Online Pharmacy ModelChoice of Pharmaceutical Retail Chain Enterprises

MENG Ling-quan, WU Zhi-ang, ZHOU Ying, CAO Jing

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Online Pharmacy ModelChoice of Pharmaceutical Retail Chain Enterprises

MENG Ling-quan, WU Zhi-ang, ZHOU Ying, CAO Jing

Objective To study the development path of online pharmacies in China.MethodsDevelopment models of types of online stores were analyzed as

to explore suitable online pharmacy models for pharmaceutical retail chain enterprises. Results and ConclusionThe pharmaceutical retail chain enterprises can adopt five models, such as the third party transaction model, to gain a quick development and to improve the service level.

online pharmacy; development model; pharmaceutical retail chain enterprise; the third party

With the development of the network technology and electronic technology, e-commerce has penetrated into people’s life and become the trend of the times.

According to the Internet drug trading service approval interim provisions (hereinafter referred to as the regulations) issued by the SFDA on September 29, 2005, the Internet drug trading business started from December 1, 2005 in China. By the end of June 16, 2012, there had been 113 Internet drug trading platforms, 68 of them were built by pharmaceutical chain retailers.

In the U.S where the medical electronic business is more mature, the online pharmacy is usually developed by pharmaceutical chains with high level of information. In addition, the enterprises from other fields also enter the B2C market to have a sale of the low-cost drugs or special drugs[1]. In 2010, the scale of online pharmacy sales in America was nearly 30% of the whole medical circulation[2]. In a few years, the Internet drug trade will exceed the traditional medicine market scale. In China, the "Regulation" clearly stipulated that enterprises which provide the Internet drug trading services for consumers must be the pharmaceutical chain retailers, and they must set up their own e-commerce transaction platforms. In 2011, China’s online pharmacy sales accounted for 0.0424% of the total drug sales. E-commerce of drug retail has a long way to go[3]. To survive in the market, the key for online pharmacy is to choose a suitable pattern. It is what we discuss in this thesis.

1 The overview of online pharmacies

Online pharmacies[4](or virtual pharmacies) are established by enterprises to have Internet medical commodities trade with consumers on the Internet. It is a branch of pharmacies E-commerce with B2C transaction mode, and its main function is the online drug retail and pharmacy service.

Consumers can enjoy 24-hour medicine service by using online pharmacies. They just input their address, drug species and quantity and payment information on the Internet, the medicine will be delivered to consumers quickly.

According to the provisions of article 9 of the regulations, online pharmacies must be established by pharmaceutical chain retailers and they should have the following qualifications:

(1) The Internet website which provides the drug trading service must obtain license in the Internet drug information service;

(2) Having sound network and transaction security measures and complete management system;

(3) Having the ability and facilities to preserve the transaction record;

(4) Having some basic trading services as online consulting, online surveys, the formation of order and the electronic contract etc;

(5) Having management system and measures for online trading drugs;

(6) Having drug distribution system in accordance with the varieties of pharmacies;

(7) Licensed pharmacists offering online real-time reference, and having the facilities and related management system to maintain consulting record.

(8) Personnel engaged in medical instrument trading service should have the knowledge of medical devices and are familiar with regulations on medical equipment.

According to the provisions of article 21: enterprises can only provide their own OTC drugs for consumers on the Internet and they are not permitted to sell drugs to other enterprises or medical institutions.

2 The analysis of the problems in drug chain retailers

By the end of 2010, the number of chain retailers with pharmaceutical trade license had amounted to 2310 in China, while the number of the retail chain stores was 137073[5].

When querying the SFDA database, we found that by the end of June 16, 2012, the number of retail chain enterprises with “Internet drugs Transaction Service Qualification Certificate” had amounted to 113, and 68 of them sold drugs to individuals on the Internet. In 2011, the medical B2C scale was about 400 million Yuan, there were five or six online pharmacies with sales of nearly 50 million Yuan each[6]. There is big scope for China’s medicine electronic business growth in the future.

The gaps between the quantity of entity pharmacy and online pharmacies shows there are inevitably some problems and obstacles for China’s online pharmacies, which mainly reflect in the following aspects: (1) Policy bottleneck: According to article 21 of the provisions, online pharmacies cannot sell prescription drugs. (2) Simple pattern: Online pharmacies are mainly built by the drug chain retailers. (3) Imperfect logistics distribution mechanism. (4) High maintenance cost for online pharmacies.

