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China's Changing Pharmaceutical E-Commerce Market

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China's Changing Pharmaceutical E-Commerce Market China’s changing pharmaceutical E-commerce market Contents 1 Foreword 2 Trend I: About RMB 150 billion in hospital and retail terminal drug sales are expected to transfer to online sales 3 Trend II: E-commerce will facilitate the reconstruction of the pharmaceutical industry value chain 6 Trend III: Pharmaceutical E-commerce development will move towards a win-win model with organic interaction 8 Trend IV: Pharmaceutical E-commerce will facilitate enterprise transformation from offline to online 10 Trend V: Mobile Internet technology will re-engineer hospital operations and service processes 12 Trend VI: The Internet medical system will focus on patient-centered care 14 Trend VII: Intelligent wearable devices will drive a new generation of health and medical services 16 Trend VIII: Big data will lead the medical system into the age of wisdom Foreword Healthcare providers and pharmaceutical operation; foreign industry dynamics; trends companies operating in China have been slower including increasingly mature online technology than organizations in other industries (such as and gradual customer cultivation, are driving Consumer Products) to embrace the potential of the development, integration, and use of mobile Internet and E-commerce to transform pharmaceutical E-commerce and online medical the marketplace (Figure 1). Roadblocks to care, as well as the evolution of China’s medical widespread adoption include health care’s and pharmaceutical ecosystem. complex, often fragmented, industry ecosystem, Pharmaceutical E-commerce has entered the highly regulated operating environment, development stage, aided by gradual policy incomplete online technology standards, and decontrol, although its development speed is underdeveloped consumer online purchasing slower than other commodity E-commerce. habits. Ultimately, pharmaceutical E-commerce will facilitate the redistribution of stakeholders’ Figure 1: General E-commerce vs. pharma E-commerce sales (2015E) interests, reconstruction of all links of the value chain, and offline enterprise transformation. Currency:RMB Meanwhile, China’s online medical system is flourishing. With the improvement of service quality, it is expected that online medical services 1.8848 trillion - PC online will partially substitute for offline medical services shopping and satisfy lower-level medical demands. The technology of mobile Internet will further penetrate hospital operations and service processes, and in the process of continuously 929.7 billion - mobile optimizing online and offline services, the two network shopping will be closely integrated, gradually breaking through the barriers of regional and traditional process, and improving the efficiency of resource allocation. 267.0 billion – online travel Understandably, the integration of new technology and traditional industry is bound to 10.0 billion - pharmaceutical face numerous obstacles, which can be overcome E-commerce by policy change, stakeholder involvement, and public interest. Nevertheless, it should However, it should be noted that online drug be understood that under the conditions of sales and healthcare services can effectively accelerated technology change and rapidly optimize operating processes, minimize costs, changing industry and operational models, it has satisfy increasingly diversified consumer healthcare become more and more important that enterprises demands, and optimize resource allocations – become more adept in deciding their future path all valuable benefits in light of China’s scarce and bold in taking action. healthcare resources and imbalanced distribution. We expect that pharma E-commerce and online Fortunately, the combination of a government medical care will have a bright future with the reform policy that frees the healthcare and easing of China’s prescribed drug policies and the pharmaceutical industry to introduce a market influence of the following eight trends. We hope mechanism based on an improved industrial that this report will drive thinking and discussion policy and more standardized industrial to clarify direction and move the industry forward. 