Alibaba Enters Negotiations With New Health Arm

After the $2.5 billion deal with a different Alibaba unit ended, Ali Health has entered talks with a new health arm to inject a new segment in its business.

According to Bloomberg, Alibaba Group Holding is all set to introduce health foods and supplements business into its health subsidiary in the coming times. It is believed that both parties previously wanted to exchange an online pharmacy operation in a mega deal which was valued at $2.5 billion but Alibaba dropped the plan. Now it is in new talks with the health arm.

It is believed that the Chinese tech giant is exploring an option to inject a fundamental segment of dietary supplements, health foods, and nutritional products business from its Tmall online marketplace to its health subsidiary known as Alibaba Health Information Technology Ltd. The news came out from the statement published by the stock exchange. The health subsidiary is also known as Ali Health.

According to the statement, Ali Health had a deal last year which it announced for $2.5 billion (HK$ 19.4 billion) to acquire an online pharmacies sales platform from a different unit of its parent company. But the talks broke down as there still were ongoing regulatory uncertainties. The Hong Kong stock exchange said in a filing, “There are currently substantial regulatory uncertainties in relation to the medical and healthcare industry.” It seems like the company instead chose another deal that would be more feasible in terms of revenues and operations. The new agreement suggested that the health arm would be operating the Tmall online pharmacies an in return it would charge a service fee of 21.5 percent on all sales it will make through the platform.

Alibaba Health Information Technology faces numerous challenges in expanding its business and services in the health and pharmaceutical industries of China. And the changes in the transaction this deal agreed upon showed its vulnerability.

The platform even struggles while doing business in China. It was believed that the company expected to grow and benefit from the mainland through online sales on the prescribed drugs. But the Chinese regulators have been an obstacle as the specific timings have not yet been announced which might be allowed.

Reports suggest that Ali Health noticed a major decline in shares at the beginning of this year. This was because the health arm was been asked to stop the production of a drug coding system by the Food and Drug Administration (FDA) of China. The drug coding system was one of the main revenue streams for Ali Health and the halt of production took the company in a loss. In fact, Bloomberg wrote that the revenue generated last year from the drug coding system accounted for more than 85 percent of Ali Health’s over revenue last fiscal year.

The two parties have entered advanced negotiations but so far no definitive or mutual agreement has been reached as reported by the health arm. Alibaba Group said in a statement, “For the year ended March 31, 2015, the total value of the pharmacies’ businesses was about 4.7 billion Yuan with Tmall getting a 3 percent commission.”