Exclusive: PharmEasy plans rights issue at 90% discount to repay loan, survive

Existing shareholders TPG and Temasek are leading the rights issue, these people said, with Ranjan Pai, chairman of the Manipal group, expected to join the company board. Pai of Manipal Hospitals is likely to invest in the rights issue as well, sources familiar with the development said.

A right issue is conducted by a company to facilitate shareholders to purchase additional shares.

PharmEasy parent’s API Holdings, will issue new stock at Rs 5 per share in its rights issue, according to documents seen by ETtech.

At its peak, API Holdings had raised funds at Rs 50 per share value. The Mumbai-based epharmacy platform, which also owns diagnostics firm Thyrocare, was last valued at $5.6 billion in 2021.

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The rights issue will likely take place at a valuation of around $500-600 million, according to calculations made by ETtech. Adjusted for the dollar-rupee rate, PharmEasy’s previous valuation would be around $4.6 billion, a person close to the firm said.

ET reported on June 1 about PharmEasy breaching a key loan term set by Goldman Sachs as it failed to close a Rs 1,000 crore funding round.

“After the convent breach, the board and shareholders wanted the loan to be repaid to Goldman Sachs.. Also the price of the share had to be readjusted as it was freely available for Rs 20 in the grey market..,” said a person familiar with the developments who spoke on the condition of anonymity. The company had the option to go for an outright distress sale or opt for a rights issue which would help current investors buy more and bring down their cost of purchase, the person added.

PharmEasy, which withdrew its IPO plans last year, had seen its share price rally to even Rs 130 at one point before the markets turned sour on new-age startup stocks along with overall volatility in the public markets. ETtech has been reporting that PharmEasy shares had slipped to a price range of around Rs 20 in grey market signalling the readjustment in its valuation.

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If the rights issue goes through at the proposed pricing it would be one of the first major down rounds for a large internet firm through a new financing. A down round is when a privately-held firm picks up funds at a lower valuation compared to its previous round. While crossover funds and public market investors have been marking down the value of their shareholding in Indian tech startups, a down round via a fresh fundraise has yet to hit the domestic ecosystem, something that’s been ongoing in the US and European markets for a while.

To compensate for the massive value erosion, the investors and board have in-principle agreed to issue new employee stock options to the founders along with the company employees, people added.

PharmEasy’s cofounder and CEO Siddharth Shah is expected to address the company staff on Wednesday to explain the new funding round and how the stock options will be issued to employees.

Shah didn’t immediately respond to ET’s query on the matter on Wednesday. Emails sent to spokespersons at TPG, Temasek and Ranjan Pai didn’t elicit a response till the time of publishing this story.

Note to shareholders

In a note to investors, Shah briefed them about the firm’s April performance, as reported by ETtech in May. The epharmacy major logged its first monthly ebitda at Rs 14 crore in April 2023. For fiscal 2023, API Holdings is estimated to have closed the year with a net revenue of Rs 6,847.2 crore, according to investor presentations seen by ETtech. In FY22, the same was at Rs 6,466 crore.

“We achieved this phenomenal turn around on the back of a clear execution roadmap based on our three core principles,” Shah said in a note to investors on improving its path to profitability.

“From a peak cash requirement of over $500 million for acquisitions and cash flow breakeven at the time of filing the IPO in November 2021, the company has demonstrated that it can fulfill the same objective in around $110 million,” Shah’s note added that going ahead the company will improve margins as it pushes cross-selling across business verticals.