1 Trend I: About RMB 150 billion in hospital and retail terminal drug sales are expected to transfer to online sales At present, the primary drug sales channels in When the share of drugs in the network/online China are the hospital and retail terminals, with terminal increases from RMB 10 billion to RMB a ratio of approximately 8:2. The network/online 150 billion, it will account for 10% of the (OTC) terminal accounts for only a tiny fraction whole market, thereby enabling pharmaceutical of total sales. When hospital drug sales are E-commerce to enter a new stage of viewed under the premise of policy decontrol, development. the hospital is very likely to retain control over Based on this forecast, we optimistically estimate in-patient pharmacy. The out-patient pharmacy that by 2020 the pharmaceutical E-commerce will likely be transitioned to the retail terminal market could reach nearly RMB 400 billion in and online; however, injectable drugs cannot sales. The market should benefit from facilitating be purchased online limiting the online transfer factors such as the continual expansion of the rate to some extent. The retail terminal will be overall pharmaceutical market, continually easing subjected to two-way influence – on one hand, government policy, further improvements in it should benefit from the outflow of drugs logistics and less time-based limits, as well as from the hospital terminal; on the other hand, the development of customers’ online shopping after the online sales policy for prescribed drugs habits. is liberalized, the impact of pharmaceutical E-commerce on retail drugstores will be Figure 2: Transformation of pharmaceutical inevitable. E-commerce market patterns (2015E) The government’s policy decontrol should release suppressed demand and support Out-patient RX (34%, 521.0 substantial development of the pharmaceutical billion) Hospital E-commerce market. Yet, since decontrol of In-patient drugs Injection (13%, 208.4 billion) terminal prescribed drug sales will be gradual, the (50%, 781.5 billion) Non-injection (13%, 208.4 (1302.5 billion) anticipated growth of the pharmaceutical billion) E-commerce market will be steady as compared Out-patient OTC (7%, 104.2 to the explosive growth seen in the traditional Retail billion) terminal E-commerce industry. RX (6%, 96.3 (240.8 OTC (9%, 144.5 billion) billion) billion) Based on estimated 2015 data (Figure 2), Network we have forecasted the scale change of terminal OTC (0.6%, 10.0 billion) pharmaceutical E-commerce. Once the (10.0 billion) prescribed drugs policy is liberalized, the existing drug market is expected to shift from the hospital and retail terminals to the network/ online terminal: Out-patient RX (20%, 306.2 billion) Hospital • Hospital terminal: About RMB 70 billion terminal in out-patient pharmacy sales will shift to (1087.7 Injection (10%, 156.3 billion) In-patient drugs billion) Non-injection (6%, 99.9 the network/online terminal; in particular, (50%, 781.5 billion) billion) out-patient non-injection drugs and OTC Retail Out-patient OTC (3%, 50.0 drugs. terminal billion) (310.0 • Retail terminal: About RMB 80 billion in drug billion) RX (12%, 180.3 billion) OTC (8%, 129.7 billion) sales will shift from the retail terminal to the Network network/online terminal. terminal RX (4.9%, 76.6 billion) OTC (5%, 79.0 billion) (155.6 billion) China’s changing pharmaceutical E-commerce market 2 Trend II: E-commerce will facilitate the reconstruction of the pharmaceutical value chain The traditional pharmaceutical industry value chain is characterized by pharmaceutical companies with pricing power and a low concentration of wholesalers that use a complex, multilayered system of agents (national, provincial and municipal). Hospitals typically cover expenses with medicine revenues, exerting pressure on drugstores’ profits. At the end of value chain, patients find themselves 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 the traditional pharmaceutical value chain in seven key areas. Figure 3: E-commerce will facilitate the reconstruction of the traditional pharmaceutical value chain Legend： New or changed link Pharmaceutical Pharmaceutical Logistics Medical institutions Patients enterprises: wholesalers distribution centers Service-oriented profit making Still controlling the With the expansion Agency simplified factory prices, but of market, third High concentration Retail pharmacies the pharmacy party logistics to Increased rights competition will join the competition Differentiated impacts on the of choice be more market independent and Improved position -oriented, and the retail pharmacies cost performance Future value chain Future is everything Pharmaceutical E-commerce To break through the traditional pharmaceutical circulation pattern Medical digital transformation and big data Integration of regulations E-commerce will make drug prices transparent and market-oriented, with prices more transparent and market-oriented. depending on the drug and user demands. With the hospital terminal currently dominating The impact of E-commerce platforms on specific pharmaceutical sales, China’s pharmaceutical pharmaceutical companies may differ. Firstly, manufacturers basically have no independent for generic pharmaceutical manufacturers, distribution channels.
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