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 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.