Toss a strand of hair and trap a mountain!
If you gain you gain a mountain. Or else you lose just a strand of hair.
The legend that is Dr. Velumani
The journey begins in a small village in Tamil Nadu. A boy is incentivized to go to the government school driven by the mid-day meal scheme. Back home his mother supports a family of 5 children from the income she makes from her two buffaloes. What the young boy lacked in resources however, he more than made up for in confidence and drive. At the age of 20, he came to Bombay (now Mumbai), got a job at BARC, got his PhD while working with the firm, and left the firm after 15 years of service to begin his own business.
Today, that small boy from Tamil Nadu got a 4,500cr exit! As Dr. Velumani says, there are two types of people in the world - the restless and KPM (Khaya, piya, mar gaya). And boy does it pay to be restless!
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PharmEasy x Thyrocare
PharmEasy has today is a well-entrenched pharma delivery application, with more than 5 million customers across 1,200 Indian cities. They operate on a simple disintermediation model - sourcing directly from the Pharma player, and passing the gains to the customer. In a market where the middlemen eat upto 40%, this can be a very attractive business, albeit a commoditized one.
Like with any commoditized business therefore - the game is in scale. As the business grows, it can drive better terms with its Pharma suppliers, use its warehousing and delivery more efficiently, while maintaining a better value prop for customers, maintaining a virtuous cycle. This is a brutal cash burning game however, especially when you have well backed competitors like 1Mg (Tata) & NetMeds (Reliance).
So what do you do - go back to the drawing board & strengthen your moats. One great advantage an e-pharmacy has vs a regular pharmacy is that they have your purchases backed against your customer profile. Side-stepping any data/oil cliches here, this data can be extremely useful - especially for chronic diseases like diabetes - where you could cross-sell glucose diagnostics tests. This helps you get more value from every customer while also making your relationship with the customer more sticky, both of which help increase the value you can generate from that customer over their relationship with you.
For Thyrocare - the incremental channel - as a preferred diagnostic partner, gets higher volumes, and better utilization levels, driving up margins! A win-win partnership all around!
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What does it mean for Diagnostics!
Before we discuss that question, let us see how the market is structured, who the large players are, and how they stack up. The market is still largely unorganized - dominating with a ~48% market share, followed by hospitals at 37%. Regional players get 9%, with the big national players having just 6%
Four large national players Dr Lal Path Labs, Metropolis, Thyrocare & SRL, and a few good regional players - Quest, Mendall, Suraksha and Suburban are expected to gain share from the smaller unorganized basket, driven by a greater variety and quality of tests, and wider network and digital presence.
The sector was an investor favourite even before the pandemic, playing on secular themes of a more affluent health conscious population, chronic lifestyle disease growth, preventive testing, and shift to organized.
Interestingly, E-pharma platforms have superior data on just the customer set diagnostic chains have been vying for (affluent/emerging affluent) with a focus on preventative healthcare and chronic disease patients - both of whom bring in the much coveted recurring revenue.
The e-pharmacy market will most likely move towards a 3-4 player market (Reliance, Tata, Amazon, PharmEasy) that will attempt to strengthen its moats by becoming a one stop shop. Like hospital drove their captive customers to their own pharmacies and diagnostic centers, these firms will also be driven in that direction - pushing up volumes and down costs in the diagnostic chain they partner with, thereby increasing the competitiveness of their platform. The higher value they can capture from each customer due to the diagnostics and healthcare equipment sales, will drive up how much they can spend on acquiring a customer, providing further impetus to their growth.
For the short-medium term, this will not be too large a shock for the diagnostic chains - just an incremental channel from which they source their tests. But slowly and surely as these channels grow larger, they will demand higher margins - or worse have preferential relationships with certain diagnostic chains. On the bright side, this helps open up the market - and increase both the penetration and frequency of diagnostics use.
We will have to wait and watch how the diagnostics chain play this one. Consolidation (buying out smaller regional chains) to build scale will be a preferred route. While the backend infra of these players is phenomenal - they will have to spend more effort on building a smoother customer facing side. And they’ll want to strengthen the Patient service center/pick up point infrastructure further.
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