Barcodes on Ice as Drug-Tracking Debate Rages
(Beijing) – Government health regulators have slammed the brakes on a counterfeiter-busting, Alibaba-backed pharmaceuticals monitoring system that can electronically track a box of pills from factory to warehouse to store shelf to shopping bag.
The system, which relies on barcodes to authenticate medicines sold at drug stores, was suspended February 20 by the China Food and Drug Administration (CFDA) just two months after a nationwide rollout.
Stock investors reacted by dumping Hong Kong shares of Alibaba Health Information Technology Ltd., the Alibaba subsidiary that operates the system, after the company said much of its revenues – about HK$ 4 million a month, according to a recent financial report – stemmed from pharmaceuticals-tracking operations.
Alihealth also operates an online drug-sales platform through Alibaba's Tmall website, through which Internet-based retailers sold about 4.7 billion yuan worth of medicines last year, representing nearly half of the country's total annual drug sales, according to the company.
Retailers with brick-and-mortar outlets have been complaining loudly ever since CFDA ordered every drug store to install and use the barcode-reading system. The rule, which was introduced in 2014 and took full effect December 31, requires that retailers swipe every item before it's inventoried and swipe again at the sales counter. Its goal is to protect consumers from fake drugs.
Not only has Alihealth cut into traditional retailing through its online platform, the drug store operators argued, but its barcode-reading system has been unreasonably costly for their businesses and has done little to stop counterfeiters.
One angry retail firm, Yontianhe Group, which operates the Changsha-based Yangtianhe Pharmacy chain, sued CFDA in February for letting Alihealth exclusively operate the barcode system as well as dominate online drug sales. The plaintiff said CFDA's barcode mandate forced retailers to spend huge sums on barcode-reading equipment at a time of rising pressure from online competitors.
Then on February 24, unhappy retailers took the battle to a higher plane by banding together and releasing a joint statement that urged CFDA to completely abolish the barcode system. They also demanded Alihealth exit the drug-tracking business.
In a statement, Alihealth said it's working with CFDA to meet the retailers' second demand and eventually could transfer the system's operating rights to another company.
Sources close to CFDA told Caixin the regulator might replace Alihealth by contracting with a new company to operate the system. The regulator is also reportedly preparing to amend regulations for pharmaceutical sales monitoring.
Nevertheless, Alihealth underscored its commitment to the business, asserting it "won't give up efforts to participant in the nation's medical reforms, and will press forward in the fight against fake drugs."
CFDA first proposed an electronic system for authenticating the nation's pharmaceuticals in 2005. The goal was to eliminate or at least seriously curb sales of counterfeit and illegal drugs by tracking every medicine container from the production stage through the retail phase.
The following year, CFDA commissioned a subsidiary of the state-owned conglomerate CITIC Group called CITIC 21CN Co. Ltd. to build and operate a drug authentication system. But the system's tracing methods only followed drugs from factory floor through distribution networks, stopping short of retail-level tracking.
Alibaba, as a tech-savvy e-commerce giant, saw in the drug-authentication system an opportunity to expand its business into the medical field. So in January 2014, Alibaba bought a 54.3 percent stake in CITIC 21CN for US$ 170 million and renamed the company Alihealth.
Later that year, CFDA said the barcode system would be expanded to include all traditional retail drug sales by December 31, 2015. Exempted, however, were drug sales through hospitals – which handle 80 percent of the nation's drug sales, according to the February 24 joint statement.
Alihealth said the factory-to-sales counter system is making a difference. For example, the company said, CFDA agents used tracking data to uncover large quantities of counterfeit drugs last year. And CFDA said nearly 20 drug wholesalers have been caught making illegal transactions since 2014.
Technically, CFDA owns the system and has full management rights. Alihealth said it only provides technical support and, in fact, has yet to make any money. In its January 23 statement, Alihealth said the company has invested nearly 100 million yuan for system improvements since acquiring CITIC 21CN.
A source who asked not to be named told Caixin the regulator pays nothing for Alihealth's services but lets the company make money in other ways. For example, Alihealth's barcode system helped its parent Alibaba develop a drug distribution data service platform called "shulaibao" through the website www.alijk.com. The platform fosters business ties among pharmaceutical makers, retailers and software vendors.
According to Alihealth, more than 30 independent software vendors have applied to offer through the shulaibao platform. So far, seven have won permission to provide platform-based data services. And of the estimated 300 health industry companies now tapping the platform for services, more than 40 have bought data products from independent software vendors.
