Why India’s e-pharmacies are still awaiting a policy prescription

The dozen-odd startups that constitute India’s nascent e-pharmacy sector currently operate in a regulatory grey area and it is unlikely they will be able to step out of it anytime soon.

The anticipated amendments to the Drugs and Cosmetics Rules, 1945 — dubbed the draft E-Pharmacy Rules — will have to wait till the country’s general elections are done and dusted in May, a top government official who is part of the consultation process told TechCircle.

“The draft E-Pharmacy Rules are stuck in the process of the Centre’s response to the courts,” the official said on the condition of anonymity. “The matter is sub-judice and it will be resolved only after the elections.”

This, after the government missed the Madras High Court’s deadline of January 31 to notify the amendments that were drafted more than six months ago.

The delay leaves e-pharmacy startups vulnerable to allegations, chiefly from brick-and-mortar pharmacies, that online platforms flout the existing rules governing the overall retail pharmacy sector. 

Some of the key players in the space include Bengaluru-based Practo and Medlife, Mumbai-based PharmEasy, Chennai-based Netmeds and Gurugram-based 1mg. 

These players are backed by multiple venture capital and private equity investors such as Sequoia Capital, Matrix Partners, Fundamentum Advisors, Eight Roads Ventures, Daun Penh Cambodia Group, Sistema Asia Fund, Tanncam Investment, OrbiMed, Maverick Capital and HBM Healthcare Investments. Such institutional investors have nearly $300 million riding on the e-pharmacy business and future capital inflows will depend on the regulatory environment.

E-pharmacies accounted for a minuscule 1% of the $33 billion retail market for pharmaceutical products (as on December 2017) according to India Brand Equity Foundation. But this market is currently growing at a compounded annual rate of 22.4%. And as consumer preferences change, e-pharmacies stand to grow their market share significantly.

How the courts view e-pharmacies

The urgency to notify the draft E-Pharmacy Rules has increased of late owing to a series of developments that have played out — primarily in the country’s courts — over the past four months. Here’s a snapshot:

October 31, 2018: The Madras High Court, acting on a plea filed by the Tamil Nadu Chemist and Druggists Association (TNCDA), barred the online sale of medicines till November 9. The TNCDA represents nearly 30,000 offline retailers and wholesalers of pharmaceutical products. The association argued that since the draft E-Pharmacy Rules had not been notified, e-pharmacies were operating in violation of the law.

December 12, 2018:  The Delhi High Court prohibited e-pharmacies from selling medicines online without a valid licence across the country. The court directed the Centre and Delhi’s ruling Aam Aadmi Party to implement the order immediately.

December 17, 2018: In a major setback to e-pharmacies, the Madras High Court enforced a blanket ban on the sale of online medicines pending clarity on the regulations in the sector.

December 20, 2018: A Madras High Court division bench reserved its verdict on the plea for a stay on the single judge’s order banning online sale of medicines. It ruled that the earlier ban should not come into force until it delivered its final orders.

January 2, 2019: E-pharmacies received a boost as the Madras High Court stayed an order banning the sale of medicines online. Vacating the earlier single-judge bench order, a two-member bench said medicines have been sold online for a long time and a sudden shut down of the practice would create “grave hardship, inconvenience and health issues to patients/persons who order medicines through online platforms”.

Are the concerns of offline retailers and wholesalers legitimate?

Offline pharmacies, who stand to be the most affected if and when the draft E-Pharmacy Rules are notified, argue that e-pharmacies increase the risk of drug abuse while posing a serious threat to their business. 

In their petition, offline pharmacies allege that e-pharmacies have flouted Rules 65 and 97 of the Drugs and Cosmetics Act, 1940, by selling prescription drugs and controlled substances without valid prescriptions.

Additionally, they allege that e-pharmacies offer bulk discounts to users with the difference in pricing sometimes being as high 20%. According to them, a slew of risk factors such as counterfeit drugs, lack of adequate information about drugs among buyers, and the misuse of medical, financial and electronic information of patients need to be addressed before regulating the online sale of drugs.

E-pharmacies have rejected these allegations. It is important to understand here that there are two kinds of e-pharmacy models prevalent in the market. Players such as Netmeds and Myra follow an inventory-based model, which means that they stock medicines at their own warehouses and sell them online. Their contention is that the risk of spurious drugs doesn’t arise as they purchase drugs from registered distributors and manufacturers who also supply stock to offline pharmacies.

