Article / 02 January 2015 at 5:58 GMT

Online prescription sales to improve health for internet retailers

China Watcher / Shanghai
China
  • Online prescription drug sales in China will greatly benefit Alibaba and JD.com
  • Alibaba is in a stronger position than JD.com in terms of market position
  • Online retailers will have to be certain that the products are genuine

By Neil Flynn

It was reported by Chinese media that new regulations would allow for the legalisation of online prescription drug sales effective as of the start of 2015, which is set to benefit the likes of Alibaba and JD.com. 

In the middle of 2014, China’s State Food & Drug Administration (SFDA) set up a system to allow registered pharmacies to dispense prescriptions online. In all, 255 online pharmacies have already registered with the SFDA, and 132 have started their online business. This is through the simple online store model, where consumers can pay for their medicine directly through the pharmacy’s website. However, this number doesn’t include merchants on retail platforms such as Alibaba or JD.com, which would drastically increase the size of the market. 

Alibaba and JD.com have already launched a pharmacy platform that sells over-the-counter products such as health supplements and traditional Chinese medicine, but the new regulations will give the firms much more scope to grow in this market, as the prescription drug market is much more lucrative than over-the-counter products. 

Alibaba is in a stronger position than JD.com in terms of market position because it acquired a 54.3% stake in CITIC 21CN for $168 million in January 2014, and the pharmacist holds a licence for online drug sales.

Tmall's Medicine Platform

Tmall’s prescription drugs store is set to benefit from new regulations. Source: Alibaba

At the beginning of December, I discussed how Alibaba is set to launch a prescription medicine app, where users can upload a photo of their doctor’s prescription, so that pharmacies will show their prices for the particular medicine, and once users purchase the medicine, it will be delivered to their home. 

This is a significant improvement on the traditional offline pharmacy business model where location of the store is key. Many customers will be elderly or ill and hence won’t be willing to travel long distances to find the cheapest price, so pharmacies essentially have a monopoly over their local area, and have no reason to offer competitive prices. 

However, Alibaba can offer a customer the prices of pharmacies within a 10-mile radius with home delivery, so pharmacies will actively lower their prices, and ultimately the customers benefit by being able to buy medicine at competitive prices. 

Allowing market forces to reform China’s rigid healthcare system

This market has huge potential, and it is no surprise that the likes of Alibaba and JD.com are actively developing their own platforms. The pharmaceutical e-commerce market launched four years ago, and due to the continued relaxing and development of government regulations, the market has grown 250.35% annually, and was worth $646 million by the end of 2013.

However, this pales in comparison to the overall pharmaceutical retail market in China, which was valued at $210 billion at the end of 2013, of which $48.4 billion was derived from over-the-counter drugs. I am very excited by the potential of China’s online retailers to expand the industry, because as we have seen with general retail, having an online store on Alibaba or JD.com is the best way to gain access to a huge base of potential customers. 

But investors must understand there is a clear difference between general retail and prescription medicine, and it will take time for Alibaba and JD.com to see strong gains in the market. Online retailers used to have a rather slack approach to counterfeit products on their platforms, and although it is much better now, the risk isn’t completely removed. 

In regards to over-the-counter and prescription medicines, online retailers will have to be certain that the products are genuine. This will likely involve collaborating with the SFDA to perform regular background checks and product analysis. But in the long run, the potential in the market remains very attractive to both online retail platforms and pharmacies across China. 

This is part of a wider issue that I have discussed previously regarding how the Chinese government is happy to let market forces reform its rigid public healthcare system. The majority of China’s healthcare system is public, although private hospitals are becoming more and more common. 

But the previous lack of an alternative meant that the top doctors were earning low salaries, and hence supplemented their earnings by charging higher prices for medication. With doctors now allowed to split their time between public and private hospitals, this means that they can earn a higher salary. The prescription drugs market is also much clearer, as manufacturers can now sell directly to hospitals, instead of having to use a distribution firm as a middle man.

– Edited by Gayle Bryant

Neil Flynn is head equity analyst at Chinese Investors. Follow Neil or post your comment below to engage with Saxo Bank's social trading platform.
4y
Buy Drug Pharmacy™ Buy Drug Pharmacy™
This comment has been redacted

Disclaimer

The Saxo Bank Group entities each provide execution-only service and access to Tradingfloor.com permitting a person to view and/or use content available on or via the website is not intended to and does not change or expand on this. Such access and use are at all times subject to (i) The Terms of Use; (ii) Full Disclaimer; (iii) The Risk Warning; (iv) the Rules of Engagement and (v) Notices applying to Tradingfloor.com and/or its content in addition (where relevant) to the terms governing the use of hyperlinks on the website of a member of the Saxo Bank Group by which access to Tradingfloor.com is gained. Such content is therefore provided as no more than information. In particular no advice is intended to be provided or to be relied on as provided nor endorsed by any Saxo Bank Group entity; nor is it to be construed as solicitation or an incentive provided to subscribe for or sell or purchase any financial instrument. All trading or investments you make must be pursuant to your own unprompted and informed self-directed decision. As such no Saxo Bank Group entity will have or be liable for any losses that you may sustain as a result of any investment decision made in reliance on information which is available on Tradingfloor.com or as a result of the use of the Tradingfloor.com. Orders given and trades effected are deemed intended to be given or effected for the account of the customer with the Saxo Bank Group entity operating in the jurisdiction in which the customer resides and/or with whom the customer opened and maintains his/her trading account. When trading through Tradingfloor.com your contracting Saxo Bank Group entity will be the counterparty to any trading entered into by you. Tradingfloor.com does not contain (and should not be construed as containing) financial, investment, tax or trading advice or advice of any sort offered, recommended or endorsed by Saxo Bank Group and should not be construed as a record of ourtrading prices, or as an offer, incentive or solicitation for the subscription, sale or purchase in any financial instrument. To the extent that any content is construed as investment research, you must note and accept that the content was not intended to and has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such, would be considered as a marketing communication under relevant laws. Please read our disclaimers:
- Notification on Non-Independent Invetment Research
- Full disclaimer

Check your inbox for a mail from us to fully activate your profile. No mail? Have us re-send your verification mail