(Report Producer/Author: Huatai Securities, Tao Ye, Shen Xiaofeng)
1 China's online medical market enters the fast lane
Benefiting from the policy dividend and the structural changes that have taken place during the pandemic, we expect the growth of China's online healthcare market to accelerate. In September 2019, regulators allowed online sales of prescription drugs, and eligible online medical services began to receive Medicare reimbursement. We believe that the COVID-19 pandemic has driven the demand for online medical services, which will drive the growth of the pharmaceutical e-commerce market.
The trend of population aging is expected to accelerate the growth of medical expenditure in China
Compared with developed countries, the average medical expenditure of Chinese is low, which shows that under the background of rapid economic development and increased health awareness, China's medical expenditure has a large room for growth. In 2018 Chinese average medical expenditure was as low as US$501.1, which is only equivalent to 11.6/11.7/4.7% in the UK/Japan/US; in 2018, the overall medical expenditure of Chinese residents was 5.4% of GDP, while the UK/Japan/US reached 10.0/11.0/16.9%.
China's medical industry has a broad market space. In 2020, the total number of patient visits in China was 3.3 billion, down 13.5% year-on-year, due to the restriction of outdoor activities and the increased acceptance of online consultations by residents during the COVID-19 epidemic. Taking into account the aging of the population and the increase in the number of patients with chronic diseases, we expect the growth rate of the reachable market size to remain stable from 2020 to 2022.
According to Frost & Sullivan, China's healthcare expenditure in 2020 was RMB7.3 trillion, ranking second in the world. Frost Sullivan expects China's healthcare spending to reach RMB17.6 trillion in 2030 and a CAGR of 9.3% in 2021-2030.
We expect healthcare spending growth to be driven by the following factors. 1) Aging population: Frost & Sullivan expects 309.3 million people aged 65 and over by 2030, representing 21.5% of the total population (2019: 12.6%). 2) Increase in disposable income: According to the National Bureau of Statistics, China's annual per capita disposable income increased from RMB 20,167 in 2014 to RMB32,189 in 2020, with a CAGR of 8.1% during the period; we expect personal disposable income to increase further in the future. 3) Rising prevalence of chronic diseases: Chronic diseases accounted for 69.6% of China's overall health expenditure in 2019, and Frost & Sullivan expects this proportion to rise to 84.4% in 2030.
China's healthcare system is undergoing a digital transformation to empower medical professionals and pharmaceutical companies to provide convenient services and create added value. The digital medical platform is the mainstay of the digital medical ecosystem, especially it provides diversified digital medical services such as online retail pharmacies, online consultations, and online consumer medical services.
According to the 2019 annual survey of the National Bureau of Statistics and our calculations, the population of the core Internet consumer population (post-70s-pre-90s) is about 445 million, and they are more inclined to obtain medical products and services through convenient online channels. According to iResearch, users under the age of 40 account for 91.3% of China's online medical service user base.
In our view, the online penetration rate of China's medical market in 2020 is only 4.3%, and the upside is still large. According to Frost & Sullivan data, the online penetration rate of consultation services/retail pharmacies in 2020 is 12.2/5.4% by vertical industry. However, with the increase in online penetration of medical services (expected to reach 24.0% in 2030), we expect China's digital health market to grow from RMB314 billion in 2020 to RMB4,223 billion in 2030, with a CAGR of 29.7% during the period.
Online medical services provide solutions to the problem of uneven distribution of offline medical resources
China's offline medical service resources have long been plagued by uneven distribution. According to data from the National Health Commission, the total number of hospitals in China in 2020 is about 35,394, of which tertiary hospitals account for only 8.5%, but serve 46.9% of patients. The long-term goal of the online medical service industry is to improve the efficiency of the use of limited offline medical service resources.
In addition, China had an average of 21.6 doctors per 10,000 people in 2018, lagging behind the level of developed countries such as Japan and the United States. The geographical distribution of medical professionals also creates problems for patients in remote areas to obtain help in a timely manner. According to the National Health Commission, 46.7% of practicing physicians worked in East China in 2019, while physicians in the central and western regions accounted for only 28.0/25.3%.
