Can Alibaba Health Information Technology Transform China’s Pharmaceutical Industry?
January 22, 2020
What is Ali Health Information Technology?
Alibaba Health Information Technology Limited
was formed in 2014, after Alibaba and Yunfeng Capital Ltd., a private-equity
firm set up by Alibaba founder Jack Ma, together bought a 54% stake in then
called Citic 21CN, which manages data on pharmaceutical products. The company
initially operated as a drug product identification, authentication, and
tracking system (PIATS) business, a platform that was operated by AliHealth but
owned by the China Food and Drug Administration (CFDA).
The drug PIATS system was designed to track
the authenticity, quality and safety of pharmaceutical products and it can used
it to combat the distribution of fake drugs in China. CFDA uses the system to
track data on manufacturing source, type of product and expiration date etc. Thus,
it was made mandatory for pharmaceutical product distributors and sellers to
use the technology, giving Alibaba Health complete control of nationwide
In addition to running the platform, Ali
Health was also involved in the online drug sales business. This caused a
conflict of interest which was disputed by other pharmaceutical companies that
Ali Health was involved in the regulation of pharmaceutical information, both
have a bearing on the safety of national data and creates unfair competition.
Due to this, the Group was forced to operate its drug PIATS under tighter
supervision by the CFDA.
This severely impacted the Group’s core
revenue source and led to a change in its business model. The Group eventually
diversified its operations after the CFDA ended the mandatory use by drug
trading enterprises of its PIATS system in China.
In April of 2015, Alibaba Group injected its
China online pharmacy business from Tmall to Ali Health for $2.5 billion of
newly issued shares and convertible bonds. Since then, the Group has created an
Internet-based drug distribution and sales system that covers the entire
industry chain, thereby enhancing the efficiency of the healthcare product
In China, 70% of prescribed drugs and
medications are sold through hospitals while the remaining are privately sold
in pharmacies and clinics. Due to its dominant market share in prescription
drug sales, hospitals control significant pricing power that led to inflated
drug prices for patients.
As the healthcare flagship of Alibaba Group,
AliHealth, aims to disrupt this monopoly and provide fair, affordable and
accessible medical and healthcare services to Chinese consumers by facilitating
medicine through big data and using the Internet to change the face of China’s
Capitalizing on its established online
platform and understanding of the market and users, the Group connects
manufacturers and distributors to offline pharmaceutical retail chains to
facilitate product circulation along the whole chain.
An efficient distribution network and supply
chain bring manufacturers, distributors, and consumers closer together so that
consumers can access fair and affordable healthcare products and services
directly from manufacturers. This results in cheaper prescription drug prices
Through five business segments:
Pharmaceutical e-commerce platform business
Pharmaceutical self-operated business
Consumer healthcare business
Other innovative businesses;
Alibaba Health brings together highly
competitive brands and large-scale brands and distributors in the medical and
healthcare industry to fully meet consumer needs by providing a full range of
quality products at reasonable prices.
To date, a number of well-known international
pharmaceutical companies, including AstraZeneca, SANOFI, Merck and Pfizer, have
established strategic partnerships with Alibaba Health. Meanwhile, the Group
has also established key business partnerships with about 40 pharmaceutical and
nutritional product brands, including Dong-E E-Jiao, Mayinglong, Jiuzhitang,
and other renowned national brands.
e-commerce platform business
Following the purchase of Alibaba’s online
pharmacy business, the Group now covers all categories of the Tmall Pharmacy
platform. This segment offers health products, adult products, healthcare
services, and medical devices.
AliHealth generates revenue from
maintenance-related software services that it provides to merchants on Tmall
e-commerce platform. These services comprise of admission fees, product quality
control, and merchants’ operational and maintenance support. For this, Ali
Health earns commissions up to 3% of the transaction amount of products sold by
AliHealth also offers business-to-customer
(B2C) services through its online stores on Tmall.com and its offline pharmacy
outlets, and business-to-business (B2B) services to merchant customers.
Presently, this segment is its fastest-growing segment and also its largest
revenue contributor, accounting for 80% of Group revenue.
AliHealth Pharmacy offers consumers an
effective solution for online purchase of OTC (over-the-counter) and imported
health products, while the e-commerce platform allows
consumers to access more health food, medical
equipment, adult and family planning products, contact lenses and medical
health services, forming a complete medical and healthcare ecosystem.
The online platforms such as AliHealth
Pharmacy and Tmall Pharmacy covers many widely used OTC drugs to meet the daily
medical needs of consumers.
The Group’s Ma Shang Fang Xin tracking
platform, provide tracking services for manufacturers and distributors to
ensure product quality and safety, and will also allow the public to verify
their medical products. Currently, the platform covers over 85% of
pharmaceutical manufacturers in China. With the tracking system, information
such as product manufacturers, distributors, and even production timeline is
available and transparent. The accessibility and transparency of this
information can lead to product safety and quality.
