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After platforms with large traffic such as Meituan, Douyin, and Kuaishou fully entered the drug selling business, medical e-commerce is becoming a battleground for major Internet companies to gain growth.

Looking back, whether it is group buying, takeout, grocery shopping, or travel, renting a house, or taking a taxi, wherever the wind of the Internet blows, there will be a bloody storm. When the wind of the Internet blew to the 2 trillion pharmaceutical market, the entire capital market was excited, and the imagination behind "Internet + medical care" was very attractive.

In this context, a large number of "Internet medical" platforms have risen up, hoping to have their own place. After years of competition, the domestic market has gradually formed a pattern of competition among Ping An Good Doctor, Ali Health, and JD Health. Just when everyone thought that the leader of "Internet medical" would emerge from these three, the accident happened as expected.

In this "Internet medical" battle with the entry of new forces, competition in the pharmaceutical e-commerce market is becoming increasingly fierce. How to build one's own moat, how to avoid homogeneous competition, and the supervision brought about by innovation will be the key to determining the outcome.

The "Battle of the Gods" in medical e-commerce has begun!

01

Beginning: Twenty Years of Cautious Exploration

China's pharmaceutical e-commerce originated in 2003. When Li Hongbo, a veteran and entrepreneur, visited the United States, he accidentally discovered that a new type of online pharmacy business was emerging in the United States: online ordering and offline mail delivery.

Li Hongbo was deeply inspired by this, so he reported his ideas from the US investigation to the Food and Drug Administration. But at that time, drugs were special items in my country, and there was a strict licensing system for both production and circulation. However, after sufficient communication, the Food and Drug Administration approved Li Hongbo to conduct a pilot exploration.

After obtaining the pilot qualification, Li Hongbo began to build the website. Relying on hundreds of retail pharmacies under Jingwei Pharmaceutical, he adopted the "online ordering, store delivery" model and launched the Pharmacy Network on December 29, 2005. This is also the first legal online pharmacy in my country.

However, the story of medical e-commerce is not so smooth.

In fact, as early as 1998, Shanghai No. 1 Pharmacy opened the first online pharmacy in China, but it was quickly stopped due to the lack of qualified policies and regulations. The following year, the regulatory authorities issued the "Interim Regulations on the Circulation Management of Prescription and OTC Drugs", which explicitly prohibited the sale of prescription and over-the-counter drugs online. The biggest concern of the regulatory authorities was that online drug sales at the time circumvented the supervision of drug circulation links and could not guarantee the safety of drugs. How to regulate became the key issue for whether drugs can be sold online.

It was not until 2005 that the policy was relaxed. With the introduction of the "Interim Provisions on the Approval of Internet Drug Trading Services", qualified online pharmacies were allowed to sell over-the-counter drugs online, but they could only be delivered by the online pharmacies themselves. It was strictly prohibited to sell prescription drugs to individuals, and it was strictly prohibited for medical institutions to sell drugs online.

The first generation of medical e-commerce platforms such as Pharmacy.com and Golden Elephant.com were born in this context. They usually have chain drugstores across the country behind them. During this period, medical e-commerce was positioned more like an advertising platform for offline drugstores, and its own profitability was limited.

After the initial accumulation of the industry, e-commerce giants represented by Alibaba and JD.com also began to frantically test the waters. Around 2012, large e-commerce platforms entered the pharmaceutical e-commerce market by jumping to online pharmacies with legal qualifications. On the other hand, more and more pharmaceutical companies also sold drugs through third-party e-commerce platforms. However, in July 2016, the State Food and Drug Administration completely stopped the pilot program of online drug retail on third-party platforms, targeting Internet companies.

Regulatory authorities are more cautious about online sales of prescription drugs and are constantly testing market reactions through draft bills for comments.

In November 2017, the State Administration for Market Regulation publicly solicited opinions on the "Regulations on the Supervision and Administration of Online Drug Sales (Draft)", which requires that prescription drugs should not be sold online. In December 2019, the newly revised "Drug Administration Law" officially came into effect, clarifying the legal status of third-party platforms and the types of drugs that cannot be sold online. Prescription drugs are not among the types of drugs that are prohibited from being sold online by law.

The three-year COVID-19 pandemic accelerated the development of medical e-commerce. On August 3, 2022, the "Regulations on the Supervision and Administration of Online Drug Sales" was released after multiple rounds of solicitation of opinions. It stipulates that online purchases of prescription drugs must be made under the real-name system, and information such as prescription drug instructions cannot be displayed without a prescription. Except for vaccines, blood products and other drugs that are prohibited from online sales, the policy on online sales of prescription drugs has been implemented.

Figure: AMC model of China's pharmaceutical e-commerce market, source: Northeast Securities

At this point, China's pharmaceutical e-commerce industry has finally ushered in a period of sustained explosive growth after experiencing policy changes.

