Prescription for Profit

Observers believed the convulsions were partly due to the detention of LBX founder and president Xie Zilong on July 28 by disciplinary authorities, allegedly for reasons unconnected to LBX Pharmacy, according to a statement the Changsha-based company released at the time.　

LBX share prices have tumbled since May. Other pharmacy chains are facing the same volatility in the markets, with shrinking profits despite growing revenue. The pressure of the national anti-corruption campaign in the healthcare sector and changes to the national social medical insurance scheme may put the brakes on what has been the fast expansion of retail pharmacies.　

An industry insider who asked for anonymity said there has been reckless expansion among retail pharmacy chains since 2022. “After a period of boom and expansion due to high-priced mergers and acquisitions since 2018, there are now too many pharmacies. Industry leaders should now shift focus from expansion to improving their efficiency and management,” he said.

A securities lawyer in Beijing told NewsChina on condition of anonymity that LBX’s August stock surge might be due to the mid-term bonus scheme it released that month, which pledged to distribute to shareholders 50.01 percent of the profit of LBX’s total net profit in the first half of 2024. The scheme will continue for at least three years according to LBX’s three-year plan (2024-2026).　

Despite this, from September 10 to 13, LBX’s share price plunged by more than 20 percent. The situation stabilized at the end of September when Xie Zilong was released and returned to work. While share prices rose on September 30 on the back of the news, in October the volatility continued.　

No official source has revealed why Xie was detained and released after more than two months.　

LBX is not the only pharmacy chain to have come under the spotlight amid a government probe into irregularities in the national social health insurance scheme. Individuals and employers pay into the nationally administered fund, and patients claim for treatment at hospitals, clinics and pharmacies that are licensed to prescribe drugs.　

In July 2023, Ke Jinlong, president of Maoming Dashenlin Pharmacy Chain, a subsidiary of Dashenlin Pharmaceutical Group, was criminally detained by Guangzhou provincial regulatory bureau. Nine months later, he was sentenced to three years and six months in prison plus a fine of 500,000 yuan (US$70,200) for offering bribes. No further details were released.　

On June 2, the National Healthcare Security Administration announced it had summoned managers of Yunnan-headquartered Yixintang Pharmaceutical over alleged violations of the social health insurance scheme. The government department accused Yixintang of fraud medications to patients and health insurance claims. The allegations included excessive prescribing of drugs, falsifying records and claiming for drugs not listed for reimbursement in the health insurance scheme. The next day, shares plunged in Yinxintang, which has 10,746 outlets, by 8.53 percent.　

The chain was ordered to review its outlets and submit a report by the end of June, Yicai Global reported.　

Since mid-May, China’s big four retail pharmacy groups, Yifeng, Dashenlin, Yixintang and LBX, which each operate more than 10,000 stores, have seen accumulative declines of more than 30 percent in share prices.

Huang Xiuxiang, former general secretary of the Provincial Medicine Circulation Commission of Hunan Province, told NewsChina there was striking data on how the retail pharmacy sector is struggling.　

“Although the big four retail pharmacy chains each increased store numbers by around 20 percent year-on-year, their operating revenue only increased by 5.8 percent on average in the same period,” he said, adding that his team found that in the first half of 2024, the top four chains earned an average of 48 yuan (US$7) in daily revenue per square meter, 11.2 percent down year-on-year.　

“It’s a marked fall, which indicates those stores are experiencing decreased sales volumes,” Huang said.　

According to Huang, retail pharmacies saw a big rise in daily revenue per square meter during the Covid-19 pandemic, but since the first half of 2021, all except LBX have experienced declining daily revenue per square meter.　

Data from a 2018 survey released by the Institute of the China Commercial & Industrial Development Corporation showed that the number of Chinese pharmacies slowly increased from 420,000 in 2012 to 454,000 in 2017. But after patients were allowed to buy medications with a hospital prescription at retail pharmacies and claim on insurance, a huge expansion in the number of outlets began. When the Ministry of Commerce announced in 2021 it was aiming for 70 percent of pharmacies to be part of chains by 2025, the sector went into overdrive.　

There was a wave of new outlets, mergers and franchising. In the 18 years up to 2019, LBX opened 5,000 outlets, but they doubled the number of branches in the next three years. As its competitors followed suit, the result was a huge increase in industry centralization and intensified competition.　

Alongside the expansion, investment poured in. In 2017, Beijing-based Hill-house Capital Group established Cowell Health and purchased or merged a large number of pharmacies. Within a year, Cowell Health had more than 12,000 outlets.　

There are so many pharmacies that they are outnumbering coffee and milk tea outlets. Some residential communities have three or four pharmacies jostling for customers.　

Canyan Data, a catering and beverage industry analyst, showed that by May 2024, China had 418,000 milk tea stores, while by the end of 2023, there were more than 660,000 retail pharmacy stores.　

The market is struggling to keep up with the expansion. An August 2024 survey by Sinohealth-CMH, a Chinese healthcare data provider, showed that in the first half of 2024, the Chinese retail pharmacy market had a cumulative scale of 258.2 billion yuan (US$36.3b), 3.9 percent less than the same period of 2023, while in the same period, 15,000 new pharmacy outlets opened.