Compared with the rapid development of electronic commerce in other industries, pharmaceutical e-commerce trade is slow due to the particularity of its development. At present, E-commerce platform of China’s B2C type (the same as online pharmacies) is the model set up by pharmaceutical retail chain enterprises. The core business for drug retail chain enterprises is the sales of drug, rather than the e-commerce platform construction and operation in the field of IT. This model needs a team to open up independent network space, purchase server and domain name, establish new site and maintain its system as well as a drug distribution team in accordance with trading varieties. All these need investment[7].Enterprises who are running online pharmacies know clearly that the Internet is a higher investment industry. Specifically, the basic input for constructing medical electronic business B2C platform in the first year will be about 3.8 million[8], at the same time, operation cost is needed. Facing the intense competition on the net, enterprises should have network promotion at all costs and offline promotion so that the consumers can take advantage of the quick and convenient online trades. This not only needs, therefore, the construction and maintenance cost of medical electronic commerce B2C platform is high.

At present, the delivery way for common online stores cannot be applied to drug distribution. According to the requirement of GSP, some protective measures must be taken for drugs delivery, such as to keep a certain temperature and humidity for special drugs. And the post office in China can't meet these requirements. Due to the particularity of drugs, China’s Food and Drug Administration requires online pharmacy must have special distribution personnel, and this requirement restricts the development of online pharmacy in a great part.

Nowadays, drug prices in the online pharmacy with the qualification of B2C are lower than the entity shop. However, the consumer who buys a single bottle of drugs has to pay ten yuan for shipping, and the advantage of online sales is not obvious for this reason. For the online pharmacy logistics distribution, when the traditional profit model is changed into respective distribution, the logistics cost can become very expensive.

To solve the problem of distribution, most online pharmacies choose the third party logistics cooperation. According to China’s “Drug Administration Law”, as a special commodity, medicine is of prime importance of the safety of people's lives, so mail order is not allowed. If the distribution is entrusted to the third party, it must be certificated by the GSP to avoid pollution and damage in the process of drug distribution. Logistics distribution can tell whether the medical enterprises have the capability of electronic business.

Therefore, only when some excellent logistics company or the new distribution mode emerges can the online drug retail business grow vigorously.

3 The analysis of existing business mode of online shopping store

The 2011-2012 China network shopping industry annual monitoring report[9]issued by Ai Rui advisory shows that China's online shopping market transaction scale was 766.6 billion yuan in 2011, accounting for 4.2% of the total volume of retail sales, and the number of buyers on Internet has reached 187 million. It indicates that online shopping has great potential in China. After analyzing literature periodical and actual site, we conclude that China’s online stores have five business patterns at present. They include the enterprises self-built mode, independent third party trading mode, independent third party information gathering mode, alliance mode and joint venture mode.

China's new eggs net[10](http://www.newegg.com.cn/) is the domestic leading 3C (Computer, Communication, Consumer Electronics) shopping website now. Its headquartered is in Shanghai, and it has the branch or sub warehouse in Beijing, Guangzhou, Chengdu, Wuhan, Xi’an, Jinan, Nanjing and other places. As to the distribution, it has set up Aoshuo logistics targeted at Chinese markets with self-built platform and an independent logistics team. It offers door-to-door delivery and collects the payment after the delivery, it also offers the mode of online sales picked up in stores.

When one commodity is warehoused, the new egg network will create a item number for it (single product number). When a customer makes a order, the warehouse management system can rapidly search out the location of the goods in the warehouse and inform the warehouse staff. They will scan the commodity barcode and inform the system that the goods will be packed. After that the goods will be delivered to the customer’s address. If the order contains few goods and they are not in the same warehouse, the system will automatically search them and mail them respectively from the various warehouses to the customer client directly.

As to e-commerce shopping, capital investment is very big for self-built logistics in the initial, the new egg network mode is good enough to support the self-built logistics. Therefore, this mode is called “new egg”.

Taobao[11]is not only a trading platform, but also an exchange platform for people to communicate and establish friendship. Taobao originated from personal second-hand business transaction platform provider---C2C mode (C2C: personal online trading mode), then it developed into B2C2C type which provided a platform for third party payment and the network information.

C2C mode of Taobao is called Taobao shop and B2C mode of Taobao is called Taobao mall. It has a mature trade system with information display, shopping process, payment, logistics and counseling service. As is known to all, most sellers on Taobao are people without business license at present, Taobao provides a network distribution platform for those people which helps consumers to save money. After consumer’s shopping, the payment will be sent into the third party payment platform – paypal and it can protect the interests of consumers. Taobao just provides a trade platform for buyers and sellers. Therefore, it is called “Taobao mode”.