In order to support the development of the online medical industry and break through the restrictions on offline medical resources, the regulatory authorities have issued a number of policies in the past few years, especially during the period of 2019-2020. In September 2019, the National Medical Insurance Bureau issued the Guiding Opinions on Improving the Price and Medical Insurance Payment Policy of "Internet +" Medical Services, which for the first time allowed medical insurance reimbursement for qualified online medical services, which we believe will make online medical services affordable and convenient.
In October 2021, the Detailed Rules for the Supervision of Internet Diagnosis and Treatment (Draft for Comment) were released, requiring doctors who provide medical consultation services online to be certified by their real names, which we believe is to protect the interests of users and patients, and will be conducive to the sustainable development of the industry.
We believe that online consultation services are still in the early stages of development. Compared with the online penetration rate of other services such as local life services (29.1%), education (24.0%) and tourism (16.7%), the online penetration rate of consultation services in 2020 was lower at 12.2%.
According to Frost & Sullivan data, China's online consultation service market grew at a compound annual revenue growth rate of 94.3% from 2018 to 2020, reaching RMB22 billion in 2020. Frost & Sullivan expects a compound annual growth rate of 69.4% from 2021 to 2023, reaching RMB107 billion in 2023, mainly due to 1) the increase in the number of online medical service users during the epidemic, 2) the structural trend of online medical service online catalyzed by offline medical resource constraints, and 3) new policies (such as new medical insurance reimbursement regulations) to support the development of the online medical industry. According to Frost & Sullivan data, the penetration rate of online consultation services is still low in 2020, at 12.2%, and is expected to rise to 33.7% in 2023.
The online pharmaceutical e-commerce sector ushered in structural transformation
In September 2019, the Chinese government issued a new version of the Drug Administration Law of the People's Republic of China, which lifted the ban on the online sale of prescription drugs by pharmaceutical companies. We expect the new rules to boost long-term revenue growth in the online pharmaceutical e-commerce market.
During the epidemic period, the National Health Commission issued the Guiding Opinions on Promoting the Implementation of "Internet +" Medical Insurance Services During the Prevention and Control of the New Crown Pneumonia Epidemic, proposing to further accelerate the implementation of the "Internet +" prescription drug medical insurance reimbursement. We expect that the new health insurance regulations will encourage more users to turn to online pharmaceutical e-commerce. We expect that despite the lower margins of prescription drug e-commerce, the expansion of the user base is expected to boost other revenue opportunities such as medical services.
In September 2021 and October 2021, the National Health Commission issued two regulations to further regulate the online medical service industry. When medical institutions are required to carry out Internet diagnosis and treatment activities, they shall strictly abide by rules and regulations such as prescription management measures. The personal income of doctors must not be linked to the income from the sale of drugs and the income from physical examinations. In addition, the platform is required to strictly comply with the rules for obtaining prescriptions before selling drugs, and only allows the basic information of drugs to be displayed before obtaining prescriptions. We believe that both of these regulations are guiding the industry towards healthy and long-term sustainable development.
The lifting of the ban on online prescription drugs has opened up growth space for online pharmaceutical e-commerce platforms. According to Ai Kunwei data, prescription drug sales accounted for about 66% of total drug sales in 2018, and the size of the prescription drug market exceeded RMB1.1 trillion.
We expect the increased outflow of prescription drugs to boost online sales of prescription drugs. Over the past few years, the Chinese government has reduced the proportion of drugs sold in hospitals through a number of measures. Frost & Sullivan expects 87.6% of outpatient drug sales in the next 5-10 years to come from out-of-hospital retail pharmacies, of which 32.5% (29% of total outpatient drug sales) will come from online pharmacies.
We believe that the support policy for "Internet +" prescription drug medical insurance reimbursement will accelerate the penetration of online pharmaceutical business. According to iResearch data, as of the end of 2019, the number of medical insurance participants reached 13.5 billion, accounting for 96.7% of the total population. About 35 percent of health care spending in 2019 will be reimbursed by Medicare; Frost & Sullivan expects that percentage to rise to about 51 percent in 2030. Benefiting from the start of Medicare reimbursement for online prescription drugs, we expect that the number of users who buy drugs online will continue to increase.
