Not Easy For PharmEasy: A Check-Mate Situation For Indian Unicorn

Online pharmacy startup PharmEasy is reportedly in dire straits, seeking emergency funds at a significantly reduced valuation to repay its loans. Founded in 2015, PharmEasy had managed to secure a staggering Rs 13,000 crore (USD 1.6 billion) in investments over the past eight years. However, the company's financial performance has eroded the value of these investments by nearly Rs 8,000 crore. The current funding round is seen by some as the end for PharmEasy's founders, thanks to the inclusion of an anti-dilutive clause.

Anti-dilutive Clause Spells "Sudden Death" for Founders

Co-founder of BharatPe, Ashneer Grover, called the funding round as a "sudden death" for the founders. Grover explained that the anti-dilutive clause would result in VC investors receiving additional shares at a nominal cost, reducing the holdings of the founders and employees. 

In a tweet, the former Shark Tank judge said, "Down Round + Anti-Dilutive Clause = Sudden Death (Jhatka) for the Founders!" He said that if this news about PharmEasy is correct, it's not a down round but the end.

Grover said that since the anti-dilutive clause will kick in, it means that "VC investors who invested in PharmEasy at more than Rs 5/share ever will get more shares so their holding cost comes to Rs 5/share".

"Simply even last round VC investors who invested at Rs 55/ share will get 10x more shares for free so their holding comes to Rs 5/share. Everyone but the founders and Employees," he posted.

Down Round + Anti Dilutive Clause = Sudden Death (Jhatka) for the Founders !

So if this news about Pharmeasy is correct - it’s not a down round - it’s the end. Because anti - dilutive clause will kick in, meaning VC investors who invested in @pharmeasyapp at more than ₹5/share…

— Ashneer Grover (@Ashneer_Grover) July 5, 2023

Consequently, the founders, along with their Employee Stock Ownership Plan (ESOP) holdings, are expected to retain a minute fraction of the company. Grover further remarked that the debt incurred in 2021 would likely be the most expensive capital ever raised by the founders.

According to Grover, founders along with ESOP holding will become 0.001 per cent or some similar fraction at the company.

"Debt taken in 2021 will turn out to be the most expensive capital raised by founders ever," he further said.

Can Manipal Group's Interest End PharmEasy's Funding Woes?

Some media reports indicate that PharmEasy is urgently seeking new funds to repay its loan from Goldman Sachs, which amounted to nearly USD 285 million, obtained during its acquisition of diagnostics solution provider Thyrocare for over USD 600 million. 

Manipal Group has expressed interest in investing approximately Rs 1,000 crore for an 18% stake in API Holdings, the parent company of PharmEasy and promoter of Thyrocare. Additionally, existing investors are expected to contribute approximately Rs 1,500 crore in a funding round led by Manipal Group.

The Blunder That PharmEasy Made

If one goes by what the experts says, PharmEasy's troubles began when it acquired Thyrocare, a publicly-listed diagnostics company, for an estimated Rs 4,500 crore in June 2021. To finance the transaction, the company secured a 5-year loan from Kotak Mahindra Bank at a high annual interest rate of 17-18%. Subsequently, PharmEasy obtained a more favorable Rs 2,280 crore loan from Goldman Sachs in August 2022 to repay the Kotak loan, with plans to go public and settle the debt through an IPO expected to raise approximately Rs 6,250 crore.

IPO Cancellation and Loan Breach 

However, the unfavourable market conditions for Indian startups in late 2022 led to the cancellation of PharmEasy's IPO plans. As a result, the company found itself unable to repay the Goldman Sachs loan. In June 2023, PharmEasy breached its loan covenant by failing to raise Rs 1,000 crore in equity. Under the terms of the agreement, Goldman Sachs could potentially take over PharmEasy or its diagnostics arm, Thyrocare, as all of API Holdings' assets had been used as security for the loan.

In its current predicament, PharmEasy is exploring a rights issue to raise emergency funds. However, reports suggest that the rights issue is likely to be valued at just USD 500-600 million, a staggering 90% decrease from the company's previous valuation of USD 5.6 billion. This substantial reduction also falls significantly below the USD 1.6 billion the company had raised from investors.

Impact on India's Startup Ecosystem: Downward Pressure on Valuations Looms

PharmEasy's plight not only impacts the company itself but also has wider implications for India's startup ecosystem. As one of the country's most valuable startups, the substantial devaluation could exert downward pressure on the valuations of numerous smaller startups and companies. Given the previous overinflation of valuations during the pandemic, this may signal the beginning of a series of down rounds for India's unicorn startups.