China’s Changing Pharmaceutical E-commerce Market
China’s changingpharmaceuticalE-commerce market
Contents1Foreword2Trend I: About RMB 150 billion in hospital and retail terminal drug sales are expected totransfer to online sales3Trend II: E-commerce will facilitate the reconstruction of the pharmaceutical industryvalue chain6Trend III: Pharmaceutical E-commerce development will move towards a win-win modelwith organic interaction8Trend IV: Pharmaceutical E-commerce will facilitate enterprise transformation fromoffline to online10Trend V: Mobile Internet technology will re-engineer hospital operations and serviceprocesses12Trend VI: The Internet medical system will focus on patient-centered care14Trend VII: Intelligent wearable devices will drive a new generation of health and medicalservices16Trend VIII: Big data will lead the medical system into the age of wisdom
ForewordHealthcare providers and pharmaceuticalcompanies operating in China have been slowerthan organizations in other industries (such asConsumer Products) to embrace the potential ofmobile Internet and E-commerce to transformthe marketplace (Figure 1). Roadblocks towidespread adoption include health care’scomplex, often fragmented, industry ecosystem,highly regulated operating environment,incomplete online technology standards, andunderdeveloped consumer online purchasinghabits.Figure 1: General E-commerce vs. pharmaE-commerce sales (2015E)Currency:RMB1.8848 trillion - PC onlineshopping929.7 billion - mobilenetwork shopping267.0 billion – onlinetravel10.0 billion - pharmaceuticalE-commerceHowever, it should be noted that online drugsales and healthcare services can effectivelyoptimize operating processes, minimize costs,satisfy increasingly diversified consumer healthcaredemands, and optimize resource allocations –all valuable benefits in light of China’s scarcehealthcare resources and imbalanced distribution.Fortunately, the combination of a governmentreform policy that frees the healthcare andpharmaceutical industry to introduce a marketmechanism based on an improved industrialpolicy and more standardized industrial1operation; foreign industry dynamics; trendsincluding increasingly mature online technologyand gradual customer cultivation, are drivingthe development, integration, and use ofpharmaceutical E-commerce and online medicalcare, as well as the evolution of China’s medicaland pharmaceutical ecosystem.Pharmaceutical E-commerce has entered thedevelopment stage, aided by gradual policydecontrol, although its development speed isslower than other commodity E-commerce.Ultimately, pharmaceutical E-commerce willfacilitate the redistribution of stakeholders’interests, reconstruction of all links of the valuechain, and offline enterprise transformation.Meanwhile, China’s online medical system isflourishing. With the improvement of servicequality, it is expected that online medical serviceswill partially substitute for offline medical servicesand satisfy lower-level medical demands. Thetechnology of mobile Internet will furtherpenetrate hospital operations and serviceprocesses, and in the process of continuouslyoptimizing online and offline services, the twowill be closely integrated, gradually breakingthrough the barriers of regional and traditionalprocess, and improving the efficiency of resourceallocation.Understandably, the integration of newtechnology and traditional industry is bound toface numerous obstacles, which can be overcomeby policy change, stakeholder involvement,and public interest. Nevertheless, it shouldbe understood that under the conditions ofaccelerated technology change and rapidlychanging industry and operational models, it hasbecome more and more important that enterprisesbecome more adept in deciding their future pathand bold in taking action.We expect that pharma E-commerce and onlinemedical care will have a bright future with theeasing of China’s prescribed drug policies and theinfluence of the following eight trends. We hopethat this report will drive thinking and discussionto clarify direction and move the industry forward.