According to Frost & Sullivan data, the online penetration rate of China's pharmaceutical retail (over-the-counter + prescription drugs) in 2020 is still relatively low, at 4.4%. Given that the online penetration rate of pharmaceutical retail in the United States has reached 33.3% in 2015, we believe that there is still room for improvement in the online penetration rate of medical retail in China. We expect China's online pharmaceutical retail penetration to grow, driven by online medical policy dividends, to reach 8.7% in 2023.
Benefiting from the "Internet + Medical" policy and prescription drug outflows, GMV in China's online retail pharmacy market will grow from RMB157 billion in 2020 to RMB1,200 billion in 2030, with a COMPOUND annual growth rate of 22.6% during the period (according to Frost & Sullivan).
Medical devices/over-the-counter/nutraceuticals/prescription drugs are the four major segments of the retail pharmacy market, and based on data from Ai Media Consulting, Frost & Sullivan, Prospective Industry Research Institute and Iqonway, we expect its revenue compound annual growth rate of 23.1/8.3/15.0/3.5% from 2020 to 2022. We expect the overall revenue compound annual growth rate of China's retail pharmacy market to be 7.1% from 2020 to 2022, and the total total revenue of medical devices/over-the-counter drugs/health products in the same period will be 14.3% in addition to prescription drugs.
According to our estimates, the online penetration rate of medical devices/over-the-counter drugs/health products/prescription drugs in 2020 is 29.9/15.7/8.5/2.1%, but we expect the penetration rate of each category to increase steadily in 2020-2022, reaching 35.2/23.4/11.2/3.6%, which is due to 1) user shopping habits online; 2) benefiting from good logistics and fulfillment capabilities, the online customer experience is improved; 3) the scale effect brings cost advantages to online channels. According to Frost & Sullivan data and our forecasts, we expect the online medical equipment/over-the-counter drugs/health products/prescription drugs sector to reach a compound annual growth rate of GMV of 34.6/39.6/33.4/51.8% from 2020 to 2022, respectively.
Frost & Sullivan expects that the growth rate of online sales of prescription drugs will lead the retail pharmacy sector to achieve a compound annual growth rate of 29.6% from 2021 to 2030; the share of prescription drugs in the overall online drug market will reach 28% in 2030, the highest among all categories (2020: 16%); the online medical device/over-the-counter/health product/prescription drug sector will achieve a compound annual growth rate of 20.0/19.5/22.2/29.6% in 2021-2030. According to Frost & Sullivan data. We believe that prescription drugs will become an important sector for attracting user traffic, while the other three sectors will generate profits for online pharmaceutical platforms.
Health insurance has become a new growth point
According to EO data, China's total health insurance premium income in 2020 was RMB817 billion, an increase of 15.7% year-on-year. The overall market size is expected to reach 19.9% cagr in 2021-2025. EO expects total online health insurance premium income to be 41.1% cagring from 2021 to 2025, exceeding the industry average. We believe that the Internet platform will become a powerful channel for insurance companies to reach potential customers.
Leading online medical companies such as Alibaba Health have begun to expand their service scope by cooperating with traditional insurance companies, while seeking to form a closed-loop service chain of the platform. At present, Alibaba Health is cooperating with third-party insurance companies to design and jointly launch insurance products for patients with specific diseases. While new business growth will still take time (or 1-2 years to climb and 3-5 years to make a substantial contribution to the overall business), we believe this layout will boost long-term revenue growth. (Source: Future Think Tank)
2 The competitive landscape of China's online medical industry
China's online healthcare market is made up of three segments: online medical services, online pharmacies (pharmaceutical e-commerce) and online health management, with different business models.
Online medical services: Ping An Good Doctor has a high-quality doctor resource pool and a huge user base, and is a leading enterprise in China's online medical service sector, which mainly provides online consultation services, prescription drugs and health membership services. Key competitors include WeDoctor, Good Doctor and Spring Rain Doctor, which are smaller than Ping An Good Doctor users.
Online pharmacy: With the ecological resources of Alibaba and JD.com, Alibaba Health and JD Health maintain a leading position in the field of online pharmacies in China. The two companies mainly realize their own income through health products or commission income.
Online Health Management: This section mainly provides medical examination services and health care plans. The main participants include Lan Xin Kang, Mei Nian Da Health and so on.
