On March 16, the Financial Link reported (Journalist Zheng Bingxun) that the chain pharmacy industry is facing a new development node. "The overall negative growth of the pharmaceutical retail market in 2024, with slight growth in pharmaceutical categories, is unprecedented but not unending. We predict that the market situation will not be optimistic in the next two to three years." At the 10th Health Commodity Trade Conference (hereinafter referred to as the '2025 Xi Ding Conference'), Li Junguo, Vice President of Zhongkang Holdings (02361.HK), pointed directly at the survival status of pharmacies.

Traditional pharmacy operations currently face an 'impossible triangle' of 'costs-efficiency-accuracy.' With chain pharmacies experiencing a serious wave of closures and entering a low or even negative profit situation, it seems even more difficult to balance all three aspects. The popularization and iteration of AI appear to gradually change this dilemma.

Currently, some leading chain enterprises have 'tested the waters' with DeepSeek. AI is increasingly expected to help pharmacies reduce costs and improve efficiency. However, at the same time, the public large model has the drawback of being 'too broad' due to a lack of verticality, and the pharmacy industry needs a more grounded AI tool.

All in AI 'rescues' the pharmacy industry.

Previously, it was widely believed in the industry that the pressure on chain pharmacies was not only due to weak consumer spending but also to policy impacts.

Starting from the second half of 2024, some local medical insurance bureaus have clearly stated that they will suspend the acceptance of new pharmacy medical insurance designated agreement applications. Among them, Fuzhou requires the suspension of applications for medical insurance designated agreement management services from medical institutions starting November 1, 2024. Entering 2025, cities like Heze in ShanDong and Ningde in Fujian have also suspended the acceptance of new medical insurance designations for medical institutions. At the same time, the 'license-style scoring' has extended the supervision of medical insurance fund usage to hospital and pharmacy personnel, also increasing the operating thresholds for pharmacies.

Against this background, chain pharmacies are expected to face a large-scale wave of closures in 2024, particularly in the second half, with leading chain enterprises generally entering a low net margin era.

According to data from Zhongkang Pharmacy, it is expected that in 2024, there will be 39,000 retail pharmacies closed nationwide, with a closure rate of 5.7%, an increase of 1.9 percentage points compared to 2023. The number of closures is also increasing quarterly, with 6,778, 8,792, and 9,545 closures in the first, second, and third quarters, respectively, and a further increase to 13,672 in the fourth quarter.

Wind data shows that including China National Accord Medicines Corporation (000028.SZ) and six major private chain enterprises, profitability will decline to varying degrees in 2024.

Based on the net margin of sales for the first three quarters of 2024, Yunnan Jianzhijia Health-Chain (605266.SH), Shuyu Pingmin (301017.SZ), DaShenLin Pharmaceutical Group (603233.SH), Yixintang Pharmaceutical (002727.SZ), LBX Pharmacy Chain Joint Stock (603883.SH), and Yifeng Pharmacy Chain (603939.SH) have decreased by 2.81%, 2.84%, 2.27%, 3.14%, 0.74%, and 0.14% respectively compared to the same period in 2023; China National Accord Medicines Corporation has also decreased by 0.62% year-on-year.

In addition, Yunnan Jianzhijia Health-Chain, Shuyu Pingmin, Yixintang, and China National Accord Medicines Corporation, which have released performance forecasts for 2024, are not optimistic about their operational situation.

Among them, Shuyu Pingmin expects a loss of between 0.12 billion yuan and -0.22 billion yuan, compared to a profit of 0.133 billion yuan in the same period last year; Yixintang is expected to have a net income of between 0.1 billion yuan and -0.15 billion yuan, a year-on-year decline of 72.70% to 81.80%; China National Accord Medicines Corporation's net income is expected to be between 0.561 billion yuan and -0.76 billion yuan, a year-on-year decline of 52.48% to 64.92%; Yunnan Jianzhijia Health-Chain's net income is expected to decrease by 0.285 billion yuan to 0.271 billion yuan, a year-on-year decrease of 68.78% to 65.50%.

"Survival before development has become an urgent issue for pharmacies," said Huang Xiaoding, Vice Director of Shandong Lijian Pharmacy Chain Co., Ltd., at the West Ding Conference. He bluntly stated that the primary task of pharmacies currently is to maintain cash flow and profit, and the view of pursuing scale must change. "Why was scale pursued back then? Because scale could bring benefits. But when scale no longer brings benefits, and even produces negative effects, it becomes useless."

