TCS Smart Manager Case Contest # 72

Last date for submission : 10 November 2014

Looking for a remedy
INTRO:A mid-sized pharmaceutical distribution firm is at a crossroads. Should he
stick to ethical practices, which constitute the core of his business model, or catch up
with prevalent trends to rake in profits?
Belgaum airportpassengers were harried as a popular carrier announced a three-hour delay
of their flight bound for Bengaluru. Many were seen talking to the airline staff, expressing
their displeasure. Aarash Vasudev calmly walked into a coffee shop and settled down for a
long wait.
Founder and chief executive officer of Aegle Enterprises, a retail and wholesale
pharmaceutical distribution firm based in Bengaluru, Vasudev had come to Belgaum to
explore the feasibility of setting up shop in the city. The flight delay, though fortuitous, gave
him the much-needed time for introspection. His fledgling firm was slowly and steadily
inching towards a high growth trajectory, but the ground beneath his feet seemed to be
shifting. A calculated business move had failed and his companys survival was at stake.
a latent need
Vasudev started his career as a medical representative in the cardiology division of a midsized Indian pharmaceutical firm. Relationship building, networking, and perseverance were
his strengths and under the guidance of his senior and mentor, Sampath Nayak, he helped the
company increase its business by almost 100% in the areas he handled. His career grew by
leaps and bounds, and in five years, he was appointed regional manager of a global
pharmaceutical giant. The responsibilities and challenges of the new position excited him,
but boredom set in soon. New product launches, sales targets, geographical expansion
nothing seemed to interest him.
During this period, he met his mentor Nayak at a seminar and shared his concerns with him.
Nayak, familiar with Vasudevs character and inclination, suggested that he strike out on his
own. This suggestion struck a chord and Vasudev started exploring new avenues. Most of his
friends and well-wishers advised him to start a pharmacy as he was familiar with the business
and the industry. However, Vasudev was looking for a different challenge. It was then that an
idea struck himbusiness for a cause.
While working as a medical representative, doctors and health workers used to request him to
help some of their patients get medicines at subsidized rates. Vasudev would procure

medicines from the stockist or the CFA (Carrying and Forwarding Agent) of a company on a
discount, and give it to them. Further, during his interactions with various pharmacies and
stockists, he understood that most patientsespecially those suffering from diabetes and
cardiac ailmentssought for discounts from their regular chemists. Chemists too, in a bid to
ensure repeat business, would give them a 2-5% discount on the total bill; free home delivery
was also offered to these customers.
Aware of the margins in the pharma retail business, Vasudev thought that if he started a retail
distribution business and offered a 10-18% discount, it would help many who could not
afford these medicines and hence were using cheaper unbranded generics that were less
effective. While everyone said it was a viable alternative, one of his colleagues, Giri
Narayan, asked a relevant question: why would someone buy medicines from him when
retail pharmaceutical chains such as Troika, Patanjali, and Sushrusha were already offering a
7% discount for their customers? Also, they had a huge intercity network and some even
operated 24x7. Narayan also pointed out that the business would not be profitable if Vasudev
offered more than 7% discount, given the huge overhead costs of procuring stocks and
building proper storage facilities, and so on.
Vasudev then realized that a traditional approach would not suit his business model. He
carefully analyzed the retail pharma distribution channel; typically in India, the
manufacturer supplies goods to the CFA or a super stockist. They then supply to a wholesaler
who then sells it to retailers and hospitals.
While manufacturers are allowed to directly supply to hospitals, they are not allowed to
supply to a wholesaler or a retailer. Given this layered supply chain, the distribution costs
constituted almost 25%-35% of the retail price of a medicine. Hence the key was to devise a
model that would bypass these intermediaries and reduce costs. After detailed discussions
with his friends and Nayak, Vasudev arrived at a process that was unconventional and started
Aegle EnterprisesAegle is the Greek god of radiant healthin 2006.
re-engineering the supply chain
Vasudev built his business on two simple ideascash and carry, and zero inventory. Most
chemists and retail chains stocked medicines in large quantities as this helped them negotiate
a better price with the wholesaler. This system had its own disadvantages: patients often got
medicines that were nearing expiry date and retailers needed huge capital to buy in bulk.
Also, since they enjoyed a thirty-day credit period, wholesalers offered them lesser discounts
than cash and carry transactions.
Vasudevs model circumvented these practices and helped him cut costs substantially. How
did this work?
Customers would place their orders with Aegle Enterprises over the phone and Vasudev
would collate these requirements and make a comprehensive list. Around noon every day, he
would procure the medicines from wholesalers by paying cash and then deliver it at the
customers homes by the end of the day. This ensured that he got a greater discount from the

