As fears of long-term economic stagnation increase and as interest rates continue to rise, defensive growth industries should be on investors' radars. The sector being discussed today is the emerging and fast-growing online pharmacy industry. The online pharmacy industry is a compelling defensive growth industry because its recession resilient, meaning revenues don’t fluctuate heavily with the business cycle. Additionally, with the dire need for a more efficient healthcare system, online pharmacies have fertile ground for future growth as it could potentially fill some of the holes in the Canadian healthcare system. Today, we uncover the current competitive landscape for the online pharmacy market and what investors should look for in an online pharmacy’s business strategy.
The Canadian pharmacy market is largely composed of brick-and-mortar players. Unlike the United States, since Canada offers a publicly funded healthcare system, the pharmacies in Canada which operate on a direct-to-consumer basis are heavily commoditized offering little to no differentiation. On the other hand, the pharmacies that compete utilizing a differentiation strategy are ones that primarily target employers, health plans, and insurers on a B2B basis, these customers desire enhanced or tailored services catering to their members. Currently, online pharmacy obtains a very small portion of the pharmacy market. With more and more consumption being done online, it is inevitable that more pharmacy delivery will be done online. This is why the global online pharmacy market is expected to grow by over 17% per annum until 2028.
Although the industry growth appears very promising, there are multiple stepping stones online pharmacies must achieve before they can begin to gain market share from their brick-and-mortar counterparts. To determine whether an online pharmacy’s strategy will be successful, we must evaluate the path to maximizing the value proposition and the path to profitability. We thank Karim Nassar, a pioneer in the HealthTech industry and former founder of a publicly traded HealthTech company, for helping us unveil these two paths.
Path to Value Proposition
The first factor to look at in the online pharmacy space is the path to maximizing the underlying value proposition. To assume that consumers would adopt online pharmacies as they would ride-sharing or discretionary e-commerce would be an intellectually lazy conclusion. Delivery of drugs to someone only solves part of a pharmacy’s function.
“I think the first mistake that people make with assessing an online pharmacy is by comparing them to Uber” – Karim Nassar
Pharmacy solutions are much more interactive, hands-on, and critical to a person’s life than other e-commerce businesses. For this reason, getting a consumer to switch from a brick-and-mortar pharmacy to an online one is significantly more difficult and costly. To begin with, a company needs to build an adequate amount of trust between them and their customer. A customer of a pharmacy must trust that not only will they get the drug that they need, but that they can easily access their pharmacist to inquire about how to take the drug, allergies, and side effects. Secondly, the pharmacy needs the logistics infrastructure to be able to deliver the drugs quickly since that is the main reason for proceeding with an online pharmacy over a brick-and-mortar one. With that being said, an online pharmacy’s primary focus should be to establish trust and reputability with consumers, this would be achieved by serving the essential roles of a traditional pharmacy with high quality and quick delivery. Once the foundation is built properly, online pharmacies may begin to expand into more holistic healthcare companies.
“The path to value proposition begins with consumers trusting the provider” – Karim Nassar
Path to Profitability
The next part of assessing an online pharmacy’s strategy is determining their path to generate a sufficient return on investment (ROI). Pharmacies have 3 sources of revenue: markups, dispensing fees, and professional allowances. The main way online pharmacies will be able to achieve profitability in the future is by obtaining volume, which can be done by selling B2B. Additionally, pharmacies need a large amount of volume to support their logistics infrastructure and reduce their operating leverage.
“Volume supports logistical density” – Karim Nassar
If an online pharmacy can achieve the level of volume needed to support its bottom line, while ensuring patient care is being offered at the highest quality, that company serves the greatest chance of sustaining positive free cash flow.
Due to online pharmacies being in the early growth phase of the industry life cycle, valuing a HealthTech or online pharmacy using traditional discount cashflow models or relative valuation analysis remains ineffective. For an investor to determine whether they can achieve long-term shareholder value through investing in an online pharmacy, investors must assess the viability of the business’s strategy. From our research, we think that if a firm can offer high-quality care, accessible pharmacists, and quick delivery, it would be a good starting point for companies to obtain a large enough clientele to support the bottom line. Overall, online pharmacies are worth a look for Canadian investors because so long as pharmacies remain a form of primary care, they will always be in high demand no matter the stage of the business cycle. Furthermore, the value proposition that online pharmacies can provide through quick medication delivery from the click of your phone bridges another gap as we enter the digital economy. To conclude this brief write-up, however, we strongly believe that investors should not be comparing the online pharmacy industry to the ride-sharing and food delivery industry.