The Only Path for Traditional Pharmaceutical Enterprises to Enter E-commerce: A Prospectus on Third-Party Operation Services

VCBeat (WeChat ID: vcbeat) Note: The author of this article is a veteran in the pharmaceutical e-commerce industry, with work experience in both B2B and B2C companies. Based on his observations, the e-commerce channel is receiving increasing attention from pharmaceutical manufacturers and distributors. However, many companies still lack a thorough understanding of specific operational strategies. Therefore, the author introduces the development and evolutionary logic of pharmaceutical e-commerce (B2B) from a practical perspective and boldly predicts emerging trends.

By April 2017, as the state relaxed approval requirements for B2B (Category B) and B2C online pharmaceutical sales, shifting from an approval-based system to a record-filing system, the e-commerce journey of the pharmaceutical industry entered a new chapter. Industry consensus holds that the transition to a record-filing system does not mean that anyone can engage in pharmaceutical e-commerce; on the contrary, regulatory scrutiny will become increasingly stringent, and operational pressures will continue to mount. In this context, what attitudes should pharmaceutical manufacturers, pharmaceutical distributors, and pharmacy chains adopt, and what strategic postures should they assume to meet the increasingly specialized landscape of pharmaceutical e-commerce?

Phase I,Digitization Phase, spanning from the early 1990s to 2005. During this phase, pharmaceutical commercial enterprises responded to national calls by implementing electronic office systems within the industry. In addition to achieving internal digitalization, many pharmaceutical commerce companies established their own official websites to sell pharmaceutical products. However, due to limitations in China’s overall e-commerce hardware and software infrastructure, as well as purchasers’ lack of acceptance of online procurement, online purchasing initiatives failed to gain traction. Thus, the defining characteristic of this stage was the internal digitalization of enterprises.

Phase II,Enlightenment PhaseThis phase spanned from 2005 to 2009. The issuance of the first online pharmacy approval license in 2005 brought pharmaceutical e-commerce into the public eye. Although it was a Class C license, it still injected significant momentum into the previously stagnant pharmaceutical e-commerce market. After Haihong applied for a Class A license, the pharmaceutical B2B market also began to take shape. During this period, various technology companies gradually emerged, including “Jiuzhoutong Pharmaceutical Network,” “Jinlida Pharmaceutical Network,” and “Kuaiyijie Pharmaceutical Network,” which remain active today. The hallmark of this phase was the digital transformation of traditional industries.

Phase III,Passive Phase, this phase spanned from 2009 to 2016. It was characterized by the digitization of transactions. It can be said that true pharmaceutical e-commerce gradually took shape, with platforms holding Class A Internet Drug Information Service Qualification Certificates playing the leading role. From 2009 to early 2013, the state maintained an observational and experimental stance toward pharmaceutical e-commerce, adopting a conservative attitude regarding its potential to develop a sustainable business model. For a considerable period, the government did not relax the approval process for Class A certificates until the first half of 2013. Representative websites during this phase included “Hanning Pharmaceutical Network,” “Drug Terminal Network,” and “My Pharmaceutical Network.” Building on their respective strengths, these websites began to explore their own pharmaceutical e-commerce models. However, their approach merely involved forcibly migrating offline operations online. This fundamental starting point led to insurmountable challenges in promotion and operations, such as “burning cash to cultivate user habits” and “spending money to acquire buyers and sellers.”

Phase IV,Active PhaseThis phase, occurring after 2017, will see pharmaceutical commerce gradually shifting toward self-operated models. A key milestone is the aforementioned “relaxation of state approval for B2B (Class B License) and B2C operations.” The author predicts that within two to three years, pharmaceutical commerce enterprises will allocate time and resources to genuinely implement e-commerce strategies and operations. The defining characteristic of this stage is: integration.

