Alibaba Health's Mega-Platform Strategy: Tmall Pharmacy and MaShang放心 as Key Drivers to Profitability | Review and Outlook

2016 was a year of particular significance for Alibaba Health. “Success and failure both stem from the same source.” The electronic drug traceability code sparked disputes, yet it also turned the tide in the company’s favor. Currently, Alibaba Health’s business operations are primarily focused on product traceability, pharmaceutical e-commerce, medical service networks, and health management.

As healthcare reform policies continue to extend to the grassroots level, Alibaba Health will leverage rural Taobao service stations to embed remote consultations into villages, facilitating medical access for villagers and achieving the goal of “managing minor illnesses within the village, treating major illnesses at the county level, and connecting severe cases with provincial hospitals.”

According to Alibaba Health’s 2016 semi-annual report, the company’s losses still reached RMB 100 million. However, Wang Lei, CEO of Alibaba Health, stated that the company is not in a hurry to make short-term profits. “Focus on building the platform first; once the business model is proven viable, profits will naturally follow.”

On November 5, 2016, Rural Taobao joined hands with AliHealth to launch the “Bringing Health Services to Villages” initiative. In the future, this program will deliver health services—including medical check-ups, online health consultations, and supportive healthcare knowledge and facilities—to residents in nearly 20,000 village service points under Rural Taobao. It is estimated that more than ten million villagers will benefit from this initiative.

Shi Lijia, head of the “Bringing Health Services to Villages” initiative under Rural Taobao, revealed that post-examination health data from villagers can be interpreted via the AliHealth Online Hospital available at service stations, thereby providing access to health management plans formulated by specialists from major hospitals. Furthermore, Rural Taobao service stations are equipped with smart devices from the AliHealth Smart Care Program, including thermometers, blood glucose meters, blood pressure monitors, and smart scales, enabling residents to enjoy the convenience of internet-based health management.

Cities Selected by Alibaba Health for Pilot Programs: The Village Clinic of Zhuping Village, Caotang Town, Fengjie County; Fengjie County People’s Hospital; and Southwest Hospital in Chongqing. These initiatives aim to facilitate medical access for rural patients and implement a tiered diagnosis and treatment system. By leveraging telemedicine and optimizing the utilization of medical resources, the program extends coverage to primary-care physicians and patients at the grassroots level, with the goal of establishing Fengjie as a model for the large-scale promotion of telemedicine integrated with tiered diagnosis and treatment.

In fact, due to factors such as inconvenient transportation and underdeveloped economy, Fengjie County still has a poverty-stricken population of up to 120,000. Among this group, the rate of poverty caused or exacerbated by illness is as high as 30%. As poverty alleviation is a key priority of current government work, this segment of the population cannot be overlooked. The ideal approach is to ensure that villagers have access to medical care and can afford it, giving rise to the concept of “Internet + Healthcare for Poverty Alleviation.”

Fengjie has made numerous proactive efforts to alleviate poverty and achieve prosperity, including initiatives such as introducing Rural Taobao and developing e-commerce. Early this year, Fengjie was designated by the National Development and Reform Commission, the Cyberspace Administration of China, and the State Council Leading Group Office of Poverty Alleviation and Development as a pilot county for “Internet + Targeted Poverty Alleviation,” demonstrating a strong Internet DNA within its county-level economy.

Rural Taobao is a distinctive feature of Fengjie’s economy. The county has established 120 Rural Taobao service points, which enable rural residents to sell local specialty products and access external information, making these hubs central to rural life. To further leverage the potential of these service points, integrating healthcare services is a logical next step.

Over the past year, another significant event for Alibaba Health was the suspension of implementation regulations related to the Drug Electronic Supervision Network and the launch of the third-party traceability platform “Ma Shang Fang Xin.”

