China’s e-commerce giants are getting into the online pharmacy business as government directed retail sales of prescription drugs away from hospitals, the Xinhua News Agency reported.
A report released by Boston Consulting Group (BCG) on Thursday, April 7, showed that the country's online pharmacy business has grown to more than 7 billion yuan ($1.1 billion) in 2014, which accounted for nearly 3 percent of all retail sales of medicine in China.
Analysts, however, said that online medicine sales would further grow if the government would allow prescription drugs to be sold by online pharmacies. Currently, over-the-counter medicines are allowed to be sold in online pharmacies and give very minimal contribution to margins.
As part of its ongoing medical reforms, China is trying to lessen hospital reliance on drug sales for revenue as it hopes to enable patients to choose on whether to buy prescription drugs in hospitals or retail pharmacies.
To allow prescription drugs to be sold online, Chinese authorities have given opportunities for e-commerce firms such as Alibaba and JD.com to enter the prescription drug business.
"E-pharmacy business is changing very quickly in China with new regulations and different competitors entering the space. Each one is trying to grab a piece of the business," John Wong, a partner for BCG's pharmaceutical practice, said.
The transition pace remains uncertain, although the regulations are expected to drive sales of prescription drugs toward retail channels that include online pharmacies.
Last week, Alibaba dismissed its plan to infuse its online pharmacy business into its health subsidiary as brick-and-mortar pharmacies criticized Alibaba's plan to operate in the country's medical tracking system.
Separate trial programs are being used by online pharmacies, in coordination with hospitals and local governments, to enable patients, with a doctor's prescriptions, to buy drugs online.
For online pharmacies, the way to get into prescription drug sales is through prescriptions. In some local trials, as incentive for patients to buy medicines online, they managed to extend medical insurance coverage to online medicine purchases.
Since China's social security system is managed by different jurisdictions, which results in discrepancies in coverage policies across the country, analysts doubt the potential success of nationwide trials.
In addition, Chinese authorities must find a way to limit expenditure online, according to Magen Xia, another BCG partner. Under the current scheme, hospitals that prescribe these drugs maintain the cap for insurance coverage.
Xia, however, said that retailers have to find upstream partners as online pharmacies cannot survive on selling online prescription drugs alone.
"Pharmacies can't just limit themselves to selling drug online. They have to either extend to consultations and diagnosis or find upstream partners that can refer prescriptions to them," Xia said.
The lack of pharmacy chains with national coverage in China also puts pharmacies in a weak position, which gave e-commerce the opportunity to consolidate the fragmented national market through their online platforms. In this way, local pharmacies can become a distribution channel for prescription drugs if they have the access to prescription.
"China's online pharmacy will grow, but whether it grows faster or slower depends on regulation on the separation between drug prescribing and dispensing," Wong said.
"Right now hospitals still want money from drugs but as soon as the government says 'stop' you will see the industry rapidly, rapidly transform," the BGC partner said.