Can Alibaba Health Information Technology transform China's pharmaceutical industry?

WHAT IS ALI HEALTH INFORMATION TECHNOLOGY? 

Alibaba Health Information Technology Limited (AliHealth) was formed in 2014, after Alibaba and Yunfeng Capital Ltd., a private-equity firm set up by Alibaba founder Jack Ma, together bought a 54 per cent stake in then called Citic 21CN, which manages data on pharmaceutical products.

The company initially operated as a drug product identification, authentication, and tracking system (PIATS) business, a platform that was operated by AliHealth but owned by the China Food and Drug Administration (CFDA).

The drug PIATS system was designed to track the authenticity, quality and safety of pharmaceutical products and it can used it to combat the distribution of fake drugs in China. CFDA uses the system to track data on manufacturing source, type of product and expiration date etc.

Thus, it was made mandatory for pharmaceutical product distributors and sellers to use the technology, giving AliHealth complete control of nationwide pharmaceutical information.

In addition to running the platform, AliHealth was also involved in the online drug sales business. This caused a conflict of interest which was disputed by other pharmaceutical companies that AliHealth was involved in the regulation of pharmaceutical information, both have a bearing on the safety of national data and creates unfair competition. Due to this, the Group was forced to operate its drug PIATS under tighter supervision by the CFDA.

This severely impacted the Group's core revenue source and led to a change in its business model. The Group eventually diversified its operations after the CFDA ended the mandatory use by drug trading enterprises of its PIATS system in China.

In April of 2015, Alibaba Group injected its China online pharmacy business from Tmall to AliHealth for US$2.5 billion (S$3.4 billion) of newly issued shares and convertible bonds. Since then, the Group has created an Internet-based drug distribution and sales system that covers the entire industry chain, thereby enhancing the efficiency of the healthcare product supply chain.

In China, 70 per cent of prescribed drugs and medications are sold through hospitals while the remaining are privately sold in pharmacies and clinics. Due to its dominant market share in prescription drug sales, hospitals control significant pricing power that led to inflated drug prices for patients.

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As the healthcare flagship of Alibaba Group, AliHealth, aims to disrupt this monopoly and provide fair, affordable and accessible medical and healthcare services to Chinese consumers by facilitating medicine through big data and using the Internet to change the face of China's healthcare industry.

Capitalizing on its established online platform and understanding of the market and users, the Group connects manufacturers and distributors to offline pharmaceutical retail chains to facilitate product circulation along the whole chain.

An efficient distribution network and supply chain bring manufacturers, distributors, and consumers closer together so that consumers can access fair and affordable healthcare products and services directly from manufacturers. This results in cheaper prescription drug prices for patients.

Through five business segments:

1. Pharmaceutical e-commerce platform business
2. Pharmaceutical self-operated business
3. Tracking business
4. Consumer healthcare business
5. Other innovative businesses;

AliHealth brings together highly competitive brands and large-scale brands and distributors in the medical and healthcare industry to fully meet consumer needs by providing a full range of quality products at reasonable prices.

To date, a number of well-known international pharmaceutical companies, including AstraZeneca, SANOFI, Merck and Pfizer, have established strategic partnerships with Alibaba Health. Meanwhile, the Group has also established key business partnerships with about 40 pharmaceutical and nutritional product brands, including Dong-E E-Jiao, Mayinglong, Jiuzhitang, and other renowned national brands.

PHARMACEUTICAL E-COMMERCE PLATFORM BUSINESS 

Following the purchase of Alibaba's online pharmacy business, the Group now covers all categories of the Tmall Pharmacy platform. This segment offers health products, adult products, healthcare services, and medical devices.

AliHealth generates revenue from maintenance-related software services that it provides to merchants on Tmall e-commerce platform. These services comprise of admission fees, product quality control, and merchants' operational and maintenance support. For this, AliHealth earns commissions up to 3 per cent of the transaction amount of products sold by the merchants.

PHARMACEUTICAL SELF-OPERATED BUSINESS

AliHealth also offers business-to-customer (B2C) services through its online stores on Tmall.com and its offline pharmacy outlets, and business-to-business (B2B) services to merchant customers. Presently, this segment is its fastest-growing segment and also its largest revenue contributor, accounting for 80 per cent of Group revenue.

AliHealth Pharmacy offers consumers an effective solution for online purchase of OTC (over-the-counter) and imported health products, while the e-commerce platform allows consumers to access more health food, medical equipment, adult and family planning products, contact lenses and medical health services, forming a complete medical and healthcare ecosystem.

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The online platforms such as AliHealth Pharmacy and Tmall Pharmacy covers many widely used OTC drugs to meet the daily medical needs of consumers.

TRACKING BUSINESS

The Group's Ma Shang Fang Xin tracking platform, provide tracking services for manufacturers and distributors to ensure product quality and safety, and will also allow the public to verify their medical products. Currently, the platform covers over 85 per cent of pharmaceutical manufacturers in China.