Trend I:About RMB 150 billion in hospital and retailterminal drug sales are expected to transferto online salesAt present, the primary drug sales channels inChina are the hospital and retail terminals, witha ratio of approximately 8:2. The network/online(OTC) terminal accounts for only a tiny fractionof total sales. When hospital drug sales areviewed under the premise of policy decontrol,the hospital is very likely to retain control overin-patient pharmacy. The out-patient pharmacywill likely be transitioned to the retail terminaland online; however, injectable drugs cannotbe purchased online limiting the online transferrate to some extent. The retail terminal will besubjected to two-way influence – on one hand,it should benefit from the outflow of drugsfrom the hospital terminal; on the other hand,after the online sales policy for prescribed drugsis liberalized, the impact of pharmaceuticalE-commerce on retail drugstores will beinevitable.The government’s policy decontrol shouldrelease suppressed demand and supportsubstantial development of the pharmaceuticalE-commerce market. Yet, since decontrol ofprescribed drug sales will be gradual, theanticipated growth of the pharmaceuticalE-commerce market will be steady as comparedto the explosive growth seen in the traditionalE-commerce industry.Based on estimated 2015 data (Figure 2),we have forecasted the scale change ofpharmaceutical E-commerce. Once theprescribed drugs policy is liberalized, the existingdrug market is expected to shift from thehospital and retail terminals to the network/online terminal: Hospital terminal: About RMB 70 billionin out-patient pharmacy sales will shift tothe network/online terminal; in particular,out-patient non-injection drugs and OTCdrugs. Retail terminal: About RMB 80 billion in drugsales will shift from the retail terminal to thenetwork/online terminal.When the share of drugs in the network/onlineterminal increases from RMB 10 billion to RMB150 billion, it will account for 10% of thewhole market, thereby enabling pharmaceuticalE-commerce to enter a new stage ofdevelopment.Based on this forecast, we optimistically estimatethat by 2020 the pharmaceutical E-commercemarket could reach nearly RMB 400 billion insales. The market should benefit from facilitatingfactors such as the continual expansion of theoverall pharmaceutical market, continually easinggovernment policy, further improvements inlogistics and less time-based limits, as well asthe development of customers’ online shoppinghabits.Figure 2: Transformation of pharmaceuticalE-commerce market patterns (2015E)Out-patient RX (34%, ient drugs(50%, 781.5 billion)RetailterminalRX (6%, 96.3(240.8billion)billion)Networkterminal(10.0 nal(310.0billion)Networkterminal(155.6 billion)Injection (13%, 208.4 billion)Non-injection (13%, 208.4billion)Out-patient OTC (7%, 104.2billion)OTC (9%, 144.5 billion)OTC (0.6%, 10.0 billion)Out-patient RX (20%, 306.2billion)In-patient drugs(50%, 781.5 billion)Injection (10%, 156.3 billion)Non-injection (6%, 99.9billion)Out-patient OTC (3%, 50.0billion)RX (12%, 180.3 billion)OTC (8%, 129.7 billion)RX (4.9%, 76.6 billion)OTC (5%, 79.0 billion)China’s changing pharmaceutical E-commerce market 2
Trend II:E-commerce will facilitate thereconstruction of the pharmaceutical valuechainThe traditional pharmaceutical industry value chain is characterized by pharmaceutical companieswith pricing power and a low concentration of wholesalers that use a complex, multilayeredsystem of agents (national, provincial and municipal). Hospitals typically cover expenses withmedicine revenues, exerting pressure on drugstores’ profits. At the end of value chain, patients findthemselves in an unfavorably passive position, facing sky-high drug prices. As illustrated in Figure 3,the development of E-commerce is expected to facilitate and accelerate the reconstruction of thetraditional pharmaceutical value chain in seven key areas.Figure 3: E-commerce will facilitate the reconstruction of the traditional pharmaceutical valuechainLegend：New or changed linkFuture value chainPharmaceuticalenterprises:Still controlling thefactory prices, butthe pharmacycompetition willbe more market-oriented, and thecost performanceis bution centersAgency simplifiedHigh concentrationWith the expansionof market, thirdparty logistics tojoin the competitionMedical institutionsService-orientedprofit makingPatientsRetail pharmaciesDifferentiatedimpacts on theindependent andretail pharmaciesIncreased rightsof choiceImproved positionPharmaceutical E-commerceTo break through the traditional pharmaceutical circulation patternMedical digital transformation and big dataIntegration of regulationsE-commerce will make drug pricesmore transparent and market-oriented.transparent and market-oriented, with pricesdepending on the drug and user demands.With the hospital terminal currently dominatingpharmaceutical sales, China’s pharmaceuticalmanufacturers basically have no independentdistribution channels. The existing model ofmultilayered links has reduced circulationefficiency, making drug prices artificiallyhigh, and rebates and commissions thenorm. In addition, the model has increasedpharmaceutical companies’ selling costs, whilethe policy of markup percentage control hasfurther promoted hospitals’ preference forhigh-priced drugs. Pharmaceutical E-commerceis expected to drive the compression ofintermediate links, making drug selection moreThe impact of E-commerce platforms on specificpharmaceutical companies may differ. Firstly,for generic pharmaceutical manufacturers,patients may use Internet platforms to identifyand choose the most cost-effective drugs.In this case, E-commerce may enable thosepharmaceutical enterprises with a historicallyweak sales force to expand their market shares.Secondly, newly-added Internet channels willenable large pharmaceutical enterprises toimprove flow liquidity. The ability to push upsales for exclusive drug varieties will be thekey to enabling an enterprise to retain its priceadvantages.3
