Alibaba Health Injects Nearly RMB 200 Million into Deshengtang to Expand Its New Retail Footprint in Pharmacy Sector

On Christmas Eve, Alibaba Health (00241.HK) quietly announced a transaction update: Alibaba Health (China) has entered into a capital increase agreement with Gansu Deshengtang. Under the agreement, Alibaba Health (China) will inject RMB 188 million in cash into the target company. Upon completion of the capital increase agreement, Alibaba Health will hold a 10% equity interest in the target company.

By investing in the target company, Alibaba Health will collaborate with it to explore and expand new retail models for pharmacies in regions where the target company holds competitive advantages, thereby reaching more consumers in the pharmaceutical retail market through omnichannel strategies and providing them with more extensive, broader, and more convenient pharmaceutical services.

This is not the first time Alibaba Health has invested in chain pharmacies. Since the beginning of this year, Alibaba Health has successively taken stakes in regional chain leaders such as Shandong Shuyu Pingmin, Anhui Huaren Health, and Guizhou Yishu, continuously expanding its footprint in the new retail pharmaceutical sector.

VCBeat (WeChat: vcbeat) interviewed Long Yan, founder of Deshengtang, this May, discussing the company’s nearly 20-year development history, current business layout, and future development plans. Long Yan also shared his perspectives on hot industry topics, such as significant capital investment in the pharmaceutical retail sector, retail pharmacies absorbing outpatient prescription outflows, new pharmaceutical retail models, and the upgrading and transformation of retail pharmacies.

At that time, Long Yan stated that the significant influx of capital into the pharmaceutical retail sector signified recognition of the industry’s value. Under the influence of policy, market dynamics, and other factors, chain pharmacies have become a highly sought-after investment target. Long Yan predicted that this trend of capital entering the pharmaceutical retail sector would continue in the near future, with a particular focus on regional leaders. He further noted that “the competitive landscape of the retail pharmacy industry may evolve to be structured around capital ties.”

Long Yan told VCBeat that Deshengtang was founded in 1999, starting out in Jinchang, Gansu Province. At that time, the pharmaceutical retail sector had not yet been fully liberalized, making Deshengtang one of the first pioneers to venture into this market. In 2001, as pharmaceutical retail was deregulated, Deshengtang began its chain-store expansion. In 2004, the company entered Lanzhou, the provincial capital of Gansu, and established “Gansu Deshengtang Pharmaceutical Wholesale Co., Ltd.,” marking the start of its rapid expansion across the province. By 2009, Deshengtang had grown to over 100 stores. This marked the first phase of Deshengtang’s development.

In 2009, Deshengtang entered the Beijing market, established “Beijing Shidai Qianfang Pharmacy Co., Ltd.,” and launched the “111 Medicine Hall” brand, marking the beginning of the second phase of Deshengtang’s development.

Regarding the rationale behind launching the “111 Pharmacy” brand, Long Yan stated that the market was saturated with pharmacies using the suffix “Tang” (Hall). Adopting this name allowed for market differentiation and distinct development. Concurrently with the launch of the new brand, Deshengtang began piloting its online pharmacy business under the “111 Pharmacy” banner, ensuring consistency between online and offline channels and building brand equity.

Currently, Deshengtang’s business spans multiple sectors, including pharmaceutical retail, pharmaceutical wholesale, medical services, internet-based B2C, B2B, and O2O platforms, telemedicine, and franchise investment promotion. It also owns its proprietary hearing aid brand “Xianyin” and the male wellness brand “Zidanfei” Liuwei Dihuang Wan (Six-Ingredient Rehmannia Pill), thereby achieving comprehensive development across the entire pharmaceutical industry chain.

Longyan stated that Deshengtang currently operates over 600 chain stores across more than 30 cities in nearly 20 provinces and municipalities throughout China, with a workforce of over 4,000 employees who have received professional pharmaceutical and medical training. Additionally, the company owns one hospital, multiple medical institutions, numerous high-quality projects and brands, and has established its own R&D and management centers in Beijing and Lanzhou.

