Earnings Call
111, Inc. (YI)
Earnings Call Transcript - YI Q1 2020
Operator, Operator
Hello, ladies and gentlemen. Thank you for standing by for 111, Inc. first quarter 2020 conference call. At this time, all participants are in listen-only mode. After management's prepared remarks, there will be a question-and-answer session. As a reminder, today's conference call is being recorded. I would like to turn the meeting over to your host for today's call, Ms. Monica Mu, Investor Relations Director. Please proceed, Monica.
Monica Mu, Investor Relations Director
Thank you, operator. Hello everyone and thank you for joining us today for 111's first quarter 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, Chief Financial Officer, Mr. Haihui Wang, Co-COO, Mr. Barry Zhu, Co-COO, Ms. Monica Mu, Investor Relations Director and Mr. Alex Liu, Finance Director. As a reminder, today's conference call is being broadcast live via webcast. In addition, a replay will be available on our website following the call. The company's earnings press release was distributed earlier today and together with our earnings presentation, are available on the company's IR website at ir.111.com.cn. Before we get started, let me remind you that this call may contain forward-looking statements made under the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. Such statements are based upon management's current expectations and current market and operating conditions and relate to events that involve known and unknown risks, uncertainties and other factors, all of which could cause actual results to differ materially. For more information about these risks, please refer to the company's filings with the SEC. 111 does not undertake any obligation to update any forward-looking statement as a result of new information, future events or otherwise, except as required under applicable law. Please note that all numbers are in RMB and all comparisons refer to year-over-year, unless otherwise stated. Please also refer to our earnings press release for detailed information of our comparative financial performance on a year-over-year basis. With that, I will turn the call over to our CEO, Junling Liu.
Junling Liu, CEO
Thank you, everyone, for joining our first quarter 2020 earnings call. A few words on the pandemic before I move on to the earnings. The world is facing a global health crisis as the pandemic continues to evolve rapidly and has created uncertainties and disruptions affecting the lives of millions of people. We would like to express our gratitude to the frontline healthcare professionals around the world selflessly caring for those who are sick. Our thoughts are with you and with those who have been affected. We have been playing an active role in the pandemic relief efforts since the outbreak and will continue to support the global community to the best of our ability. I am very proud of how our leadership team and our staff have mobilized and united to ensure the safety of each other while continuing to serve our customers, partners and the support communities in China and around the world at this time of great need. Let's begin. I will start my remarks with a recap of our mission and the growth strategy and overview of the company's business and operational performance and then pass the call to our CFO Luke for a detailed financial review and our guidance for the second quarter. We will then open the call for Q&As. Please turn to slide four of section one. As we entered 2020, we have a growth strategy to continue executing our mission of digitally connecting patients with drugs and healthcare services. Our goal is to tie all of our businesses together and bring focus to our organization in service of our customers and partners to the millions and millions we serve, particularly patients with chronic diseases. We are structured around meeting their needs. Our commitment to them is this: that we will strive to provide what they need to keep them well in the most convenient, affordable and dependable way, either in person, online or via web app to home. We will deliver to our end consumers a broad range of products and services from medical consultations to prescription drugs and from health and wellness products to tools for one-time fixes to lifecycle chronic disease management, from offline to online and the support services that help them better manage their conditions. There are four facets in our growth strategy. One, capitalize on the enormous market opportunity from building China's largest virtual pharmacy network of over 260,000 drugstores with a coverage of over 50% of the country and over 60% of the Tier 3 to 6 cities. This expansive network allows us to serve millions and millions of chronic disease patients in the country. The strategic placement of our fulfillment centers across China gives us the operational flexibility to effectively respond to a crisis like this pandemic as we ramp up and down our various centers to meet the constantly evolving needs of the different parts of the country. We have a deep sourcing capability, which includes 214 direct sourcing relationships. We are able to provide one of the richest selections of medications and choices to consumers even if they are in the far-flung corners of the country. These pharmacies badly need a business model upgrade and we are determined to advance their business with digital transformation and help them to build a store that suits today's consumer needs with service modules such as access to online doctors, patient engagement and appropriate assortment management based on big data. Two, build omni-channel drug commercialization capabilities to establish 111 as the partner of choice for pharmaceutical companies. With the success of the 4+7 initiative, volume-based purchase is being rolled out across the country. These initiatives urge the majority of the pharmaceutical companies to focus on innovative drugs and as a result, it is becoming the fastest-growing sector in the healthcare industry. We have set up a team with the best available talent in the market to work with doctors and hospitals on innovative drugs. One of the outcomes of the pandemic