Why the Netmeds acquisition is significant for Reliance Industries

Reliance Retail’s acquisition of a majority stake in digital pharma marketplace Netmeds for ₹620 crore in cash is significant for a few reasons.

One, it seems part of a larger acquisitions-driven growth strategy unfolding in Reliance Industries’ (RIL) retail segment. RIL is also said to be in talks to acquire big stakes in retail major Future Retail, online furniture company Urban Ladder, online grocer Milkbasket and lingerie brand Zivame.

This approach seems similar to the ‘string of pearls’ strategy adopted by RIL in its digital business through a host of acquisitions such as Haptik, Embibe and Reverie to build a larger digital ecosystem.

Reliance Retail could also integrate acquisitions such as Netmeds with the digital commerce business to be driven by JioMart. These acquisitions could be preparing the ground for expansion, consolidation and eventual top-dollar stake sales in Reliance Retail — similar to the recent mega stake sales in Jio Platforms, the digital holding company set up by RIL. An IPO could follow at a later date.

Reliance Retail, as part of the overall consumer business, is already one of the key growth engines of RIL, and acquisitions such as Netmeds can add further heft.

Mega battleground

Two, a major battle is brewing in the online pharmacy market with Amazon recently launching ‘Amazon Pharmacy’ on a trial basis in Bengaluru. Reliance Retail may have stolen a march with the acquisition of Netmeds, an already known name in the online pharmacy space along with other players such as 1Mg, PharmEasy and Medlife. Reports suggest that a merger is being discussed between PharmEasy and Medlife, indicating the trend of consolidation and presence of big players in the segment.

The online pharmacy and digital health market is said to be have huge growth potential, catalysed further by the pandemic that has accelerated home deliveries of medicines. From about $1.2 billion in FY 20, the broader e-health market is expected to quadruple in the coming year and further to touch $16 billion over the next five years, say reports.

RIL, which plans to take on Amazon India and Flipkart in the e-commerce sweepstakes in India, seems to be positioning itself to capitalise on this potential growth with acquisitions such as that of Netmeds. It is pertinent that despite ongoing legal challenges and uncertainties to online pharmacies, the pushback by brick-and-mortar pharmacies, and the lack so far of a clear regulatory framework, Reliance Retail has gone ahead with the acquisition of Netmeds.

This suggests that RIL is optimistic about the rollout of an e-pharmacy policy, easing of legal challenges and the segment’s prospects in the years ahead. It helps that in the press release about the deal, Netmeds is said to be a ‘fully licensed’ e-pharma portal. The restriction on online pharmacies imposed in December 2019 seems to apply to unlicensed players.

Netmeds currently services over 20,000 pin codes across the country, giving consumers access to more than 70,000 prescription drugs for chronic and recurring ailments as well as enhanced lifestyle drugs and non-prescription goods for wellness, health, and personal care.

A ‘good’ deal

Third, the cash consideration of ₹620 crore (about $80 million) for Reliance Retail’s acquisition of an about 60 per cent stake in Vitalic and 100 per cent stake in its subsidiaries — Tresara Health, Netmeds Market Place and Dadha Pharma Distribution (collectively known as Netmeds) — seems a good deal. Recent reports had suggested that the Netmeds acquisition would happen at a valuation of about $120 million. According to reports, PharmEasy had been valued at $700 million in a funding round in November 2019 while Medlife was valued at $450 million in June 2019. But it could also be that the relatively lower valuation in the Netmeds deal is a function of the losses/low profit being posted by the acquired companies.

Reliance Retail will increase its equity stake in Vitalic through secondary purchase and primary investment to at least 80 per cent stake by April 2024, with an option to increase it to 100 per cent. The consideration for this hike in stake in the future is unclear now.