India: Online pharmacies see muted investor interest over regulatory uncertainties

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After a disappointing year in which investments in online pharmacies fell by half in an atmosphere of regulatory uncertainties, companies and investors are hoping for a better year in 2017, betting on the country’s large market size.

According to Tracxn, an online data aggregator for start-ups, online pharmacies in India received a total funding of $28.45 million in 2016, compared with $62.20 million a year ago. Overall funding in health tech was also down at $92.35 million in 2016 from $321.85 million in 2015.

In a December 2015 notification, the Drugs Controller General of India (DCGI) directed state authorities to put a “strict vigil” on online sales of medicines and take action against e-pharmacies that violate the provisions of the Drug and Cosmetics Act, 1940. The central drug regulator added the rules of the Act do not distinguish between conventional and online sale of drugs and, hence, the provisions of the Act have to be complied with in both cases.

Consequently, in May 2016, there was a crackdown on five online portals by state regulators, creating confusion on whether online sales of medicines were permitted under the Act, making investors wary.

“The Indian pharmacy market is about $15 billion and online sales are a very small component. So it is but natural that this space will go through multiple disruptions. Once the laws to regulate e-pharmacies are clear, we are expecting the leading companies to have a multifold jump in market share and raise larger amounts of funding to do the same. So, 2017 can be quite bright for these companies,” said Patni Healthcare director Apoorva Patni, who has invested in seven healthcare start-ups since 2015 through his Currae HealthTech Fund.

The central drug authority in early 2016 formed a sub-committee headed by Harshadeep Kamble, commissioner of Maharashtra Food and Drug Administration, to look into issues related to online pharmacies. The panel submitted its report to the health ministry last month. “There is potential in this business to grow and become a dominant part of the pharmacy retail opportunity. If government comes out with clear guidelines, 2017 could be a better year for online pharmacies,” said Vishal Bali, co-founder and chairman of Medwell Ventures Pvt. Ltd, a firm providing home healthcare services. He is also a senior adviser and Asia head for healthcare at private equity firm TPG Growth.

Currently, there are about 10-15 start-ups in the online pharmacies segment and at least seven-to-eight have got funding—the prominent being Netmeds, 1mg, Pharmeasy and mChemist.

The other factor behind the lower investments was that some online pharmacies had already secured primary funding in 2015, three consultants for investments in healthcare sector that Mint spoke to said, adding that there could be increased activity this year as these firms may go for series B and series C funding.

“I think till the middle of last year, there was this regulatory overhang on the sector; but that is now reasonably clear. Given that almost all top-grade investors have put money behind some online pharmacy or the other, I feel investor interest is very positive,” said Prashant Tandon, chief executive officer and founder of online pharmacy 1mg.

Government officials have said the Drugs and Cosmetics Act does not mention the channel of sales; so, whether online or offline, as long as the firm is compliant, there is no problem, Tandon added.

Pradeep Dadha, chief executive officer and founder of Netmeds Marketplace Ltd, agreed, saying the government’s stance on e-pharmacies has been positive in the past few months, which is likely to boost investors’ interest in the sector.

J.P. Nadda, health and family welfare minister, told Lok Sabha in November that the government recognizes the possible benefits of e-pharmacy, the potential for its misuse, and the deficiencies in the existing brick-and-mortar model of dispensing medicines and that currently online pharmacy continues to be regulated as per the provisions of the Drug and Cosmetics Rules.

According to a news report last week by Pharmabiz, DCGI is reviewing a study that will allow optimum use of innovation and technology in online pharmacy by preparing a registry of legitimate online firms, which will be governed under a centralized portal as per the provisions of the law.

Online pharmacy is currently governed by Information Technology Act, 2000, and the Drugs and Cosmetics Act, 1940.

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This story was first published on Livemint