is that both doctors and patients realized how important it is to be online ready. With our broad consumer reach, vast retail pharmacy network and smart technology-enabled omni-channel commercialization system, we are well-positioned to help pharmaceutical companies commercializing their drugs from exploring additional distribution channels, expanding reach, optimizing their sales and marketing functions, enhancing patient services and support programs to introducing new products, and ultimately consumers will benefit from having greater access to newer, better medications on the market. Three, strengthen our healthcare ecosystem by enabling key stakeholders via cloud-based solutions. Our key stakeholders include doctors, pharmaceutical companies, pharmacies, insurance companies, suppliers and partners. This ecosystem creates the interdependency that brings multidirectional benefits for all our stakeholders, resulting in diversified revenue sources for 111, Inc. and highly sticky relationships that raise the barrier of entry for our competitors. Finally, enhance our smart technology and integrated online and offline infrastructures to deliver best-in-class supply chain management services to our customers. Our truly smart system leverages the latest in AI cloud-based solutions and big data to give our pharmacy customers more effective sourcing capability, better inventory management, more optimal assortments and broader market reach, resulting in greater cost efficiency, higher earning potential and enhanced ability to serve our end consumers and fulfill essential orders, even in challenging circumstances. Our smart technology empowers doctors to work with the latest suppliers to bring the best solutions to patients for better health outcomes. With our best-in-class supply chain management services, consumers all across the country can enjoy the benefit of obtaining their medications at home and having access to the newest available drugs for treatment of their medical conditions. Let's move on to our quarterly performance. For details please refer to slides five to eight for our business performance and slides 14 to 15 for the operational updates. You can find out more about the significant progress we have made in enhancing our competitive advantage from slides nine to 13. We also included the latest regulatory changes in slide 16. The strength of our strategy and our ability to execute can be seen from our strong Q1 2020 performance and meet the challenges of an unexpected global pandemic. We generated RMB 1.58 billion or $252.5 million in revenue, representing a year-over-year growth rate of 140.3%. Our gross profit increased by 163.3%. Driving these results are our three fast-growing core business segments, B2B, B2C and E-Channel. Our B2B segment serves our 260,000 strong pharmacy network providing best-in-class sales and supply chain management solutions. During the quarter, this segment saw robust revenue growth of 178.4% year-over-year. Underpinning our B2B segment is an online marketplace for healthcare and other wellness products. During the quarter, we were able to leverage our strong relationships with our suppliers and partners to deliver many high-demand items that consumers had trouble finding elsewhere. As a result, registered users, site traffic and orders all increased. For this segment, we achieved revenue of over RMB 190 million in the quarter, a year-over-year increase of 17.5%. Due to the dramatic growth in what is now referred to as the E-Channel segment, we will from now on report results from this segment separately. In Q1 2020, this segment grew by 229.7% year-over-year. The E-Channel segment consists of revenue from product sales to other online drug retailers such as Ali Health, JD Health, Ping An Good Doctor and so on. Historically, revenue from these sources had been included in the B2C segment and generally accounted for between 15% to 20% of the segment's revenue. These very strong results were achieved in spite of the challenges posed by COVID-19 and are a testament to the strength of our business model and technology-enabled infrastructure, one that seeks to bring comprehensive convenient healthcare to where the need is greatest. In fact, we believe that our pandemic response tested and bolstered our system. As a result, we efficiently sold and delivered products and managed disruptions to the supply chain and delivery system. This robust performance also demonstrates our ability to build a resilient infrastructure and a sticky ecosystem. But we are not resting on our laurels. We will continue to vigorously advance our growth strategy. Towards that end, we have recently appointed Mr. Anfeng Guo as 111's Chief Innovation Officer to ensure that our omni-channel drug commercialization platform continues to evolve to anticipate customer needs and stay ahead of the competition. Anfeng is a respected veteran of the Chinese pharmaceutical industry bringing with him over 20 years of experience in such world-leading companies as Pfizer, Bayer, AstraZeneca, and Bristol Myers Squibb. And as another demonstration of 111's constant drive forward, on May 8, 2020, we launched the first online diabetes patient management platform in conjunction with Lilly China, expanding our partnership network with pharmaceutical companies to support managing their medical conditions. In spite of the consecutive quarters of robust performance since the IPO, many of you would agree that given the dynamic and fluid situation due to the pandemic, it is difficult to predict what might happen to the global economy. However, we believe we have the right strategy, proven track record, leadership experience, resources, and partners in place to deliver despite the current environment. We are well-positioned to capitalize on the enormous market opportunities as technology ushers in a new era in healthcare in China. We will continue to focus on executing our growth strategy, driving performance, building and expanding our lead over the competition and maximizing value for our customers, partners, and shareholders. With that, I will hand the call to Luke to walk through our financial results. Thank you.