02

Dispute: Whoever gets the traffic wins the world

Who will become the king of "Internet medical care"? It depends on who can bring more convenience to consumers.

In the eyes of most investors, "Internet + Healthcare" is an innovative industry, but in fact, like other "Internet +" industries such as taxi-hailing and grocery shopping, its essence is to grab traffic from traditional retail pharmacies.

Data shows that from 2013 to 2022, the sales volume of Chinese physical drugstores increased from 361.6 billion yuan to 611.7 billion yuan, with a compound annual growth rate of 6.02%; during the same period, the market size of China's pharmaceutical e-commerce increased from 4.3 billion yuan to 260.8 billion yuan, with a compound annual growth rate of 57.8%, and a compound growth rate of 37.5% in the past three years. In the past decade, the proportion of pharmaceutical e-commerce in the retail drugstore market has rapidly increased from 1.2% in 2013 to 29.9%. With the promulgation of a series of regulatory policies such as online sales of prescription drugs, the proportion will further expand.

With strong growth, medical e-commerce has become a battleground for major traditional pharmacies and Internet giants. A large amount of capital has been invested in it, and the market competition is extremely fierce. After rounds of trials and tribulations, Ping An Good Doctor gradually fell behind, and the Internet medical track has become a duopoly of Ali Health and JD Health.

As a pioneer in China's e-commerce industry, Alibaba Group has also shown a keen sense of smell in the field of pharmaceutical e-commerce. When the Food and Drug Administration just started to carry out the pilot of online drug retail on the Internet third-party platform in 2013, Hebei Huiyan Pharmaceutical obtained the first pilot qualification. Alibaba soon joined hands with Yunfeng Fund to spend US$170 million to acquire 54.3% of the shares of Hebei Huiyan Pharmaceutical's parent company, Hong Kong-listed CITIC 21st Century, and renamed it Ali Health.

In the latest fiscal year 2024 (ending March 2024), Ali Health achieved revenue of 27.027 billion yuan, a year-on-year increase of only 1%; net profit attributable to the parent company was 883 million yuan, a year-on-year increase of 64.7%. Among them, the number of online self-operated store members reached 77 million, a year-on-year increase of 17.2%, and the self-operated pharmaceutical business achieved revenue of 23.739 billion yuan, accounting for 87.8%.

On the other hand, as the second pole of Internet e-commerce, JD.com is also working hard to expand its pharmaceutical e-commerce business. At the end of 2020, JD Health was split and listed independently on the Hong Kong Stock Exchange, and quickly became the largest subsidiary of JD.com by market value. JD Health's total revenue in the first half of 2024 was 28.344 billion yuan, a year-on-year increase of 4.6%; net profit was 2.0378 billion yuan, a year-on-year increase of 30.5%. Among them, the self-operated pharmaceutical business was 23.91 billion yuan, accounting for 84.4%.

Compared with Ali Health, JD Health's advantage lies in its ability to provide convenient and efficient instant retail services. In the first half of this year, JD Health's instant retail services have covered more than 490 cities, with more than 150,000 cooperating pharmacies, and can respond to user needs 24 hours a day. In May 2024, it took the lead in launching a pilot service for individual medical insurance account payment in Beijing, and local insured persons can realize real-time medical insurance settlement for online O2O orders. As of June 30, 2024, more than 350 designated medical insurance retail pharmacies have been connected to the JD platform.

In essence, Internet healthcare is an industry where whoever has the most traffic wins. Ali Health and JD Health, backed by their parent company's strong e-commerce user base, have gained sufficient first-mover advantage, enjoyed the Internet healthcare traffic dividend, and seized a large market share. On the other hand, Ping An Good Doctor, once the third-largest player, has gradually fallen behind because it has no traffic entry support.

The wind does not always blow in one direction. With the fading of the Internet traffic dividend, the competition in the pharmaceutical e-commerce industry is no longer limited to traditional e-commerce companies, but has gradually entered a new era of competition after the participation of O2O platforms and live broadcast e-commerce platforms.

As the winner of the O2O competition, Meituan also has a huge user base and regards the pharmaceutical track as an extremely important emerging market. With more than 7 million riders nationwide, Meituan launched the "Little Yellow Light Health Guardian Alliance". As of September 2023, there are nearly 13,000 24-hour digital pharmacies in 319 cities in 31 provinces, municipalities and autonomous regions across the country, covering 1,467 districts and counties.

The two major short video platforms, Douyin and Kuaishou, also relaxed the entry threshold for drug sales in 2023 and began to try live streaming drug sales. In December 2022, Douyin Mall launched the OTC drug category to test the waters of the pharmaceutical e-commerce business. At the beginning of the new year, the Douyin platform once again launched two prescription drug-related rules, the "Prescription Drug Management Specifications" and the "Prescription Drug Access Brand List", marking that Douyin officially opened up the sale of prescription drugs.

