China shuts down online drug sales

HONG KONG – China is shutting down online drug sales for the time being, despite rapid growth.

“The supervision system for third-party online pharmaceutical product sales is not mature yet,” said Shi Li Chen, director of Beijing Dingchen Pharmaceutical Management. “Traceability is a big problem. For example, how can we make sure of the sources of drugs selling online and also how could we make sure where do these drugs, prescription medicines in particular, go since people are usually anonymous online?”

Alibaba Group Holding Ltd. (NYSE:BABA) officially shut down online sales of drugs in China after authorities called for a break of a trial that had seen the giant e-commerce company experiment with selling pharmaceutical products directly to consumers via online third-party platforms.

The Chinese firm issued a statement to vendors on its business-to-consumer site, Tmall.com, to stop selling medicines as of Aug. 1, in accordance to requirements from the Hebei provincial branch of the CFDA.

Tmall said in a statement that it will “adjust its business model based on the new regulation in order to provide better service to customers within the law.”

In 2014, Alibaba Group acquired a 54 percent stake in investment holding company CITIC 21CN and gained control of the business-to-consumer (B2C) drug e-commerce marketplace Yao.95095, a subsidiary of CITIC 21. Yao.95095 received CFDA approval to join an online third-party retail pharmaceuticals sales pilot project in 2013.

Total revenue from selling medicines online was less than ¥400 million (US$60.2 million) in 2011, but jumped to ¥4.2 billion in 2013 and to more than ¥7 billion in 2014, accounting for 3 percent of all retail medicine sales, according to data from the Boston Consulting Group. In comparison, the figure is 30 percent in the U.S., 17 percent in Japan and 23 percent in Europe.

Concerns have risen, however, that the system opens the door for abuse by both distributors and users. The change in regulation that requires Tmall to shut down will apply to other online pharmaceutical retailers, said Geng Yiya, an analyst with Beijing-based Zhenghe Ruiseng Capital. All are expected to receive similar directives and shut down their online drug sales, including popular shopping sites Yhd.com and 800fang.com.

The third-party online sales trial launched in 2013 is expected to come to an end and a little earlier than most expected. A series of loopholes, which the CFDA identified in a recent news report on its official website, may be at the heart of the decision.

“It is unclear which party, the e-commerce site or the online vendors, should take responsibility when drug products are sold online via third-party platforms,” said the CFDA report. “It is difficult to monitor the quality of drug products sold this way, and it is not possible to protect the interests of consumers and ensure safe usage of drugs. Therefore, we decided to end the trial operation.”

NO QUICK FIX

Fake drugs have flooded the market in recent years, and the flow of such products could only get worse if more online sales licenses are issued.

Still, analysts said the sudden change in policy, while a setback for the country’s online pharmacies, could help brick-and-mortar drug chains that are allowed to sell medicine to consumers directly online, even if they are currently too small to have much reach.

“I’ve read many financial reports of these companies, who just revealed their revenue rather than profit,” said Geng, the Beijing-based analyst.

Data from China Drugstore, a magazine run by the country’s Ministry of Health, echoes Geng’s interpretation, noting that nearly two-thirds of companies selling drugs online suffered losses.

For the time being, online vendors may adjust their business model by receiving orders online and then directing consumers to go to off-site stores nearby to pick up their drugs.

And experts don’t see any quick fix to the situation.

“A lot of things need to be prepared, for example, how to connect the platform with hospitals and how to link the payment with the national health care insurance system. Also the related supervisory authority will need a better and clearer framework on this,” said Geng.

“But e-commerce of medical products is the trend in [the] long term, and I believe the CFDA will work more on this area to push it forward,” Geng noted.

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