Luke Chen, CFO
Thank you Junling. Moving to the financials. You can see the details for the first quarter 2020 in section two of our presentation from slides 18 to 20. I would like to highlight a few key business and financial metrics and I will focus on year-over-year comparisons. All numbers are in RMB, unless otherwise stated. Let's start with our robust performance for the first quarter. Total net revenues for the quarter grew 140.3% to RMB 1.58 billion, which was driven by the robust performance across all of our business segments. Product revenues from our B2B segment were up 178.4% to RMB 1.28 billion as compared to RMB 460 million in the same quarter last year, mainly due to the increase in the number of pharmacy orders which reached 419,000, with a growth rate of 196.4% year-over-year, as well as newly added pharmacies in our network. Product revenues from our B2C segment were up 7.5% to RMB 191 million from RMB 162 million in the same quarter last year as a result of our continuous efforts to engage existing and new users. Product revenues from E-Channel, our new segment, were up 229.7% to RMB 99 million from RMB 30 million in the same quarter last year. The E-Channel segment consists of revenue from product sales to other online drug retailers such as Ali Health, JD Health, Ping An Good Doctor, et cetera. Historically, revenue from these sources had been included in the B2C segment and generally accounted for between 15% to 20% of the revenue in the B2C segment. The growth in the E-Channel segment in the first quarter of 2020 is also in line with the overall increase in e-commerce traffic during the national lockdown and previous periods has been restated to conform to the current period reportable segments presentation. Service revenue was up 72.1% to RMB 7 million from RMB 4 million in the same quarter last year due to the increase in commissions from our marketplace customers as well as the increase in service revenue from patient education and management from pharmaceutical companies. Overall, our gross profit increased by 163.3% to RMB 88 million, and the combined gross margin was 5.6%, up from 5.1% a year ago. We are pleased to see that our gross profit has grown much faster than the net revenue growth, which demonstrated our ability to improve profitability while building scale. Compared to the same quarter last year, gross margin in our B2B segment was 2.9%, up from 0.9%. The B2C segment was 20.2%, up from 14.3%. The gross margin improvement was directly related to our improved business scale, smart pricing, assortment management as well as our sourcing capabilities. Total operating expenses for the quarter were up 44% to RMB 201 million. As a percentage of net revenue, total operating expenses for the quarter was down to 12.8% from 21.3% in the same quarter last year as we continue to improve our operating leverage and optimize our operational efficiency. Fulfillment expenses as a percentage of net revenue was 3.5%, as compared to 3.2% in the same quarter last year. Sales and marketing expenses as a percentage of net revenue was 6.1%, down from 11.5% in the same quarter last year. G&A expenses as a percentage of net revenue were 1.9%, down from 4.2% in the same quarter last year. And technology expenses accounted for 1.3% of net revenue, down from 2.3% in the same quarter last year. As a result, non-GAAP net loss attributable to ordinary shareholders for the quarter was RMB 109 million, as compared to RMB 96 million in the same quarter last year. Non-GAAP net loss attributable to ordinary shareholders for the quarter accounted for 6.9% of net revenue, down from 14.7% in the same quarter last year. As to the guidance for the second quarter of 2020, on slide 22 of section three, the company expects total net revenues to be between RMB 1.55 billion and RMB 1.68 billion, representing a year-over-year growth of approximately 85% to 100%. The above outlook is based on current market conditions and reflects the company's current and preliminary estimates of the market and operating conditions as well as customer demand, which are subject to change. Please refer to slide 24 and 26 of section four for our selected financial statements. A quick note on our cash position. As of March 31, 2020, we had cash and cash equivalents and restricted cash of RMB 525 million, compared with RMB 697.7 million as of December 31, 2019. Underscoring the confidence in the company's prospects, as of March 31, 2020, the company used an aggregate of $4.9 million and repurchased 998,000 ADS on our $10 million share repurchase program. This concludes our prepared remarks. Thank you. And operator, we are now ready to begin the Q&A session.