Ping An Good Doctor is a comprehensive online medical service provider, providing a variety of medical services such as online consultation, referral, prescription drug purchase and membership services. Cooperation with Ping An Group and membership products are the main source of revenue and key competitive advantages of its online medical services. Through cooperation with Ping An Group, Ping An Good Doctor has access to Ping An Group's extensive user base and is constantly expanding its scale. According to the company's announcement, the proportion of 1H21 Ping An Good Doctor's 400 million registered users from Ping An Group plug-ins reached 47.6%.
WeDoctor is an emerging online medical service platform that opens up the medical industry chain. The platform provides a comprehensive range of online medical services, including online consultations, prescription drug evaluations and medical insurance e-commerce services. As of March 2020, WeDoctor operates 12 offline medical institutions and 22 Internet hospitals, connecting more than 7,200 hospitals, 240,000 doctors and 200 million users in China.
Good Doctor is a platform specializing in online medical services, providing online consultation and registration services. As of October 2021, Good Doctor Online has collected the information of 860,000 doctors in 9,780 regular hospitals in China, of which 240,000 doctors have registered with real names on the platform, and the proportion of doctors in tertiary hospitals has reached 73%. As of October 2021, Good Doctor has served more than 74 million patients.
According to the work and experience of hospital doctors, the consultation service provided by the online medical service platform is priced between RMB 9.9-600 per time. We believe that Ping An Good Doctor's membership services are extensive, including 24 gold medal doctor consultations per year and a wealth of assistance services. As Ping An Good Doctor continues to develop membership products, we expect the platform products to attract more users and drive revenue growth in medical services.
The online medical service industry is in the early stages of development
Compared with offline participants, online medical service companies have cost advantages due to scale effects. To be sure, the online healthcare industry is still in the early stages of penetration. However, with the online shopping habits of users and the ability of platforms to increase the ability to launch more comprehensive online medical services, we believe that the industry's online penetration rate is expected to further increase.
In our view, competition for customer acquisition and retention in the online healthcare industry is still in its early stages. In the long run, we expect that good supply chain management capabilities and the ability to provide efficient medical advice supported by strong technical capabilities such as artificial intelligence and cloud technology will continue to be the focus of outperforming competitors.
According to Frost & Sullivan data, the overall GMV of the pharmaceutical and non-pharmaceutical products market (online and offline) was RMB2.65 trillion in 2019, and is expected to achieve a compound annual growth rate of 9.2% in 2020-2022 and reach RMB3.46 trillion in 2022. According to Frost & Sullivan data and company announcements, JD Health/Alibaba Health GMV market share in 2019 was 1.6/3.3%, and we expect its market share to expand to 6.8/5.7% in 2023, respectively.
In the online pharmaceutical market, the market share of JD Health/Alibaba Health's self-operated business GMV was 14.0/10.7% in 2019, and we expect its market share to rise to 19.9/12.8% in 2022 (according to Frost & Sullivan data).
The main threshold of the online medical industry
Technology and supply chain capabilities: The healthcare industry is reshaping the drug procurement process and reducing drug prices through two-invoice and collective procurement reforms. This directly squeezes the profit margins of pharmaceutical suppliers and distributors, leading them to adopt an online retail pharmacy model in search of more cost-effective retail solutions. Therefore, we believe that online retail pharmacies with strong technology and supply chain capabilities, such as Alibaba Health and JD Health, can gain and maintain a leading position by providing cost-effective solutions.
Mature and robust business model: The head medical platform has developed a clear profitability strategy, while most of the smaller players are still exploring sustainable business models. At present, Alibaba Health and JD Health both use online retail pharmacy business as the main monetization channel. The online pharmacy business helps leading enterprises to establish a solid industry position, and also provides an important user portal for their medical business such as online consultation and consumer medical care.
Rich medical resources: The platform needs to develop a sound medical resource network to meet the different needs of users. Alibaba Health, JD Health and other large platforms have established the above networks and formed close cooperation with medical institutions. As of June 30, 2021, JD Healthcare has a medical team of more than 130,000 doctors consisting of full-time doctors and external partner doctors. Alibaba Health has about 60,000 doctors (as of March 31, 2021). (Source: Future Think Tank)
3 Comparison of head online medical platforms
We conducted a comparative analysis of major online medical platforms in China, including JD Health, Alibaba Health and Ping An Good Doctor. According to Frost & Sullivan data, JD Health is China's largest online medical platform in terms of revenue in 2019. We believe that the liquidity of the pharmaceutical e-commerce model has been confirmed, and the diversified business derived from online medical services can increase revenue sources.