First,The pharmaceutical industry is relatively unique., significantly influenced by national policies, with pharmaceutical e-commerce being even more so. The impact of the Two-Invoice System and the VAT reform on the industry needs no explanation; the state’s original intent was not only to regulate but also to optimize the industrial chain. Prior to the implementation of these regulations, the industry was fraught with anxiety. However, as the cases were settled, both manufacturers and distributors appeared remarkably calm. Instead of speculating about when policies will be implemented, it is better to devote time to compliance and new market development. In the short term, without a substantial increase in costs, the fastest and most effective way to boost sales is through “Internet Plus.”

Commercial enterprises must break free from the narrow-minded notion that “data is king” and instead adopt the principle that “service is king.” The sole reason clients rely on commercial companies for procurement is simply “excellent service.” Often, when we ask, “How many purchasing customers does your company have?” the response might be, “3,000!” This may seem impressive, ranking among the top in the local market. In reality, however, we need to scrutinize this figure of 3,000 customers closely. Are all 3,000 continuing to make purchases? How many account for 80% of sales revenue? It is possible that these 3,000 represent only historical purchasers. Customer count is merely a number; successful commercial companies transform data into sales. The value of penetration rate far exceeds that of coverage rate for commercial enterprises, and e-commerce platforms initially address precisely the issue of penetration rate.

Second, the industry trend is characterized by mergers and acquisitions.Incorporating e-commerce is conducive to boosting valuationIn recent years, central state-owned enterprises such as China Resources and Sinopharm, along with giants in the pharmaceutical industry chain, have targeted every segment of the sector and expanded their presence across various regions in China. Last year, the number of mergers and acquisitions (M&A) in the national pharmaceutical industry exceeded 400, with a total transaction value surpassing RMB 180 billion, while overseas M&A deals amounted to over RMB 20 billion, setting new records for both deal volume and value. Data from listed company announcements and consulting firm reports indicate that since 2012, the number and value of M&A transactions in China’s pharmaceutical industry have continued to grow, increasing more than fivefold over the past five years. Companies are incorporating e-commerce business modules to gain additional negotiation leverage. Enterprises aim to enhance industry concentration through M&A-driven integration, while also considering strategies such as backdoor listings, asset restructuring, and the introduction of overseas technologies and R&D capabilities.

In 2017, China Resources seized the opportunity presented by the full implementation of the “Two-Invoice System” to accelerate its expansion into underserved provinces, deepen its distribution networks at the prefecture and city levels, and continuously strengthen its coverage of medical end-users, primarily through mergers and acquisitions (M&A). China Resources Pharmaceutical stated that it would acquire regionally leading distributors with strong relationships with hospitals and other competitive healthcare customers. Compared with China Resources Pharmaceutical, Shanghai Pharmaceuticals is accelerating its footprint in untapped markets on one hand, while seeking breakthroughs in pharmaceutical e-commerce on the other. Relying mainly on Shanghai Pharma Cloud Health, it has established an electronic prescription circulation system. Over the past year, it actively expanded its network of connected healthcare institutions. By the end of 2016, the number of new electronic prescriptions reached 217,000, representing a year-on-year increase of 600%; additionally, 30 new hospitals were integrated into its network nationwide, marking a year-on-year growth of 1,400%.

Across all industries, the capital market’s enthusiasm for e-commerce concepts has remained unabated. In 2014, Renhe’s introduction of the Dingdang Kuaiyao and F2C (Factory-to-Consumer) concepts drove its stock price up by 45% in a short period. Shanghai Pharmaceuticals was no exception. In the M&A market, many companies with annual sales of RMB 200–500 million have become acquisition targets. Integrating e-commerce operations and running them for a period to generate performance data can serve as an effective strategy to boost valuations.

Third, integrate industrial resources for one’s own use.Improve the operational efficiency of this segment, driving the optimization of the entire industrial chain, is the most tangible benefit that e-commerce can currently bring to the industry.

