cipla despite its highly sophisticated distribution network and massive product range is likely to gain from this deal – more data, better distribution and steeper discounts. One expects many more pharma companies to tie-up in similar deals as technology continues to disrupts its value chain.

Leave a Reply

Fill in your details below or click an icon to log in: Logo

You are commenting using your account. Log Out /  Change )

Google photo

You are commenting using your Google account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s