　

“There are too many stores for the available market. No one can get a big share,” Huang said.　

In its Q3 fiscal report released in October, retail pharmacy chain Shuyu Pingmin reported a shift from profit to loss. The company, based in East China’s Shandong Province, said the retail pharmacy industry has entered a phase of “weak growth.”

By the end of 2023, about 73 percent of retail pharmacies nationwide were allowed to sell medications to patients and claim from the social insurance system.　

The health insurance system has two parts: individual accounts, mainly funded by personal contributions, and comprehensive social accounts, mainly funded by the government. Funds from individual accounts can be used to buy medications at pharmacies covered by the social insurance system.　

In February 2023, the government decided to reform the system, transferring some individual payments into comprehensive social accounts to increase reimbursements to hospitals and clinics. Though the reform reduced the scope of individual payment accounts, it allowed appointed pharmacies to claim from comprehensive social accounts for medications prescribed from a public hospital.　

It was believed the change would help retail pharmacies develop, yet hospitals, which had been prescribing drugs themselves, are reluctant to transfer their prescriptions to outside pharmacies.　

“Hospitals all have their own pharmacies and they have formed a complete closed loop, from prescribing to offering drugs,” Li Zihao, a researcher at the Institute of the China Medical Pharmaceutical Material Association, told NewsChina.　

A 2023 survey by SinoHealth-CMH showed how the new insurance rules affected implementation of the social medical insurance policy by region, which influences how many hospital prescriptions retail pharmacies are able to fill. In Changsha, where hospitals were more willing to allow outside pharmacies to fill prescriptions, there was a 20-30 percent increase in customers of retail pharmacies on average year-on-year, with a 10-30 percent increase in sales volume. In Dalian, Northeast China’s Liaoning Province, hospitals are reluctant to transfer prescriptions, and pharmacies on average saw a 50 percent plunge in customer flow and a 30 percent decrease in sales volume, directly impacted by the narrowed individual fund.　

Furthermore, as health authorities continue to add more medications to the national central procurement list at low prices, hospitals are taking patients from pharmacies.　

“Middle-aged and elderly people prefer medications from community clinics, and younger people like [the convenience of] buying online,” Huang said. Online pharmacies can prescribe drugs with a hospital prescription, or they offer an online certified physician to prescribe drugs.　

In another blow to the sector, the government has capped the retail price of drugs covered by central procurement, decreasing profits even more. Huang said some pharmacy operators told him that even a 15 percent profit margin cannot cover operating costs.　

Some chains, including listed ones, have begun to merge or close unprofitable stores. “From what I know, one company with over 10,000 stores had planned to close about 2,000 this year (in 2024),” Huang said.　

“Most of the closed stores were new ones opened this year (in 2024) or last year, since they have fewer VIP members [who have loyalty cards that offer discounts] and still need a long time to make a profit,” he added. It used to take a new outlet a year or two on average to turn a profit, but he found that many new stores are only making 600-1,500 yuan (US$84-211) in daily sales.　

Yan Hui (pseudonym) who has worked in the retail drug sector for years, told NewsChina that there are too many pharmacy outlets for the sector to sustain, and most big retail chains do not have plans to expand.　

According to figures from SinoHealth-CMH at the end of 2023, Chinese pharmacies serve about 2,100 people each, while those in the US and Japan serve about 4,000 each.　

“Many less competitive pharmacies will close or merge. The era of reckless expansion has ended,” Yan said.

He believes that people will still trust and choose brands they recognize, and that large chains have leverage when it comes to negotiating the cost of drugs. They are also selling online themselves.　

“The big chains can afford [short-term] losses as they compete for customers,” he said.　

Interviewed experts believe that based on international experience, pharmacy chains are still the most likely scenario. Minutes of an LBX investors meeting in June showed that in Japan, the top 10 pharmacy groups have a 74 percent market share, while in the US, its top three retail pharmacy companies have 85 percent of the market. In China, the top 10 retail pharmacy groups only have a 31 percent market share.　

Huang pointed out that the key is not whether to expand or merge, but how to effectively integrate resources at each store the firms operate.　

“Most domestic pharmacies are still highly dependent on making high profits [from selling drugs]. But as the influence of the social medical insurance reform and central purchasing continues, there is less profit from that,” he said, adding that business models must change if they are to increase each pharmacy’s revenue per square meter and revenue generated per employee.　

Interviewees suggested copying Japan’s model, where pharmacy chains have outlets with licensed pharmacists to fill prescriptions, as well as drugstores that only sell non-prescription drugs, cosmetics and daily necessities. China has few drugstores and lacks trained prescribing pharmacists.　

“Being professional and diversified is one way that pharmacy chains should develop,” an expert who did not reveal his name told NewsChina. “Some domestic pharmacies are already offering services like testing blood pressure and blood sugar levels,” the expert said.　

Yan Hui agrees. “Besides providing prescription medicines, pharmacies should care more about how to attract paying customers [for services]. Some pharmacies I know are trying to attract customers by offering services and treatments like anti-aging, anti-alopecia and facial care,” he said.　

“It is painful to make such a transition, but they must do it,” he added.