111, Inc. Q4 FY2020 Earnings Call

Hello, ladies and gentlemen, and thank you for standing by for 111, Inc.'s Fourth Quarter and Fiscal Year 2020 Conference Call. As a reminder, today's conference call is being recorded. I would now turn the meeting over to your host for today's call, Ms. Monica Mu, Investor Relations Director. Please proceed, Monica.

Thank you, operator. Hello, everyone, and thank you for joining us today for 111's Fourth Quarter and Fiscal Year 2020 Conference Call. On the call today from 111 are Dr. Gang Yu, Co-Founder and Executive Chairman; Mr. Junling Liu, Co-Founder, Chairman and CEO; Mr. Luke Chen, CFO of our major subsidiary; Mr. Harvey Wang, Co-COO; Mr. Barry Zhu, Co-COO; and Ms. Senior VP.

Good morning, and good evening, everyone. Thank you for joining this call today for our fourth quarter and full year 2020 results. Let me begin with an update on the COVID-19 pandemic. The past year plus has been difficult for all of us. But the global efforts and the commitment to overcome this terrible disease have also shown the resilience of the human spirit. We'll continue to be in awe of the first responders working tirelessly throughout these unprecedented times, and together, we will persevere and beat this disease. With the hard work from our dedicated employees and the safety and other operational protocols we have put in place, 111 has been able to service our customers and deliver critical care to patients without interruption throughout this difficult period. With the vaccine rollout, we're optimistic that an end to the pandemic is in sight, as we continue to stay vigilant for the potentially more dangerous variants of the coronavirus. Moving on to our earnings, I'll begin with a brief look back on what we accomplished in 2020, our extraordinary journey of growth in Section 1 of the deck, and a look ahead on 2021 and beyond.

Thank you, Junling, and good morning or evening, everyone. I want to begin by thanking all of our colleagues for their resilience and hard work over fiscal 2020 as we navigated a challenging environment, making operational changes at the onset of the pandemic to support our fast-growing business. We remained resolute in our focus on taking care of all our stakeholders, including our staff, customers, partners, and shareholders, and it was this focus that enabled us to report another phenomenal fourth quarter and fiscal year results today. Moving to the financials, my prepared remarks will focus on a few key business and financial highlights.

Your first question comes from the line of Zoe Bian of Citi.

This is Zoe Bian from Citi. May I ask the management three small questions? The first is, how many pharmaceutical companies are now partnered with you? And other than procurement, have you seen any progress or other ways of cooperation such as e-prescription or your marketing services? And my second question is on your B2B segment. Want to check if you have seen a rising turn of the scale of procurement from 111 in single retail pharmacy. And what are the levels in change versus independent pharmacies? Is there a cap? And the third question is about the progress of your subsidiary, with Yao Fang Shanghai listing on the STAR board.

Zoe, let me first answer your first question. You probably have seen that lately, we have started to partner with many pharmaceutical companies worldwide. We also announced that we have a direct strategic partnership with 330 pharmaceutical companies. So we start to become the preferred partner for pharmaceutical companies due to several major reasons. One is that we are fully compliant, and we have high efficiency and transparency, and we have provided digital solutions. Pharmaceutical companies and us have complementary strength. They can offer products, the medicine experts, and the medical expertise. They also have their pain points of coverage, how they will commercialize their products through all regions and channels. So we have the capability. So we are the preferred choice for pharmaceutical companies for their omnichannel product commercialization and for more regional coverage and channel coverage. Also, our data can help the pharmaceutical companies to provide customer insights, and our systems, for example, our CRM system, can help them to improve customer medicine compliance and duration of treatment. So I'd probably like Harvey to answer the other questions?

The second question is about procurement from pharmacies, which includes both chain stores and independent pharmacies. In recent quarters, we have noticed that our customers are consistently increasing their purchase volumes every quarter since they joined us. Based on the sales data from 2020, existing customers account for approximately 80% of our sales. Both chain stores and independent pharmacies are increasing their purchase volume. Looking ahead, as we further expand our supply chain network, we will provide a greater selection at better prices and improve our services. We firmly believe there is still significant potential to enhance our collaboration and increase the amount our customers spend with us.

Zoe, it's Luke. To answer your question on our progress on the STAR listing. Yes. First of all, we are making progress according to schedule. We have achieved a couple of milestones. One is in December 2020, we completed a new round of capital injection from third-party strategic investors. We have raised close to USD 143 million, or close to RMB 1 billion. The second financing was at the pre-money valuation of RMB 10 billion, which is approximately $1.53 billion. Now with this third-party investment introduced, we have, according to the law, converted this limited company to a stock-holding company, which is required for STAR listing.

