Caixin
Sep 25, 2014 03:10 PM

Market for Online Sales of Prescription Drugs Grows in Fits and Starts

(Beijing) – The government recently put in place policies to reform the country's health care system and at the same time has said it will try to bring down the cost of medical services and drugs.

The Ministry of Commerce published a notice on September 9 urging cities to launch pilots to separate medical services and drug sales, a move that would allow patients to get prescriptions filled at drugstores.

That move is intended to let drugstores compete with hospitals, also in a bid to slash prices.

Meanwhile, a draft regulation covering online sales that was unveiled by the China Food and Drug Administration (CFDA) in May could be put into practice by October, sources with knowledge of the matter say.

The draft says third-party companies cooperating with drugstores can sell drugs online, and small drugstores could get also licenses for e-sales or prescription medicines.

Analysts say this would be a major opportunity for e-commerce companies to get involved in the growing market for sales of medicines online.

Slow Going

In the past, the government has issued licenses allowing drugstores and manufacturers to sell medicines online, and Internet companies were given permission to provide information on their websites.

As of August 26, the CFDA has issued information licenses to 5,225 companies and sales licenses to 302 firms. However, only 218 companies had set up websites to sell medicines online.

Most of companies sell only a few kinds of medicines on their sites and have a small number of visitors, an employee of e-commerce giant JD.com Inc. said. Large business-to-consumer (B2C) websites are the future of the field, he said.

Firms such as JD.com and Alibaba Group have the information licenses but not the sales variety. Alibaba's Tmall.com launched an online drugstore in July 2011, but 18 days later, it was shut down by authorities in the eastern province of Zhejiang.

On February 1, 2012, Tmall.com's drugstore opened again, but eight days later it closed. Later that month the company said the site was only intended to provide information about medicines.

Authorities have two standards for judging whether e-commerce companies are selling drugs or not: the presence of a shopping cart function and sales records, a source from an e-commerce firm said.

Some e-commerce companies get orders on the Net, then inform drugstores to send buyers their goods, something that is also illegal, the source said.

A source from the CFDA said fake drugs have flooded the market in recent years, and authorities could not control the situation, which could get worse if more of the sales licenses were issued.

At the beginning of the year, Alibaba invested HK$ 1.3 billion in Citic 21CN Co. Ltd., a subsidiary of the state-owned financial and industrial giant Citic Group. This was because in November a subsidiary of Citic 21CN became the first third-party company to get an online drug sales license.

Then in July, Guangzhou Babaifang Information Technology Co. Ltd. and Shanghai Yishiduo E-Commerce Co. Ltd., which owns the shopping site yhd.com, also got licenses.

The expectation among e-commerce companies is that more of them will get the licenses, the employee of JD.com said. Companies that get permission earlier will be in a better position to dominate, he said.

Online Drug Sales

In the past, drug companies have gotten sales licenses and started to build websites, but then ran into problems. Beijing Golden Elephant Pharmacy Medicine Chain Co. Ltd. got a license and set up jxdyf.com in June 2007, said Niu Zhengzhao, the site's CEO.

However, the website is only breaking even, Niu said. It is professional and wants to attract buyers, he said, but so far has only a few visitors. The site has sales of less than 100 million yuan a year, Niu said.

Jointown Pharmaceutical Group Co. Ltd., a private company, said in 2013 that revenue from online sales hit 1.17 billion yuan, and the website it launched in 2009 had more than 8,000 buyers. That said, the company said its profits from online drug sales are low.

Companies sell medicines online for less than in physical stores, meaning volume must be large to achieve high revenues, an analyst said. The trouble is companies are having trouble attracting buyers on the Internet.

Online drug sellers were having difficulty meeting their expense, data from Anbound Consulting (Anbound), a consulting firm, show. Nearly two-thirds of companies selling drugs online suffered losses, data from the Pharmaceutical Research Center of the magazine China Drug Store, show.

However, many manufacturers are still launching websites, including Yunnan Baiyao Group Co. Ltd. and Beijing Tongrentang Group Co. Kangmei Pharmaceutical Co. said last year it saw online sales as a core business. It got a sales license in April, and sales started the next month.

Another drugmaker, Shijiazhuang Yiling Pharmaceutical Co., Ltd. got a license in August, and it said it would invest 50 million yuan to the online sales business.

Bright Future

Total revenue from selling medicines online was less than 400 million yuan in 2011, but it was 1.6 billion yuan in 2012 and 4.2 billion yuan last year, data from the consultancy Sinohealth showed. Sinohealth predicts the figure this year will be 6.8 billion yuan.

The figure for 2013 may seem high, but it was only 0.5 percent of the entire drug sales market, data from China Medical Pharmaceutical Material Association show. The figure was 30 percent in the United States, 17 percent in Japan and 23 percent in Europe.

Thus, many say the market in China can only grow. An estimate from UBS Securities Co. Ltd. shows that the online drug sales market will grow from 200 billion yuan now to around 3 trillion yuan after the government relaxes control on prescription drugs.

(Rewritten by Guo Kai)

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