Next opportunity: Will China's e-commerce revolution lead to accessible biologics?

Print 15 May 2015
Shannon Ellis / BioWorld

SHANGHAI – Each year investors looking to ride the next big wave of opportunity convene at China's Healthcare Investment Conference to test the waters. This year, the promise of technology to tackle some of China's most complicated health care woes, summed up by the term e-Health, generated the most buzz.

In 2014, the money began to flow in the direction of China's e-Health sector with more than 80 deals totaling $1.7 billion, said Franck Le Deu, partner in consulting firm McKinsey & Co.'s Greater China health care practice.

Many have high hopes that new analytics, mobile and cloud technologies could be transformative, especially now that corporate giants such as Alibaba Group have entered the fray.

"Health care is a strategic priority for Alibaba," said Li Ma, vice president of strategy and product for Alibaba Health (Alijk.com). "What do we want to achieve? It is not just about selling drugs online; it is about the looming social problems China faces."

Looking beyond the world of health care, online commerce is thriving in China, partly due to Alibaba's pioneering efforts. It seems reasonable to expect that Chinese consumers' fondness for buying everything from food to cars online might help get drugs into patients' hands faster and more affordably.

China has proven itself willing to rapidly adopt new technologies, said Richard Yeh, head of China Healthcare Research at Citi Research, and with digital disrupting business models, China can leapfrog some of its systemic health care troubles, similar to how mobile networks overtook telephone landlines.

THE LARGEST ONLINE MARKET IN THE WORLD

China already has the largest e-Retail market in the world, having surpassed the U.S. in 2013. By 2018, it is expected to be valued at $1.13 billion and account for 18.3 percent of the country's overall retail market, according to McKinsey.

In an uncertain world where trust between buyer and seller is weak, many of China's 630 million internet users prefer social networks to guide their purchases, and the vast majority use mobile devices to get online.

It is also important to note the behavioral preferences of that vast group of consumers can change swiftly. A recent McKinsey iConsumer survey found the rate of change within China's e-commerce sector is happening much faster than originally predicted and in a direction that supports online pharmacies.

NEW FUTURE OF O2O

In particular, the survey found the demand for innovative online shopping experiences is rapidly accelerating and that consumers are showing a newfound enthusiasm for online-to-offline (O2O) services, which is how online sales of OTC drugs currently work.

Alijk is hoping to exploit that latest O2O trend, and as Ma explained, executives have seen "explosive growth beyond our expectations," with some 200 cities and 20 provinces signed on to the third-party online pharmacy platform.

But Alijk is not alone. Other online pharmacies such as Jingwei (yaofang.cn) directly own 4,294 offline pharmacies while Kaixinren (360kxr.com) has 136, according to the Citi 2015 Healthcare Handbook.

While Alibaba's health services will be multifaceted, including a "cloud hospital" that was announced on April 19, Ma described the mobile health app that will allow patients to source prescription drugs online. The app is designed to allow consumers to upload a prescription, search nearby pharmacies to see where it is stocked and then compare prices before deciding to confirm an order. The drug can then either be delivered or picked up.

"This is not really changing the traditional way of buying medicine," said Ma. "The actual sale is offline, and the ordering process is done online."

But it does allow buyers of medicines more choice then is currently the norm. If China's e-commerce is at the cutting edge, then the way prescription drugs are typically bought and sold is best described as highly inefficient, with hospitals taking a monopoly position.

"Eighty percent of drugs are sold through hospitals; this causes a lot of problems," said Ma. "We are looking at a model to link pharmacies to consumers using a market approach that makes prices more reasonable. It will be more efficient and convenient while at the same time guaranteeing safety."

Ma added, "This will require collaboration with chain drugstores."

The current system permits hospitals to gain a significant portion of their revenue from in-house pharmacies. That has created well-documented perverse incentives leading to overprescribing of drugs, and a preference to write scripts for the most expensive medicines.

The Glaxosmithkline plc scandal brought attention to that murky situation when the London-based big pharma was charged for paying bribes in excess of ¥3 billion (US$500 million) in order to boost drug sales. (See BioWorld Today, Sept. 22, 2014.)

The government is aware of the hospital pharmacy problem and is trying to reform the situation from multiple avenues, McKinsey's Le Deu told BioWorld Today. "A key priority of the government is to accelerate the reform of public hospitals, and getting rid of their dependency on income from pharmacies is an important aspect in making this happen."

Of course, that will raise a serious problem of how hospitals will collect revenues. And, not surprisingly, the process of flowing prescriptions drugs away from hospitals toward drug stores has created resistance. "There is a vested interest for the hospital and the barriers are there," said Ma.

But it is not just a simple matter of the government stepping in and injecting hospitals with cash to replace the income derived from pharmacies. As Le Deu pointed out, the government's emphasis is to ensure that hospitals better price their services, find sustainable revenue sources and modernize to become more efficient.

But policymakers have shown their willingness to push hospitals in that direction via limited competition from online pharmacies. The May 2014 draft of the CFDA Measures for the Supervision and Administration of Internet Food and Drug Business Operation included plans to allow sales of a specified number of prescription drugs to be sold online.

In January, Reuters reported that a senior health care policy advisor said the CFDA is expecting to allow online prescriptions sales in the first half of 2015.

CHALLENGES REMAIN

While all signs are pointing in a promising direction, Le Deu cautioned there are many challenges that still need to be overcome before online pharmacies start selling the more complex and higher-priced biologics.

The quality and "trustability" of drugs is a big issue in a country where fakes are common and people are hoping to find low-cost alternatives to drugs they may not otherwise be able to afford. (See BioWorld Today, Feb. 12, 2015, and June 18, 2014.)

Even where authentic therapies are available for purchase, cold chain storage required for biologics is only as effective as its weakest link; maintaining storage from pharmacy to patient will be daunting.

"There is a big question of the logistics," Le Deu said. "It is one thing to sell pills in a box; it is another thing to sell biologics that need to be kept refrigerated and require special care."

Another hot topic is patient privacy, and how that can be managed over the cloud.

"How can an HIV patient be guaranteed that if they go online and try to buy drugs that their identity will be kept secret? This could be particularly sensitive in the China context," Le Deu noted.

However, it is clear that there is room to make biologics more accessible and affordable and online pharmacies might help to make that happen. While they dominate the market in the U.S., biologics only accounted for 12.9 percent of the overall pharma market in China (based on 2013 sales data), according to Citi's 2015 Chinese Healthcare Handbook.

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