Benefiting from the large user base and low penetration rate of the JD/Alibaba e-commerce platform, we expect Alibaba Health and JD Health to grow more users than Ping An Good Doctor. We expect Alibaba Health/JD Health FY22-24/21-23 to forecast annual active users CAGR of 30.5/31.9%. In terms of ARPU, we expect JD Health/Alibaba Health's self-service ARPU to achieve a CAGR of 7.0/3.1% respectively.
We believe that Alibaba Health's ARPU improvement will be supported by the following factors: 1) enhanced product supply and logistics management capabilities, which will help improve the online penetration rate of pharmacies; 2) the outflow of prescription drugs and the increase in consumption of existing user groups. We forecast Jingdong Health's revenue CAGR of 42.5%, Alibaba Health's 31.8%, and Ping An Good Doctor's 11.0% for 2021-2023. We attribute JD Health's faster revenue growth to its stronger consumer mindset of self-operated business, proprietary logistics and supply chain support. We expect Ping An Good Doctor's revenue growth to slow in 2021 and recover in 2022-2023, mainly due to the company's strategic adjustment and focus on services in 2021, or the impact on the revenue growth of the health mall business.
We expect Ping An Good Doctor's gross margin to gradually increase from 27.2% in 2021 to 28.4/31.3% in 2022/2023, mainly due to the increase in the proportion of medical service revenue with high gross margin. We expect Ali Health and JD Health to have a similar trend in profit margin growth, as both benefit from the release of scale effects, although this is partially offset by an increased share of prescription drug sales revenue.
The pharmaceutical e-commerce model is still the main monetization channel for online medical platforms. JD Health and Alibaba Health's 2020/FY21 pharmaceutical e-commerce revenue accounted for more than 80%. Ping An Good Doctor has more sources of income, with non-e-commerce revenue accounting for 45.9% in 2020.
Benefiting from the parent company's ecology and infrastructure, JD Health and Alibaba Health have higher operational efficiency. JD Health/Alibaba Health's adjusted net profit margin for 2020/FY21 was 3.9/4.1%, and Ping An Good Doctor's adjusted net loss ratio was 7.3% for the same period. With the support of JD.com and Alibaba's extensive user traffic, JD Health and Alibaba Health maintained low customer acquisition costs. JD Health/Alibaba Health's 2020 marketing expense ratio was 7.4/7.9%, while Ping An Good Doctor's marketing expense ratio was 23.1%.
We believe that Alibaba Health, JD Health and Ping An Good Doctor will drive long-term growth in 2021 by increasing marketing expenses for customer acquisition and brand promotion, which will lead to higher marketing expense rates for the company. We expect Alibaba Health's sales expense ratio to rise from 7.9% in FY21 to 10.4% in FY22, and Ping An Good Doctor's sales expense ratio to go from 23.1% in 2020 to 27.5% in 2021. JD Health's sales expense ratio will drop slightly from 7.4% in 2020 to 7.3% in 2021.
Ping An Good Doctor, a head online medical service provider
Unlike Alibaba Health and JD Health, which mainly provide pharmaceutical e-commerce solutions, Ping An Good Doctor focuses on online medical services, and its gross profit mainly comes from medical services. In 2020, the total revenue of non-e-commerce business (online medical, consumer medical and health management business) accounted for 45.9%, far exceeding Alibaba Health/JD Health (14.8/13.5%)
According to the announcement of Ping An Good Doctor Company, as of June 30, 2021, Ping An Good Doctor has signed up to cooperate with more than 38,000 external doctors and established more than 450 famous doctor studios.
The Opinions on Promoting the Development of "Internet + Medical Health" issued in 2018 allow doctors to provide professional services such as consultation in different hospitals, including Internet hospitals. Online healthcare platforms are constantly seeking to work with healthcare professionals to improve service capabilities and achieve long-term growth and outperform competitors.
