Why We Invested — MedznMore
--
This is the sixth instalment of our “Why We Invested” series, where we will share our thought process in the investments we have made from Integra Partners Fund II, the problems they are addressing, and what they are doing about it. You can find the rest of the series here.
In June 2022, we gave a brief overview on the digital and fintech landscape in Pakistan, where we looked into 1) Pakistanis’ preference to use cash for transactions, 2) the large proportion of unbanked population and existing credit gap, and 3) the current fragmented payments processes available. In this instalment, we go a little deeper into why we invested in MedznMore, Pakistan’s leading B2B digital pharmacy and how it is playing a key role in the local healthcare market and onboarding local pharmacies into the digital financial ecosystem.
Fake Drugs
Imagine you wake up one morning with gastric flu, you frantically look through your first aid box for medication only to realise that you have none stocked up at home. In pain, you head over to your local pharmacy just down the street to get some medicine for your gastric flu. When you arrive at the pharmacy, you give a sigh of relief when you spot the medicine you need on the shelves. After popping a pill, you head back to bed, waiting for the medicine to take effect. To your horror, several hours later you wake up in excruciating pain and need to be rushed to the hospital. Turns out the pill you bought was a counterfeit one and not only did it not cure your gastric flu, it might have worsened your condition altogether!
While the above story might sound like a scene ripped out from a soap opera, millions of Pakistanis face the same risk daily. The World Health Organization estimates that as many as one million people die every year worldwide from ingesting counterfeit medications. Frequent reports show Pakistan’s bustling grey markets filled with wholesalers hawking counterfeit medicine from painkillers to antibiotics, with some even concocting the pills or syrup on the spot.
In Pakistan, medicine licensing, manufacturing, registration, pricing, imports and exports are supervised by the federal government. Distribution and sales are regulated by the respective provincial governments. Pakistan has four provinces, a capital territory, and federally administered tribal areas. Pharmacies are regulated by the Drug Regulatory Authority of Pakistan (“DRAP”) under the Pharmacy Act of 1967. One of the functions of the DRAP is quality control and detection of counterfeit medicines. From 2013 to 2017, 89 market authorizations were suspended and 18 companies lost their licence to operate.
Medical prices are heavily controlled by regulators in Pakistan. Before the establishment of the DRAP, price moratoriums were enforced between 2001 to 2013 in a bid to address the entwined issues of medicine affordability and accessibility. With the price ceilings in place, it became non-viable for many pharmaceutical companies to market their products in Pakistan — leading to stock-outs of essential medicines. In 2015, the DRAP introduced the Drug Pricing Policy where annual increases in medicine prices were linked to the Consumer Price Index of Pakistan. This supply shock, coupled with demand driven from the grey market fuels the counterfeit market. As a result, despite the efforts of the country, the share of counterfeit medicines sold remains high, with estimates of total medicines sold being counterfeits ranging from 10–50%.
MedznMore estimates Pakistan’s counterfeit pharmaceutical sector to be worth approximately $1.4b annually — a problem that has plagued the country’s 215m consumers and 700 pharmaceuticals firms and 50,000 pharmacies.
Digitising and Financing Pharmacies
Retail pharmacies in Pakistan fall within a wide spectrum — with some using excel sheets and others incorporating basic ERP and inventory management tools to track inventory and drug sales. Regardless, most pharmacies are underbanked and underfinanced. What then, does financial inclusion look like for these pharmacies? Based on our observations from adjacent markets, we categorise the inclusion story into the following three phases.
Phase 1 — Digitization: To begin, digitising inventory management and the sales and payment processes is the first crucial step. This allows for greater efficiency in processes such as ordering new inventory and reconciling sales and payment data. Integrations into POS systems, suppliers, accounting systems, and consumer rewards programs become possible. More importantly this step allows for accurate and verifiable data to be collected and analysed, allowing for further value added offerings such as sales forecasting and credit scoring.
This is where MedznMore steps in to provide retail pharmacies with an end-to-end ERP system, tailored to their needs with the end goal of helping them get banked.
Phase 2 — Solving for Working Capital Needs: Retail pharmacies are generally cash-strapped and struggle with working capital needs. In Pakistan, pharmacies are forced by drug distributors to purchase at minimum a week’s worth of supply at a time. Multiply this by the large SKUs required to run a pharmacy and we can see how the lack of working capital becomes an issue. Larger pharmacy chains that are banked can tap on credit lines to bulk-buy inventory. Smaller pharmacies on the other hand end up purchasing 3–4 days of inventory and risk stocking out in the later half of the week, or use cash flow from the first half of the week to purchase the inventory from the grey market for the rest of the week. This is a huge driver of grey market counterfeit drugs entering the licenced pharmacy ecosystem.
In the absence of credit-score, or alternative data required for working capital financing, the industry needed a creative solution to provide pharmacies with working capital. MedznMore plays this role by bulk-breaking weekly inventory sales into daily inventory sales, supplying more frequently in smaller quantities to retail pharmacies. On the ground experience shows that pharmacies using this service have a direct correlation with reduced trips to the grey market, resulting in overall lower demand for drugs from unofficial sources and counterfeit drugs.
Phase 3 — Data for Credit Provisioning: Once a pharmacy has been digitised, and intra-week sales have normalised, data can be collected and processed to help them build credit scores using alternative data such as point-of-sale data or forecasted sales. This puts the pharmacies on the road to becoming a banked customer, with access to credit for not just working capital but other solutions such as revenue-based financing and expansion capital.
Using authenticated transaction data, MedznMore is now working with banks and programs from the State Bank of Pakistan to provide loans to credit-worthy pharmacies which were previously unbankable.
Population Health Data
We have written extensively about how data is the new oil — specifically in healthcare (read more here). This extends beyond individual healthcare data to population health data. Having nationwide visibility on district-level drug purchases allows medical bodies, drug manufacturers, and regulators to monitor potential communicable diseases outbreaks, and manage them using real time information. For instance, well documented studies show that these data serve as an useful tool for surveillance of gastrointestinal and respiratory disease, and over-the-counter drugs having potential for early outbreak detection. Time-series data is also valuable to multiple stakeholders including the governments assessing effectiveness of health intervention and population health behavioural, pharmaceutical firms monitoring the evolution of drug immunity, pricing and effectiveness of their drugs.
By digitizing siloed pharmacies across the nation, MedznMore is well placed to aggregate time-series drug data on a granular level, putting them in a prime position to solve other population-wide issues in the future.
Looking Ahead
The company has grown revenue over forty-times in 2022, despite the challenging macroeconomic environment in Pakistan. This validates MedznMore’s sole mission to provide easy access to healthcare services in pharmerging countries, starting from Pakistan. By sourcing authentic pharmaceuticals directly from manufacturers to on-demand delivery, and bringing pharmacies into the digital and financial ecosystem, we believe MedznMore can catalyse the industry in the coming decade.
As venture investors, we seek to find the companies that solve the biggest problems in the largest markets with the ability to generate the greatest outcomes, both from a financial and impact perspective. Despite the increased discount rate that reflects the country’s macroeconomic risks, MedznMore’s growth has outpaced its risk profile and we continue to be positive on the risk-return profile of the company. We are impressed with the exceptional execution capabilities of the management team to fulfil this mission and we are proud to partner with MedznMore to embark on this journey together.
Written by Joshia Kwa, Principal at Integra Partners. Illustrated by Theodore Ng, Analyst at Integra Partners.
