Fairval

Notes on Indian equities, sectors and economy

Apollo group well on its way to creating a pharma distribution behemoth

Posted by fairval on January 21, 2018

Keimed Private Limited, the pharma distribution business aligned to Apollo Hospital group, ended FY17 with revenues of Rs 35B (~USD 540m). This makes it by far the largest distributor, in the totally fragmented pharma distribution market in India. No other distributor is even close to Rs 10B. Among the top distributor names in many cities, you will find subsidiaries of Keimed, gained through acquisitions.

The pharma distribution space in India is badly fragmented. In a domestic market size of around USD19B (Rs 1200B), Keimed’s market share is barely 3%. There are believed to be over 40,000 distributors in India, catering to 800,000 chemists (the retail market is fragmented too). If you look at these numbers, the average appears to be 20 chemists per distributor! In general, a distributor doing say USD 2m per annum is considered a reasonably successful distributor.

A fragmented distribution, fragmented retail and relative fragmented formulation side of the pharma business is an obvious recipe for chaotic state of affairs. The scenario is further complicated by that fact that, unlike in FMCG, where a company will have a dedicated distributor for a certain region, it is free-for-all in the pharma market. Any distributor can sell to any chemist (albeit within restrictions imposed by AIOCD, but that’s another story altogether). Also, a distributor will stock for multiple companies.

A chemist deals with anywhere between 30-50 distributors, maybe more. He will try to stock as little as possible, often just 2-3 days of stock. Order of say 2 strips are common (meaning, a distributor has to break open a case, and sell strip wise – complicating logistics and track and trace).

This fragmented and chaotic state of affairs has several negative side effects. Very few distributors or retails have any respectable IT. Too much time and effort is lost in inefficiencies. More pernicious are things like serious disregard for cold chain. Most distributors switch off their freezers when they go home. In several states, there is no electricity for half the day in any case. They can’t afford generators or other forms of power backup. This probably renders a large bunch of vaccines ineffective. Then, there is the temptation to sell spurious drugs. Around 30% of all drugs sold at retail pharma counters are believed to be spurious.

There is huge need for scale players in pharma distribution. Keimed started more than a decade ago, and has grown via a series of quietly made several acquisitions. For ex, it owns Meher Distributor, Mumbai’s largest distributor. Similarly, it owns Vardhman Pharma Distributor, Bangalore’s largest distributor. Its model is not to take 100%, many of its acquisitions are owned 51%, the original owners continue to run the show. In fact, within the pharma market also, most people don’t know about that these distributors are owned by Keimed. Keimed’s financials are quite good. ROCE/ROE are more than 20%. Given its size and growth trajectory, this is a company which could list in another 2-3 years.

Part of Keimed’s success could also be the ability to supply to hospital and pharmacies by the listed company – Apollo Health Enterprise Limited (AHEL). Apollo Group has a successful pharma retail business as well – Apollo Pharmacies. That is a part of the listed company Apollo Health Enterprise Limited (AHEL), it is division of AHEL. This business reported revenue of Rs 28B in FY17.

In FY17, Keimed reported Rs 15B of sales to AHEL, in its ‘related party’ disclosure. So around 43% of its revenues came from AHEL as a customer. That is a huge advantage for Keimed.

Keimed is not owned by AHEL however. The ownership is in personal names, of which Shobhana Kamineni (vice chairperson of AHEL) appears to own the larger share. Japanese company Mitsui now owns 20% of common equity, having invested in 2015.

 

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One Response to “Apollo group well on its way to creating a pharma distribution behemoth”

  1. […] Apollo group well on its way to creating a pharma distribution behemoth – Link here […]

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