wholesaler, and also that the medicines procured belonged to the latest batch and had the
longest possible expiry date. This also resulted in zero inventory costs, and reduced storage
costs.
With an initial capital of Rs900,000, Vasudev rented a two-bedroom apartment and procured
a retail and wholesale drug distribution license. He invested in the basic billing and
accounting software and set about introducing his business to the various medical
practitioners he had interacted with during his career. Most knew him and readily offered to
help. Vasudev then put up flyers of his firm in the reception hall of their consulting rooms.
The receptionists also handed over a card of Aegles services to the patients. This was how
the first customers were acquired.
Aegle had in its books around 75-80 patients by the end of the first quarter. Soon, by word of
mouth, the business grew exponentially and at the end of five years, they were serving
around 1,500 customers per month with total revenue of almost Rs10cr annually. As the firm
grew, Vasudev employed three tele-callers and ten delivery boys, and rented a small facility
with ILR and a 5kva automatic generator backup to store medicines that required continuous
cold chain storage.
The only drawback in Vasudevs model was that any order placed after 12 pm would get
delivered only the next day. But most customers did not mind waiting since they were
assured of quality medicines at the lowest price. Also, his customers were mostly those above
55 who required a particular set of medicines on a daily basis. They were generally wellorganised and hence any aid that helped them lead their lives smoothly was welcome.
Vasudev also understood that most of them preferred the same supplier/chemist/chain. They
looked forward to interacting with familiar people when buying medicines. He felt he could
convert this into a huge advantage. While giant retail chains lacked the personal touch, his
delivery boys and tele-callers were trained to behave courteously to customers. At the end of
each day, the tele-callers would identify regular customers whose medicines need to be
refilledbased on the billing and prescription cycleand would call them up asking if they
wanted to place an order. This was greatly appreciated and led to repeat customers.
In the meanwhile, Vasudev also acquired distributorship of six leading multinationals that
specialized in cardiac and diabetology drugs; this helped him to cut costs further.
Impressed by Vasudevs success, Giri Narayan too quit his job and joined the business as a
working partner. He then expanded Aegles reach to medical institutions. Soon, institutional
sales contributed to almost 40% of Aegles revenue. Buoyed by their success, the duo started
drawing up plans to expand to Tier II cities such as Belgaum, Mysore, Hubli, and Dharwad,
which held immense scope for growth. At this point, they came to know that a global
manufacturer of medical devicesspecializing in implantable cardiac deviceswas looking
for a distributor in Bengaluru. Aegle met most of their requirements and decided to bid for it.
a golden opportunity?

With a projected growth rate of 17-20%, Indias medical devices market held great growth
opportunities. If these rates were sustained, then the market would be worth almost $10bn by
2020. Most medical devices were imported and the margins were much higher than the retail
drug business. For example, a device imported at `15,000 was sold to a distributor for
`20,000, who then sold it to hospitals at `30,000. The business would be lucrative. Narayan
and Vasudev pooled in an additional capital of `5cr and bid for the distributorship. They
convinced Nayak to quit his job and be a part of the business. In spite of stiff competition,
they won the deal.
Vasudev and Narayan approached hospitalsstandalone private as well government
ownedand corporate healthcare chains and explained the Aegle model of offering
maximum possible discount to the patients. Most of them welcomed the initiative and
promised their support. Amongst these, the hospital chains accounted for more than 60%
purchase of the cardiac implantable devices in the country. Slowly, orders started coming in
and the firm was poised to rake in sizeable revenue. Motivated by the trend, Aegle borrowed
an additional `7cr from a bank and invested in stocking devices.
As a couple of months went by, they realized that orders were not coming in and there were
absolutely no repeat purchases from the hospital chains. Given that the demand for such
devices never decreased, they wondered as to why sales was not picking up. Vasudev and
Narayan revisited all their institutional clients. What they discovered was shocking. Some of
the major hospital chains bought the devices at low rates from the distributor, created inflated
bills in the books, and charged the patients based on that amount. They then received a credit
note from the distributor for the difference in cost. For example, the distributor would bill the
hospital `30,000 for a stent. The hospital would charge a premium on the billed rate and sell
it to the patients. However, in reality, the distributor would give the hospital a credit note for
`15,000, thereby bringing down the cost of the stents to `15,000, for the hospital. None of the
hospitals were willing to go on record, but they were not buying the devices from Aegle
because it did not subscribe to this practice.
The entire business chain was corruptthe manufacturer turned a blind eye to this practice
for fear of losing their market share to competitors; distributors agreed to it as bulk sales
would help increase their turnover. Since Vasudevs company was committed to ethical
practices, it refused to follow the system. This was the reason why their order book was
drying up. Their contacts also subtly informed Vasudev and Narayan that if Aegle was
willing to share its margins, they would get more orders.
Vasudev felt that the raison d'tre of his businessthat of providing medicines and devices
at an affordable ratewould be lost if they indulged in this practice. Despite working in the
pharmaceutical sector for long, Vasudev was not aware of such murky dealings. As a medical
representative, his interactions were limited to doctors and wholesalers; little did he know of
the nexus between hospitals and distributors. He even contemplated complaining to the
companys chairman based in London, but Narayan urged him to be more practical. He felt
there were many other factors that had to be considered. They had a huge inventory of
medical devices, to procure which they had borrowed money at a high rate of interest.
Further, their margins in the retail drug distribution business would be squeezed due to the

latest government move to widen the scope of price controls on pharmaceuticals. Proposals
were afoot to increase the number of medicines covered by price caps to 348. Their argument
was that the prices of life-saving drugs should not be determined by market forces, but
should be regulated.
Narayan advised that they should go along with the flow to ensure that their business
remained sustainable. After all, over-invoicing to the institutions and then giving a credit
note was an age-old practice. How could they beat the system when everyone
manufacturer, distributor, and hospitalswere a part of it? Further, if Aegle did not meet the
sales target set by the manufacturer, their distributorship would be cancelled. Someone else
would replace them and reap the profits. So it was wiser for them to make a compromise.
Your question
Should Vasudev follow current practices to ensure that his business brings in more profits?
Or should he risk losing a lucrative opportunity by remaining a staunch moralist?
If you choose the latter option, suggest the growth strategy for Aegle Enterprises.
Click here to register free and submit your analysis
or mail your analysis to casestudy@thesmartmanager.com
Note : Please check your email after registration for your username and password
All right reserved with The Smart Manager