Your next question comes from the line of Rachel Yang of HSBC.

Congratulations on another strong quarter. I have two questions. First, Luke, can you provide insight into the overall GMV size of your B2B model? How do you report revenue from service fees compared to overall CapEx and the top line? What is your perspective on their structure? Secondly, regarding your promotion model, I understand you began promoting Trulicity and Cosentyx for Lilly and Novartis some time ago. How are the two drugs performing? Is there potential to strengthen collaborations with all partners for exclusive partnerships? Those are my two questions.

Rachel, can you repeat your first question?

The first question is about the structure of your B2B business and the overall GMV model. I understand that you categorize some of the revenue as a service fee, meaning you only charge half of the net profit from the service provided to them, while other revenue is recorded at the sales price. I would like to know the overall GMV size and what portion of your revenue you anticipate will come from it versus what will come from top line sales.

Okay. If you look at our earnings release, I think on Page 3, we have disclosed our segment revenues. We have not disclosed the GMV because our main major business is self-operating business. We have marketplace business as well, but overall the size is not big. So if you want to know the GMV, I think one way is you can use our revenue times the VAT, which is 13%, to come up with a quick answer. In terms of structure, our major part of revenue contribution is from the B2B business, which is revenue to the retail pharmacies, private clinics, private hospitals, and some distributors, et cetera. We have B2C business as well. The proportion is like 93% to 7%. Yes, we are now deriving income or service revenue from our digital marketing with pharma companies, the commission from those marketplace vendors, as well as some service fees from our supply chain service. Now we believe with our S2B2C model, we will continue to see more and more revenue coming from the service side. So that's something we are expecting.

Rachel, I'll take your second question about promoting drugs. In China, by law, we are not allowed to promote any drugs, but we do help pharmaceutical companies in commercializing their drugs. So that's why we've built out the omnichannel platform for us to help those pharma companies to launch new drugs and follow that lifeline of that particular drug. So initially, once a pharma company obtains NDA from CFDA, they launch the drug, but it usually takes a fairly long time for the drug to be able to gain access to hospitals. So there has to be a startup hospital supply chain to help the pharma guys to maximize sales in a limited time window. And that's why we have been trying to build a supply chain platform. Our supply chain platform enables us to help the pharmaceutical company from day one to get the drugs delivered to customers' homes, to clinics or to hospitals. And you referenced a few pharma companies. Of course, our list is growing every quarter. We are pretty confident that the model we have been building is going to be a great tool for all the pharmaceutical companies when it comes to new drug launch or even after they gain access to hospitals; we'll have digital reps to help them continue to disseminate the medical information. Even when they get to VPP, or into retail, our over 300,000 pharmacies across the country will be a great channel for them to capture more sales. Thank you.

Okay. So how well are the two drugs performing, Trulicity and Cosentyx?

So Trulicity and what's the other one, Novartis?

It's Cosentyx.

They're doing exceedingly well. Usually, you do a CAGR, right? But we do actually on a monthly compounded growth rate. Both drugs have been growing at a monthly growth rate close to 70%.

I know we're introducing many more new drugs. As you can see, we have just announced a partnership with Beijing, and we are launching new drugs through our platform.

Yes. Yes, we also noticed that. So how many new drugs can we expect for the year 2021?

Many more.

Many more. Many more to come.

Your next question comes from the line of Christopher Lui of Jefferies.

This is . I'm asking questions on behalf of Chris from Jefferies. And my first question will be on the whole industry outlook. What do you think is the biggest change for the internet healthcare industry today compared with 10 years ago, especially with the new norms of reimbursement regulation extended? And how do you see those opportunities for pharmaceuticals within the context of the Internet industry? And my second question is about competition. We see that after nearly 10 years of development, some of the players in this industry have grown big and some have failed and vanished. What do you see our company's positioning in today's internet healthcare market? How shall we compete with those big players like AliHealth or JD Health? How do we differentiate ourselves? And what market share are we expecting in the long term? My last question will be on the company's new progress in the construction of smart supply chain. That's all from me.

So let me answer your first question, and then Junling can answer the second question. First of all, we feel very fortunate. We are facing an unprecedented window of opportunities. You can see that the whole healthcare industry is growing in double digits for the past few years and for the next decade to come. In 10 years, the whole healthcare industry will exceed the automobile and real estate industry to become the largest industry in China. Certainly, we need to seize that window of opportunity. The reasons are very apparent. One is the rapid aging in China. Second is increasing disposable income every single year. More importantly, the government policy has started to favor telemedicine, online healthcare. I think added advantages are the penetration of mobile internet and also now digital technology. We must grab this opportunity and heavily invest in our digital health technology, especially to boost our S2B2C model to build our core competency. I'll leave it to Junling to answer the second question.