With the tracking system, information such as product manufacturers, distributors, and even production timeline is available and transparent. The accessibility and transparency of this information can lead to product safety and quality.

CONSUMER HEALTHCARE BUSINESS

Through its online stores on Tmall and mobile apps, AliHealth also connects medical and healthcare service organisations to end customers. The Group generates revenue from commissions earned through e-commerce platform maintenance-related software services, customer consultation, reservation, and other value-added services.

OTHER INNOVATIVE BUSINESSES 

Other than the above businesses, the Group has been exploring fee models in the Internet healthcare and intelligent medicine areas. It offers health consultation services to users through professionals, such as medical practitioners, pharmacists, and nutritionists, consumers are then charged a fixed consultation fee for these services.

OWNERSHIP

Ali Health is largely owned by Alibaba Group which owns 67.5 per cent of the company. The large stake ownership was due to shares exchanged for its initial takeover in 2014 and also the injection of Alibaba Group's pharmaceutical businesses in 2015. Other notable major shareholders are, its Chairman Wu Yongming with 1.2 million shares and Non-Executive Director Lei Wang with 4.4 million shares.

REVENUE SEGMENTS

Most of its revenue is derived from the self-operated pharmaceuticals serving B2C and B2B segments, in 2019, the pharmaceutical self-operated business almost doubled its revenue from RMB2.2 billion (S$0.43 billion) in 2018 to RMB4.2 billion this year.

As of March 31, 2019, its self-operated online stores (AliHealth Pharmacy and AliHealth Overseas Flagship Store) accumulated more than 27 million annual active consumers, indicating more than 90 per cent year-on-year growth.

Its pharmaceutical e-commerce business has also grown significantly, expanding almost 4-fold in revenue. In FY19, the gross merchandise volume (GMV) generated by Tmall Pharmacy platform as operated by the Group was approximately RMB59.5 billion. Its annual active consumers of Tmall Pharmacy platform for the year ended March 31, 2019 exceeded 130 million.

The Group's consumer healthcare business covers segments such as aesthetic medicine, oral health, vaccination, and physical examination.

During the year, the Group's consumer healthcare business grew rapidly with GMV increasing by more than 140 per cent year-on-year. During Tmall's "Singles Day" and other shopping festivals, consumer healthcare GMV grew explosively at a rate that was among the highest across all Tmall industry categories.

FINANCIALS

Revenue

Revenue of the Group for the year ended March 31, 2019 amounted to RMB5.09 billion representing an increase of RMB2.65 billion or 108.6 per cent as compared to RMB2.44 billion for the year ended March 31, 2018.

The increase in revenue was mainly attributable to the rapid growth in revenue from the pharmaceutical self-operated business, pharmaceutical e-commerce platform business and consumer healthcare business during the year.

Net Profit

Despite its rapid growth in FY19, the Group is still in the red with a net loss of RMB82 million. On the positive side, this represents a net loss reduction from RMB-129 million in 2018 and RMB-198 million in 2017.

The loss incurred was largely attributed to operating expenses such as fulfillment, Sales and marketing, administrative and product development expenses. Overall, the Group's operating expenses increased by 80 per cent year-on-year.

GROWTH POTENTIAL 

Compared to China's huge pharmaceutical market, its pharmaceutical e-commerce market is still in infancy. Pharmaceutical e-commerce making up only approximately 3 per cent of pharmaceutical sales in China, which means there is still a huge potential for development.

With favourable government support, China intends to promote the development of "Internet + Healthcare" and encourage the regulated development of Internet drug sales and medical logistics through the inter-connection of its supply chain.

In 2018, Internet healthcare was expressly supported at the national level and was finally regulated by law. According to the National Health Commission of the PRC, the number of medical treatments received in China reached 8.31 billion in 2018, representing an increase of nearly three times from a decade ago.

Given its citizens growing healthcare needs and compared to the level of supply of doctors, China still faces issues such as shortages and an uneven distribution of physicians and needs better ways and quality of delivering medical services.

The implementation of the Internet healthcare policy will provide accessible, affordable and quality medical products and services for consumers and promote optimal allocation of medical resources in China's healthcare industry.

VIA'S VERDICT 

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AliHealth is a fast-growing pharmaceutical company that aims to deliver quality and affordable healthcare to Chinese consumers. Its business segments are designed to bring closer manufacturers and consumers to facilitate a more efficient and transparent medical supply chain.

With China's huge pharmaceutical market, e-commerce will pave the way for a new direction in China's growing healthcare industry. Despite the near-term losses, financial numbers seem to indicate that the Group is working towards profitability. With the support of its parent company (Alibaba Holdings) and favourable government policy, Alihealth can pioneer this new direction and reap the financial rewards in future.

If you are a growth investor, AliHealth is a stock that should be on your watchlist.

This article was first published in Value Invest Asia.  All content is displayed for general information purposes only and does not constitute professional financial advice.