Back in late 2015, Alibaba Health held discussions with the China Food and Drug Administration (CFDA) regarding the future operational rights of the Drug Electronic Supervision Network. Under the previous arrangement, Alibaba Health’s subsidiary, CITIC 21st Century, was entrusted with the operation and maintenance of the network; however, this endeavor had consistently been operating at a loss.

The dispute dates back to 2014, when Ali Health acquired a stake in CITIC 21st Century and obtained the operational rights to the Drug Electronic Supervision Network. Since then, industry debate over whether Ali Health legitimately holds these operational rights has persisted. Although Ali Health has repeatedly clarified that data ownership remains with the government, this has failed to dispel external skepticism.

By early 2016, the situation had further evolved. The core of the lawsuit filed by Hunan Yangtianhe Pharmacy Enterprise Group Co., Ltd. against the China Food and Drug Administration (CFDA) centered on the rationale for the existence of the Drug Electronic Supervision Network and the legality of its operational rights. The plaintiff argued that Alibaba Health, as a commercial entity, was both engaged in online drug sales and entrusted with operating industry-wide data (including sales-related data) on behalf of state authority, thereby creating unfair competition within the industry.

Regarding the electronic drug supervision code, the China Food and Drug Administration (CFDA) expects it to effectively combat counterfeit drugs and eliminate all sales channels for such products. Furthermore, it enables effective traceability of “problematic drugs” across production, wholesale, and distribution stages. As reported by media outlets, following last year’s “vaccine incident,” Ali Health collaborated with the CFDA to analyze data and identify leads, providing analytical results on suspected enterprises. This demonstrates that the electronic supervision system can indeed monitor in real time whether product sources originate from legal or illegal sales channels.

“We have always believed that this is a worthwhile endeavor, and one worth persisting in, because the value of the electronic drug supervision code cannot be ignored,” said Wang Lei.

More than three months after the China Food and Drug Administration (CFDA) announced the suspension of enforcement of the 2015 regulations on electronic drug supervision, Alibaba Health launched “Ma Shang Fang Xin,” an open, market-oriented third-party traceability platform. This platform is compatible with the former electronic drug supervision code system and serves brand owners, distributors, government agencies at all levels, and consumers. The platform enables brand owners to continuously improve their product traceability systems; allows distributors to record or label the products they purchase and sell; provides professional consulting services to government agencies at all levels for planning important product traceability systems; and offers permanent, free query services to the public.

On September 27 of last year, the China Food and Drug Administration (CFDA) issued the "Guiding Opinions on Promoting Food and Drug Producers and Traders to Improve Their Traceability Systems" (hereinafter referred to as the "Opinions"), formally providing guidance on advancing the improvement of food and drug traceability systems by producers and traders. The "Opinions" emphasize that food and drug producers and traders shall assume primary responsibility for establishing their traceability systems, ensuring that product sources are verifiable and distribution paths are traceable. The "Opinions" explicitly state that enterprises are not mandated to use designated traceability systems; producers and traders lacking information technology infrastructure may adopt paper-based records or other methods to achieve traceability.

This means that enterprises have greater flexibility to choose suitable drug traceability systems, which led Harbin Pharmaceutical Group to develop its own “Ma Shang You” app for end-to-end drug information traceability. However, this app faced joint resistance from numerous pharmacies. The core reason for the initial setbacks of Harbin Pharmaceutical Group’s traceability system lies in the interest-based game between manufacturers and distributors. From a broader perspective, more pharmacies and pharmaceutical companies will continue to use traceability systems compatible with the original electronic supervision code system, given the substantial financial and time costs associated with switching to a new system. Consequently, Alibaba Health has identified a commercial model to operate the new traceability system.

Under the fee schedule of the “Ma Shang Fang Xin” platform, storage volumes below 20 million codes are charged as if they were 20 million, resulting in a minimum monthly storage fee of RMB 200, or RMB 2,400 annually. Previously, pharmaceutical manufacturers using the Drug Electronic Supervision Code Platform only needed to pay an annual key fee of RMB 300.