In the initial stage of the electronic commerce, the credit problem bothered Taobao for quite a long time. Though each platform had trading points to prove the credibility of the seller, risk still existed. Many people hesitated to do online shopping, however, paypal made this problem solved which changed the direct trade into indirect transaction.

T-mall, formerly known as Taobao mall, (it officially changed its Chinese name into T-mall On January 11, 2012), is the B2C shopping platform created by Taobao (Business to Customer, B2C). After the establishment of T-mall on April 10, 2008, many brands set up their official stores on it, including Kappa, Levi’s, Esprit, Jackjones, LOCK&LOCK, Supor, Lenovo, HP, Disney, Uniqlo and others, which was welcome by the consumers. So far, the T-mall has got more than 400 million buyers, fifty thousand sellers and seventy thousand brands[12].

Different from Taobao mode, T-mall is B2C electronic business information gathering platform which attracts many sellers. T-mall only provides sellers’ information for customers and these sellers must have qualification-mall does not intervene in the specific transaction but only provide technology support. Consumers may search different shops on the websites before they make orders. They can pick out the most satisfied goods. T-mall integrates thousands of manufacturers and provides e-commerce solution for them. It offers one-stop service for customers[13], therefore, we call this information gathering platform T-mall mode.

At T-mall annual festival[14]held on March 29, 2012, T-mall worked with numerous well-known brands to make the real and the virtual world into a future shopping city, a new concept to lead the future online shopping trend. Many AR (Augmented reality, enhance the reality) technology applications had the stunning debut.

AR uses computer to generate a lifelike virtual environment, the users immerse into the environment through various sensing equipment, which achieves the human-machine interaction. The virtual reality system can make users feel the same as the real world. Before the computer camera, users can have clothes trying and place an order if they feel good. The birth of AR technology gives online shopping a big imagination space, users can experience everything without going to the shop to have the real trying[14]. It is T-mall’s qualitative change from 2 d to 3 d experience for users. T-mall narrows the gap between user and sellers which upgrade e-commerce experience comprehensively.

Due to the increasing price of Internet resource, enterprises promotion costs are high. Many enterprises use alliance as their marketing promotion, such as Baidu union, Taobao alliance and so on. Some famous B2C electric malls, such as Vancl and Letao nets launched alliance business to seek greater market share.

Take Letao network (http://www.letao.com) as an example. Letao network is a website to retail sports shoes and leather shoes in China and its biggest feature is to bind new media as an important mean for its union adjustment. As long as users register as a union membership and share Letao news through micro blog, Renren nets, Kaixin net and other nets, they can get commission. In March 2011, Letao alliance changed its commission policy with an increase from 8% to 18%. In addition to the website, personal online store and blog, the micro blog and other new media also can become a channel[15]for earning commission.

Writing a micro blog has become a part of our life, the micro blog has been quite popular in Beijing, Shanghai and other large and medium-sized cities, the policy of increasing the commission would encourage members to share the information which can help them to promote the product.

Baidu and Japan’s largest electronic commerce company-Rakuten formed a joint venture company “Baidu Rakuten”, making an ultra large comprehensive B2C online shopping mall for Chinese users[16]. Japan Rakuten was founded in 1997, which is a leading global B2C platform model. The joint venture takes advantage of each other. China's future electronic commerce market has great potential. Rakuten can enter China’s market with the help of Baidu platform. As to Baidu, it can improve its operating experience with the help of an electronic business company. When the seller needs a big platform to enter the market, Baidu search engine can provide corresponding service for it. Therefore, we call it the Baidu Rakuten mode.

4 Analysis of online pharmacy business modes for drug retail chains

Online pharmacy trading platform for China’s pharmaceutical retail chain enterprise can draw lessons from common online store patterns to enhance the rapid development.

In recent years, B2C e-commerce continues to be the leading one in industries. Clothing sales and books sales are using B2C. Pharmaceutical industry has just begun to layout the online sales business, and many pharmaceutical companies have built the B2C websites.

As new egg mode, the domestic medical based on B2C e-commerce platform is self-built mode. This mode means that a drug store relies on its own funds, manpower and material resources and technology to set up online pharmacy and has the independent operation. At present, most of China's online pharmacies are self-built mode like the new egg net, and it is accredited by law. China's first online pharmacy is Jingwei pharmacy net. Therefore, we call this self-built online pharmacy Jingwei mode.

