Huge growth in online drug sales as demand for health products surges

It's difficult to imagine a sector that could register a sales increase of more than three times in just one year, with insiders predicting its growth momentum to continue over the next few years or even longer.

But that is the tale of online drug sales in China.

Sales in the sector jumped to 1.65 billion yuan ($270 million) in 2012 from 440 million yuan a year earlier, according to the China E-business Research Center. The market research firm also found that web users viewed medical service and health websites twice a day on average, and there were more than 1,000 online drug retailers in 2012.

Zhang Yong, secretary-general of the China Online Pharmacy Council, said that the swift development is reasonable and is expected to continue. His council predicts that sales from drug e-businesses will hit 15 billion yuan in 2015.

He attributed the swift growth of the sector to the e-commerce boom in China, the convenience and competitive price of buying drugs online and surging demand for over-the-counter medicines and healthcare products.

"As early as 2010, online medicine purchases accounted for 30 percent of all pharmaceutical sales in the United States, while in China the figure is no more than 1 percent so far," Zhang said.

More competition

As sales increase, more and more medicine distributors and retailers are competing to enter the online drug-selling sector.

A recent survey by market research company Ipsos showed that 29 percent of respondents had purchased healthcare products online, compared with over-the-counter buyers at 19 percent, which indicated the number of online medical products buyers has grown in scale.

It also showed that the official websites of chain pharmacies and pharmaceutical companies are the main channels for over-the-counter buyers.

As for health products, in addition to the above, main channels include business-to-consumer platforms, such as Tmall and JD.com.

Big companies, both chain pharmacies and B2C websites, are playing key roles in China's drug e-commerce sector.

Guangzhou Pharmaceuticals Corp, the largest chain pharmacies operator in South China, launched its drug retailing website in August 2011. Its sales are expected to increase three times this year from more than 6 million yuan in 2012, according to website general manager Yu Jinghui.

JD.com's drug e-commerce platform was built under cooperation with domestic medicine distribution giant Jointown Pharmaceutical Group. Its turnover was nearly 100 million yuan in 2012, after a year of operations.

"Concerning drug and healthcare products, consumers focus more on safety and reliability, thus big companies are preferred," Yu said.

More and more pharmaceutical companies, especially small and medium-sized ones, are choosing to use big chain pharmacies' or business-to-consumer websites as sales channels.

"The result is a natural consolidation of the industry at its emerging stage, facilitating sound and sustainable development of drug e-business in China," said Zhang from the China Online Pharmacy Council.

Ipsos' survey shows that the products purchased online are mainly low-risk products such as cold medicines, gastrointestinal medicines, vitamins and Chinese natural remedies. "How drug e-businesses win consumers' trust and expand their businesses is the next critical step for the online drug market," it said.

Obstacles and dilemmas

Drug e-commerce is faced with two major obstacles - quality reliability and logistics.

The main problem with online medicine purchases is that consumers have difficulty in judging the authenticity of the drugs for sale, as 61 percent of the respondents to the Ipsos survey said.

Fang Jiming, a 32-year-old Beijinger, said she often buys health products such as vitamins and nutrition supplements online, but only purchased medicine once.

"It's for coughing. Because of hazy weather that day, I didn't want to go to the physical store. Otherwise, I will not buy drugs online," Fang said, adding that the scandals revealed on TV about false drugs sold online scared her.

Deng Jinguang, general manager of Dongeejiao Pharmaceutical Co Ltd's online purchase website, said that as his company's major product is ejiao, a traditional Chinese health improvement product, online purchases are very popular.

"I know that the key businesses and profit driver of many online drug sellers are medical devices and healthcare products instead of medicines, because consumers have concerns on quality and authenticity," he said.

Logistics and distribution are also bottlenecks for the development of drug e-commerce, as nearly half of the respondents of Ipsos' survey said the reason they did not purchase drugs online is that they could not get the drugs they need in time. Meanwhile, 38 percent expressed their concerns about drug distribution quality.

Due to the medicine industry's quality and safety requirements, e-businesses need to have a GSP (generalized scheme of preferences)-certified distribution system. Many third-party logistics companies do not have such a certificate, which limits the logistics capacity of many drug e-businesses and reduces potential sales.

"In this matter, our traditional chain pharmacies have advantages," said Yu from Guangzhou Pharmaceuticals. "With physical stores nationwide, we have our own logistics points. We can leverage this distribution network to support our online business."

In addition to trust and logistics factors, the lack of consulting services is also a focal point. Fang from Beijing said that another reason that she does not want to purchase medicine online is there is no pharmacist or professional providing consultancy to buyers.

The big boys are also affected. While JD's drug sales are growing noticeably, the business is still in the red, as a result of its huge expenditure on marketing, logistics and services.

Tmall's medical business also has a low profit margin because of high marketing and advertising costs, according to a manager of the business who requested anonymity.

"It's a brand-building period," said the manager. "Any business hopes to grasp market share - the earlier, the easier to maintain the leading position. Pharmaceutical retailing depends heavily on reputation, and brand loyalty is very stable in this industry."

According to the Ipsos survey, 64 percent of the respondents said they would purchase over-the-counter or health products online, while 75 percent said they might do so in the future. If this is matched by a corresponding increase in trust, it will spur the growth of the industry.

The report also said that if the government puts policies in place to further strengthen market regulation and certification for online medicine markets, consumers' confidence will be greatly boosted.