Operator, Operator
Your first question comes from the line of Bingyu Chen from Citi. Please ask your question.
Bingyu Chen, Analyst
Hi. Thank you for taking my question, and congratulations on the strong fulfillment. This is Bingyu from Citi. My first question is about the impact of COVID-19 on the entire industry and on your company specifically. We have seen the tremendous effort you have made during the pandemic. My second question is regarding the collaboration with Lilly on the online diabetes patient management platform. Are we expecting more collaboration in the future? I am also interested in your follow-up strategy for chronic disease management. Thank you.
Junling Liu, CEO
Thank you. I think the situation is such that we hope the pandemic is going to end soon. But that we actually fully anticipate it is going to stay with us longer than we wanted. Our company is extremely vigilant about the uncertainties it's going to bring. And it is our view that during the uncertainties there are actually more opportunities than risks for us, mainly because the infrastructure we have built out will really enable us to deliver the badly needed products and the services to the needy, as evidenced during the worst times of the crisis a couple of months ago. We also anticipate that COVID-19 will forever change the landscape of healthcare in China. I think it is a catalyst for some of the profound changes for pretty much all the stakeholders in the industry. I believe that the transformation and digitization of the industry is going to accelerate at an unprecedented pace. Fortunately, we have built out layers of advantages to benefit from it. I think I will ask Gang to address the Eli Lilly partnership question.
Gang Yu, Co-Founder and Executive Chairman
Okay. Sure. Let me address that question. So certainly, the specialized hospital for chronic diseases is a very innovative idea we conceived at the end of last year. In February, we had a very good discussion with Eli Lilly's global CEO, David Ricks, and received his very warm support. With the two teams working very closely together and our strong execution, we launched that platform on April 30. And we have already started receiving orders by now. Certainly, this is a very interesting and very innovative idea. We will use this platform to conduct lifecycle management for diabetes patients. We realize that the three major chronic disease types in China account for over 100 million people. So we have to manage them separately. We conceived the idea of a specialized hospital for each disease type. Through this platform, we will conduct lifecycle management for diabetes patients, link the patients with doctors, use our entire system to provide patients with various contents and treatment of the disease, the new drug launches, and properties and criticality for drug compliance. At the time of refill, we remind the patient for the refill and will also use this platform for digital prescription. Certainly, this concept and this model would be expanded to manage many other chronic disease types. Hope that answers your question.
Bingyu Chen, Analyst
Well, thank you so much.
Operator, Operator
Your next question comes from the line of Sherry Yin from JPMorgan. Please ask your question.
Sherry Yin, Analyst
Thank you for taking my question. Congratulations on delivering another big quarter result. This is Sherry from JPMorgan. I have two questions here. So the first question is about our E-Channel segment disclosure which you started this quarter. Could you elaborate more about how we are collaborating with the other e-commerce platforms like Ali Health and JD Health? And what's our growth and margin expectation on this E-Channel business? The second question may be a more broader one about our strategic plan in the future. As we have heard many other platform companies are talking about constructing a closed ecosystem, a broader ecosystem. We know 111 has done very well with our existing business model. So what do you see as the potential future expansion direction for us? That's the two for me. Thank you very much.