Centralization of the pharmaceuticalwholesale agency industryCurrently, the pharmaceutical wholesale agencyindustry is highly fragmented: there are 16,300domestic pharmaceutical wholesalers, with thetop three pharmaceutical wholesalers accountingfor 29.7% of the entire industry, and the topten accounting for 36.3%. The small scale ofwholesalers and decentralization have increasedmedicine circulation/distribution costs. Forthis reason, although the average gross profitrates of domestic wholesalers are higher thancountries such as the United States and Japan(Figure 4), their average overhead rates are muchhigher, thereby maintaining the status quo oflow profits.Figure 4: Medicine circulation/distributionlink expenses and profit margins in differentcountriesChinaUSAJapanAverage grossprofit rateSlightly high 3% 3%Average expenserate7%Average profitrate 1%purchased drugs, including factors such asdosage and dispersion, will increase logisticscosts. This may prompt some pharmaceuticalenterprises to outsource logistics to third-partyorganizations. The new government drug policymay allow enterprises to entrust third-partylogistics firms to deliver the drugs; logisticsenterprises may use the opportunity to buildout the pharmaceutical logistics system, meetGSP system requirements, and connect withthe pharmaceutical E-commerce supply chain toexpand the third-party logistics market. Thirdly,drugstores will become an important part of thelogistics process by delivering medicines to users.Finally, E-commerce is expected to transformthe logistics value chain through innovation ininformation, standardization, automation, andprocesses.Figure 5: E-commerce will expandpharmaceutical logisticsHospital pharmacymarketPharmaceuticallogistics market 1.5% 1.5%Retail pharmacymarketConsumer market1.5%1.5%In the future, E-commerce is expected to havemixed impacts on China’s wholesale agencyindustry. E-commerce will compress theintermediate links, which may reduce industryprofitability. On the other hand, by leveragingscale and terminal resources, large agencies areexpected to benefit from industry centralizationand resource integration.E-commerce will expand thepharmaceutical logistics marketFuture E-commerce development will have fourimpacts on the pharmaceutical logistics market.Firstly, the decontrol of prescribed drugs willopen the logistics market at the business-toconsumer (B2C) end and expand market size(Figure 5). Secondly, the features of customers’"Last Mile Distribution"Third partydistributionSelf-built logisticsDrugstorelogisticsE-commerce will move hospitalsfrom a “covering expenses with medicinerevenue” model to a service-orientedmodelRevenue from medicines accounts for 45% 50%of China’s public hospitals’ gross income andit is a deep-rooted practice to cover hospitalexpenses with medicine revenue. However,the general trend towards separating the clinicfrom the pharmacy should help pharmaceuticalE-commerce to become an important channel ofdrugs for consumers. To compensate for reduceddrug revenue, hospitals will need to raise theirmedical service prices and move to a serviceoriented model (Figure 6).China’s changing pharmaceutical E-commerce market 4
A medical reform pilot to reduce the proportionof medicine-related revenue launched in BeijingFriendship Hospital, Chaoyang Hospital, TiantanHospital, Ji Shui Tan Hospital, and TongrenHospital has shown positive results. By theend of November 2014, compared with thefirst half of 2012, the proportion of medicinerelated revenue in the five pilot hospitals haddecreased from 46.1% to 36.1%. In the medicalreform model based on the successful pilots, theproportion of medicine-related revenue in publichospitals nationwide is expected to be lower.E-commerce will increase patients’purchasing powerBeyond doubt, patients will benefit from thedevelopment of pharmaceutical E-commerce.Medicine prices will gradually become moretransparent and drug terminal prices will bereduced so that customers can buy drugs atmore affordable prices and with more bargainingpower. In addition, mobile medicationmanagement will make buying and takingmedicine and disease prevention more timelyand effective.Figure 6: Hospitals will move to a serviceoriented modelDownHospital revenues after thereform of medical care anddrug separationDrug sales withoutadded profit, andcancellation of 15%mark-upCancellation ofregistration fee andphysician feeIncrease of physicianservice chargeUpIncreased governmentinput, special subsidiesto pilot hospitalsHospitals to exploresaving approachesE-commerce will improve retaildrugstores profitabilityCompared with retail drugstores, pharmaceuticalE-commerce has obvious advantages: twice theaverage