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Author: Xiao Li Feidao, Editor: Xiao Shimei
Since mid-May, leading A-share pharmacies such as Yifeng Pharmacy, Yixintang, and Dashenlin have been sold off by the capital market, with a cumulative decline of about 40%.
Behind the collective flash crash of stock prices, it is a warning that future performance may deteriorate significantly, mainly due to the triple negative critical attack - serious oversupply of stores, new online price comparison policies, and the accelerated rise of pharmaceutical e-commerce, which in turn brings about the reshaping of the valuation of pharmacy companies.
[Serious oversupply of stores]
For many years, pharmacies in China have been a good business – with a good competitive landscape, rigid demand and high gross margins. As a result, the performance of a large number of listed chain pharmacies has ushered in rapid growth for several years.
For example, Yifeng Pharmacy, a leader in the industry, has seen its revenue swell from 1.2 billion yuan in 2011 to 22.6 billion yuan in 2023, and its net profit attributable to the parent company has swelled from 56 million yuan to 1.4 billion yuan. The stock price also soared more than 10 times at one point.
▲The revenue trend chart of the four major chain pharmacies, source: Wind
With the passage of time, China's pharmacy industry has become more and more involuted, and business has changed.
In 2023, the number of pharmacies nationwide will climb to 667,000, an increase of more than 40,000 from 2022 and a significant increase of 178,000 from 2018, a cumulative increase of more than 36%.
This is more than 100,000 more than the total number of bubble tea shops in the country in the same period, which shows how dense the pharmacies are. There are also media reports that there are more than 5 pharmacies within 100 meters in some areas of Chongqing.
The expansion of pharmacies across the country is still running wildly. As of the end of June 2024, the number of pharmacies nationwide has exceeded 700,000, equivalent to more than 30,000 new stores in just half a year.
As early as 2020, Ni Huping, a former official in the medical system, warned that China's pharmacy industry had experienced serious overcapacity, with supply far outstripping demand.
According to Ni Huping's calculations, according to international practice, one store serves 6,000 people, so China only needs 233,000 pharmacies. In that year, the total number of pharmacies in the country had reached 546,000, and the service ratio had reached the level of 1:3,000.
After more than 3 years of rapid expansion, the involution of pharmacy operation cannot be avoided. According to Zhongkang CMH data, in 2023, the average daily efficiency and ping efficiency of chain pharmacies across the country will drop to 1,344 yuan/person and 72 yuan/square meter, a decrease of more than 15% compared with 2018. In addition, the single-store service capacity has been reduced from 3,000 in 2020 to 2,000 by the end of June 2024, and some key cities have dropped to 1,000 people.
In the first seven months of 2024, the average daily sales of physical pharmacies was 2,989 yuan, a year-on-year decrease of 10%. Among them, the average order volume of stores was 41.9 orders, down 1.5% year-on-year, and the average customer price was 71.3 yuan, down 8.6% year-on-year.
▲Retail pharmacy unit price chart, source: SDIC Securities
Against the backdrop of serious oversupply, listed pharmacy chains have no intention of stopping expansion. Among them, Yifeng Pharmacy expanded 1,575 stores in the first half of the year, planned to build 1,800 stores in the first half of the year, merge and acquire 700 stores, and franchise 1,500 stores. After being interviewed by the Fund Supervision Department of the National Health Insurance Administration, Yixintang said that the store expansion in the second quarter was accelerated compared with the first quarter, and it will continue to expand stores in the future according to the previous plan.
However, China's drug demand is relatively weak. In the first six months of 2024, the national pharmacy retail market size was 245.8 billion yuan, an increase of only 0.4% year-on-year. The market cake is almost at its peak, and more stores will share it, and the income and profitability of a single store will naturally deteriorate.
As a result, the performance of listed chain pharmacies has also begun to deteriorate.
Guoda Pharmacy lost 14 million yuan in the first half of the year, the first loss in 23 years. In addition, Yixintang's net profit attributable to the parent company in the second quarter was 40 million yuan, a year-on-year decrease of 84.9%. Jianzhijia's net profit attributable to the parent company in the second quarter was 11 million yuan, a year-on-year decrease of 87%.
The above is just the evil result of the spontaneous involution competition in the pharmacy track, and there will be an impact at the policy level and a dimensionality reduction blow from external competitors in 2024.
【New Deal for Online Price Comparison Medicine】
On May 29, the Department of Pharmaceutical Prices and Bidding and Procurement of the National Health Insurance Administration issued a letter - "Letter on Carrying out the Special Action of "Online Stores, Checking Drug Prices, Comparing Data, and Grasping Governance".
According to the content, the National Health Insurance Administration will launch a new special action to control drug prices, that is, to use the "instant price" of the online drug sales platform as the anchor point to compare the prices of drugs with the same name, the same brand, the same dosage form, the same specification, and the same packaging, and use the drug price of the online drug sales platform as a "sharp weapon" for price discovery.
In addition, if the provincial centralized procurement platform is found to be high, the price of the selected price of centralized procurement with volume, and the price of designated retail pharmacies are compared with the "instant delivery price" of the online store, if a high price is found, the enterprise will be urged to adjust the price to a reasonable level.
The starting point of the new policy is very clear, that is, to continue to reduce the burden of drug use on the people. For pharmacies, it poses a big threat to the profit model on which they depend.