Gang Yu, Co-Founder and Executive Chairman
Okay. As Junling just mentioned earlier, the E-Channel segment consists of revenue from product sales to other online drug retailers such as Ali Health, JD Health, Ping An Good Doctor, and so on. Historically, revenue from this project has been included in the B2C family and generally accounted for between 15% to 20% of B2C business. To elaborate on this business model, we can look back at page 13 in the deck. In the last part, there are the pharmaceutical companies we have signed exclusive contracts with them. We are delivering some well-designed services to these partners including inventory management systems, pricing and intelligence systems, and so on. Other services we provide can be referred to in the bottom part of the slide. As you can see, we have expanded to almost all the main online drug retailers in China. I would like to discuss the record growth in the segment. First, the epidemic contributed to our record growth in quarter one. More and more pharmaceutical companies are willing to authorize us as their E-Channel. Some of them are even exclusive partners. Last, but not least, we are also further meeting the needs of our E-Channel customers and enhancing their orders quickly and accurately to improve wallet share and ARPU. So that's a snapshot of our E-Channel business strategy.
Junling Liu, CEO
Yes. I will address the question about the strategy moving forward. As I said during my remarks, we laid out a mission and we have the four pillars to really execute that mission. If I put things into a very simple concept, we really have a two-folded strategy. One is to build this omni-channel drug commercialization platform because we are in a very unique position in B2C. We are the pioneers in terms of B2B in the pharmacy space. We have already taken up more than 60% of the overall market. We recently hired Mr. Anfeng Guo to onboard. He will be running the doctors' and hospitals' channel focusing on innovative drugs. The second fold is, through that omni-channel, we are the only one with that capability, which we believe is unique in the marketplace. We are going to strengthen that. By doing that, we are going to accumulate many consumers and many patients. We are aiming to help those patients do lifetime disease management. Chronic disease management is an ongoing problem, and this country has never had such infrastructure in the past. Now that with this pandemic and the infrastructure we built out, we are able to service those patients. We calculated that for each of the patients we acquire, we should have an average of 20 years to service them. Our approach comes from connecting the patients with drugs. There are lots of drugs available in the market, and those drugs need to find patients while those patients need to find the latest and most effective drugs as well. If we can build a barrier there, we believe that will be our best defense moving forward. Thank you, Sherry.
Sherry Yin, Analyst
Thank you very much. That's very clear.
Operator, Operator
Your next question comes from the line of Rachel from HSBC. Please ask your question.
Rachel Yang, Analyst
Hi. Thanks for taking my question and congratulations for a really strong pick up going forward in 2020. I actually have two questions. One is regarding your margin change. We noticed that our B2C business gross margin has expanded quite significantly in the first quarter compared to the same quarter last year. Now it has expanded to 20.2%, if I remember correctly. Can you elaborate a little more on what drives such a meaningful margin expansion? And the other question is regarding your fulfillment costs. Actually, fulfillment cost ratio expanded by 30 bips year-over-year. But as to my understanding, as you are growing bigger, the fulfillment cost ratio should come down. So can you maybe help us to understand why the fulfillment cost ratio is increasing? Also, can you explain what constitutes your fulfillment costs? Is there a potential for future cost saving as the business size grows bigger? This is my first question. The second question is regarding your strategy acquisitions. I think 111 kept its strategy to service standalone pharmacies but now we are talking more about connecting patients with drugs and healthcare systems. Does that mean that we are ending our strategy that we will be focused on clients? Or can you elaborate a little more about that? Yes, that is the second question.
Haihui Wang, Co-COO
Rachel, this is Haihui. I think you have two questions, but in the last part, I am not very clear. What I heard is, first of all, it is about our B2B margin improvement. You want to see the insight. And the other one is about logistic fulfillment cost. Are these the two questions you are asking? Or was there anything else because in the last part, we could hardly hear you?
