Where Is China's B2C Pharmaceutical E-commerce Headed in 2016? Three Major Trends Emerge

Over the past two years, Jianyi.com, 111.com, and Qilekang have each secured hundreds of millions of yuan in financing; the pharmaceutical O2O model, once deemed a false premise, has begun to gain capital market recognition; and pharmaceutical e-commerce platforms have continued to break sales records during the annual “Double 11” and “Double 12” shopping festivals.

Meanwhile, Kangaidu, Jinxiang.com, and Yaofang.com have been acquired by different enterprises in succession. The long-standing reliance of pharmaceutical B2C platforms on traffic resources from third-party platforms such as Tmall and JD.com is expected to be broken, with more vertical pharmaceutical B2C players building their own traffic bases through their official websites. The era of simply selling drugs online has come to an end, as the pharmaceutical e-commerce sector enters a phase characterized by competition in services, with emerging models integrating “pharmaceutical e-commerce + healthcare” and “healthcare + pharmaceutical e-commerce.”

M&A Wave Continues

In 2005, China’s first license for online drug trading was issued to Yaofang.com; in 2015, Renhe Group acquired Yaofang.com and its parent company, Beijing Jingwei Yuanhua, in a full buyout for RMB 600 million.

In 2006, Jinxiang.com became the second company in China to obtain an Internet drug trading license. In early 2015, it became a wholly-owned subsidiary of WeDoctor Group. In 2014, Kangaiduo Online Pharmacy was fully acquired by Tai'an Tang for RMB 350 million. Will more online pharmacies be merged or acquired in the future?

The answer is yes.

Nowadays, internet giants such as BAT and JD.com, along with insurance powerhouse Ping An Insurance, are actively entering the pharmaceutical e-commerce market, while various investment institutions have also begun to take action.

Capital investors’ enthusiasm for pharmaceutical e-commerce stems from their expectation of identifying the “JD.com” of this sector. Internet giants such as BAT and JD.com are entering the pharmaceutical e-commerce space to avoid missing out on this potential market growth. Traditional pharmaceutical manufacturers and pharmaceutical commercial companies aim to keep pace with the internet era by undergoing digital transformation, thereby avoiding obsolescence in the future. For companies like Ping An Insurance and WeDoctor Group, which intend to make significant strides in the internet healthcare sector, pharmaceutical e-commerce is an indispensable component of building their healthcare service ecosystems, as well as a key channel for future monetization.

Mergers and acquisitions represent the most direct and effective approach to rapidly establishing a presence in the pharmaceutical e-commerce sector. With nearly 400 enterprises holding online pharmacy transaction licenses available as acquisition targets, companies seeking to enter the pharmaceutical e-commerce market have no need to expend time and effort on independently applying for such licenses.

Meanwhile, prospective acquirers must make swift decisions, as valuations in the pharmaceutical e-commerce sector continue to reach new highs, leaving an increasingly scarce pool of high-quality targets.

Gradual Decentralization of Traffic

According to market research data on pharmaceutical B2C from Analysys International, platform-based pharmaceutical B2C platforms accounted for approximately 60% of the market share in 2014. Currently, there are three companies that have obtained pilot licenses from the China Food and Drug Administration (CFDA) for third-party online drug trading: 95095 (affiliated with Alibaba Group, indirectly utilized by Tmall Pharmacy), 800 Fang, and Yihaodian. These three major platforms possess substantial traffic resources, which are essential prerequisites for the independent development of pharmaceutical e-commerce.



Among these three major platforms, Tmall Pharmacy is currently the most critical platform for online pharmacies. Nearly all online pharmacies choose Tmall as their primary testing ground. As of now, there are 201 online pharmacies operating on Tmall Pharmacy. By December 24, 2015, the number of enterprises that had obtained licenses for online pharmacy operations reached 388 (some of these enterprises have not yet officially launched their online stores).

Traffic surges with immense power during the annual Double 11 shopping festival, with many merchants achieving sales volumes on this single day that rival their entire monthly turnover in other months. The pharmaceutical e-commerce sector is no exception. Although the day is typically characterized by cutthroat competition in a “red ocean” of pricing, no player is willing to miss out on this annual feast.

As the second-largest traffic platform in China’s online retail market, JD.com is also home to numerous pharmaceutical B2C enterprises.

JD.com did not enter the pharmaceutical e-commerce sector late, but its operational journey has been far from smooth. JD initially hoped to collaborate with Haoyaoshi, a subsidiary of Jointown Pharmaceutical Group, to build a third-party B2C pharmaceutical platform, but the two parties parted ways in 2013. In May this year, JD Health Home was launched as a category on the JD Daojia platform. According to public data from JD.com, JD Health Home currently covers 11 cities, including Beijing, Shanghai, Wuhan, and Tianjin. Its partner pharmacies include Deshengtang, Guoda Pharmacy, Laobaixing Pharmacy, Yifeng Pharmacy, Jinxiang Pharmacy, Kangfu Zhijia, and Tongrentang, with the total number exceeding 1,000 stores.

Baibaifang is the only independent, vertically focused third-party pharmaceutical B2C platform, but its biggest weakness lies in the lack of traffic. Constrained by institutional limitations and insufficient funding, it has remained in a lukewarm state.

There are 49 online pharmacies listed on the Yihaodian official website; compared with Tmall Medicine and JD.com, Yihaodian has a slightly weaker traffic advantage.

In the short term, most B2C pharmaceutical e-commerce players remain heavily reliant on third-party platform resources. However, the rise of mobile internet and O2O models has made traffic decentralization possible.