At present, the electronic supervision code remains Alibaba Health’s largest source of revenue.

Alibaba Health’s 2016 semi-annual report shows that revenue from its electronic supervision network reached RMB 48.983 million, a year-on-year increase of 184.9%. However, it is understood that the electronic supervision code still accounts for a significant proportion of revenue due to the rapid growth in the number of healthcare institutions and pharmacies joining the network in the second half of 2015.

Another controversial topic is Alibaba Health’s self-built Tmall Pharmaceutical B2C platform. This has been a disaster similar to that of the “Ma Shang Fang Xin” platform.

As early as 2011, Tmall Pharmacy launched its operations. It was subsequently suspended due to qualification issues before resuming services. Alibaba’s acquisition of Hebei Huiyan (whose subsidiary, 95095, obtained the first pilot license for a third-party B2C pharmaceutical platform) was aimed at resolving the operational licensing requirements for Tmall Pharmacy. According to regulations set by the China Food and Drug Administration (CFDA), the pilot license had an operational period of one year. In addition to 95095, 800 Fang and Yihaodian also received this license.

95095 obtained its license in November 2013, with its one-year pilot operation qualification expiring in November 2014. In the same year, 95095 applied for an extension of its pilot status and was approved to extend its pilot operation qualification for another year until November 2015. However, the China Food and Drug Administration (CFDA) did not provide a clear statement on the future direction of this license thereafter. It was not until late May last year that the CFDA issued a document halting the pilot platform and stipulating that third-party platforms such as Tmall Pharmacy were temporarily prohibited from selling any over-the-counter (OTC) products.

The sudden suspension of the pilot platform indeed caught Tmall Medicine by surprise. Subsequently, Ali Health established its own pharmaceutical B2C platform to ensure a better shopping experience for consumers. Moreover, the self-operated B2C model primarily focuses on over-the-counter (OTC) drugs, which do not directly compete with the existing merchants on Tmall Medicine in terms of product categories.

In August 2016, Alibaba Health acquired Guangzhou Wunian Medical Chain Co., Ltd., which held the Class C Internet Drug Transaction Service Qualification Certificate, for RMB 16.8 million, thereby launching its B2C pharmacy business. According to Alibaba Health’s 2016 semi-annual report, the company’s online self-operated store, Alibaba Health Pharmacy, officially opened on September 12, 2016. The B2C pharmacy business generated revenue of RMB 1.38 million, with the online self-operated store contributing RMB 789,000 in just over half a month. In its announcement, Alibaba Health also stated that the B2C business would rapidly become the most significant source of operating revenue in its next phase of development.

Currently, users can still browse the product detail pages for over-the-counter (OTC) medications on Tmall’s Health Pharmacy channel. However, purchases must be fulfilled by third-party merchants through a “Submit Request” button, and online payment is unavailable; customers can only pay upon delivery. “The shopping experience has indeed been significantly impacted,” Wang Lei admitted.

Currently, nearly 300 B2C pharmacy merchants operating on the Tmall Health Pavilion have been compelled to shift their focus for OTC sales to their own official websites due to the suspension of services by third-party B2C platforms. Meanwhile, Alibaba Health has begun building its O2O platform.

Since the Double 11 Shopping Festival, Jack Ma has been consistently advocating for “New Retail.” In his strategic vision for Alibaba’s future, “New Retail” represents the overarching direction, and the pharmaceutical sector is no exception. Jack Ma stated that over the next ten to twenty years, the concept of “e-commerce” will cease to exist; only through the integration of online and offline channels with logistics can true “New Retail” emerge.

Since Alibaba Health launched its own B2C pharmaceutical platform, many merchants have expressed concerns: Once Alibaba Health scales up its B2C business, will we no longer have a reason to exist?

“Alibaba Health has always adhered to operating solely as an open platform. We will certainly not transform into a super-large pharmacy ourselves; instead, we will choose to collaborate with leading regional pharmacy chains,” said Wang Lei.

