It fell from 16 US dollars per share at the time of listing to a low of 2 US dollars. After 1 and a half years since the US stock market was listed, the stock price performance of Internet Pharmaceutical E-Commerce 111 Group (YI.US) has been relatively sluggish. Recently, however, this company has been “caught” by the news that “online sales of prescription drugs have been loosened.”

On December 1, 2019, the new domestic “Drug Administration Law” was officially implemented. The new law stipulates that drugs specially controlled by the country, such as “vaccines, blood products, narcotic drugs, psychotropic drugs, toxic drugs for medical use,” cannot be sold on the Internet. However, prescription drugs are not directly included in the ban on online sales, so it is interpreted by the industry as “unblocking” online sales of prescription drugs.

The opportunity to sell prescription drugs is of course beneficial to those Internet pharmaceutical e-commerce businesses that have been in the “gray zone” of selling prescription drugs online all year round. The stock price of 111 Group, the parent company of 1 Pharmaceutical Network, has risen from $5.15 per share to a maximum of $7.25 per share since December, an increase of more than 40%.

However, the favorable news did not allow investors to maintain full confidence in the future development of this company. As an Internet “intermediary” for pharmaceutical sales, 111 Group continued to expand its losses until Q3 last year. It has not been possible to open up a profit channel for a year and a half since the listing, and the patience of many investors has already been lost.

It's hard for online “middlemen” to make money

In a 100 billion pharmaceutical e-commerce market, the days of One Pharmaceutical Network are still not going well.

As the probability of “Internet +” gradually penetrates into various domestic industries, pharmaceutical sales have also begun to accept “baptism” from the Internet, and the domestic Internet pharmaceutical e-commerce industry has been able to develop rapidly.

The Zhitong Finance App learned that as early as 2018, the national pharmaceutical e-commerce scale had reached 231.5 billion yuan, of which the B2B business scale reached 93.1 billion yuan, maintaining an industry growth rate of more than 30%. According to forecasts, in 2019, China's pharmaceutical e-commerce market will exceed 100 billion yuan to reach 102 billion yuan, and in 2023, the market size will grow to about 166 billion yuan, with an average compound growth rate of about 12.95% in 2019-2023.

As time went by, the overall market potential continued to be unleashed, but as for Pharmaceutical 1, it was only when you were in it that you knew “it's not easy to make money.”

Combined with the latest 2019 Q3 earnings report disclosed by 111 Group, it can be seen that in terms of business scale, by the end of September last year, the company had served 210,000 pharmacies. Furthermore, it is expected that by the end of 2019, the company will cover 230,000 pharmacies nationwide. Furthermore, the company also revealed that when the coverage of 230,000 pharmacies is completed, the 111 Group will occupy more than 50% of the retail pharmacy market in China.

However, behind this high market coverage, the company's operations and profit conditions do not match positively. Motivated by the rapid development of the Internet pharmaceutical e-commerce market and the company's market expansion in recent years, in terms of revenue, the net revenue of 1 Pharmaceutical Network increased from 498 million yuan in Q3 2018 to 11.1 billion yuan in Q3 2019, an increase of 122.89% over the previous year;

However, the company's net profit remained in a state of loss during the same period. In the Q3 quarter of 2019, the company's net loss reached 124 million yuan, the same as the same period last year. However, in the first three quarters of 2019, the company's net loss reached 344 million yuan, an increase of 34.26% over the same period last year. “Increased revenue without profit” became the biggest problem with the performance of Pharmaceutical 1.

The major problem that has contributed to this profit structure is how the company monetizes. Pharmaceutical Network 1 mainly helps pharmaceutical companies cover pharmacies, clinics, private hospitals, community hospitals, 3-6 city hospitals, and patients other than Tier 1-2 city hospitals and pharmacy chains through platforms. However, the problem with this kind of To-B business model is that the company also has to bear the purchase costs and shipping costs of the products. This is described in more detail in the company's 2018 annual report. However, this model makes 1 Pharmaceutical Network more like an online “middleman” in terms of form.

In the third quarter of 2019, the company's product sales cost reached 1,063 million yuan, accounting for 95.77% of the company's current net revenue, which greatly reduced the company's gross margin level. In addition to the company's necessary performance expenses, marketing expenses, and management expenses, etc., its operating expenses reached 1,229 billion yuan in the current period. This is also the root cause of the loss of performance of 1 Pharmaceutical Network.

Furthermore, the company's net loss in operating cash flow reached 288 million yuan, which is larger than the loss in net profit for the current period. It reflects from the side that the company's ability to pay is constantly being weakened.

At the time of listing in 2018, 1 Pharmaceutical Network stated in its prospectus, “The company has had operating losses in the past, and may not be able to achieve or maintain profits in the future.” Judging from the company's operations that have been listed for a year and a half, it is unrealistic for 1 Pharmaceutical Network to achieve profit in the short term, and this is the reason why the company's stock price has been falling all the way down. However, the news that “online sales of prescription drugs have been loosened” has given a dose of “stimulants” to Pharmaceutical 1. Can the company rely on policy relaxation to achieve “financial freedom”?

Prescription drug “outflow” to online

The huge potential of the online sales market for prescription drugs is an important reason for the “boom” of e-commerce in Internet pharmaceuticals.

The overall downturn in the pharmaceutical market in recent years has become the consensus of investors, but with the progress of centralized procurement, the rate at which oncology drugs and innovative drugs are entering hospitals has accelerated, and the prescription drug market, with the hospital market as the main body, has taken the lead in emerging from the downturn. According to forecasts, retail channels will account for 45.3% of prescription drug sales in 2019, up from 43.6% and 44.8% in 2017 and 2018, while sales growth will reach 4%.

Domestically, the prescription drug market has been controlled by hospital channels for a long time, but the Zhitong Finance app learned that with the in-depth implementation of hierarchical diagnosis and medical segmentation, the prescription drug market is expected to exceed 500 billion in 2023. From major hospitals to the primary market and retail (online+offline), about 180 billion dollars may flow directly into retail channels, of which 130 billion dollars will be borne directly by offline and 50 billion dollars online. The online share will get higher and higher, from less than 10% to nearly 30%.

Seen from this perspective, if online sales of prescription drugs are legalized, Internet pharmaceutical e-commerce will rely on the outflow of prescription drugs to gain a market of over 100 billion dollars, but this presupposes that online sales of prescription drugs are legalized. Judging from the current policy interpretation, it is unrealistic to liberalize online sales of prescription drugs. Judging from actual market conditions, when it comes to selling prescription drugs online, the relevant platforms are still “still nonexistent” in reviewing prescriptions, including problems such as falsifying prescriptions to buy drugs, etc.

One week before the implementation of the new “Drug Administration Law”, on November 22, the National Development and Reform Commission and the Ministry of Commerce jointly issued the “Negative Market Access List (2019 Edition)”, which clearly states, “Pharmaceutical manufacturers and operators must not use postal or Internet transactions to directly sell prescription drugs to the public in violation of regulations.” Voices of policy tightening followed.

As far as No. 1 Pharmaceutical Network is concerned, the biggest impact of policy relaxation is that it has pulled its Internet online sales business from a gray area back to the legal track, and has continuously increased the company's market share and influence on the B-side. In the current situation where Internet traffic is becoming more and more expensive, this has almost become the only way for it to achieve large-scale profits. However, judging from the policy tone or the progress of the introduction of a medical insurance payment system, it is still too early to fully liberalize online sales of prescription drugs. Given the time costs brought about by the cooperation of all parties, 1 Drug Network may still maintain its current loss state for a long time to come.