Who can win the huge pharmacy market in China?

The Chinese pharma market has been growing steadily with support from the government and rising awareness of a healthy lifestyle among Chinese people. However, the physical pharmacies are switching their business models to maintain their strengths in the OTC and Pharma market.

Facts about Chinese pharmacy chains:

With a unique healthcare and reimbursement system in China, hospital pharmacies are still the main retail channel for prescription drugs while retail pharma accounts for a large proportion for the OTC pharma market. In the last 5 years, with reforming policies on the China OTC and Pharma market, such as a “hierarchical medical system”, the sales of prescription drugs have increased rapidly, which is also called “prescription outflowing”.

In 2017, chain pharmacies accounted for a proportion of more than 50%. The majority of the large pharmacy chains are public companies. One of the largest pharmacy chains, GuoDa Drugstore, with more than 3,000 stores throughout the country, had a revenue of 11 billion CNY in FY2017. GuoDa Drugstore is held jointly by Sinopharm Group, a public state-owned company, and Walgreens Boots Alliance (WBA), an American holding company with several well-known pharmacy brands. WBA acquired 40% minority share of GuoDa Drugstore in 2018. Besides, several large pharmacy chains, including YiXinTang Pharmacy, LBX Pharmacy, and DaShenLin Pharma, had an annual revenue of more than 8 billion CNY in FY2017, respectively.

Table 1. Sales of top 5 pharmacy chains in China in FY2017

Source: Chinair

The best advantage of physical pharmacies is the professional service, such as pharma consulting and traditional Chinese medicine (TCM) therapy. However, with the development of online pharmacies, the market share of physical pharmacies in the OTC retail market has decreased since 2013. Only 49.81% of OTC products were sold through the physical pharmacy channel in 2017, falling below 50% for the first time. The threat from both, hospital pharma and online pharma, forces pharmacy chains to maintain their market share through new business models.

New business models of physical pharmacies:

  • DTP (Direct to Patient) pharmacy: Pharmacies get their marketing rights directly from the pharma companies, and consumers get their products as well as the professional service at the pharmacy. LBX Pharmacy for instance collaborated with AstraZeneca in building Respiratory Caring Centers at different pharmacies in China.
  • O2O (Online to Offline): O2O means that consumers can order the products and pay for them online and receive the delivery from the nearest pharmacy within 1 hour. With the growing popularity of mobile payment in China, O2O helps physical pharmacies in improving their professional value. Nepstar Drugstore, one of the nationwide pharmacy chains listed on the NYSE, started its O2O payment service in collaboration with Alipay in 2014 and plans to build an overall O2O service soon.

The rapid development of online pharmacies:

The first online pharmacy in China started in 1997, and since the enactment of Interim Provisions on the Examination and Approval of Internet Drug Trading Services in 2005, the number of online pharmacies has increased continuously. The low cost of operation is an advantage for online pharmacies. Compared with physical pharmacies, online pharmacies are not allowed to sell prescription drugs. Therefore the majority of online pharmacies in China are focused on OTC brands and personal healthcare products. Meanwhile, online pharmacies have not been covered by the medical insurance payment system, which means, although online pharmacies usually sell the same products with a lower price than physical pharmacies, the price actually paid by the consumers (out-of-pocket cost) may be even higher.

The business model of online pharmacies is a B2C model, the majority of which build their online business at a third party platform (e.g. JD, Tmall), while others build their own B2C online platform. The headquarters of large online pharmacies are mainly located in Beijing, Shanghai, and Guangdong Province, which are the most developed regions in the country. “1 Drugstore” is a specialized online pharmacy founded in 2010 and became one of the largest online pharmacies in China. Till June 2018, the registered members of “1 Drugstore” are more than 15 million, and its revenue in the first 3 quarters in 2018 reached 1.2 billion CNY. The market size of online pharmacies in 2017 reached 6.1 billion CNY.