Chinese ecommerce site Alibaba (BABA, Financial) has already created ripples on the NYSE after its listing in the later part of 2014 and its founder, Jack Ma, has also shown interest in expanding their online business in the U.S. However, recently, the wholly owned subsidiary of Alibaba Group Holdings, Alibaba Health Information Technology Limited, has announced plans to acquire online pharmacy business Beijing Chuanyun Logistics Investment Limited from its associate for a deal of worth about $2.5 billion. In fact, this news could offer more growth momentum to the parent company at its home turf where the population suffering from serious ailments such as cardiac conditions and diabetes are on the constant rise. Let’s dig in deeper to find out what is the existing health-care scenario prevailing in the Nation, and whether this move could add an ace up the sleeve for Alibaba Group.
The healthcare landscape in China needs immediate attention
In China, the government has been taking measures to revamp the medical infrastructure since the country lacks the presence of strong retail pharmacy network in several regions. This makes the online healthcare business a growing opportunity in China, though this is subject to the approval of the Chinese regulatory authorities.
Several technology companies such as Tencent Holdings Limited (TCEHY, Financial) are currently investing in the online healthcare business in China. Alibaba hopes that after this acquisition it would offer similar services through the Tmall site that is currently offering store products of at least 186 pharmacies which sell a wide range of healthcare products such as contact lenses, OTC drugs, medical devices and other general pharmaceutical products online, as approved by the government of China. But no prescription drugs are currently sold online in China. But hopefully for the benefit of consumers, the Beijing government would possibly hand out licenses allowing the online sale of vital prescription drugs.
But allowing online sale of drugs would obviously affect the sales over the counter of hospitals and of retail pharmacy outlets. So, it remains to be seen whether this acquisition actually helps Alibaba to grow in the healthcare segment at home.
The deal details
As per the terms of the deal, Alibaba’s health unit would issue convertible bonds and shares worth HK$19.5 billion, which translates to $2.5 billion, to acquire the online pharmacy firm Beijing Chuanyun Logistics from Ali JK Investment, another investor in the Alibaba Group.
Since the parent company presently holds around 38% stake in Alibaba Health Information Technology, this deal could possibly create an entity that would become the platform for selling prescription drugs by online pharmacies. It is being heard that this platform would be integrated with the online-pharmacy business of Alibaba, the Tmall unit. When the bonds are fully converted the stake of Alibaba Group in Alibaba Health would increase to almost 56% stake.
Benefiting Alibaba in the long run
As per a report of IMS Health Institute for Informatics, prescription-drug spending in China would reach $120 per capita in 2018 from around $70 in 2013. And the total healthcare spending in the country would grow from $357 billion in 2011 to over $1 trillion in 2020, as per McKinsey & Co. Hence, signing this acquisition deal is like a cherry on a pie for the Alibaba Group which urges to grow the online pharmacy business beyond borders and expects to get positioned better in the online- prescription drugs market in China.
This move brings the Internet giant’s health-care assets under a single roof, moving its web pharmacy business into its publicly listed health arm. Soon after the announcement was made on April 15, shares of Alibaba Health Information Technology Limited soared 81% to close at HK$12.26 on Hong Kong stock exchange and this was the smartest move noticed in the stock in the past 15 years.
Mark Natkin, managing director of Marbridge Consulting, stated, “Online and mobile health care is an area with enormous potential in China. … You’ve got an aging population, increasing income and therefore increasing awareness on fitness and health, and a rapidly growing IT infrastructure with more and more people accessing the Internet on Web and mobile…”
He further added, “Alibaba is particularly well positioned to bring greater efficiency to the health care industry, in terms of product sourcing, tracking the supply chain and offering greater transparency on pricing …”
To conclude
This is indeed an innovative strategy opted by Jack Ma in his endeavor to expand further into China’s booming online health-care market. As more Chinese consumers seek professional advice, buy wellness products and use mobile gadgets to monitor their fitness – such acquisitions might prove fruitful in growing the market share of Alibaba in China’s online health-care market. So, let’s keep watching.