In fact, drug purchasing is highly regional, leading to variations in brand preferences among consumers across different regions. This is why no single pharmacy chain in China currently boasts a nationwide network. Another major reason for this market characteristic is the relative fragmentation of upstream enterprises. In the United States, pharmaceutical manufacturers and distributors are relatively consolidated, whereas in China, there are over 4,000 pharmaceutical manufacturers and as many as 13,000 pharmaceutical distribution companies.

This also reflects the original intention behind Alibaba Health’s establishment of the O2O Pharmacy Pioneer Alliance: to unite relatively fragmented chain pharmacies across China and achieve mutual benefit and win-win outcomes.

The Pharmacy Pioneer Alliance has established the “Four Interconnections and One Fast Delivery” standard, namely: member interoperability, service interoperability, procurement interoperability, online-offline product integration, and rapid O2O delivery.

First, a unified system is required. Because pharmacies adopt vastly different management systems, it is impossible to enable the sharing of member information among them.

Next is service interoperability, whereby users who purchase medications through the Alibaba Health platform are provided with corresponding pharmaceutical care services and can engage in remote online consultations with offline chain pharmacies. Procurement interoperability refers to pharmacies joining the alliance to participate in centralized procurement, thereby securing competitively priced products.

If a chain pharmacy wants to conduct promotions on university campuses but is unsure which products to sell to students, Alibaba Health can provide relatively precise recommendations for promotional products based on the purchase data of this user demographic.

On the other hand, AliHealth can also help pharmacies extend their shelf space. Pharmacies are constrained by the limited physical space of their offline stores, which restricts their product inventory. However, AliHealth can facilitate user purchases by displaying relevant product information online, with subsequent delivery handled by corresponding wholesalers. This represents the integration of online and offline merchandise flows. The prerequisite for achieving rapid O2O (Online-to-Offline) delivery is the possession of localized offline physical stores.

It is reported that the Pioneer Alliance now comprises more than 100 members, covering over 10,000 offline brick-and-mortar stores. However, Wang Lei noted that these chain pharmacies are predominantly concentrated in second-, third-, fourth-, and fifth-tier cities. “The distribution of pharmaceutical resources in second- to fifth-tier cities is less abundant than in first-tier cities, and residents have a stronger demand for pharmaceutical services.” In fact, channel penetration into lower-tier markets is a trend across the entire e-commerce industry. JD.com, Alibaba, and Suning are not only aggressively expanding into third- and fourth-tier cities but have also launched fierce competition for rural markets.

With the rise of the Internet, big data has garnered increasing attention; indeed, every industry is discussing it. Major players in the healthcare sector, such as Tencent, Baidu, and Ping An, are exploring various possibilities for integrating big data with their related business operations.

Baidu established Baidu Medical Brain, leveraging its data collection technologies to pursue medical big data initiatives; its debut on The Super Brain garnered immense popularity. Meanwhile, Ping An is conducting in-depth mining of medical big data through its subsidiary platform, Ping An Good Doctor.

In the future, Alibaba Health will also focus on building a medical big data system, as big data will help optimize the operation of existing business models.

Previously, Alibaba Health formulated a ten-year strategic plan. First, to ensure that the general public has access to affordable and reliable medications, which includes developing an electronic regulatory traceability platform and operating pharmaceutical e-commerce services. Second, to leverage big data to support healthcare delivery. Third, to transform health management through internet technologies. The ultimate goal of Alibaba Health is to establish a closed-loop ecosystem that integrates pharmaceuticals, medical services, and insurance.

Within the existing public healthcare system, pharmaceuticals, medical services, and insurance operate relatively independently, making it difficult to generate synergistic effects. “Whether from a research or commercial perspective, data can only create value when it forms a closed loop.”

The application of data can be observed from the following aspects:

1. Data from the Tmall Medicine Pavilion can directly feed back to corresponding merchants, facilitating their monetization efforts.

