Profitability is now in focus at online drug company, as it seeks to breathe life into its shares that are down 10% this year.
With massive revenue growth and market share gains in the bag, online drug seller 111, Inc. (YI.US) has a new focus: earning a profit. The company was talking up that potential in its latest quarterly results and followed that with a modest share buyback last week in a bid to excite skeptical investors.
Founded in 2010, 111 now boasts one of the biggest networks selling to online and brick-and-mortar pharmacies in China, and also operates its own online retail pharmacy. It sells directly to more than 300,000 pharmacies – including independents, chains, clinics and private hospitals – and operates in almost 900 cities where it can deliver drugs in less than 24 hours.
The Shanghai-based company has chalked up several consecutive quarters of robust revenue growth, including in its latest results announced late last month. Revenues in this year’s second quarter rose 86.5% to 3 billion yuan ($468.4 million), driven predominantly by its core B2B sales to pharmacies and healthcare providers.
The vast majority – about 96% – of its revenue came from its B2B business while the remainder came from its modest B2C business selling drugs directly to consumers. B2B typically carries far smaller margins than B2C, which may partly explain why the company has faced big hurdles becoming profitable.
But profitability is clearly now in focus, a factor which could finally help breathe life into the company’s lackluster shares in the coming quarters. 111’s shares are trading at about $6.50, well off an all-time high of over $23 in February as investors briefly cheered its status as a leading player in China’s huge market for drug distribution.
But that was before Chinese regulators started a series of crackdowns on tech companies targeting everything from anti-monopolistic behavior to data security and after-school education. While drug companies have yet to fall into the regulator’s crosshairs, 111’s stock got sucked into the broader selloff that sent shares of many U.S.- and Hong Kong-traded tech companies tumbling.
Rather than dwell on that, 111 has turned its attention to its bottom line with a goal of breaking even within the next 12 to 18 months, management said on its earnings call. The company has never posted an annual profit in its three years as a publicly traded company.
“Improving our bottom line will be a key focus for us going forward,” CFO Chen Yang, who also uses the name Luke Chen, said on the company’s quarterly earnings call. “We will be focusing on improving margins and reaching profitability.”
The company’s non-GAAP net loss stood at 118 million yuan for the quarter, widening from 78.8 million yuan in the same period a year earlier. But as a percentage of revenues, the loss shrank to 3.9% in the second quarter from 4.9%, indicating the company’s margins were improving as it builds up scale.
Chen said gross margin for the company’s main B2B business improved to 3.8% in the latest quarter from 3.4% a year earlier, reflecting the razor-thin margins for that part of the business. By comparison, the company’s B2C business margin stood at a much higher 20%, though that figure was unchanged from a year earlier, he added.
Changing Fortunes
Drug suppliers like 111 and the many retailers it counts as B2B customers saw their fortunes change overnight in 2019 when the government ended the near-monopoly that hospitals previously had on prescription drug sales, paving the way for others to move in. The Covid-19 pandemic has also lifted sales as patients raced to buy drugs and seek medical advice online.
111 has been busy building up its logistics network to meet surging demand. It plans to expand fulfillment capacity to about 243,000 square meters by the end of its financial year, more than doubling the amount of space it had at the start of the year.
Its revenue growth has been outpacing peers, including more B2C-focused online healthcare giants like Alibaba Health Information Technology Ltd. (0241.HK) and JD Health (6618.HK).
In the first half of the year, 111 saw a 76% increase in revenues. That compared with a 55.4% rise at JD Health, which also remains in the red, and a 39% increase at rival Ping An Good Doctor (1833.HK), which markets itself as a one-stop online medical portal. Alibaba Health, which is already profitable, saw revenues rise 62% in its fiscal year ended March 31.
The market potential is huge thanks to China’s aging population and increasing wealth. Online retail drug sales in China are forecast to reach 177 billion yuan by 2028, accounting for about 30.8% of total sales, according to a report last year by Deloitte. Prescription drug sales could grow annually by almost 60% while over-the-counter medicines should grow 32%, the report said.
111 is clearly keen to be taken seriously by investors who may favor higher-margin B2C drug sellers. The company, which was listed in 2018 and had a solid cash position of 1 billion yuan at the end of the second quarter, last week announced a modest $10 million share buyback program – a move that looks largely symbolic and aimed at showing investors it thinks it is sorely undervalued.
Its share price rose to almost $8 on the day of that announcement, but struggled to keep up the momentum and has been on a steady decline since.
Worries over future regulation, especially for the bigger players in the digital healthcare sector, have weighed heavily on shares. With regulators already taking action targeting education and data security, some analysts say that China’s healthcare sector could be next in the line of fire.
Indeed, shares of both JD Health and AliHealth have plunged 50% so far this year. 111 shares are down a more modest 10% in the same period, perhaps reflecting market expectation that regulatory action might be more targeted at bigger internet names, and at B2C rather than B2B drug sellers.
Government officials may also find it harder to justify reining in companies like 111, which have made it their mission to improve healthcare access for millions of Chinese and address inequalities. Through its offerings, 111 has helped lower the cost of treatment and vastly improved healthcare access to rural areas in particular.
Company executives sought to downplay concerns over regulation of the sector on the earnings call, saying they welcomed policies aimed at containing unfair practices.
“We view the recent regulatory actions as a tailwind rather than a headwind for 111,” said Chairman and CEO Liu Junling.
Disclosure: None
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