In PharmEasy’s acquisition of Thyrocare, two plus two equals five

Now, suddenly, the firm is valued at $4.1 billion ( ₹30,600 crore) in a new funding round.

Of course, it has made the bold move of acquiring a majority stake in listed diagnostics firm Thyrocare Technologies Ltd for $612 million. But PharmEasy’s own valuation of $1.8 billion plus the value of its stake in Thyrocare adds up to around $2.4 billion.

Evidently, investors see a far greater opportunity for the firm post the acquisition. The size of this opportunity is being valued nearly as much as PharmEasy’s entire value before the deal.

“The acquisition of Thyrocare by PharmEasy puts it into a different league than its traditional diagnostic peers. Companies have realized that online is the way forward and value lies in creating an integrated ecosystem by bringing doctors, diagnostic labs and pharmacies to patients and insurance companies to enable an end-to-end customer journey. This, we believe, opens the window for a higher valuation framework," said analysts at Edelweiss Securities Ltd.

But this higher valuation framework is likely to get captured in the private market, rather than in Thyrocare shares. And PharmEasy is using this to its advantage. It is raising capital at higher valuations on the back of the deal announcement, which will help fund the acquisition. Indeed, even Thyrocare’s exiting promoter is investing a third of his proceeds from the stake sale back into PharmEasy. Six other institutional investors will invest to fund the acquisition as well.

But while Thyrocare investors may not be able to participate in the huge value creation from the combine, they have little to complain about. The diagnostics firm has been valued at ₹1,300 per share, more than double its pre-covid highs.

What’s more, the deal values the firm at 14 times annual revenues, nearly double the valuation at which Metropolis Healthcare acquired a 100% stake in Hitech Diagnostic Centre earlier this year. While Hitech is a regional firm, and therefore demanded a relatively lower valuation, Throcare’s far higher valuation shows its investors haven’t really been short-changed. In fact, they too have benefited from PharmEasy’s ability to raise cheap equity and acquire growth.

Thyrocare’s valuations have lagged those of Dr Lal Path Labs largely because of its greater B2B focus. Some analysts believe its B2C share may rise after the deal.

“Thyrocare has largely been a B2B player and can leverage the customer base of PharmEasy. We expect the B2C segment of its business to increase faster through this integration and Thyrocare will benefit from higher volumes," said analysts at ICICI Securities Ltd in a note to clients. It remains to be seen how long Thyrocare remains listed as a separate entity for investors to participate in this growth.