2. Applied to primary healthcare, the establishment of a cloud-based medical imaging platform helps village doctors and primary healthcare institutions reduce misdiagnosis rates.Wanli Cloud, in which Alibaba Health has invested, is building a “Remote Imaging Center” to provide primary healthcare institutions with services including managed operations, image interpretation, and expert consultations for complex cases. Meanwhile, Wanli Cloud will also establish professional “Third-Party Imaging Centers” to help large hospitals divert imaging service volumes.

Patients can initiate personal remote imaging requests via the Ali Health App, seeking secondary diagnostic consultation opinions on medical images from experts in the “Expert Studios” hosted on the platform or from physicians practicing at multiple institutions. This approach enables patients to access expert image interpretation and diagnosis both through offline medical institutions and via multiple online channels on the client platform. Building on the reduction of misdiagnosis rates, Ali Health will next endeavor to standardize these related services.

3. Development of an intelligent engine for healthcare, commonly referred to as artificial intelligence.

Feeling unwell and wanting to consult a doctor via the Taobao mobile app, how can one find the most suitable physician among thousands of online consultants? Reporters learned that Alibaba Health has developed and launched “Health Xiaomi” on the Taobao mobile app—a smart pharmaceutical and healthcare Q&A engine designed to help users resolve this dilemma.

According to Alibaba Health’s algorithm team, this engine, which functions similarly to an intelligent Q&A bot, can answer general medical and health-related questions from ordinary users. Based on user preferences, it then automatically matches them with appropriate physicians or pharmacists. Furthermore, in response to user inquiries, the engine automatically generates several candidate answers for healthcare professionals to review. These professionals may directly select a suggested answer, make minor modifications, or craft a new response to provide to the user. These modifications and newly added responses are fed back into the engine, thereby automatically optimizing its coverage.

The engine operates on the principle of leveraging multiple medical and health data sources. By employing artificial intelligence (including deep learning) technologies, the intelligent engine effectively integrates, utilizes, and consolidates the collective expertise and wisdom of physicians, pharmacists, and nutritionists on the platform. This approach not only eliminates long user wait times and enhances user experience but also improves the overall service quality and efficiency of Alibaba Health’s online doctors.

In addition, Alibaba Health is developing more intelligent engines designed to help physicians improve efficiency. Lung cancer is a common visceral malignancy. Traditional manual interpretation of lung CT scans is time-consuming and associated with high misdiagnosis rates. The pulmonary nodule Computer-Aided Detection (CAD) system under development by Alibaba Health employs deep learning technology to enable automated analysis of lung CT images for the detection of pulmonary nodules. This system can reduce radiologists’ image reading time and improve diagnostic accuracy. Meanwhile, it can effectively alleviate the shortage of high-quality medical resources in remote areas.

Alibaba Health currently employs over 300 people, nearly half of whom are engineers. “Our business does not rely on a manpower-intensive strategy; our core focus is on building a robust platform,” said Wang Lei. He noted that the big data sector is still in a highly competitive and fragmented stage, and Alibaba Health has a long journey ahead to explore and refine its approach.

Alibaba Health is also actively laying out its insurance business within its entire closed-loop ecosystem. Last year, Alibaba Health announced plans to collaborate with several companies to establish an internet-based health insurance company.

Based on the major events involving Alibaba Health last year, it can be anticipated that the following business areas will be prioritized for development in 2017:

The use of electronic traceability systems is a key measure adopted by the Chinese government to strengthen the oversight of critical products such as pharmaceuticals and food. The Chinese government continues to mandate that enterprises assume responsibility for implementing traceability systems for their products. Leveraging its accumulated experience in platform operations, the company will continue to increase its investment in market-driven traceability system platforms. By collaborating with enterprises, industry associations, governments at all levels, and third-party technical service providers, it aims to build a robust ecosystem, expand the service capabilities of traceability platforms, support industry development, fulfill social responsibilities, and safeguard public health.