From Gansu to the National Market, From a Single Retail Pharmacy to Development Across the Entire Pharmaceutical Industry Chain: What Is the Secret Behind Deshengtang’s Growth, and Why Has It Stood Out Among Numerous Chain Pharmacies?

“Quoting a recently popular phrase, ‘Stay true to our original aspiration and forge ahead with determination,’ before expanding, we must first ask ourselves why we are doing this and clarify our reasons for embarking on this journey. Deshengtang’s mission is to provide customers with omni-channel pharmaceutical and healthcare services, allowing health products to flow into every household like water, thereby truly making Deshengtang the ‘trusted health neighbor’ for community residents. Committed to fulfilling this mission, we will continue to grow,” said Long Yan.

Previously, Deshengtang also secured investments from Coastal Capital and Bangsheng Capital in August 2017. After securing the capital, the company primarily focused on two initiatives: first, it remained committed to the Northwest China market, with Gansu Province as its core, gradually expanding its presence; second, it established management and R&D centers in Beijing to absorb successful experiences from other pharmacy chains, while experimenting with new models and approaches in pharmaceutical new retail, thereby institutionalizing and tooling effective business models.

Since Alibaba’s capital injection in 2014, Alibaba Health has roughly undergone four stages of development: the Capital Injection Initiation Phase, with businesses primarily focused on electronic supervision codes and e-commerce services; the Business Adjustment Phase, during which it piloted internet hospitals, pharmaceutical O2O (Online-to-Offline), and self-operated e-commerce; the Business Stabilization Phase, where its business landscape gradually took shape, forming four core business lines—pharmaceutical e-commerce, product traceability, smart healthcare, and health management; and the Continuous Deepening Phase, in which, after years of exploration, Alibaba Health has identified its position within the industry and established stable revenue streams, continuing to deepen its industry engagement and upgrade existing businesses.

A review of historical data reveals that the self-operated business has been the primary driver of Alibaba Health’s performance growth. Its revenue in fiscal year 2016 was over RMB 56 million. After launching the self-operated business, its performance surged to RMB 470 million in fiscal year 2017 and further climbed to RMB 2.442 billion in fiscal year 2018. In the first half of fiscal year 2019, revenue reached RMB 1.879 billion, representing a year-on-year increase of 111.2%.

In addition to its self-operated business, the injection of Alibaba’s e-commerce platform’s pharmaceutical operations has also been a significant driver: In June 2017, Alibaba Health completed the acquisition of Tmall’s “Blue Hat” health food supplement business; in early August 2018, Alibaba Health further acquired Tmall’s e-commerce platform operations covering categories such as medical devices and healthcare products, adult family planning products, contact lenses, and medical and health services. Meanwhile, Alibaba Health expanded its outsourcing and value-added services for Tmall’s nutritional and health supplement categories, achieving full-category coverage of the Tmall Pharmacy Pavilion.

Official data shows that as of March 31, 2018, the annual gross merchandise value (GMV) of Tmall’s medical device business had reached RMB 20.561 billion, involving 85.5 million active buyers and more than 3,300 registered merchants, including well-known brands such as Omron, Yuwell, Johnson & Johnson, Bausch + Lomb, and Durex.

The combined gross merchandise volume (GMV) of Tmall’s pharmaceutical category products operated by Ali Health and the e-commerce platform services for health food products acquired by Ali Health exceeded RMB 30 billion, with e-commerce platform service revenue reaching RMB 171 million, representing a year-on-year increase of 324.1%.

This indicates that Alibaba Health controls the entry point for over RMB 50 billion in e-commerce sales of pharmaceuticals, medical devices, and health supplements, making it the most significant traffic distribution platform and gateway in China’s pharmaceutical e-commerce and consumer health sectors.

In addition to its B2C pharmaceutical business, Alibaba Health is also “actively expanding into the offline pharmaceutical retail market and continuously exploring new development pathways for new retail in the pharmaceutical sector.” In May 2016, Alibaba Health spearheaded the establishment of the China Pharmaceutical O2O Pioneer Alliance together with 65 retail pharmacy chains. Over the past few months, Alibaba Health has collaborated with leading offline chain pharmacies within the O2O Pioneer Alliance, partnering successively with Cainiao and Ele.me’s Hummingbird delivery service to launch 24-hour emergency medication delivery services in four cities: Beijing, Guangzhou, Shenzhen, and Hangzhou.

