Alibaba Health Enters Exclusive Three-Year Agreement to Operate Tmall's Healthcare and Wellness E-commerce Business

On April 1, Alibaba Health issued an announcement stating that, effective immediately, it has entered into a three-year service agreement with Tmall, under the Alibaba Group, to exclusively operate Tmall’s e-commerce business for pharmaceuticals and health products, in exchange for service fees.

The agreement disclosed in the announcement shows that Alibaba Health should provide Tmall with outsourcing and value-added services, including investment promotion, customer service, and operations for Tmall's medical and health e-commerce business, while Tmall will pay service fees to Alibaba Health.

Alibaba Health to Secure New Revenue Streams

“The Group believes that, through the Service Agreement, it will grow as a comprehensive service provider to the Tmall entity and develop additional capabilities to serve more participants in China’s healthcare industry. The Service Agreement will provide the Group with a new revenue stream benefiting from the growth of Tmall’s healthcare e-commerce business,” the announcement said.

Compared with the Tmall online pharmaceutical business previously injected into Alibaba Health, the assets of the nutritional and health supplement business are significantly larger.

Data shows that in 2015, the sales revenue of Tmall Health reached RMB 6.7 billion, with the top five best-selling products all belonging to the category of nutritional and health supplements.

Reports indicate that the specific fee structure for Alibaba Health’s operation of Tmall’s medical and health category is based on a profit-sharing model tied to the revenues of the Tmall Medical Pavilion. The exact sharing ratio remains undisclosed. However, the financial data of the Tmall Medical Pavilion are not consolidated with those of Alibaba Health.

Previously, Alibaba Health’s primary source of revenue was the electronic drug supervision code. According to Alibaba Health’s 2014 financial report, the company’s revenue amounted to HK$37.2 million, of which HK$37.18 million came from its electronic supervision network business, representing a year-on-year increase of 49.2% and accounting for 99.9% of total revenue. The gross profit margin of China’s Electronic Drug Supervision Network rose from 6.3% in the same period of the previous year to 22.4%.

However, in February this year, Alibaba Health was forced to hand over the management rights of the Drug Electronic Supervision Network to the CFDA due to the "Electronic Supervision Code Incident." The CFDA subsequently suspended the drug electronic supervision policy, causing Alibaba Health to lose its source of revenue.

In early 2014, Alibaba Group officially announced a RMB 1 billion investment to take control of the pharmaceutical e-commerce company CITIC 21st Century, which was renamed “AliHealth” in October of that year. The core asset of CITIC 21st Century was the drug electronic supervision code system. The controversy surrounding the “Electronic Supervision Code Incident” centered on whether the drug electronic supervision code system should be retained or abolished, and allegations that AliHealth was engaged in the improper commercialization of data.

Will Tmall Medicine Hall Be Injected into Alibaba Health?

Analysts suggest that Tmall Pharmacy may be injected into Alibaba Health in the future, which would effectively constitute a back-door listing for Tmall Pharmacy. The announcement indicates that both parties are actively exploring the possibility of injecting the “major business segments of health foods, dietary nutritional supplements, and traditional tonic nutritional products” into Alibaba Health, and may reach a final agreement in the shortest possible time.

The announcement further disclosed that, given the significant uncertainty currently facing China’s healthcare and pharmaceutical industry, the acquisition transaction would not be extended beyond the deadline specified in the Share Purchase Agreement. As the final deadline was not extended, the Share Purchase Agreement automatically terminated upon its expiration on March 31, 2016, and the proposed acquisition has lapsed.

In April 2015, Alibaba Group announced that it had reached a final agreement with AliHealth to transfer the operational rights of Tmall’s online pharmaceutical business to AliHealth in exchange for newly issued shares and convertible bonds of AliHealth. In January 2016, AliHealth issued an announcement stating that the acquisition date of Tmall’s online pharmaceutical business would be postponed to March 31, 2016.

“Alibaba Group has confirmed to the Company that it continues to support the Company, as the flagship healthcare business of Alibaba Group, in executing a strategy of organic growth and investment consistent with its mission to establish an online community connecting participants in China’s healthcare market,” the announcement stated. “The service agreement provides the Group with opportunities to further develop its expertise in the pharmaceutical and healthcare e-commerce sector in China.”

By Hao Xueyang, Bu Yan