For example, Yihaodian Pharmacy (now renamed as 1 Drug Network). In December 2013, the Yihaodian Pharmacy segment was officially spun off from Yihaodian’s pharmaceutical division to operate independently and was renamed “Yi Drug Network.” In early 2015, Yi Drug Network secured RMB 450 million in financing. Subsequently, Chen Hua resigned, and Yu Gang, a co-founder of Yihaodian, personally took charge. Currently, 1 Drug Network has no equity relationship with Yihaodian. Later, Yu Gang announced that Yi Drug Network would secure a new round of financing amounting to RMB 1 billion.

According to publicly disclosed data from 111.com, nearly 60% of its sales revenue comes from its self-operated channels, with its mobile app contributing over 70% of its sales volume. Leveraging its proprietary platform, 111.com has gradually accumulated traffic resources in the pharmaceutical e-commerce sector.

In addition to 111.com.cn, DeKai Online Pharmacy and KangAiduo have also stated that the proportion of sales completed through their own official websites and apps is gradually increasing compared to third-party platforms.

MedicineB2CAlliance for Internet Healthcare

The fierce competition among the three tech giants—Baidu, Alibaba, and Tencent (BAT)—for internet healthcare resources, coupled with the liberalization of multi-site practice for physicians and an influx of hot money, has rapidly spurred the growth of the internet healthcare industry.

E-commerce for pharmaceuticals plays a very important role in this process. The two pathways for monetizing internet-based healthcare are: one is connecting with insurance, and the other is e-commerce for pharmaceuticals.

The pharmaceutical e-commerce sector is currently grappling with significant profitability challenges. With the exception of a few online pharmacies operating on razor-thin margins, the majority are unprofitable. For an extended period, the top-selling categories in online pharmacies have remained contraceptives, contact lenses, and medical devices, while over-the-counter (OTC) drugs account for only a small share of sales. Since most OTC products are branded medications with low gross profit margins, online pharmacies must rely on high-margin non-pharmaceutical categories to offset their costs.

On the other hand, early-stage users’ habits of purchasing medications online are still in the cultivation phase.

Allying with internet healthcare may also be a viable path for pharmaceutical e-commerce to break through its profitability dilemma.

Online consultation/follow-up — medication purchase — drug delivery: this healthcare service loop, which appears to be rapidly established through online channels, represents the ideal business model for many platform-level internet healthcare companies. The recent issuance of the first electronic prescription from Wuzhen Internet Hospital has further fueled entrepreneurs’ high expectations for this model.

During this year’s Double 11 shopping festival, Tmall Health welcomed many new participants. Examples include United Family Healthcare’s maternity service packages, Da An Gene’s genetic testing services, and Tongrentang’s “RMB 0.01 flash sale for consultations with renowned traditional Chinese medicine practitioners.” These initiatives reflect Alibaba’s ongoing efforts to build a “healthcare + e-commerce” service model.

A significant portion of the substantial financing secured by 7leKang and 111.com was allocated to establishing their internet healthcare operations. According to its strategic plan, 111.com aims to become an integrated online pharmaceutical and health platform. This platform will not only enable physicians to conduct video consultations and issue prescriptions but also facilitate direct home delivery of medications to patients or arrange for them to undergo testing at partnered medical institutions, thereby creating a closed-loop ecosystem for online pharmaceutical and healthcare services. Recently, 7leKang launched its comprehensive health management platform, the “Da Bai Yun Zhen” APP, in an effort to integrate it with its pharmaceutical e-commerce business.



However, the current experience of online consultations for rare diseases is far from satisfactory. On one hand, policy frameworks have not clearly defined liability risks associated with remote consultations, leading physicians to offer increasingly conservative advice. Moreover, many inquiries are addressed directly through automated responses generated by big data algorithms, with the most common outcome being a generic recommendation to “visit a hospital for further diagnosis and confirmation.”

Moreover, the success of this model largely depends on the deregulation of prescription drug policies. Most over-the-counter (OTC) medications are for common ailments, and consumers remain accustomed to purchasing them through offline channels, where average transaction values are low. Prescription drugs, therefore, constitute the primary revenue driver for achieving profitability in B2C e-commerce. Another essential condition for scaling online prescription drug sales is the integration of online reimbursement through medical insurance. Patients with chronic diseases requiring long-term medication place particular importance on insurance coverage, and chronic disease medications represent the category with the greatest market potential for pharmaceutical e-commerce. A noteworthy model worth emulating is that of "Tang Yisheng" (Diabetes Doctor), a diabetes management app that enabled the online purchase of diabetes products by collaborating with the Tianjin municipal government to integrate medical insurance reimbursement.

According to Kuang Yi, Investment Director at Fosun Kunzhong, the outward diversion of prescription drugs from hospitals is undoubtedly a major trend. While the complete separation of pharmaceuticals and medical services cannot be achieved in the short term, pharmaceutical companies will proactively seek ways to facilitate the outflow of prescriptions due to policy pressures such as tender-based price reductions. The integration of internet healthcare and e-commerce is certainly a significant trend.

Notably, the market share of OTC and other pharmaceuticals has increased on Tmall Pharmacy’s category sales rankings. This trend was particularly evident during this year’s Double 11 shopping festival. Shao Qing from JD Health At Home attributes the rise in OTC’s proportion to two factors: first, greater participation by traditional industrial enterprises and chain pharmacies has significantly expanded the variety of OTC products; second, consumers have become more accustomed to purchasing medications online, which will further drive the development of the entire pharmaceutical e-commerce sector.

Certainly, if telemedicine policies and regulations on the online sale of prescription drugs are fully liberalized in the future, and medical insurance can be reimbursed online, the golden age of internet healthcare plus pharmaceutical e-commerce will arrive.