CFDA's suspension of the barcode system has apparently affected shulaibao. Several companies using shulaibao recently reported that some platform services have been frozen since the agency's suspension decision in February.
Alihealth's business ventures have drawn criticism from academics and drug store companies alike.
For example, economics Professor Chen Hongmin of Shanghai Jiaotong University warned that Alibaba's takeover of CITIC 21CN may have been the first step toward monopolization of valuable industry data. And he said Alihealth, as the sole operator of the barcode system, might have garnered an unfair advantage over industry rivals.
But retailers and other business critics have largely focused on complaints about how Alihealth has squeezed their pocketbooks and threatened future profits.
An Alihealth financial report for the April-September 2015 period said barcode system-related revenues rose 14.6 percent year-on-year to HK$ 21 million. An anonymous source close to the company told Caixin most of these revenues reflect a 300 yuan charge Alihealth collects from each company that joins the system.
The source stressed, however, that despite these charges "Alihealth hasn't profited."
Nevertheless, Alihealth has found other ways to make money. And critics fear it could be planning to make a lot more by, for example, taking unfair advantage of its access to the databases based on the tracking system containing in-depth information on nationwide drug sales.
Yangtianhe President Li Neng said the tracking system has given Alihealth access to key drug sales information that may be used to undermine fair competition.
A medical software services company manager told Caixin that Alihealth profits from players in his industry by controlling how information is uploaded to the barcode system's servers. Software upgrades needed to meet Alihealth standards can cost a software services firm more than 100,000 yuan a year, he said.
Yangtianhe's Li said CFDA revoked his company's medicine sales license on grounds it had refused to upgrade its computer network to accommodate Alihealth's barcode system. He said the company, which operates 540 Yangtianhe stores around the country, decided not to spend the more than 12 million yuan to buy new barcode readers and other equipment needed to comply with Alihealth's requirements.
An executive of another Hunan-based company Laobaixing Pharmacy, said the company needs to spend about 80 million yuan – a sum equal to one-third the firm's profit last year – for barcode authentication equipment.
Without expressing an opinion on the Yangtianhe lawsuit, the Laobaixing executive said in his opinion CFDA has no legal grounds for requiring that retailers use the barcode system. In fact, he said, the agency broke the law when it let Alihealth operate the system without first inviting bids from other potential contractors.
Pharmaceutical companies have also raised red flags over Alihealth's access to data. They're particularly concerned about how the Alibaba unit uses drug production and distribution data.
Chen Yonghong, general manager of Guangdong Zhongsheng Pharmacy Co., fears Alihealth may obtain secrets related to his company's production activity, sales and customers.
Some industry players say data from drug makers may already have made it onto the black market. Sources who asked not to be named told Caixin that, in recent months, they've been contacted by people claiming to be shulaibao staffers who offer to sell pricing and promotional information gleaned from pharmaceutical companies.
An independent software vendor source told Caixin that companies like his need permission to access any company's and must follow confidentiality agreements. An Alihealth staffer who declined to have his name used said the Alibaba unit follows strict rules for controlling access to other company data and, to prevent the misuse of information, gives access to independent software vendors only after getting the data-owner's permission.
One of the sharpest debates between pharmaceutical sector companies and the CFDA-Alihealth partnership revolves around the barcode system's presumed ability to prevent drug counterfeiting.
At a January 27 meeting between CFDA officials and drug company representatives, system supporters argued that some retailers don't like Alihealth's tracking simply because it prevents them from profiting from illicit sales of health products not approved by the government.
But that argument was refuted by executives at the meeting representing Laobaixing, Yunnan Hongxiang Yixintang Pharmaceutical Group and Yifeng Pharmacy. They said regulator spot checks along the supply chain and inside retail outlets are the best way to prevent illicit drugs.
"During a spot check, drugs can be traced by their production codes and transaction records without the electronic authentication code," said Zhao Biao, president of Yixintang. "It's impossible to simply rely on a barcode on a package to determine whether the drugs are authentic."
Indeed, Zhao said, clever criminals can always find ways to sneak illicit drugs into a supply chain without being detected through the barcode system. Another retail chain executive agreed, telling Caixin that the system has a limited impact on illegal activity since "the barcode can be easily forged, and (counterfeiting) is almost impossible to detect."
(Rewritten by Han Wei)
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