Breakingviews: Alibaba’s health shift prescribes market medicine

Alibaba’s new health priorities come at the right time. The e-commerce group is injecting more assets into its healthcare subsidiary, now worth a punchy $25 billion. It’s a timely bet that the coronavirus will accelerate reforms, like opening China’s $370 billion drug industry to web retailers.

The Hong Kong-listed Alibaba Health Information Technology will issue $1 billion worth of new shares to its parent in exchange for the latter’s pharmaceutical business. The group’s stake will rise to 59.5% from 56.6% as a result. The sale follows earlier transactions which saw the $570 billion parent offload nutritional and healthcare operations to the subsidiary, as well as medical devices.

Operationally, little changes. Ali Health will manage drug sales on Alibaba’s shopping sites. Citi analysts estimated in early February that the new business will bring in an additional $18 million in revenue next year for the healthcare unit – less than a 1% addition to its total.

Even so, excited investors have added more than $6 billion in market value to the loss-making Ali Health since the deal was announced a month ago, as the Covid-19 epidemic ravaged the People’s Republic. Shares now fetch an eye-popping 10.5 times forward sales, on par with online rival Ping An Healthcare and Technology, but far above most listed brick-and-mortar drugstore chains, Refinitiv data shows.

Even before the outbreak, Ali Health shares were rallying on policy changes, in particular the removal of a ban on online prescription-drug sales last year. That’s a big deal: sales of prescription and other medicines are forecast to grow from $370 billion this year to over $500 billion by 2025, Citi analysts reckon. Digital sales could account for up to 15% of the total by then.

Beijing is under pressure to upgrade the country’s medical system, parts of which were visibly overstretched by the coronavirus epidemic. A beefed-up Ali Health will surely benefit. Its online pharmacy has 37 million active customers as of September, and offers 30-minute delivery services in 10 cities. Behind it stands an e-commerce colossus with 824 million monthly active shoppers, plus logistics and payment support services via affiliates Cainiao and Ant Financial, which gives it an edge over rival apps from Tencent and Ping An. That should keep its shareholders in long-term rude health.