Pharmaceutical distribution companies with annual sales of RMB 500 million to RMB 1 billion exhibit distinct characteristics compared to their peers. These enterprises command extensive local resources, including customer bases, manufacturers, and medical institutions. Against the current backdrop of the pharmaceutical industry, survival is not a concern; the key priority lies in the continuous integration and restructuring of these resources.The Internet brings them resources from the periphery of their industries.For example, by collaborating with financial supply chain partners to leverage the advantages of online payments and alleviate capital pressure; and by partnering with digital health technology companies and chain pharmacies to jointly develop out-of-hospital prescription resources.

The market is constantly evolving. Given that the internet represents an irreversible trend, why not adopt a cautious, step-by-step approach? After all, after years of development, the pharmaceutical e-commerce sector is no longer starting from scratch. In regions such as Sichuan, Jiangsu, Zhejiang, and Guangdong, end-users have already developed mature procurement awareness.By leveraging the advantages of local services and established commercial brands, self-operated pharmaceutical e-commerce is bound to thrive.

When it comes to self-operated models, many people may ask: Isn’t it true that self-operation is inferior to joining third-party platforms? Why still choose self-operation?

Disclaimer:Self-Operation Is Not Equivalent to In-House Development. Self-operated models focus on management and operations, with operational infrastructure hosted either on proprietary websites or integrated with third-party platform systems; such models emphasize marketplace operations, promotion, and maintenance. In-house development encompasses the entire operational system, including system architecture, staffing, system maintenance, marketplace management, and content services.

Regarding the choice between in-house development and third-party operation, the author offers three perspectives.Cost Considerations, it is widely believed that e-commerce platforms provide a free software and hardware infrastructure, whereas building and operating a self-owned platform entails significant costs. In reality, while a self-operated platform does require upfront investment in software and hardware—including the development of proprietary procurement and sales systems, payment systems, databases, and repositories for contracts and quality management documentation—this initial outlay typically ranges from RMB 50,000 to 100,000. Additionally, ongoing expenses for software and hardware maintenance must be factored in later on. Therefore,From a short-term cost perspective, it is recommended that commercial companies collaborate with third-party platforms to leverage these external institutions for workforce development, business model exploration, and online sales.

If we consider only the short term and costs, my message to pharmaceutical commercial enterprises is simple: just let it be and muddle through. There is no such thing as a free lunch. After tech companies have amassed a trove of dispensable data, they will simply cast pharmaceutical commercial companies aside. Take a look: how many pharmaceutical commercial enterprises have generated sales independently through third-party platforms? How many third-party platforms have lowered their stance to accompany you on your e-commerce journey? The answer is none! After thoroughly examining all current platforms, we face a harsh reality: pharmaceutical distribution e-commerce has not yet truly integrated with pharmaceutical commercial enterprises.

Reasons include:

1. 1.The starting points for engaging in e-commerce are not consistent.Let us first examine the motivations of commercial companies. Many enterprises lacked the resources to engage in pharmaceutical e-commerce prior to 2016. Even when they did enter the e-commerce space, one of the primary drivers was to boost their valuations in the capital markets, as mentioned earlier. This passive approach was destined to fail. In contrast, pharmaceutical e-commerce firms, as technology-driven enterprises, aimed to acquire valuable data and present favorable financial statements to the capital markets. The outcome is predictable.

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3. 2.The level of effort invested varies.While it is true that pharmaceutical companies must ultimately build their own e-commerce platforms, is it not laughable to think that third-party platforms can help distributors enter the e-commerce space simply by quickly consolidating terminal resources and running a few promotional campaigns? Whether terminals are willing to adopt online procurement and whether an e-commerce culture can be fostered within distribution companies cannot be changed by a few ordering conferences. Only through sustained, efficient, and practical promotion, combined with a strategy of both incentives and discipline toward terminals, can genuine e-commerce habits be established.

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5. 3.Whether it is adapted for localization.In summary, pharmaceutical e-commerce has remained superficial, largely because third-party platforms fail to achieve full localization. What does this mean? Without product implementation grounded in local markets and without support from regionally best-selling products, how can you claim to jointly develop the market with local distributors? Without effective sales execution on the ground and lacking field promotion teams as a key lever, how can you gain the trust of manufacturers and thereby penetrate the chain pharmacy market?