Meanwhile, Alibaba Health has made successive strategic investments in regional leading pharmacy chains, including Shuyu Pingmin in Shandong, Huaren Health in Anhui, and Guizhou Yishu. Shuyu Pingmin, deeply rooted in the Shandong market, operates over 1,000 stores and reported sales of RMB 2.86 billion in 2017, ranking 11th among China’s top 100 pharmaceutical retailers. Huaren Health, established in the Anhui market, owns more than 500 stores under its Guosheng Pharmacy brand, making it one of the largest pharmaceutical retail enterprises in Anhui Province. Guizhou Yishu, also a regional chain leader, is deeply entrenched in the Guizhou market.

From online to offline, Alibaba Health has established a comprehensive new retail layout for pharmaceuticals, providing users with integrated in-store and at-home services. This has greatly enriched the pharmaceutical retail ecosystem and created a seamless online-to-offline service loop.

Within Alibaba Health’s strategic roadmap, smart healthcare is undoubtedly one of the most critical business lines. This segment connects hospitals at the upstream end, integrates a middle layer of medical artificial intelligence technologies and service providers, and reaches downstream consumer (C-end) users. By offering internet hospitals, medical AI solutions, and health management as its core products, it establishes a complete closed-loop ecosystem for smart healthcare services.

On March 29, 2017, Alibaba Cloud launched “ET Medical Brain,” formally entering the medical AI sector. ET Medical Brain serves as an assistant to physicians in areas such as virtual patient assistance, medical imaging, precision medicine, drug efficacy mining, new drug research and development, and health management. By September of this year, in collaboration with Alibaba Cloud, ET Medical Brain was upgraded to version 2.0. In October of this year, AliHealth and the Beijing Municipal Science & Technology Commission announced the joint establishment of China’s first open innovation application platform for medical AI, while also launching a third-party artificial intelligence open platform dedicated to the medical AI industry.

In mid-October, it was announced that Alibaba Health, Alipay, and Yuhang First People’s Hospital had officially integrated and successfully implemented health insurance point-of-care settlement at the hospital following six months of system development and joint debugging. During the one-and-a-half-month trial period, there were over 1,000 instances of “face-scanning for medical services,” and 200 patients completed their registration at the hospital using facial recognition.

In mid-November, Alibaba Health announced the signing of a strategic cooperation agreement with Alipay, a subsidiary of Ant Financial, to exclusively establish an independent healthcare services channel on the Alipay client app, and to fully manage and operate the healthcare businesses and industry partners within this channel.

Meanwhile, the earnings announcement revealed that Alibaba Health’s proprietary artificial intelligence (AI) products are being fully implemented: it has launched China’s first commercial AI product for comprehensive CT-based detection of pulmonary diseases and deployed it at partner institutions. In collaboration with the National Metabolic Disease Research Center, the company has completed the development of the “Rui Ning Zhu Tang” AI-assisted decision support system for diabetes medication management and organized the “Rui Ning Zhu Tang” Artificial Intelligence Competition.

In its announcement on November 20, Alibaba Health revealed: “The Group’s sustained enhancement in profitability will help us continue to invest in areas such as medical big data and medical artificial intelligence, and increase our investment and strategic layout in innovative businesses including internet healthcare and smart healthcare. This also serves as clear evidence of Alibaba Health’s continued deepening engagement in the healthcare sector and its expanded presence within hospitals.”

As stated in this announcement, Alibaba Health’s mission is to “make health accessible.” By connecting participants in China’s pharmaceutical and healthcare market, it aims to “leverage big data to empower healthcare and use the internet to transform health,” providing equitable, inclusive, and accessible pharmaceutical and healthcare services to one billion people. With its pharmaceutical retail business gradually taking shape, Alibaba Health’s broader ambition lies in smart healthcare.