Right. So competition. Yes, you referenced AliHealth and JD Health. First of all, I think we admire the market cloud they command, of course, the traffic they have is tremendous. But our path is very different. As I have explained in my remarks, our model is actually a S2B2C, the supply chain platform to enable businesses to service or better service consumers. Our focus is actually to create value for pharmacies and doctors. Those are the two B's we want to empower. By working together with the supply side, such as pharmaceutical companies, distributors, marketplace vendors, and other service providers, we create a better supply platform. Companies like us, without the background of super big companies, can only rely on our own ability to innovate and execute. The fact that we have survived to date proves our ability to innovate and execute.

So the third question is about our supply chain infrastructure. We have been a bit conservative before, and we didn't anticipate such fast growth. Now we think the supply chain infrastructure has become a bottleneck. We added two new fulfillment centers, one in Northeast, one in Northwest. The other six are all in the process of enlarging capacity and throughput. We are drastically improving our total capacity. At the same time, we are upgrading our supply chain management systems. We are optimizing our supply chain network, categories, and assortments. All these optimizations are done through data models and algorithms. We formed a new team called BPI, Business Process Improvement, really applying lean processes to every single one of our business processes. We foresee that we'll continue to improve not only our infrastructure but also our processes.

Your next question comes from the line of CIBC.

Hi. This is from CIBC. Congratulations on the company progress. I have two little questions. The first one is, well, actually I noticed that the company has achieved high growth since its IPO in 2018, reporting around a 9-fold increase in revenues over the past three years. I wondered what has been the key driver for this growth? And what is the new revenue stream of the company in 2021? What should we expect in 2021? This is my first question. My second question is about your B2B business. We see that B2B represents a large portion of our business revenue type. How is this B2B business different from traditional distribution businesses? What makes you outperform those traditional ones? That's my question.

Thank you for the questions. We have truly enjoyed significant growth over the past three years, driven primarily by our S2B2C model. For any business to maintain this growth, it must have a strong model in place, along with effective execution. We launched the S2B2C business in mid-2017 from the ground up and made it a strategic goal to engage with more than 50% of all pharmacies in China. In just three years, we've reached over 300,000 pharmacies. Crafting a strategy is one thing, but executing it is another, and 111 is proud of our capabilities in this area. Thanks to these factors, we are optimistic about sustaining high growth rates in the coming years. We are in a promising market, and it will take time before we hit the industry's ceiling. We already have a robust revenue stream, and we are developing innovative models by building our supply platform. We expect not only new revenue streams but also profit margins from our e-commerce activities, similar to what others in the space are doing. Our aim is to create service modules to generate additional fees. For example, we have an internal unit called JBP, or treasure box, which attracts smaller distributors to our platform and we charge them for logistical and marketing services. We can also create revenue from pharmaceutical commercialization, as well as digital services and marketing fees. Regarding your question about B2B revenue representation and its differences from traditional distributors, it's an intriguing topic. Traditional distributors like Sinopharm or Shanghai Pharma serve as one large entity, but they face restrictions in reaching customers in today's digital landscape. 111, as a technology company, focuses on developing a supply platform that empowers smaller businesses on our platform to collectively serve consumers. Let me illustrate our differences: through our treasure box initiative, commercial distributors can store their inventory in our fulfillment centers and manage their own stock and pricing. When orders come in, we aggregate them and deliver to the customer as a single package. We have thousands of partners on our platform. Previously, these distributors could only serve local pharmacists, but now they can access over 300,000 pharmacies nationwide. Even for single items, we can deliver them in one package at minimal marginal costs. On the pharmacy side, they have transitioned from dealing with multiple distributors to placing one order through our app, receiving everything in a single delivery. This simplifies compliance with regulations in China. We are adding value for distributors, pharmacies, and consumers while significantly reducing shipping costs over time. Traditional distributors do not operate in the same manner as we do.

Yes, that's very clear and exactly the pain points. We can be more excited about the future achievements of the company. Congratulations again on the company's progress.

Your next question comes from the line of .

Hello. Kudos to everyone at 111 for the strong performance last quarter. I have a question. What are your projected revenue and gross margin for 2021? And when will you become profitable?

