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PharmEasy’s $5.5 billion valuation was unwise but that acquisitions will save the company

PharmEasy has also drawn criticism for racking up a lot of debt. In order to settle an earlier loan from Kotak Mahindra Bank for the purchase of Thyrocare, it borrowed $285 million from Goldman Sachs.

Siddharth Shah, Dhaval Shah, Dharmil Sheth, Harsh Parekh, and Hardik Dedhia founded PharmEasy in 2015. The business has already raised $1.2 billion in capital.

The trend of the moment seems to be price reductions. It shouldn’t be shocking to learn that the valuation of another start-up has dropped amid concerns about corporate governance, layoffs, and other difficulties. However, there has been considerable uneasiness in the case of PharmEasy.

According to recent media reports, the medtech company was preparing to raise $292 million at a valuation reduction of 90%. This indicates that PharmEasy won’t simply drop off the unicorn table; instead, its valuation will plummet to $500–600 million, a significant decrease from its previous valuation of $5.5 billion at the height of the pandemic.

According to Gaurav Singhvi, who made an investment in the Mumbai-based company roughly two years ago, PharmEasy’s $5.5 billion value was unwise. Additionally, he stated to Business Today that “it will take the company 24 months to bounce back to normalcy.”

As a patient and long-term investor, Singhvi, who is also the co-founder of the investing platform WeFounder Circle, defends its down rounds and states, “I am not afraid. Entrepreneur investment is not for the impatient. The time it takes to reach profitable can range from four to seven years. That’s fine with us.

Siddharth Shah, Dhaval Shah, Dharmil Sheth, Harsh Parekh, and Hardik Dedhia founded PharmEasy in 2015. The business has already raised $1.2 billion in capital.

“PharmEasy is a fantastic business. I want to continue investing since the founders are aware of the ecosystem,” he says.

Future of Thyrocare in the spotlight

The parent firm of the medtech start-up, API Holdings, paid Rs 4,546 crore in June 2021 to purchase a 66.1 percent share in Thyrocare Technologies. At Rs. 1,300 per share, the interest in the diagnostic chain was purchased. In 2021, PharmEasy purchased rival MedLife.

Thyrocare won’t be hampered, experts say , and its performance will continue to be “robust.” Additionally, they think that PharmEasy’s acquisitions, such as Thyrocare, will rescue it from the current crisis it is experiencing.

“PharmEasy’s buy-outs, notably those of Thyrocare, have been successful. Thyrocare is currently the main source of income for PharmEasy, according to Singhvi.

The acquisition of Thyrocare, which contributed significantly to PharmEasy’s present valuation, occurred for about Rs 4,500 crore, according to Anirudh A. Damani, the founder of Artha Group.

He writes, “Given that PharmEasy reports itself to be on the path toward profitability, the drastic reduction in valuation does not necessarily reflect on Thyrocare’s performance, which we believe continues to be robust.”

It submitted its draft red herring prospectus to market watchdog Sebi in November 2021. At a $9 billion valuation, the company aimed to raise $780 million. Later on though, it abandoned those intentions, blaming the state of the market.

Returning to the valuations discussion, industry leaders concur that investors need to be questioned about exaggerated valuations. “If a company’s performance is stable, there is no obvious justification for its valuation to increase. According to Sahil Kanuga, Co-Head, International Disputes Resolution and Investigations Practice at Nishith Desai Associates, the board, including the venture capitalists, “needs to explain how the valuations have increased when the growth prospects have been negative.”

Unsafe business

PharmEasy has also attracted attention for racking up significant debt. To pay off an earlier loan it had accrued from Kotak Mahindra Bank to purchase Thyrocare, the online pharmacy company had borrowed $285 million from private equity firm Goldman Sachs. According to a story published by Economic Times last month, PharmEasy violated the loan covenant provisions by failing to raise equity.

A similar scenario played out for the large edtech company BYJU’S, which has recently made news for its difficulties in repaying its $1.2 billion Term Loan B. WhiteHat Jr. and Aakash Institute were just two of the many acquisitions the Bengaluru-based business made with the loan.

Damani claims that using debt to finance acquisitions is a very dangerous strategy. “It should be noted that almost 90% of purchases fail, raising the financial risk. This is particularly risky for cash-intensive enterprises with insufficient operating cash flow to pay back loans, the author claims.

Additionally, he claims that BYJU’S and PharmEasy are both businesses that are fundamentally in “existential crisis” and are not yet profitable. Additionally, they must provide assistance for the acquisitions.

Before making such important financial decisions, “companies must consider the potential risks and have a robust plan to manage debt,” he said.