Rachel Yang, Analyst
Sorry. The last one is actually about our strategy because we kept, I am talking about our B2B model, which is to provide better added service to pharmacy, to standalone pharmacies. But now we are also talking about connecting patients with drugs and healthcare services. So does that mean we are actually shifting our strategy from a more B2B model to a more B2C model? That's the second question.
Haihui Wang, Co-COO
Okay. I will take the first two, and Junling will cover the last one. For the first question regarding B2B margin improvement, I will conclude with three key words. First is sourcing. Second one is assortment. And the third one is technology. Regarding our sourcing side, we have mentioned that we are continuing to strengthen our partnership with most pharmaceutical companies. For example, our direct sourcing relationships help us to lower down our COGS and improve gross margin in the past quarter. Secondly, from the assortment side, the ARPU and selection with our pharmacy customers are also increasing, which means we are providing more products, including more high-margin products to our customers. Finally, for our technology side, as our CFO Luke just mentioned, our smart pricing system also helps us to continuously optimize our pricing and balance sales and profit. So all three contribute to the increase of our B2B margins. Regarding the logistics and fulfillment costs, this is a very good question. With the volume growth and scaling effects, we reduced our fulfillment costs in 2019. However, as you have already mentioned, in Q1 2020, there is a minor increase. Although we expanded our fulfillment centers to provide a better logistics experience, the main reason for this minor increase is because of the epidemic in China. During the pandemic, our delivery costs, labor costs, and transportation costs increased significantly. Additionally, the Chinese New Year affects our fulfillment cost. The good news is that as the epidemic stabilizes in China, these logistic costs have reduced to normal levels, and we expect to see logistic efficiency improvement trends returning soon.
Junling Liu, CEO
Okay. So let me address your last question. There are many ways and different angles to look at a business, and obviously you could look at the business from a B2C angle or a B2B angle. Another angle could be B2B2C. There are a lot of industry jargons and so on. However, if you look at what is happening today in the market, I want to state two facts. Right now, China has more than 300 million chronic patients. The other fact is that with the 4+7 policies and the bulk purchase program rolling out across the country, it urges the majority of the pharmaceutical companies to focus on innovative drugs. Those drugs need to find the patients, and patients need to find the best available drugs on the market. If we leave aside those industry jargons like B2C or B2B, we are really in the business of connecting patients with those drugs and much-needed healthcare services. This is the way we want to move the company towards Phase 2. We have already built numerous layers of competitive advantage regarding having drugs available on our platform and also having patients available on our platform. We believe we have a real opportunity to be the leader in providing a platform for these drugs to be commercialized and, in the meantime, help the patients find the drugs digitally. I hope that answers your questions.
Rachel Yang, Analyst
Okay. Thank you, guys. Very clear. Thank you. That's my questions.
Operator, Operator
Your next question comes from the line of Chris Lui from Jefferies. Please ask your question.
Chris Lui, Analyst
Hi guys. Thank you for taking my question. I have two questions. The first one would be on opportunities and risks. Over the next 12 to 24 months, what are the opportunities and risks throughout your value chain? And what are we doing to monetize the opportunities or to avoid the risk? So that's the first question. The second question would be on your revenues. Can you give us color on organic growth versus inorganic growth? And from organic growth, how much was the ASP impacted? Thank you.
Junling Liu, CEO
Opportunities and risks, yes, I have the opportunities and risk. I really struggled to hear clearly the second question. Yes, do you mind repeating the second question, please?
Chris Lui, Analyst
Yes. So yes, the second question would be on the organic growth versus inorganic growth from your different business segments. Yes. The first question is just opportunity and risk over the next 12 to 24 months.
