China Web Pharmacies Would Have Alibaba Vying With Legacy Firms

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The Chinese are prolific Internet shoppers, buying everything from diamond rings to toilet seats online. E-retailers like Alibaba Group Holding Ltd. may soon be able to gain a foothold in yet another area: prescription drugs.

While China hasn’t specified when it might allow prescription medicines to be sold via the Internet, analysts expect the government to permit web sales this year.

The shift could gradually reshape the country’s $149 billion market for such drugs, by moving sales to web retailers and away from hospitals, which sell almost three quarters of medicines prescribed in the country. That monopoly often leads to higher prices for patients and contributes to corruption in the public health system, according to Yanzhong Huang, author of the book ’Governing Health in Contemporary China.’

The Asian country presently only allows online sales of some treatments and products that don’t require prescriptions. For companies that have scale, permission to sell prescription therapies online would “definitely be good news,” said Liu Lei, chief executive officer at China Jo-Jo Drugstores Inc., which says it has an agreement with Alibaba’s health subsidiary to sell medicines through its platforms after approvals come through. “With this change, even though our stores are in Hangzhou, eventually anyone across China who has a mobile or Internet connection can become a potential customer.”

China’s second biggest medicine distributor -- Shanghai Pharmaceuticals Holding Co. -- this month announced its plans to build its own Internet drug company to position itself “at the key time when the gate of online sales of prescription drugs is about to be opened.” It didn’t immediately respond to e-mails seeking comment. Its stock traded as much as 8.8 percent higher in Hong Kong trading today.

Gradual Reform

The China Food and Drug Administration didn’t immediately respond to calls and a fax seeking comment on when it might approve Internet sales of prescription drugs.

Opening up the market “can indirectly decrease corruption by dispersing the power as more players will have control,” Angus Cole, a consultant at Deloitte China, said via e-mail. Patients will also benefit from the increased competition through lower prices, better service, and more convenience, he said.

China has for years sought to clean up its public health system and make it more efficient. Last month, the National Health and Family Planning Commission said in a statement that new rules had been issued on medicine procurement at public hospitals to address problems including “medicine kickbacks and commercial bribery cases happening frequently.” The agency, which oversees public hospital reform, did not respond to a fax seeking comment.

Former chief drug regulator Zheng Xiaoyu was executed in 2007 for taking bribes amid a clampdown on fake medicine. Drugmaker GlaxoSmithKline Plc was fined 3 billion yuan ($483 million) in September after Chinese judicial authorities found it guilty of bribing non-government personnel. Glaxo at the time said it “fully accepts the facts and evidence” of the investigation and that it had taken steps to rectify the issues identified in its China operations. A Glaxo spokeswoman said the company has no updates on the case or on the fine.

In China, doctors who work for hospitals write prescriptions that are then filled at the hospital pharmacy. So, a shift to the Internet would be “a fresh effort from China to try and separate doctors’ prescriptions from the supply of medicines,” Huang said. The Chinese Medical Doctor Association did not respond to a fax seeking comment.

Approval on web sales may come “very soon,” Huang said. “I think it should be this year.”

Internet Pharmaceuticals

On the website of Alibaba’s Tmall, the health-care section -- yao.tmall.com -- currently only offers over-the-counter products like condoms, vitamins, and throat lozenges. Alibaba Health Information Technology Ltd., a separately listed subsidiary of Alibaba Group, has a mobile application that allows prescription uploads to match the user with nearby pharmacies.

Alibaba declined to comment further on its plans through a spokeswoman as “the Chinese government has not yet opened up the market for the online sale of prescription medicines.” The company is keeping an eye on policy developments, it said in an e-mail.

Some Challenges

Industry experts predict it will take years to iron out the details and build a workable, trusted model. Along the way, Chinese regulators and companies will be faced with some tough questions: How to ensure the drugs are real? What mechanism to use for prescription authentication? Will patients be willing to wait for their medicines?

Alex Zuo, spokesman for the Beijing-based industry group R&D-based Pharmaceutical Association Committee, says there will be many challenges, including issues with reimbursement and the threat to hospitals of declining drug sales. The association hasn’t done research in the field of public hospitals and corruption there, and can’t comment on that aspect, he said.

In China’s 925 billion yuan ($149 billion) prescription drug market, 71 percent of sales were through hospitals, 16 percent through retail pharmacies, and the rest were via other channels, according to IMS Health Inc.

“It’s like throwing a stone in the water: it’s the beginning of a ripple effect and everyone will have to innovate the way they do business,” said Andrew Chen, a Shanghai-based health-care practice leader at PwC Strategy& Consulting.