Shanghai Pharmaceutical raises funds for online-to-offline sales push with eye on ethical products

A key drug company in China fired a new salvo in the online over-the-counter healthcare market with an eye on wider sales of ethical products in hopes the China Food and Drug Administration (CFDA) will come through on plans to allow online sales of prescription drugs at some point this year.

Shanghai Pharmaceuticals President and Executive Director Cho Man

China's largest drug distributor, Shanghai Pharmaceuticals, said in an Aug. 26 press release of its half-year results that it would launch a China healthcare venture capital investment fund of as much as RMB3 billion ($470 million) to back startups in all life science fields via its distribution subsidiary.

Initially, $157 million will be raised in a first tranche with Shanghai Pharmaceuticals putting down 25%. A local galaxy of venture capital and online sales firms will help out with the rest, according to the Aug. 26 release. A separate story in China Money Network said that the funders include a firm called O2O (online-to-offline), a start-up founded 6 months earlier by Shanghai Pharmaceuticals that has completed a RMB1.112 (US$174 million) series A funding from, IDG Capital Partners and other investors.

The term online-to-offline has gathered traction in China, and elsewhere, as a way to marry the tech smarts of software companies with specific industry expertise for product delivery.

In May, Shanghai Pharmaceuticals struck a deal with Chinese online retailer for OTC and other healthcare product sales as the space sees increased competition with rival Alibaba Group Holding ($BABA), Reuters said, citing a Shanghai Stock Exchange announcement in Chinese by the drug company.

That effort followed speculation about a new policy that has been circulating since mid-2014. If approved, the policy could lead to the emergence of a market worth more than RMB1 trillion ($161 billion) as sales shift from hospitals to online pharmacies.

The latest update suggests the funds raised could, in part, provide capital to grow an online sales business with Shanghai Pharmaceuticals' distribution subsidiary handling the "offline" part.

"On Aug. 18, the company (Shanghai Pharmaceuticals Holding, or SPH) entered into share subscription and capital increase agreement with Shanghai Pharmaceutical Distribution Co., Ltd., JD, Beijing Harmony Growth Investment Centre LP ('IDG Capital') and e-commerce management team in relation to SPH Commerce. SPH Commerce placed 1,112,125,000 ordinary shares privately to SPH Holdings, JD and IDG Capital, after which the registered capital of SPH Commerce increased to RMB1.21 billion," the company said in the Aug. 26 release.

"Introduced strategic partners and financial investors through capital increase, (are) setting up comprehensive strategic cooperation relationships in the fields of prescription drugs e-commerce and non-prescription drugs, including OTC, healthcare products and medical devices. By injecting relevant resources into SPH Commerce will help it to set up e-commerce platform and establish leading position in the industry, making preparation for separation between medical and pharmaceutical services and consolidating the leading position in pharmaceutical industry. Meanwhile, the capital increase also provided sufficient capital to SPH Commerce for its future development."

A spokesman for Shanghai Pharmaceuticals declined to provide further details.

The play in OTC lays down a market as well for Alibaba Group as it took a controlling stake in HK-listed Alibaba Health Information Technology to grow in a still-fragmented market in China for online drug sales in July.

The potential saw Hangzhou-based Alibaba in April transfer its China online pharmacy business from Tmall to Ali Health for $2.5 billion of newly issued shares and convertible bonds that if fully utilized would take its stake in Ali Health well above 50% from around 38% now.

The fundraising method has also captured attention following a spate of such consortiums between Chinese firms and venture capital arms that have snapped up targets in North America as well as done deals at home across clinical candidates to device deals, drawing on life science expertise.

- here's the release
- and a story from China Money Network