Alibaba Health vs JD Health
Given that alibaba health and JD health derive most of their revenue from the pharmaceutical e-commerce business, we believe that the two are more comparable than compared with Ping An Good Doctor. As far as the self-operated business is concerned, JD Health has a large number of annual active users and a higher ARPU in 2020, which we believe is partly due to its rich category. In terms of platform business, Alibaba Health recorded a higher GMV, but its overall commission rate is lower, which we believe is due to Tmall's lower commission and revenue commission on the latter.
According to the company's announcement, JD Health's GMV in 2020 is RMB78.4 billion, accounting for 3.0% of the overall GMV of JD Group, and the Tmall pharmaceutical platform FY21 GMV is RMB123.2 billion, accounting for 1.6% of Alibaba's overall (Tmall + Taobao) GMV.
Self-operated business: JD Health's user scale and ARPU surpass Alibaba Health.com'
Compared with Alibaba Health, JD Health has a larger number of active customers and higher ARPU, which we believe is partly due to its strong ability to perform contracts. Nevertheless, we believe that because both are expected to further penetrate the parent company's customer base, their user size has a large room for growth, and the trend of online transformation of users when consuming drugs and medical devices is expected to drive the growth of ARPU in both.
According to the company's announcement, as of September 30, 2021, the annual active consumer number of Alibaba Health's self-operated online store was 90 million (customers who made one or more actual transactions); as of June 30, 2021, the number of annual active customers of JD Health was 109 million, the annualized ARPU of annual active users was RMB 216.6, and the annualized ARPU of Alibaba Health 1HFY22 was RMB180.
We believe that compared with Alibaba Health, JD Health has more products. JD Health's pharmaceutical products mainly include common over-the-counter drugs and prescription drugs, 2017/2018/2019/1H20 Medical product sales revenue accounted for 21/25/27/29% of product revenue. Revenue from other products comes from sales of non-pharmaceutical products, including health products, medical supplies and equipment such as invisible eyewear, adult products, and home health, rehabilitation care and health monitoring supplies and equipment.
Alibaba Health's proprietary business provides effective solutions for consumers to purchase over-the-counter drugs, health care products, medical equipment, contact lenses and skin care products online.
We expect that both Ali Health and JD Health will achieve strong user base growth in 2021-2023, mainly because the two are closely linked to the resources of the parent company, and both are the domestic head e-commerce platforms, which have accumulated a huge customer base. According to the company's announcement, the penetration rate of the number of active users of JD Health in 1H21 was 20.5% among the number of active customers in JD.com 2Q21. Alibaba Health's self-operated online store FY21 has 90 million users, an increase of 38.5% year-on-year, and a penetration rate of 10.4% of the annual active consumers in Alibaba's 2QFY22 Chinese retail market (863 million).
Platform business: The overall commission rate of Alibaba Health is lower than that of JD Health
Compared with JD Health, we found that Alibaba Health's overall commission rate was lower, mainly due to 1) Alibaba's overall medical commission percentage was lower than JD.com's; and 2) Alibaba Health and Tmall adopted a 50% revenue sharing scheme.
According to the company's official website, Alibaba generally charges merchants a 3-4% technical service fee (service fee) based on the healthcare category GMV, while the JD.com platform service rate is 5-10%. In addition, due to the service fee sharing scheme adopted by Alibaba Health and Tmall, compared with JD.com, the comprehensive commission rate of Ali Health is lower than that of JD Health, and at the same time, the transaction with Tmall in medical products and services will help Ali Health release long-term growth space and provide support for the growth of its overall service rate in 2017-FY21.
Alibaba Health has signed a number of agreements with Tmall to acquire a network of merchants used to promote and distribute target products on the Tmall platform, as well as to manage the relationship with target merchants.
Prior to the acquisition transaction, Tmall paid Alibaba Health a certain service fee, which was 21.5% of the fee paid by the merchant to Tmall based on the sales volume of the relevant category products or services sold through Tmall. After the completion of the acquisition, all service fees will be directly charged by Alibaba Health, and Alibaba Health will be required to pay No more than 50% of the service fee it collects from the merchant to Tmall, which will help Alibaba Health increase the overall service rate.
(This article is for informational purposes only and does not represent any of our investment advice.) For usage information, see the original report. ）
Featured report source: [Future Think Tank]. Future Think Tank - Official website