Alibaba In New Talks With Health Arm as $2.5 Billion Deal Ends

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Alibaba Group Holding Ltd. is discussing injecting a health foods and supplements business into its publicly traded health arm after the two companies dropped plans to exchange an online pharmacy operation in a $2.5 billion deal.

Alibaba Group is considering injecting "a substantial segment" of the health foods, dietary supplement and nutritional products business operated by its Tmall online shopping platform into its Alibaba Health Information Technology Ltd. subsidiary, according to a stock exchange statement today.

Ali Health has dropped a HK$19.4 billion ($2.5 billion) deal announced last year to acquire from another Alibaba unit a sales platform for online pharmacies, due to "ongoing regulatory uncertainties", according to the statement. Instead, it entered into a new agreement to operate the platform of Tmall for a service fee amounting to 21.5 percent of payments made by online pharmacies. Tmall typically takes a cut of all transactions handled through its website.

The changes announced to the transaction today show some of the challenges that Alibaba’s health-care arm faces as it seeks to expand in China’s pharma and health industries. The pharmacy platform had been expected to benefit from China potentially allowing online sales of prescription drugs, but Chinese regulators have yet to announce any specific timing on when that might be permitted.

Ali Health shares traded 4.4 percent lower at HK$4.52 at the noon break in Hong Kong trading today. The stock is down about 16 percent this year.

Ali Health saw its shares fall earlier this year after China’s Food and Drug Administration halted the implementation of a drug-coding system. Revenue generated from operating that platform, which was built to identify counterfeit medicines, accounted for almost all of Ali Health’s revenue for the year ended March 31, 2015.

The two companies are in talks and no definitive agreement has been entered into so far, Alibaba Health said in today’s statement. For the year ended March 31, 2015, the total value of the pharmacies’ businesses was about 4.7 billion yuan with Tmall getting a 3 percent commission, according to an Alibaba statement last year and Tmall’s rules on commissions.

A vehicle for billionaire Jack Ma’s health-care ambitions, Ali Health’s scope of business has ranged from the drug-coding system to an e-pharmacy platform, online consultation services and selling health insurance.

The company was given its name after Ma’s Alibaba Group gained control of Citic 21CN Co. for HK$1.33 billion about two years ago to venture into the drug-data industry. Alibaba said at the time that the transaction would be the foundation for a partnership aimed at driving development of a pharmaceutical-product information platform.

— With assistance by Hui Li, and Lulu Chen

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