Through its online stores on Tmall and mobile
apps, AliHealth also connects medical and healthcare service organizations to
end customers. The Group generates revenue from commissions earned through
e-commerce platform maintenance-related software services, customer
consultation, reservation, and other value-added services.
Other than the above businesses, the Group has
been exploring fee models in the Internet healthcare and intelligent medicine
areas. It offers health consultation services to users through professionals,
such as medical practitioners, pharmacists, and nutritionists, consumers are
then charged a fixed consultation fee for these services.
Ali Health is largely owned by Alibaba Group
which owns 67.5% of the company. The large stake ownership was due to shares
exchanged for its initial takeover in 2014 and also the injection of Alibaba
Group’s pharmaceutical businesses in 2015. Other notable major shareholders
are, its Chairman Wu Yongming with 1.2 million shares and Non-Executive
Director Lei Wang with 4.4 million shares.
Most of its revenue is derived from the
self-operated pharmaceuticals serving B2C and B2B segments, in 2019, the
pharmaceutical self-operated business almost doubled its revenue from RMB2.2
billion in 2018 to RMB4.2 billion this year. As of March 31, 2019, its
self-operated online stores (AliHealth Pharmacy and AliHealth Overseas Flagship
Store) accumulated more than 27 million annual active consumers, indicating
more than 90% year-on-year growth.
Its pharmaceutical e-commerce business has
also grown significantly, expanding almost 4-fold in revenue. In FY19, the
gross merchandise volume (GMV) generated by Tmall Pharmacy platform as operated
by the Group was approximately RMB59.5 billion. Its annual active consumers of
Tmall Pharmacy platform for the year ended March 31, 2019 exceeded 130 million.
The Group’s consumer healthcare business
covers segments such as aesthetic medicine, oral health, vaccination, and
physical examination. During the year, the Group’s consumer healthcare business
grew rapidly with GMV increasing by more than 140% year-on-year. During Tmall’s
“Singles Day” and other shopping festivals, consumer healthcare GMV grew
explosively at a rate that was among the highest across all Tmall industry
Revenue of the Group for the year ended March
31, 2019 amounted to RMB5.09 billion representing an increase of RMB2.65
billion or 108.6% as compared to RMB2.44 billion for the year ended March 31,
2018. The increase in revenue was mainly attributable to the rapid growth in
revenue from the pharmaceutical self-operated business, pharmaceutical
e-commerce platform business and consumer healthcare business during the year.
Despite its rapid growth in FY19, the Group is
still in the red with a net loss of RMB82 million. On the positive side, this
represents a net loss reduction from RMB-129 million in 2018 and RMB-198
million in 2017. The loss incurred was largely attributed to operating expenses
such as fulfillment, Sales and marketing, administrative and product
development expenses. Overall, the Group’s operating expenses increased by 80%
Compared to China’s huge pharmaceutical
market, its pharmaceutical e-commerce market is still in infancy.
Pharmaceutical e-commerce making up only approximately 3% of pharmaceutical
sales in China, which means there is still a huge potential for development.
With favorable government support, China intends to promote the development of
“Internet + Healthcare” and encourage the regulated development of Internet
drug sales and medical logistics through the inter-connection of its supply
In 2018, Internet healthcare was expressly
supported at the national level and was finally regulated by law. According to
the National Health Commission of the PRC, the number of medical treatments
received in China reached 8.31 billion in 2018, representing an increase of
nearly three times from a decade ago. Given its citizens growing healthcare
needs and compared to the level of supply of doctors, China still faces issues
such as shortages and an uneven distribution of physicians and needs better
ways and quality of delivering medical services. The implementation of the
Internet healthcare policy will provide accessible, affordable and quality
medical products and services for consumers and promote optimal allocation of
medical resources in China’s healthcare industry.
AliHealth is a fast-growing pharmaceutical
company that aims to deliver quality and affordable healthcare to Chinese
consumers. Its business segments are designed to bring closer manufacturers and
consumers to facilitate a more efficient and transparent medical supply chain.
With China’s huge pharmaceutical market, e-commerce will pave the way for a new
direction in China’s growing healthcare industry. Despite the near-term losses,
financial numbers seem to indicate that the Group is working towards
profitability. With the support of its parent company (Alibaba Holdings) and
favourable government policy, Alihealth can pioneer this new direction and reap
the financial rewards in future. If you are a growth investor, AliHealth is a
stock that should be on your watchlist.
Ruzaini is the founder of theasiancontrarian.com, a deep value focus that provides insights on some of the most undiscovered and undervalued businesses in Asia. With a keen eye for oddball and obscure ideas, Ruzaini seeks to offer an alternative perspective in the investing arena.