With Ride-Hailing Legalized, Is Online Prescription Drug Sales Far Behind?
By Wu Chong
From a macro-policy perspective, the State Council’s overarching direction is to encourage “Internet Plus” initiatives and promote the development of pharmaceutical e-commerce. Meanwhile, the National Health and Family Planning Commission’s healthcare reforms aim to separate prescribing from dispensing and support the outflow of prescription drug sales from hospitals. However, at the implementation level, the China Food and Drug Administration (CFDA), constrained by the challenges of regulating drug distribution safety, has advanced hesitantly—often taking two steps forward and one step back. As a result, retail sales of prescription drugs and pharmaceutical e-commerce remain in an awkward position.
Data indicates that online pharmaceutical retail remains a key investment focus in internet healthcare.
In 2015, the domestic prescription drug market was approximately RMB 1.2 trillion, while the OTC market reached RMB 200 billion (Source: Zhongkang CMH);
In 2013, pharmaceutical e-commerce accounted for approximately 30% of total pharmaceutical sales in the United States, with prescription drugs comprising around 50% of the pharmaceutical e-commerce market. In China, pharmaceutical e-commerce (limited to medicines only) accounted for less than 1% of total pharmaceutical sales. Online drug sales in China were predominantly over-the-counter (OTC) products; according to Analysys data, online OTC sales reached approximately RMB 5 billion in 2015. Meanwhile, online sales of prescription drugs have remained in an awkward position.
Policy Changes Are One of the Key Themes in the Development of Pharmaceutical E-Commerce, with Investment Experiencing Ups and Downs
The 1999 Interim Provisions on the Circulation Management of Prescription and Over-the-Counter Drugs prohibited the online sale of prescription and over-the-counter drugs, nipping pharmaceutical e-commerce in the bud;
In 2005, the “Interim Provisions on the Approval of Online Drug Trading Services” liberalized online transactions for over-the-counter (OTC) drugs, and in 2006, the China Food and Drug Administration issued the first pharmaceutical B2C license. Investment in pharmaceutical e-commerce began to take off; however, it was not until around 2009–2010 that the sector truly entered its inaugural year, with the establishment of now leading pharmaceutical e-commerce platforms such as Yihaodian, Qilekang, and Kangaiduo. By 2012, China’s pharmaceutical e-commerce industry finally reaped the benefits of a traffic boom: the Tmall Pharmacy Hall was launched, quadrupling its traffic within that year.
The 2014 “Measures for the Supervision and Administration of Online Food and Drug Operations (Draft for Comment)” permitted internet platforms with appropriate qualifications to sell prescription drugs online, and allowed third-party logistics providers to handle the delivery of drugs or medical devices. The prospect of deregulating online sales of prescription drugs triggered a surge in investment in pharmaceutical e-commerce, with the top five financing rounds each exceeding USD 100 million: 111.com.cn (nearly RMB 2 billion), Shanghai Pharmaceuticals Cloud Health (RMB 1.1 billion), Qilekang (over RMB 1 billion), iKangduo (RMB 1 billion), and Jianke.com (USD 100 million).
On July 28, the China Food and Drug Administration (CFDA) published an article titled “Conclusion of the Pilot Program for Online Retail of Pharmaceuticals by Third-Party Internet Platforms,” and notified the food and drug regulatory authorities in Hebei Province, Shanghai Municipality, and Guangdong Province to terminate the pilot programs for online pharmaceutical retail conducted by Tmall Health, Yihaodian, and 800 Fang, thereby halting pharmaceutical retail operations on third-party platforms. This indicates that, with regard to the safety of online sales of prescription drugs, the CFDA currently lacks a sufficiently authoritative and systematic methodology for assessment, leading to the decision to suspend these activities for the time being.
On July 25, the National Development and Reform Commission (NDRC) released the “Plan for Assigning Key Tasks under the Guiding Opinions on Promoting the Healthy Development of the Pharmaceutical Industry,” which explicitly reaffirmed the directive prohibiting medical institutions from restricting the outflow of prescriptions. This move once again underscores the government’s determination to advance the separation of prescribing and dispensing and to facilitate the outflow of prescription drug sales from hospitals.
It is undeniable that policies governing pharmaceutical e-commerce are tightening. In May 2014, the "Measures for the Supervision and Administration of Online Food and Drug Operations (Draft for Comment)" opened up room for policy discussion on the online sale of prescription drugs, only for such activities to be halted later on grounds of inadequate regulatory oversight. However, since 2015, many pharmaceutical O2O trends have gained significant momentum among offline pharmacies. The delivery of prescription drugs by brick-and-mortar pharmacies fully complies with regulations. Consequently, we have observed Alibaba adopting a fallback strategy: on July 29, Alibaba announced that its Tmall Pharmacy platform would officially cease online drug transactions as of August 1, with all drug sales to be conducted via “cash on delivery.” Prior to this, on July 6, Alibaba Health had acquired full equity in “Guangzhou Wunianqian Pharmaceutical Chain Co., Ltd.,” thereby obtaining a B2C pharmaceutical e-commerce license. From this, it can be inferred that tighter pharmaceutical e-commerce regulations cannot halt the online sale of prescription drugs; further liberalization of relevant policies is merely a matter of time.