The Chinese pharmaceutical and healthcare market is characterized by a highly fragmented distributor landscape and an elongated supply chain. There remains significant room for efficiency improvements within the pharmaceutical product supply chain. The Group is committed to leveraging internet-based solutions to enhance supply chain transparency, reduce information asymmetry, and improve supply chain efficiency, thereby delivering benefits to all market participants and consumers. The Group will continue to strive to build a more efficient pharmaceutical distribution network, enhancing user experience through technology-driven initiatives and business model innovation, while promoting industry transformation and upgrading.

The Chinese government has implemented multiple healthcare reform measures to encourage the adoption of tiered diagnosis and treatment systems and multi-site practice for physicians. The Group will continue to actively explore healthcare services tailored for rural areas, leveraging its Rural Taobao service stations that already cover 28 provinces. By integrating Alibaba’s resources in e-commerce, finance, education, and entertainment into grassroots communities, the Group aims to advance the development of new socialist countryside. In the next phase, the Group will roll out smart devices at Rural Taobao service stations in stages to provide chronic disease screening and management services, further alleviating the imbalance in the distribution of pharmaceutical and medical resources between urban and rural areas and meeting the growing healthcare demands of the rural population.

The internet, big data, and various innovative technologies have brought new opportunities to address challenges in the healthcare sector. The Group will continue to enhance its health management platform through its Smart Care Initiative, providing consumers with comprehensive health management services that span their entire lifespan and offer round-the-clock support. Moving forward, the Group will collaborate with more like-minded partners to explore the application of big data analytics in establishing personalized electronic health records for the public, thereby promoting integrated health services that cover prevention, treatment, rehabilitation, and health management across the full life cycle.

On January 13, 2016, Ali Health and Sinopharm Health Online Co., Ltd. jointly announced the creation of a public-interest medicine search platform. The platform was made freely accessible to the general public to help patients and their families locate scarce and urgently needed medications, marking the first non-profit public medicine search platform.

In March 2016, Alibaba Health invested RMB 225 million in Wanli Cloud, a subsidiary of China Resources Wandong, acquiring a 25% equity stake and the right to nominate two of the five members on Wanli Cloud’s board of directors, thereby ushering in an era of remote imaging diagnosis and treatment for patients.

On May 25, 2016, Baijiahui Suhe, Deshengtang, Baicaotang, and 63 other pharmacy chains joined forces with Ali Health to jointly announce the establishment of the “China Pharmaceutical O2O Pioneer Alliance.”

In June, Alibaba Health announced the launch of its traceability platform, “Ma Shang Fang Xin.”

On September 7, Ali Health, in collaboration with the Center for Disease Control and Prevention (CDC) of Hannan District, Wuhan City, Hubei Province, jointly launched a QR code-based inquiry service for citizens to track vaccine storage and transportation temperatures and distribution channels.

On September 13, the service agreement between Alibaba Health and Tmall was unanimously approved by the shareholders’ meeting with 100% support. Alibaba Health has obtained exclusive operational rights for Tmall’s pharmaceutical segment and will provide comprehensive outsourcing and value-added services to the Tmall Pharmacy Pavilion, assisting Tmall in developing its e-commerce business for pharmaceuticals and health products while charging corresponding fees.

On October 9, Alibaba Health and Tmall Pharmacy jointly launched the “Nourish China” brand strategy and announced the establishment of the “Nourish China Traceability System,” enabling item-level traceability for health supplements through a unique code for each product.

On October 19, the “Smart Care Initiative,” jointly launched by AliHealth and dozens of smart medical and health device brands, was officially unveiled, infusing “intelligence” into smart health devices.

On November 5, Alibaba Health partnered with Rural Taobao to launch the “Bringing Healthcare Services to Villages” initiative. In the future, this program will deliver healthcare services—including physical examinations, online consultations, and supportive health education and facilities—to residents in nearly 20,000 village-level service points under Rural Taobao, with an estimated benefit to over ten million rural residents.