The express delivery leader SF Express officially entered the pharmaceutical O2O field in October 2023. SF Express launched an integrated "Internet + Medical Health" pharmaceutical distribution comprehensive logistics solution, covering the two core medical consumption scenarios of new pharmaceutical retail and Internet hospitals.

The entry of many new forces has made the competition landscape of pharmaceutical e-commerce more complicated, and the originally clear duopoly landscape will become blurred again. There is both cooperation and competition between offline chain drugstores, online self-operated drugstores, third-party platforms, and distribution companies. Driven by technologies such as big data, artificial intelligence, and cloud computing, new models of pharmaceutical e-commerce are constantly being discovered, and the existing market structure of the pharmaceutical e-commerce industry may be broken at any time.

The emergence of a new competitive landscape means that the traffic entrance for medical e-commerce is switching from e-commerce platforms to more areas in people’s lives.

03

Endgame: The battle for user minds

The deep reason why Ali Health and JD Health were able to win the Internet medical war that year was that the Internet broke down the information barriers of the past.

In the past, users went to pharmacies to get medicine passively. They did not know the price of the medicine and could only choose to accept it passively. But with the intervention of Internet e-commerce platforms, users can check the price of medicines through e-commerce platforms, thus having more choices for purchasing medicines.

However, this approach of breaking down information barriers is essentially "involutionary", which is determined by the "openness" gene of the Internet. For example, breaking down the information barriers of the past has caused small clothing stores and cosmetics stores that were originally based on regional service information to lose their living space, but it also means that Internet companies cannot occupy a certain information advantage for a long time.

However, in the field of pharmaceutical e-commerce, it is not enough to just make information "public". The essence of selling medicines is not only about the cheapness, but also about the user experience. After all, many drug selling scenarios require timely delivery. Traffic, distribution, supply chain, and pharmaceutical value are the four new competitive elements of pharmaceutical e-commerce in the new era.

Figure: Overview of the usage rate of mainstream pharmaceutical e-commerce platforms, Source: Kaiyuan Securities

More traffic means more users. Traditional retail chain drugstores lacking traffic have first-mover advantages and are more professional, but it is difficult to expand on a large scale and cannot compete with Internet giants. More traffic also means lower publicity and marketing costs. Take Ping An Good Doctor and Ali Health as examples. According to the latest annual report data, their sales expense rates are 17.89% and 6.6% respectively. Without traffic, they cannot realize cash. The former has not made a profit in the five years since its listing.

It is precisely because of the importance of traffic that Tik Tok, Kuaishou and other large traffic groups dare to enter the pharmaceutical e-commerce field monopolized by Alibaba and JD. But traffic is not omnipotent. For pharmaceutical e-commerce, service is actually the first priority.

Medicines are different from ordinary commodities. People generally do not have the habit of hoarding medicines. Once they have a cold or fever, they hope to buy medicines as quickly as possible. In this process, the price of the medicine is not as important as the delivery efficiency.

In terms of delivery speed, major companies have increased the delivery time from "next day delivery" and "same day delivery" to "hour delivery", "half hour delivery" and "minute delivery", and the competition for delivery efficiency is becoming increasingly fierce. At the same time, the circulation of medicines is more stringent than that of ordinary goods. Companies such as Alibaba, JD.com, Meituan, Ele.me, and SF Express all have "self-built teams" in logistics and delivery to meet demand.

In terms of supply chain integration, there are more than 100,000 drug specifications in China, and there are thousands of pharmaceutical companies behind them. With the liberalization of online sales of prescription drugs, whoever can obtain more varieties of drugs and meet users' demand for drug varieties will gain an advantage in the competition. This requires pharmaceutical e-commerce companies to establish a supply chain network that includes pharmaceutical companies, smart warehousing, and logistics distribution.

The competition in traffic, logistics, and supply chain is just a game for the existing market. The proportion of "medical" in medical e-commerce determines the upper limit of medical e-commerce.

Figure: Factors that determine user mindset, source: Jinduan Research Institute

During the three-year COVID-19 pandemic, a large number of online consultation demands have accelerated the development of Internet hospitals. Internet hospitals can not only provide electronic prescriptions for the sale of prescription drugs, but more importantly, if they are well developed, they can make up for the uneven distribution of medical resources in China to a certain extent.

Medical e-commerce will extend its services to Internet hospitals, horizontally providing full-process services such as online consultation, prescription, and chronic disease management to increase user stickiness, and vertically serving grassroots markets such as townships. These areas that are not covered by the traditional medical system will be important incremental markets for medical e-commerce in the future.

Pharmaceutical e-commerce is the only way for future drug retail. The competition in this field is changing from pure traffic competition to a competition for user minds. Who can become the leader in China's pharmaceutical e-commerce field? That is the platform that users can think of first when they need medicine.