Apollo HealthCo Demerger Explained | Finology

Apollo Hospitals Enterprise Ltd., India’s largest private hospital network and one of the country's most ambitious omnichannel healthcare platforms, recently announced a major structural change — the demerger of its pharmacy business. While on the surface, this may appear to be a move to streamline operations, a deeper dive into the business landscape, the pharmacy supply chain, and global benchmarks reveals a more layered narrative.

This week, the Finology Research Desk dug deep into Apollo’s evolving story. Here’s what we found.

What Makes the Healthcare Industry Special?

The healthcare industry occupies a unique position in every economy. Unlike discretionary sectors, healthcare isn’t a "nice to have"; it’s a “need to have”. Globally, healthcare expenditure tends to expand in tandem with economic growth. In 2020, healthcare spending as a percentage of global GDP stood at approximately 11%. Developed nations like the US, UK, France, and Germany registered even higher ratios.

Source: Global Health Expenditure Database – WHO, CRISIL MI&A Research

However, India’s expenditure on healthcare lagged significantly behind, with healthcare accounting for just around 3% of GDP. This is despite India being the world’s most populous country — a mismatch that highlights both an ongoing challenge and an enormous opportunity.

The Indian healthcare industry is made up of many different parts working together. It spans several sub-segments — pharmaceuticals, hospitals, diagnostics, medical devices, and health insurance. These form a complex and interconnected ecosystem where manufacturers, service providers, insurers, and intermediaries operate together to serve patients. The delivery touchpoints - hospitals, pharmacies, diagnostic labs are just one part of the chain.
 

Source: DRHP, Entero Healthcare Solutions Ltd

As India’s population ages, lifestyle diseases rise along with increasing healthcare awareness, technological adoption, and a growing middle class, the demand for quality healthcare services is expected to rise sharply. Between FY2023 and FY2028, the Indian healthcare market is projected to grow at an 11-12% CAGR, reaching approximately Rs 16.5–17.5 trillion by FY2028.

Source: DRHP, Entero Healthcare Solutions Ltd

Now, to understand why Apollo is choosing to demerge its pharmacy vertical, we must first understand how the pharmaceutical supply chain works in India, which is an area often underappreciated in healthcare analysis.

The Indian pharma distribution system comprises several layers:

Source: Industry, CRISIL MI&A Research

1. Upstream: Manufacturing to Distribution

In the pharmaceutical distribution ecosystem, manufacturers are at the top of the value chain. They produce the finished drugs at centralised facilities, act as a marketer for pharma products and enjoy the highest ~40-60% margins in the entire value chain. These drugs are first dispatched to C&F agents, who act as storage hubs and handle logistical execution, billing, and compliance. C&F agents operate on wafer-thin ~2-4% margins. The products then move to distributors who cover large geographies and cater to thousands of retail pharmacies and hospitals. These distributors are the backbone of the industry; they aggregate pharmacy demand, manage inventory flow, and often conduct promotional campaigns in partnership with manufacturers. They operate at ~8-15% margins in the industry.

2. Downstream: Reaching the Patient

At the final leg of this chain are the retailers, hospitals, and physicians who are the last-mile delivery points of medication. Retail pharmacies, especially the fragmented ones, dominate drug distribution, accounting for about 80–85% of the industry demand. Hospitals serve around 12–15% of the market, while physicians directly handle the remaining 3–5%.

Pharmacy retailers earn ~20–25% margins. The Indian pharmaceutical distribution landscape is vast and fragmented, with ~65,000 distributors and ~9 lakh+ pharmacies. Local players dominate both segments. The share of large/national distributors in India stands at only ~8-10% and the remaining is accounted for by traditional local distributors. However, the pharmaceutical distribution industry is consolidating, with larger players acquiring smaller traditional local distributors to increase market reach and achieve better operational performance. This backdrop sets the context for Apollo’s decision to separate its pharmacy business.
 

Source: Industry, CRISIL MI&A Research

Business Model of Apollo Hospitals Enterprise Ltd.

Apollo Hospitals is engaged in the business of providing hospital services, selling pharma and healthcare and wellness products through a network of pharmacies, including the operation of multidisciplinary private hospitals, clinics, diagnostic centres and pharmacies. Its business segments can be divided into 3:
 

Source: Investor Presentation Q4FY25, Apollo Hospitals

1. Healthcare services: Its primary and most profitable business vertical is hospital services, a segment operated under the Apollo Hospitals banner. As of FY25, Apollo has built an extensive hospital network comprising 73 hospitals with a cumulative bed capacity of 10,187 beds. This segment alone contributes approximately 52% of the company’s total revenues. But more importantly, it contributes almost all of the company’s profits, contributing Rs 1,426 crore of the total Rs 1,446 crore profits in FY25, while delivering a robust ~18.2% profit before tax margins for the healthcare vertical.