Junling Liu, CEO
Got it. So you are referring to the opportunities and risks. Yes. With regards to the opportunities and risks, the biggest opportunity is going to be the COVID-19 becoming a catalyst, which will drive the whole offline process to online. That is going to be a tremendous opportunity. Also, the latest regulatory changes on the generic drugs have made most of the profit disappear, forcing pharmaceutical companies to find better ways to make money in the biggest consumer market in the world. Therefore, they must focus on innovative drugs. Those are the biggest opportunities we see. Consequently, we laid out a mission to connect patients with drugs and medical services. When it comes to risks, there are all kinds of risks, including regulatory risks, geopolitical risks, and so on. However, the biggest risks for us would probably be competitive risks. We have been very careful navigating our path. Obviously, we laid out our mission, and that is vastly different from any of the competitors out there in the market. Our competitive advantage largely lies in our smart supply chain capabilities. We believe the best defense is to stay on the offense. If we continue to execute our strategy, that will be the best mitigation of risks. Regarding your second question on organic growth versus inorganic growth, obviously that is always on the card. While we are growing the business organically, we are always on the lookout for other potential opportunities to help us grow even faster. Thank you.
Operator, Operator
Your next question comes from the line of Jonas Xu from CFT Capital. Please ask your question.
Jonas Xu, Analyst
Thank you for taking my question. First of all, congratulations on the strong performance in the first quarter. My question consists of two parts. The first part is that I would like you to elaborate a little more about the company's mission. In regards to the mission, does 111 have an aligned business development plan for the coming year? And the second part is, we have noticed that Ali Health and Ping An Good Doctor have significantly increased their value in the stock market in the first quarter, and it seems that their models have been recognized as benefitting from the COVID-19 outbreak. Could you share your view on your models versus their models? That's my question. Thank you.
Junling Liu, CEO
Thank you. Yes. I would love to repeat the mission we laid out, which is digitally connecting patients with drugs and healthcare services. The reason why we singled out drugs is that, in today's healthcare industry, drugs are still the most incredible business to build upon, especially in China. We have laid out four facets of strategy to continue building our leadership in the virtual pharmacy network. We have already taken over more than 50% of the market share, and we will need to continue leading in that space. Secondly, we want to ensure our omni-channel drug commercialization platform is going to be further perfected. We have hired the best talent in the market, Anfeng Guo, who will be leading our efforts in the innovative drugs space. Thirdly, we want to continue to strengthen our ecosystem by enabling key stakeholders, such as pharmaceutical companies, insurance companies, pharmacies, and our partners. Finally, we want to continue to build our supply chain, which is leading the industry. We want to ensure that we build a moat around our core business. We will continue to strengthen relationships with the upstream pharmaceutical companies and optimize our logistics network to eliminate any blind spots. Wherever our patients are located, we want to deliver those drugs at an affordable cost to their doorsteps. I will invite Dr. Yu to address your second question.
Gang Yu, Co-Founder and Executive Chairman
Okay. Sure. You mentioned about Ali Health and Ping An Good Doctor, and it's great to see that they are recognized by the capital markets. That really shows the value and potential of the Internet health industry. We are happy to see that, and directionally we are very similar, although we are from different routes and our focuses are different. As Junling just mentioned, our mission is to digitally connect patients with drugs and healthcare services. We are a technology company and our strengths lie in smart supply chain and cloud-based services. We believe we are the hidden gem in this space. Even now with improved liquidity and market value, we believe we are still undervalued, but that is not our focus. We focus on our core competence and customer experience. We believe if we execute our strategy correctly, our value will finally be released and recognized.
Junling Liu, CEO
Good stuff to buy?
Gang Yu, Co-Founder and Executive Chairman
Yes.
Jonas Xu, Analyst
Okay. Thank you.
Operator, Operator
Your next question comes from the line of Tony Fan. Please ask your question.
Unidentified Analyst, Analyst
Hello. I have two questions. One is, why did the stock price and liquidity increase significantly in the first quarter? My second question is regarding the Holding Foreign Companies Accountable Act that recently passed the Senate. I know that the law would require Chinese companies to establish that they are not controlled by the Chinese government, although I understand that probably isn't the case with 111. A company listed in the U.S. will then be required to submit an audit that can be reviewed by PCAOB. I know there is some tension with regard to Chinese policy that does not allow Chinese auditors to work being transferred out of the country. Does this new law have any impact on 111 going forward? If so, what kind of impact? How do you envisage that you will deal with the same?
