Alibaba Health: pill pop

There is big money in drugs. Or at least buyers of Chinese etailer Alibaba's latest venture, Alibaba Health Information Technology (AHIT), had better hope. On Tuesday, AHIT announced that it will buy a business indirectly owned by its indirect parent. The Follow-Jack-Ma's-Money effect - seen just last week when Ali Pictures took some assets from Alibaba - then took hold. AHIT stock jumped 80 per cent, adding $5.8bn to its value.

AHIT was created last year from a company formerly named CITIC 21N. In April, Alibaba subsidiary Perfect Value paid $171m for a 54 per cent stake that is now somehow worth $7bn. AHIT's main business is a system that tracks consumer products and provides information on their provenance. It is, for instance, the only system in China which monitors and tracks drugs (if they have been registered).

The target company for the latest deal, AliJK.com, looks like a nice fit. It operates Alibaba's online pharmacies business, hosting 186 merchants licensed to sell over-the-counter drugs. It is just over three years old and is one of only three companies in China with a licence to host pharmacies online. AliJK has handled $765m worth of drugs in the past year, taking a fraction of a per cent of that for itself.

AHIT will pay $2.5bn in new shares for AliJK and throw in a convertible bond. The price is clearly not about current profits (it amounts to 190 times the target's earnings before interest, tax depreciation and amortisation). It is about market potential. China is underspending on healthcare - only 6 per cent of gross domestic product, or half the level of Europe. It is an area of policy focus. Authorities are keen to shift some of the healthcare burden from the state to private enterprises. Last year, drug pricing was deregulated in order to attract competition.

For Alibaba and AHIT's existing shareholders the deal has already worked well. As for buyers at this level: they are clearly on drugs.

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