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7. 4.Human Factors.Language, atmosphere, and habits are concepts that belong to the community. In a group with a strong pharmaceutical atmosphere, third-party community managers need to possess certain capabilities. First, they must be pharmaceutical professionals. They should understand the industry’s jargon, know which drugs sell well, which channels are profitable, how to boost sales, and who the local competitors are. To put it in perspective, how many third-party platform operators truly understand these nuances? Therefore, it is essential to have someone with experience in the pharmaceutical circle. Second, they should be locals. When discussing local businesses, everyone has endless stories to share; when mentioning shortages of specific drug varieties, all pharmaceutical professionals pay close attention. This approach is far more effective in driving engagement than posting high-level commentary or policy updates.

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The above discusses both the localization strategies for pharmaceutical distribution e-commerce and the inevitable path for pharmaceutical commerce to enter e-commerce—third-party operations.

Collaborations focused on team building, system maintenance, operational promotion, ongoing coaching, and value discovery for traditional pharmaceutical enterprises are collectively referred to as e-commerce third-party operations.

Third-party operation services are common in pharmaceutical B2C enterprises, with chain stores showing high acceptance of this model. This trend primarily stems from the rise of Tmall’s Pharmacy Channel, which initially focused on store operations for Tmall and later expanded to include self-operated websites. Such third-party operators can be individuals or corporate entities. Due to the low entry barriers in the pharmaceutical retail industry, third-party operators with preliminary B2C experience have rapidly evolved into specialized service providers for pharmaceutical e-commerce B2C operations.E-commerce operation agency services are relatively rare in the traditional pharmaceutical production and distribution sector., a few years ago in Xiamen, the author observed an agency providing operational outsourcing services for Xiamen Pien Tze Huang Hongren Commercial. As for the outcome, one can well imagine.

The Process of E-commerce Agency Operations in Pharmaceutical DistributionThe following outlines the process for e-commerce agency operations in pharmaceutical distribution. First, after both parties confirm their collaboration, the agency operator must thoroughly understand the client enterprise’s business model and operational framework to ensure targeted and effective online transactions. Subsequently, the agency operator will collaborate with various functional departments of the client organization and establish a coordination mechanism.Coordinate with the technical department to improve the system, liaise with counter sales staff regarding training and order placement, collaborate with sales representatives on strategies for promoting and educating end-users, and work with the procurement department on selecting product varieties for promotional activities.

Do not assume that outsourcing operations or integrating with an agency means the job is done. A critical task remains: continuous internal education. E-commerce awareness must permeate the entire organization, from senior leadership down to warehouse staff. During this process, identify and groom suitable candidates as successors. Having managed outsourced e-commerce operations for many traditional businesses, I have found that educating personnel is the greatest challenge I have encountered. Following this, the focus should shift to the sustained execution of campaigns and the ongoing optimization of internal processes.

Each of the aforementioned steps is critical and closely interconnected. I will provide a detailed overview of the specific scope of managed operation services in my next article. I have emphasized to my team that a managed service provider should not act as an outsider. Once engaged by the client to undertake business operations, it must adopt the right mindset, treating the client’s affairs as its own. This applies to all aspects, from e-commerce positioning and execution details to strategic alignment with leadership and persuasion of procurement stakeholders.

In summary, pharmaceutical e-commerce platforms require the support of professional third-party operation teams. It is the responsibility of these teams to lay a solid foundation and ensure a smooth transition. But what exactly does “third-party operation” entail? It means minimizing the risk of trial-and-error errors and fostering talent development!

Hong Xiuhai entered the pharmaceutical B2C e-commerce sector in 2007 and has been active in the pharmaceutical B2B arena since 2009. With many years of deep-rooted experience in pharmaceutical e-commerce, he has accumulated practical expertise at several renowned e-commerce companies, having held positions at Yaofang.com, Huayuan Pharmaceutical Network, Hanning Pharmaceutical Network, and My Pharmaceutical Network, among others.