What investors are more concerned about is how large the market for online sales and delivery of prescription drugs is. This issue involves the outflow of prescription drugs.
Under the “drug-revenue-driven healthcare” model, China’s prescription drug market was traditionally confined to hospital pharmacies. However, since the launch of the new healthcare reforms, the separation of prescribing from dispensing has become a major trend. Policies such as caps on the drug-to-revenue ratio (by the end of 2017, public hospitals in 100 pilot cities were required to reduce their drug-to-revenue ratio from the then-current 42% to 30%), zero markup on hospital drugs (transforming hospital pharmacies into cost centers), and deregulation (including prohibitions on restrictions that hinder the outflow of hospital prescriptions) have continuously driven the outflow of prescription drugs from hospitals. According to estimates by China Pharmaceutical Network, the theoretical incremental market size generated by this prescription outflow exceeds RMB 200 billion in the short term, and is projected to reach RMB 900 billion in the long term (by 2020).
The policy climate is now in place; the outflow of prescription drugs still requires the participation of two stakeholders: pharmaceutical companies and hospitals, which correspond to the two key elements of prescription drugs entering retail pharmacies and the sources of prescriptions, respectively.
Pharmaceutical companies have made their stance clear: in response to the overall market trend of declining hospital tender prices amid stringent medical insurance cost containment, their strategy is to penetrate grassroots markets and expand into retail pharmacies. The former aligns with the expansion of primary care medication within tiered diagnosis and treatment medical consortia, while the latter corresponds to the retail sales of prescription drugs.
For pharmaceutical companies, the primary driver behind prescription drug retail sales is that many products are unable to enter hospital channels due to price reductions imposed through centralized procurement bidding. Additionally, for certain chronic disease medications not covered by medical insurance, retail channels offer greater convenience to consumers. Prior to 2014, among foreign pharmaceutical companies, only Pfizer’s Viagra was sold via prescription retail/e-commerce channels, with approximately 90% of its sales volume coming from pharmacies. In 2014, Merck & Co. became the first foreign pharmaceutical company to implement a comprehensive prescription drug retail strategy across its entire product portfolio. AstraZeneca followed suit in 2015. In 2016, Sanofi, Merck KGaA, Bayer, Eli Lilly, and Abbott, among others, established dedicated prescription drug retail teams. As a result, the range of prescription drugs available through retail channels has expanded, and these efforts have been supported by pharmaceutical companies in providing the essential pharmaceutical care services required for prescription drug sales.
Prescription sourcing requires hospital involvement, with the zero-markup policy on pharmaceuticals and internet hospitals currently serving as the primary drivers. As the zero-markup policy is piloted and advanced in public hospitals, the revenue hospitals derive from their in-house pharmacies continues to decline, and their control over prescriptions gradually weakens. Many public hospitals have already initiated pilots collaborating with socialized pharmacies, guiding patients to fill prescriptions at off-site pharmacies. However, from the perspective of actual development, medical consortia established by public hospitals under the tiered diagnosis and treatment system also possess the capacity to absorb hospital prescriptions, namely by directing patients to primary healthcare institutions for medication dispensing. This represents the true competitor to prescription drug retail.
The flip side of this positive trend is the proliferation of internet hospitals across China in 2016. Leveraging the advantages of electronic prescription circulation, prescription drugs are naturally suited for retail channels within internet hospitals. For pharmaceutical e-commerce platforms, electronic prescriptions have resolved policy restrictions on the sale of prescription drugs, making the collaboration a perfect match.
Overall, the National Medical Products Administration (NMPA) has taken a step back on the online sale of prescription drugs. However, the outflow of prescription drugs, coupled with policies supporting internet hospitals, has opened another door for pharmaceutical e-commerce. The rapid development of China’s pharmaceutical e-commerce sector is imminent, and the ensuing explosion in market size will, in turn, compel the NMPA to confront regulatory challenges directly, ensuring that policies are effectively implemented.
The author of this article is Wu Chong, an investment manager at Lian Fund. The views expressed herein do not necessarily reflect those of VCBeat. This article was exclusively first published by VCBeat after editorial review; please cite the source when reposting. Regarding the outflow of prescription drugs, we welcome you to share any additional insights or perspectives you may have.