Prior to the New Deal, retail pharmacies enjoyed independent pricing power within the scope of regulation, and the pricing was often higher than that of medical institutions, including public hospitals.
You must know that the prices of drug sales channels at the hospital end and the retail side have been inconsistent with each other for decades. With the large-scale promotion of national centralized procurement, the price of hospital-end drugs has dropped significantly, and with the promotion of prescription outflow and outpatient co-ordination system, the share of pharmaceutical companies in hospital-end channels has dropped to about 60%.
Correspondingly, the share of drugs sold by retail pharmacies has risen to about 30%, but the retail price of drugs has not been significantly affected by centralized procurement, and the price difference with the hospital has widened.
After the introduction of the new online price comparison policy, the price competition between offline physical pharmacies and pharmacies, between hospitals and retail, and between online and offline will become more intense, homogeneous, and more transparent, which can be described as a subversion of the previous independent pricing model of pharmacies to a certain extent.
The new policy is somewhat similar to the centralized procurement of pharmaceutical companies, and the elimination of inflated prices will intensify the involution of the industry, and the downward space for retail pharmacy prices will be opened, which will have a significant impact on the profitability of chain pharmacy enterprises. This is also the core driving force behind the continuous plunge in the stock prices of pharmacy companies after the introduction of the new policy.
【The rise of pharmaceutical e-commerce accelerates】
In addition to the serious oversupply of stores and the new impact of online price comparison, there is also a strong external competitor - pharmaceutical e-commerce will come to eat away at the stock cake.
In 2015, the sales scale of pharmaceutical e-commerce was only 14.3 billion yuan, accounting for only 3.2% of total sales, and the sales of physical pharmacies accounted for 96.8%. With the increase in online penetration rate and the catalysis of consumers' online drug buying habits due to the three-year epidemic, the sales of pharmaceutical e-commerce will exceed 300 billion yuan in 2023, accounting for 32.5%.
▲The proportion of physical pharmacies and e-commerce terminals, source: Minenet
There are three main operating models of pharmaceutical e-commerce, which have different impacts on physical pharmacies. First, B2B. This type of e-commerce platform is located upstream of terminal pharmacies and medical institutions, providing drug procurement, distribution and other services for pharmaceutical terminal enterprises or institutions, and has little impact on retail pharmacy sales.
Second, B2C. This is similar to the Taobao model, which provides pharmaceutical products to consumers and competes directly with retail pharmacies. This model is mainly occupied by e-commerce platforms, including Ali Health and JD Health.
Among them, Ali Health's revenue in fiscal year 2024 will exceed 27 billion yuan, a slight increase of 1% year-on-year, but the net profit in the same period will soar by more than 60%. JD Health's revenue in the first half of 2024 was 28.3 billion yuan, an increase of 4.6% year-on-year, and the net profit margin was 7.18%, a record high, and the profitability has exceeded that of offline pharmacies.
Third, O2O. This model provides pharmaceutical delivery services from retail pharmacies to consumers. Relying on physical pharmacies, part of the channel profits are divided through commissions. The main players include Meituan, Ele.me, Dingdong Medicine, etc.
According to data from Minenet, the sales scale of the O2O market in 2023 will be 43 billion yuan, with a compound annual growth rate of 76% in five years, far exceeding the 3% of offline retail stores. In addition, the share of brick-and-mortar pharmacies has increased from 0.8% in 2019 to 7% in 2023.
Pharmaceutical e-commerce has many advantages such as convenience, speed and low price, and continues to eat away at the cake of offline physical retail pharmacies, and the trend will become more and more obvious.
It is also worth noting that in recent months, first-tier cities in Beijing, Shanghai, Guangzhou and Shenzhen have opened online payment services for drug purchases and medical insurance. In addition, Qingdao, Shangrao, Dongguan and other cities have also followed the line, and it is expected that it is only a matter of time before it is rolled out on a large scale across the country.
This further amplifies the advantages of online drug purchases, which will drive customer traffic to continue to shift online, and pose a big impact on the business of physical pharmacies.
On the one hand, the opening of online medical insurance payment will be conducive to the expansion of the B2C market and directly squeeze the business cake of physical pharmacies.
On the other hand, the trend of online drug buying is becoming more and more obvious, and more and more physical stores will connect to platforms such as Meituan, Ele.me, and Dingdang Fast Medicine. But this is equivalent to one more opponent who divides the channel profits, and the discourse power of pharmacies is greatly weakened, and there is a risk of becoming a platform worker. In addition, once the proportion of online sales is too large in the future, pharmaceutical companies will also have the motivation to skip pharmacies directly and supply drugs directly to the platform.
All in all, under the triple crit, China's pharmacy business has lost ground, and profitability will deteriorate significantly, making the logic of prescription outflow, non-pharmaceutical sector increment, and concentration increase in the previous market transaction vulnerable.
The speed of life and death of Chinese pharmacies has kicked off, and the key to who can survive the upcoming cold winter lies in whether they can adapt to the market with the trend. Otherwise, it will be difficult to escape the end of being brutally eliminated.
disclaimer
The content of this article related to listed companies is the author's personal analysis and judgment based on the information publicly disclosed by listed companies in accordance with their legal obligations (including but not limited to temporary announcements, periodic reports and official interactive platforms, etc.); The information or opinions contained herein do not constitute any investment or other business advice, and Market CapWatch disclaims any liability for any actions resulting from the adoption of this article.
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