According to the provisions of article 9,"enterprises that provide Internet trading service for customers should have a sound network with security measures and management system". It means that the drug retail chains can only have self-built platform for online pharmacy.

Jingwei online pharmacy (www.yaofang.cc) officially obtained the first “Internet drug trading service certificate” (Jing C20050001) on December 29, 2005, which marked the beginning of online pharmacy in China. After that consumers can buy OTCs without going to the drug stores.

Jingwei pharmacy is one of the chain enterprises which has online pharmacy qualification in China and it focuses on the fast, cheap and convenient online pharmacy operation. It occupies the market with its mode of online purchasing and drugstore distribution.

B2C online pharmacy mode is the main stream in China, Stipulated by the medical supervision policy, online pharmacy must have offline entity retail chains. To a certain degree, this restricts the development of online pharmacy. As to drug chain retailers, they can seek a new mode from the experience of the common online stores and ask for the support and encouragement from the government.

There are three kinds of platform for Internet drug trade, the public platform, online wholesale and online pharmacy. The public platform is the third party's B2B mode. And online pharmacy belongs to the B2C transaction mode. Taobao mode belongs to the third party B2C2C mode for its online trade comes from Taobao, T-mall (business) and Taobao shop (personal). Drug retail chains can take reference from Taobao's third party B2C mode and medical electronic commerce B2B mode to carry out online retail business. But at present, pharmaceutical e-commerce law does not recognize this form.

With the popularity of online shopping, the demand of online drug purchase is growing day by day. Due to the particularity of drugs, the source of online drugs must be highly safe and reliable. Therefore, enterprises qualification must be good. Although the market demand is big, the current industry supervision is not in place and fake medicines frequently come out, which makes consumers concerned about online drug quality and safety. if the market standard cannot be guaranteed, it will be difficult to implement the medical trading B2C mode. Those two reasons lead to the difficulty in applying the sale medicine license.

Haihong pharmaceutical e-commerce (http://hi.emedchina.cn/index.asp) is the third party trading platform set up by Weihong medical electronic business co, LTD in Hainan province. It is one of the earliest companies which has obtained the third party certificate of B2B (GuoA20060002). It has been carrying out the medical third party B2B mode for a few years and accumulated rich experience for the future B2C mode.

Therefore, it is difficult to develop the medical third party B2C mode in the market without good supervision. Only when the market becomes standardized, the transaction mode can grow quickly. At present, China's third party pharmaceutical e-commerce platform has been mature technically. Once the third party drug trading platform is set up, it can links drug production with circulation effectively. We call it Haihong mode.

Online pharmacy is a business developed in recent years and many people still don't know much about it. Online pharmacy must face this situation that people who buy medicines do not surf the Internet and those who surf the Internet don't buy medicine. Enterprises spend lots of money from the website construction, product online sales to promotion and maintenance. T-mall is an independent third party information gathering platform, it has a great deal of flow with big potential. Online pharmacy can take advantage of T-mall for its promotion to improve efficiency and reduce the operation cost.

At the end of June 2011 Taobao medicine mall cooperated with other five pharmaceutical companies, they were Shanghai Fumei pharmacy, Beijing Jingxiang pharmacy, Hangzhou Jiuzhou pharmacy, jiangxi Kaixinren pharmacy and Yunnan Baiyao pharmacy[2]. It covered the OTCs, health care products, medical devices and other items which were allowed to have online sales. it was a changes of trade. However, after 18 days of trial operation, Taobao medicine mall was closed by the Food and Drug Administration department because it did not get a certificate. Taobao can only release drug information and can’t sell drugs online.

After eight months the T-mall medicine mall (original Taobao medicine mall) was changed from a trading platform into a commodity browsing platform. It became a site navigation for online pharmacy. T-mall medical platform only provided drug display instead of trade. Consumers chose the drugs on T-mall platform and then they would jump to the legal online pharmacies for subsequent transactions. T-mall medicine mall has some requirements for its partners. First, they must have certificates. Second, the operation must comply with the electronic commerce form, for example, the good distribution and after-sales services

The development of medical mall in the T-mall has gained medical retailers’ support vigorously. Analysts point out that T-mall can achieve the maximum profit if it can not only provide drug display but also drug trade. However, according to the Internet drug trading service approval interim provisions ", If T-mall medicine mall wants to apply for the drug trade certificate, it must have chain entity pharmacy. The legitimacy of this form needs to be recognized by pharmaceutical e-commerce law.

