Why Alibaba Health is going offline for pharmacy deal

Investors obviously have strong confidence in China’s pre-profit online healthcare sector. But even a leading player like AliHealth is striving hard for positive cash flows.

China's healthcare sector is red hot and for good reason. The world's most populous country is greying fast, and its healthcare system has failed to keep pace with a rapidly aging society.

It's therefore no wonder that investors have swooned over companies promising to harness technology to transform the patient experience, especially when a major corporate name is involved.

That has benefitted the likes of Ping An's Good Doctor and Tencent-backed WeDoctor. However these platforms share a common challenge: with technologies still under development and remote diagnosis yet to find full acceptance, how should they turn huge internet traffic into profits?

Offline pharmacies, with wide distribution networks, could generate considerably decent and stable cash flows and attract internet players with ambitions in the healthcare space.

Late on Friday night, Alibaba Health, the loss-making health spin-off of Alibaba Group, said it had proposed an Rmb826 million ($120 million) investment in Chinese local retail pharmacy chain Guizhou Ensure.

Specifically, the deal is comprised of a Rmb421.8 million acquisition of 14.54% equity interests in the target company, and a Rmb404.3 million subscription to the company’s capital increase. The investment secures a 25% stake in the target firm.

The target firm is a provincial pharmaceutical retail chain company operates more than 1,000 pharmacy stores in China.

Through the deal, AliHealth will “explore and expand new retail models for pharmacies”, and tap technologies like big data to “provide fair, affordable and accessible medical and health care services to one billion people”, its filing to the Hong Kong Stock Exchange read.

PROFIT OFFLINE

Clearly, it will take a while for AliHealth to reach its goal of serving one billion patients — especially with such keen competition about.

Investors in these platforms might be deep-pocketed and supportive, but for how much longer?

Keeping the backers patient for as long as possible is crucial. And there is no more effective way of doing so than delivering stable positive cash flows.

According to AliHealth latest annual report, it recorded a Rmb109 million loss in the fiscal year ending in March 2018 – not really a satisfying performance despite a notable improvement from last year’s Rmb208.7 million loss.

Guizhou Ensure, recording more than Rmb1 billion revenue and Rmb66.0 million of earnings after tax (EAT) in its fiscal year ending in March 2017, is clearly a favourable deal for AliHealth from an income statement perspective.

The transaction marks AliHealth’s third investments in offline healthcare companies in the second half of this year.

On June 25, it disclosed a Rmb454 million investment in another local retail chain pharmacy firm – ShuYu Civilian Pharmacy Corporation, in which AliHealth now holds a 9.34% stake.

The same day also saw AliHealth team up with Huaren Health, another local retail chain pharmacy company, via a strategic partnership that involved the former’s contribution to the latter’s series B round of funding.

Although noted as an e-commerce guru, Jack Ma's attempt to bolster the physical presence of his kingdom began earlier — as it proposed a HK$19.8 billion ($2.6 billion) bid for Hong Kong-listed shopping mall operator Intime Retail Group in January 2017. The move into offline healthcare seems to reflect an extension of that strategy.

In the process of integration between advanced technology and the traditional healthcare industry, platforms like AliHealth are likely to stay ahead with their outstanding big data analysing capability and internet traffic advantage.

However, the broader target is to more efficiently guide online users to shop for medicines and healthcare services offline, and ultimately redistribute limited healthcare resources to benefit more people, especially those in the rural and poorer areas.

Just like WeDoctor’s founder Jerry Liao told FinanceAsia in an interview earlier last month: “In healthcare space, online and offline are not substitute to each other, rather, they should be sequences and complement each other.”

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