In his view, the wave of pharmacy closures seems to be a process of cleansing the industry, "the number of pharmacies should be reduced by one-third or even half to maintain a dynamic balance, which is the best state. We need to shift from pursuing overall scale to focusing on the profitability of individual stores," Huang Xiaoding stated.

Li JunGuo further pointed out, "Superficially, the pressure on the pharmaceutical retail market is caused by the continuous deepening of medical reform policies. Essentially, it is because the supply model of pharmaceutical retail has not kept pace with the times and is difficult to meet the needs of social development. In the future, pharmacies need to deeply meet diverse health needs and work on optimizing the product mix and building service loops."

He believes that negative growth is forcing chain pharmacies to accelerate their transformation, and AI is an important tool driving this process.

Due to the complexity and strong ethical requirements of healthcare, AI will initially be applied on a large scale at the consumer end, and having an AI health steward for everyone is not a distant future. Secondly, it will be applied in the pharmaceutical and medical sectors, leading to disruptive changes in the entire pharmaceutical market, with marketing ecology changes being foremost. Not embracing AI will hinder communication with consumers, and without AI, it is impossible for enterprises to reduce costs and increase efficiency. All in AI will be the fundamental threshold for the operation of pharmaceutical and commercial enterprises.

There is an urgent need for more practical AI solutions.

According to a report from the Financial News Agency, since the surge of AI this year, in addition to several pharmaceutical industrial enterprises, including Jiangsu Hengrui Pharmaceuticals, integrating DeepSeek, some chain pharmacies have also entered the arena to 'test the waters.' Among them, DaShenLin's 'AI Xiaoshan' has fully integrated DeepSeek, with functions including pharmaceutical management, medication consultation, employee training, etc., making DaShenLin the first enterprise in the pharmaceutical retail chain industry to integrate DeepSeek.

Zhu Hai, the general manager of the digital retail division of Zhongkang Technology at Zhongkang Holdings, stated in a media interview that in traditional pharmacy operation, the process involves perceiving problems from external sources, gaining insights, and executing plans, but there are gaps in the intermediate links, leading to poor operational efficiency of pharmacies.

Zhu Hai mentioned that in the health sector, there exists a 'cost-efficiency-accuracy' 'impossible triangle.' When pharmacy operators seek balance among these three factors, they often prioritize cost and efficiency, making it difficult to prioritize accuracy, as accuracy leads to increased costs and reduced efficiency. However, the application of AI is changing this situation.

Li Jun Guo believes that the essence of AI empowerment is to use data density to counteract labor costs, optimize service processes, and improve operational efficiency. However, he also stated that so far, public models like DeepSeek, despite providing some directional guidance, still lack sufficient support from vertical domain data to support the actual business operations of pharmacies.

Yu Xiang, vice president of China Resources Sanjiu Medical & Pharmaceutical, stated at the Xiding Conference that AI is an auxiliary tool to accelerate our decision-making efficiency, and the underlying logic of its decision-making is based on vast amounts of data. The level of professionalism depends on whether the data is sufficiently complete and accurate. He mentioned, 'Many times when we use DeepSeek, the focus is not on the results of its thinking, but on the thinking process itself, including how many articles it references, where the sources are from, and why those articles are chosen, etc.'

Based on this, ZhongKang Technology launched the "Medical Health Full-Scenario AI Agent" on the existing AI technology, and its core competitiveness lies in relying on ZhongKang Technology's data ecosystem.

According to Wu Han, Chairman of ZhongKang Holdings, ZhongKang Technology, as the largest Medical data solution provider in China, has served over 2,000 enterprise-level clients. Its data cooperation network covering the entire Industry Chain and large model training capabilities provide the data sources for the AI agent. The tool's functions cover real-time customer flow analysis for pharmacies, market trend forecasting for pharmaceutical companies, personalized health management for patients, medical decision-making, AI simulated research and development of new drugs, and many other aspects.

Currently, ZhongKang Technology has reached cooperation with several top hospitals, leading pharmaceutical companies, and chain pharmacies, promoting the rapid implementation of the AI agent in real scenarios. Wu Han believes that this AI tool, which combines vertical data, is also of significant importance for the development of the entire pharmaceutical Industry. On one hand, it will help accelerate the intelligent upgrade of the Medical health industry. On the other hand, it will help address the imbalance in Medical services and promote health management throughout the entire life cycle.