At present, to establish a third party information platform is not only the trend, but also in line with the need of China's online pharmacy. In this way more chain retails with double certificates can participate in online pharmacies. By the end of September 28, 2012, the web sites which provide drug information had amounted to 3714 (data sources: State Food and Drug Administration website. (www.sfda.gov.cn). This mode has a huge potential.

The goal of Letao alliance mode is to promote their own products. Online pharmacy can also use the alliance mode to promote their own drugs widely. At present, online pharmacy alliance is the trade union (such as China online pharmacy alliance) and different industry alliance (such as Beijing Jinxiang online pharmacy cooperated with 96156 hot line).

On January 23, 2010, 8 online retailers including Jinxiang, TianShiLi, Kaixinren, Hongpin health network, Baiyang health pharmacy, pharmacy nets, medicine guiding nets and Beijing drug network along with the Searching medicine network, a well-known media website in China, established China’s online pharmacy alliance[17]under the support of the growth pharmaceutical enterprise development BBS chain. It’s executive secretariat is located in Beijing Searching medicine information consulting co., LTD. (searching medicine network).

One of the aims of the league is to set up an information platform so that they can exchange purchasing information with each other. With the help of the tender system, enterprises procurement departments will reduce the purchasing cost. Then enterprises can develop their own brands and achieve market competition initiative. Pharmacy alliance will be a link to provide services for member enterprises.

At present, the delivery of drugs for online pharmacy mode is carried out by the chain stores nearby. If the national pharmacy alliance can distribute by its members nearby, the network will cover any corner in China. It shortens the distance and the delivery cost will be cut. However, this dream is hard to fulfill. The electronic commerce platform will face a serious problem, that is, the passengers flow of the alliance members will be broken by the network and their interests may be damaged which will affect the sustainable development of the alliance platform.

Beijing Jinxiang online pharmacy cooperated with 96156[18]to start a hot line project that provides guidelines for drug information consultation. The hotline will record and the demands of the customer and then give feedback to Jinxiang online pharmacy. The customer service will contact customers to confirm the drug name, quantity, payment and shipping address, the recipient and time. After all those are checked, they will do shipping service.

The sucessful cooperation between Beijing Jinxiang online pharmacy and the 96156 hot line shows that the cooperation in different industry has many business opportunities. Enterprises that are seeking a good pattern can take reference from above example and cooperate with other industry.

Lotte is Japan's largest network mall and Baidu is China's leading search engine. The joint venture of them can complement each other. However, just after two years cooperation, Lotte announced to close the B2C website Rakutan, the joint-venture with Baidu in China. There are various reasons such as the degree of localization (the top manager should be Chinese), the familiarity with national situation and cultural conflicts. In addition, the deficiency of Baidu e-business experience is another reason. Therefore, the e-business enterprises should be cautious to start a joint venture for they need to invest more and the risks are high. Never the less, joint venture is also an available pattern for online pharmacy.

Jingdong mall entered medical e-commerce business along with Jiuzhoutong company Their cooperation took the joint-venture mode[19], Beijing Jingdong 360 degree e-business company would participate in shares of Beijing Haoyaoshi pharmacy chain Co., LTD, a subsidiary of Beijing Jiuzhoutong pharmaceutical Co., LTD. Two parties would take Haoyaoshi company as the platform to develop the online pharmacy.

Jingdong mall cooperated with Jiuzhoutong company, holding “Jingdong Haoyaoshi” together. This pattern has been thought highly of since the beginning, and “e-business B2C plus medicine enterprises” will become a typical pattern of the pharmaceutical e-business.

The cooperation between Jingdong mall and Jiuzhoutong is a complement for each other. As to e-business enterprises, the shortage of medical Internet related licenses and upstream pharmaceutical resources can be covered by cooperating with medicine enterprises, besides, it is a shortcut for e-business enterprises to expand medical market and break a variety of policy limits and barriers. While for pharmaceuticalsindustry, cooperating with experienced B2C will take full advantage of its initial customers, mature e-business operating experience and superior logistics services. Meanwhile, it can reduce e-business high operating cost and expand the market scale rapidly. Therefore, drug retail chain enterprises can choose the joint venture mode to carry out online pharmacy.

Based on the above analysis, we can take reference from the pattern of common e-commerce shopping. In addition to the legal recognition form of medical e-commerce, other modes can be used by drug retail chain enterprises to carry out online pharmacy. We hope that the legal environment for online pharmacy will be improved through legislation.

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Author’s introduction: WU Zhi-ang, Research direction: Pharmaceutical technology evaluation and drug risk management,. E-mail:wuerla501@126.com。