Thank you for the question. We have provided quarterly revenue guidance. For Q1 2021, we expect revenue to be between RMB 2.53 billion and RMB 2.6 billion. This reflects an estimated growth of 87% to 93% when excluding the one-time pandemic impact from the first quarter of last year. We are aiming for nearly 100% growth internally. We have significantly expanded our business while improving our margins, particularly in the B2B segment. We anticipate that we can maintain this trend as we continue to establish direct sourcing partnerships with pharmaceutical companies, and we encourage our team to focus on profitable drug items sold through this channel. Regarding profitability, our operating expenses for 2020 were around 10%. If we double our size again in 2021 and our expenses typically grow by 20% to 30%, our operating expenses could decrease to about 5% to 6% of total net revenue. If we enhance our margin from the current 4.5% to 6%, we would be close to break-even. While we do not have a specific date for achieving profitability, we believe it is very near, and we are optimistic about it.

Your next question comes from the line of IDG Capital.

Hello? Can you hear me?

Yes, please go ahead.

I have three questions. First, as you mentioned, there is a significant opportunity for digital transformation in China's healthcare industry. However, there is intense competition, particularly among major players. While you indicated that these large companies may not be as appealing as yours, it seems they could easily enter the market. What do you believe is the main barrier to entry for these competitors? My second question is whether you envision the company becoming a 100% SaaS tool in the future, focusing solely on service fees rather than the current business model. Lastly, I've noticed that many small pharmacies exist in China, but there is a growing trend of larger pharmacies acquiring them. What are your thoughts on this trend? If large pharmacies buy out the smaller ones, could it reduce opportunities for your company? That's my question.

Thank you. Let me try to provide some answers to your questions. First of all, on the competition in the digital transformation: that's great news, right? We have many companies participating in that transformation, and 111 is one of them. How do we differentiate? I've provided some answers just now, and obviously, you want to dig deeper. Obviously, nobody is going to take the whole piece of the cake, and even if you are the biggest player in the healthcare space. Our focus is really on drug commercialization of medicine. If you look at our mission, it's very different from others. If you talk about whatever health, that is a very obvious B2C play, and our positioning is a S2B2C. We focus on doing the best job in drug commercialization, and that is our differentiation. The supply side can be pretty big and complex, and one company has always got limitations. In traditional sense, B2C and B2B play quite an important role, but we anticipate that moving forward, a more innovative model will be required: S2B2C. That's why we're investing resources in building that supply platform. With regards to being a pure SaaS company, I would say no. We are a technology company, but being a SaaS player is not the direction we are guiding the company towards. We see in the future that our basic model is S2B2C, but within that model, there will be an element of SaaS. We're experiencing very encouraging adoption from many pharmacies, and we have already signed up many of them. We're expecting more to use some of the SaaS services we provide. For the third question about market consolidation, I agree that consolidation is taking place. It's not anything new; for the past 10 to 15 years, that consolidation has been occurring. Even today, the fragmentation is still the main theme. Even if you take the top 5%, or top 6%, even the top 10%, I would say that only accounts for about 10% to 12% of total market share. The 80% plus, close to 90% of the market, are still single stores and small chains. Obviously, the bigger chains are becoming bigger, but this fragmentation will still be the reality, and it will not go away completely. We like fragmentation as a technology company because we believe our S2B2C model is a perfect fit to help those smaller businesses stay in business by providing access to a variety of services on our supply platform. That's our view. Yes, larger companies are getting larger, but the smaller ones will be around for a long time.

Let me add a point: more than 50% of the top 100 pharmacy channels are enjoying our services.

That's also true.

I have a little question regarding your answer. Does that mean that following this trend of consolidation, the remaining pharmacies are not in good condition? The remaining market for us is not that big. And also for the first question, because of digitalization, do you think that the big players have more consumer data? Therefore, they have a big advantage for the digitalization of the healthcare industry?

I hold the view that no, obviously they have more consumer data. But patient data is not the same as consumer data. It is one thing to sell a whole bunch of nutrition products or food supplements, etc. But when it comes to prescription drugs, B2C is the wrong model because prescriptions are always issued by doctors. That’s why we define pharmacies and doctors as our B. Our model is focused on enabling those small Bs to better service consumers or patients.

As there are no further questions, I would now like to hand the conference back to Ms. Monica Mu for any closing remarks.

Thank you, operator. In closing, on behalf of the entire 111 management team, we'd like to thank you for your interest and participation in today's call. If you require any further information or have any interest in visiting us in China, please let us know. Thank you for joining us today. This concludes the call.

Ladies and gentlemen, you may now all disconnect your lines. Thank you for participating.