number of SKUs, price competitiveness,and consumer purchasing access unrestrictedby time and space. The impacts of E-commercedevelopment on independent drugstores andretail drugstores are mixed. E-commerce may drivefurther independent drugstore consolidation.These stores generally have weak upstreambargaining power, noncompetitive prices,and lower profits, which make them targetsfor a merger or acquisition. Chain drugstores,meanwhile, may benefit from the E-commercetide. They have strong upstream bargainingpower, their prices are fairly competitive, and theyoffer excellent customer service. Chain drugstoresmay choose to cooperate with E-commercecompanies to take advantage of complementaryadvantages and capture online-to-offline (O2O)guided traffic.5E-commerce will drive informationinnovationThe data produced by pharmaceuticalE-commerce may not only assist in drugadministration; its impacts may expand to theoverall health industry. For many pharmaceuticalE-commerce transactions, it is necessary forcompanies to establish user health files, integrateinformation, store that information in the “cloud”and provide clients with medication guidanceand other value-added services. Pharmaceuticalmanufacturers, meanwhile, can use E-commercedata to analyze drug flow, sales volume, etc.Finally, medical institutions and productionenterprises can improve their products andservices by taking advantage of more transparentpharmaceutical industry data.The future growth of pharmaceutical E-commercerequires that participants satisfy consumers’requirements for a seamless demand-side andsupply-side relationship, a positive customerexperience, and an easy-to-use pharmaceuticalE-commerce platform. Other consumers’demands include affordable price, quick pickup,diversified drugs, high-quality service, and brandtrust. Such demands have been the key driversfor enterprises to establish and improve theirappropriate internal capabilities to enhancethe E-commerce transaction flow and convertinfrequent consumers into core customers.
Trend III:Pharmaceutical E-commerce developmentwill move towards a win-win model withorganic interactionThe future development pattern of pharmaceutical E-commerce (Figure 7) will depend on theorganic interaction of two key factors: pharmaceutical stakeholders’ (producers) control of themedical resources and the availability of Internet enterprises to guide the conversion from offlineto online traffic. Control of the medical resources traditionally includes leveraging upstream drugbargaining power; integrating downstream hospitals and drugstores; mastering logistics; andproviding the medical resources (products and services). Internet enterprises provide value-addedservices and advertising; and establish, guide, and monetize online customer traffic.Figure 7: Future transformation of pharmaceutical E-commerce patternGrowing against each other, and theplatform oriented enterprises areslightly betterFuture: organic combination, win-win cooperationPlatform oriented (2.58 billion)Traffic transformationTraffic advantageHighInternet enterprises B2CPharmaceutical enterprise B2C Internet enterprises: having great traffic advantages, butfairly weak in the interfacing of pharmaceutical industrychain, to attract the manufacturers to settle in theplatform is the key, and finally using the traffic so directlyaffect all main bodies in the pharmaceutical industrychain Pharmaceutical enterprises: utilizing the userresources accumulated in the early stage and thesynergy effect of varieties, still needing the thirdparty platform to import traffic Business enterprises: with strong control to thepharmaceutical resources, utilizing and integratingthe upstream pharmaceutical enterprises resources their own logistics offline physical drugstores services, but still needing the traffic import of thethird party platform Chain drugstores: having sales terminals (medicinedispensing and distribution), capable of solving the "LastMile" problem; meanwhile, having the advantages ofupstream resources, getting lower purchase prices,and needing the third party platform to import trafficPlatform typewww.babaifang.comChain drugstore ss enterprise (B2C O2O)Traffic guidePlatform typeLowSelf-run oriented (2.58 billion)Resources matchingWeakResources matchingControl efforts of medical resourcesTraditional pharmaceuticalstakeholders control the medical resourcesPharmaceutical producers, business enterprisesand chain drugstores have, to varying degrees,traditionally dominated the control of medicalresources in the pharmaceutical industry valuechain. The future E-commerce developmentpatterns of these three mainstays may evolvein two ways. Firstly, pharmaceutical producersStrongwith chronic-disease-related medicines willhave prominent advantages, and are expectedto seize their rivals’ share if their E-commercecapabilities can be strengthened throughin-house development or acquisitions. Secondly,chain drugstores and business enterprises, whichgenerally
E-commerce market. Yet, since decontrol of prescribed drug sales will be gradual, the anticipated growth of the pharmaceutical E-commerce market will be steady as compared to the explosive growth seen in the traditional E-commerce industry. Based on estimated 2015 data (Figure 2), we have forecasted the scale change of pha
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