Further, such e-pharmacies have also obtained a retail licence (under the Drugs and Cosmetics Act, 1940) from the respective state food and drugs authority where they set up their warehouses. Marketplaces such as 1mg and PharmEasy, on the other hand, argue that they do not need a licence as these platforms are just intermediaries which do not stock inventory, but source products from licensed pharmacies.

Why do e-pharmacies operate in a regulatory grey area?

The prevailing regulatory regime has much to do with the impasse that currently faces e-pharmacies.

The last established legal framework around medicine sales — Drugs and Cosmetics Act, 1940 and Drugs and Cosmetics Rules, 1945 – dates back to much before the internet era. After e-pharmacy startups began mushrooming across the country in the early part of the current decade, the Office of Drugs Controller General (India) issued a notification in late-2015 clarifying that the Drugs and Cosmetics Rules, 1945, which regulate the sale and distribution of drugs in India, do not distinguish between the conventional (offline) sale and internet sale of drugs. Therefore, e-pharmacy companies have to comply with the provisions of the Drugs and Cosmetics Act, 1940 and the Drugs and Cosmetics Rules, 1945 framed for offline stores.

“Under the prevailing legal framework, the licensing regime is broadly distributed between the central government and state governments,” said Sharanya Ranga, partner at law firm Advaya Legal. “The licensing authority appointed by the State Government (i.e., the State Drug Controlling Authority) issues licences relating to sale, stock, exhibit or offer for sale or distribution of drugs that are specified by the law. The Central Government through the Central Drugs Standard Control Organization (CDSCO) issues licenses for the import of drugs and cosmetics.” 

Therefore, even with offline pharmacist associations alleging that more than 3,500 websites are involved in online sale of medicines, there is no specific law regulating the online sale of medicines in India at present. In the absence of specific laws regarding online sale or distribution, e-pharmacies claim they hold valid licences and continue to sell medicines online. 

Inventory-led online pharmacies operate with a pharma retail licence while marketplaces function on the licence of one of their vendors. While there is no licensing factor that distinguishes aggregators from inventory-led e-pharmacies, firms having foreign direct investment (FDI) cannot purchase or stock goods on their balance sheet.

Given that there is no blanket prohibition or restriction on the online sale of medicines, e-pharmacies have taken the stand that they are entitled to carry on selling medicines online. Most such entities claim to have proper mechanisms and strict processes in place to comply with the existing legal framework as well as to prevent any irregularities. 

“The legal loophole is the very lack of regulation of online pharmacies,” said Advaya Legal’s Ranga. “So while businesses operating in this space may follow (or claim to follow) strict internal checks and balances, there is no regulatory mechanism in place to oversee such compliances.”

How will the draft E-Pharmacy Rules resolve the current impasse?

The licencing structure will change as and when the Draft Drugs and Cosmetics (Amendment) Rules, 2018 come into effect. It will serve as a formal recognition for e-pharmacies besides giving parity to online players and bringing transparency in the monitoring of the overall sector.

“We expect the existing draft regulation to get finalised eventually, with some modifications that the government may deem necessary,” said Netmeds CEO and founder Pradeep Dadha. “However, we are waiting for it to get notified. We only have an idea as to what it was, but in the form and format as it was as it least in August last year (when the draft amendments were introduced), we are fine with it.”

The Draft Rules introduce a pan-India registration mechanism through the national drugs regulator for any person intending to conduct an e-pharmacy business.  The rules will also make registration mandatory for all e-pharmacy companies, irrespective of whether the nature of investment is via FDI or otherwise, and also ban advertisements of drugs. 

This registration will enable e-pharmacies to operate throughout India. However, it remains to be seen how the central government addresses the grey areas in the draft regulations around the monitoring of e-pharmacies, the definition of the marketplace model, and rules concerning last-mile delivery.

“E-commerce has invaded every sector of business, and medicines should be no exception,” said Atul Pandey, partner at law firm Khaitan & Co. “The draft of the E-Pharmacy Rules is progressive and adequately addresses concerns of offline pharmacies in relation to a drug epidemic and drug abuse.”