Junling Liu, CEO
Let me address the first part of your question, and probably Luke will take the second. As a general principle, we always under-promise and over-deliver. Since our IPO on September 12, 2018, we have exceeded market expectations and guidance for six consecutive quarters. We have shown the value of what we can create, and this pandemic demonstrated that Internet health can provide tremendous value to the patients. That’s probably the reason we are starting to be recognized. However, I believe we are still a hidden gem.
Luke Chen, CFO
Yes. The U.S. Senate passed a bill that could impact the Chinese listed companies. Of course, this proposed bill, if signed into law, will potentially have a universal impact on all Chinese companies listed in the U.S. rather than us individually. We think we will, of course, monitor the development very closely. In the meantime, we will always focus on our own business and growth to bring values to all shareholders, users, partners, and employees. That hopefully will answer your question.
Unidentified Analyst, Analyst
Yes. Thank you.
Operator, Operator
Your next question comes from the line of Peter Halesworth from Heng Ren. Please ask your question.
Peter Halesworth, Analyst
Hello. I have three questions. The first two relate to orders from pharmacies. The ratio seems quite low on a quarterly basis, and I am just wondering why it seems low in terms of the number of orders per pharmacy. Can you explain what's in a pharmacy order, and what the average ticket price is? Secondly, regarding operating expenses as a percentage of revenues, what would be a reasonable run rate to expect for this year and on a three-year basis? Finally, we see some Chinese companies are doing well in terms of R&D for COVID-19 vaccines in China. I am wondering if there is any role for 111 to play in the eventual commercial COVID-19 vaccines in China? Thank you.
Junling Liu, CEO
Maybe I will just take the first part and the third part. If you look at the number of pharmacies we have covered versus the number of orders, it appears to be low. But I want to remind everyone, we cover standalone stores and small to medium chains. For a typical chain store, one order could cover 50 or 60 stores. That could skew those numbers. When we look at those numbers, we are not only covering the pharmacies but also the chains as well. In terms of revenue, I am not sure, Luke, if you have detailed numbers.
Luke Chen, CFO
Yes. On the operating expenses, if you look into the operating expense items, we have selling and marketing, G&A, and technology expenses. As revenue size continues to increase, we see these as a percentage of net revenue continue to go down, as it has ever since our IPO. In the first quarter, our overall operating expenses as a percentage of net revenue decreased from 21.3% to 12.8%. We believe we will continue to see that leverage. However, fulfillment cost is very closely related to volume and revenue. As we just explained, fulfillment costs include warehousing, handling costs, labor costs, and delivery costs from third-party logistics companies. We believe we are going to continue to reduce it, but it's more in relation to volume and revenue. We want to improve gross margins, especially net of human costs, so that we can support our operating expenses. For this year, we think we will continue to narrow down the net loss quarter-by-quarter. However, as we shared, there are valuable opportunities in the Chinese market. We are still in the investment stage, so we will continue investing, building up to scale quickly, and improving operating leverage.
Junling Liu, CEO
That's a great question about the COVID-19 vaccine and the potential role we could play. Today, we've seen great news about companies, mainly CanSino, listed in Hong Kong. The stock has multiplied many folds in a very short period of time, which is encouraging news, although it's only in the clinical testing and trial period. We have built a tremendous network, and we believe our network can be deployed to serve the country. As we speak, we have already deployed a COVID-19 test kit on our website, where people can get tested and be directed to clinics for a blood draw to test if they’ve contracted the virus, etc. The infrastructure is built, and we are actively looking for ways and solutions over the long term. At the moment, our primary focus is still our core business. If a vaccine becomes available, we believe with our direct-to-consumer model and the largest pharmacy network across the country, we can deliver vaccines to consumers or, if it's for injection, leverage pharmacies to provide an integrated online-offline solution. Hopefully, vaccines will become available, and we would love to play a role in that space. Thank you.
Operator, Operator
Thank you. As there are no further questions, I would like to hand the conference back to Ms. Monica Mu for any closing remarks.
Monica Mu, Investor Relations Director
Thank you, operator. In closing, on behalf of the entire 111 management team, we would like to thank you for your interest and participation in this call. If you require any further information or have interest in visiting us in China, please let us know. Thank you for joining us today. This concludes the call.
Operator, Operator
Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may all disconnect.