2. Diagnostic and retail health: The company also operates a growing diagnostics and retail health business through its subsidiary, Apollo Health and Lifestyle Ltd. This segment includes clinics, diagnostic centres, dialysis units, dental clinics, IVF services, and Spectra centres. As of FY25, the company has 267 clinics, 2,212 diagnostic centres, 146 dialysis centres, and 219 dental clinics under its umbrella. However, this vertical currently contributes just about 7% of total revenue and remains loss-making, reporting a Rs 27 crore loss in FY25. While the infrastructure scale is noteworthy, operational efficiency and patient monetisation in this segment still remain areas for improvement.

3. Digital health and pharmacy distribution: The third major vertical is digital health and pharmacy distribution, operated through Apollo HealthCo Ltd., which includes its offline pharmacy network and the Apollo 24/7 digital platform. Apollo HealthCo is India’s largest omnichannel pharmacy network, with over 6,626 pharmacy outlets and ~40 million digital registrations on Apollo 24/7. The platform engages over 8 lakh daily active users and serves as the company’s most consumer-facing tech play. This vertical contributes 41% of the company’s revenues as of FY25 and has recently turned the corner on profitability, reporting Rs 47 crore after tax profits for FY25, a sharp reversal from a Rs 195 crore loss in FY24.

This combination of scale in hospitals, early bets in diagnostics, and a digitally integrated pharmacy arm has positioned Apollo as a unique healthcare platform. Yet, it’s the complex capital structure and differing business economics that drove the company to announce a strategic demerger.

Demerger

Apollo Hospitals Enterprise Ltd. recently announced that it would demerge its pharmacy and digital health business, Apollo HealthCo Ltd. into a new standalone entity. However, this isn’t a plain vanilla demerger. The structure involves three layers.

• First, a new entity will be formed as a result of the demerger of Apollo’s stake in Apollo HealthCo Ltd. 
• Second, Apollo HealthCo Ltd. itself will be amalgamated into this new entity. 
• Third, Keimed Private Ltd., India’s largest pharmaceutical distributor and a company owned by Apollo’s promoters, will also be merged into the same entity. In effect, the final structure will combine Apollo HealthCo and Keimed to form a single, independently listed healthcare distribution powerhouse.

Source: Company Presentation, Apollo Hospitals

Apollo Hospitals Enterprises Ltd. will hold 17.5% in the new entity, its shareholders 42.1%, private equity company Advent 12.1%, Keimed promoters and shareholders 25.3%. Along with this their will be an ESOP pool of 3%.

There are strong strategic and financial incentives behind this merger. Keimed, being India’s largest distributor of pharmaceutical products, operates on better profit margins than Apollo HealthCo Ltd. By combining the high-margin distribution capabilities of Keimed with the consumer reach of Apollo’s retail and digital channels, the merged entity is expected to deliver significantly improved profitability and return ratios.

Source: Company Presentation, Apollo Hospitals

On the other hand, Apollo Hospitals Enterprise Ltd., the parent, is also expected to benefit from this. As of FY25, the company’s consolidated net profit margin is ~6%. With the pharmacy segment demerged, the remaining hospital-centric business is expected to operate at a cleaner and higher net profit margin profile, potentially expanding to ~9%+.

The new entity is expected to be listed over the next 18 to 21 months, which is expected to unlock value for Apollo shareholders.

What caught our attention was not just the deal itself but what it represents. India’s largest pharmacy network is about to get listed independently, at scale. This move allows us to re-evaluate the retail pharmacy sector from a fresh lens, particularly in the context of global parallels.

To evaluate the long-term prospects of retail pharmacy businesses, we found it instructive to study mature markets like the United States. In the U.S., the retail pharmacy sector is dominated by large players such as CVS Health, Walgreens Boots Alliance, and Rite Aid. Yet, despite their scale and branding, the sector has underperformed on shareholder wealth creation. CVS Health, the strongest among them, has delivered only ~4% CAGR in stock price from 2000 to 2025. Walgreens has delivered ~(-58%) in the same period, while Rite Aid filed for bankruptcy. Even CVS’s better performance came largely from its diversified segments, not pure pharmacy retail.

This sobering trend tells us something: size alone doesn't guarantee wealth creation in the retail pharmacy space. That said, India is a very different market with low penetration, fragmented supply chains, and rapid digitisation. While the U.S. experience tempers expectations, the Indian story might evolve differently. With Apollo HealthCo now going to form an independent health company, and business dynamics being different in India, do you think it can create shareholder wealth over the long term?

The Bottom Line

Apollo HealthCo, after its demerger, will have scale, distribution synergies, digital integration, and margin tailwinds. But whether this translates into long-term wealth creation — like what Finology 30 demands — remains an open question.

At Finology, our investment ideology is built around businesses with fundamentally strong models and long-term performance track records. Apollo Hospitals, while a clear leader in the hospital space, is carving out its retail bet at a time when investor expectations are high and market competition is heating up.

We’ll be tracking this closely. For now, while the demerger appears to be value-unlocking on paper, only time will tell whether the pharmacy giant in the making will live up to its promise.

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