The "tornado" of online medicine purchases cannot blow away Dingdang Express Medicine

As control measures were relaxed, the number of people with fever surged, making it difficult to find common antipyretics and cold medicines. To this end, everyone showed their talents. Some people spent a lot of money to buy overseas generic drugs, while others went to expensive private hospitals to try their luck.

Today, with the Internet highly developed, more people are hunkering down on major drug purchasing platforms on their mobile phones, trying to use the strong Internet connection to increase their chances of buying medicine.

The sensitive capital market seems to have seen through everything. With the recent overall recovery, Internet medical concept stocks have almost collectively surged - Ali Health soared from 3 Hong Kong dollars to a short-term high of 10.14 Hong Kong dollars in just 33 trading days, an increase of more than 220%; JD Health and Ping An Good Doctor were not to be outdone, with increases of more than 120% in the same period.

However, in any boom, there are always people who can’t catch up. Capital is obviously not very interested in Dingdang Health, a company in the same sector that just went public in September. The most well-known company in the Dingdang Health sector is Dingdang Express Medicine, an online drug purchase platform. Since its listing, Dingdang Health has been fluctuating in a narrow range around 11.5 yuan. The surge in its peers has nothing to do with it. What’s worse is that its average daily trading volume is pitifully small, only a little over 8 million. Some investors jokingly call it a “dead stock.”

During the peak of the infection in Beijing, consumers complained that Dingdang Express Pharmacy had a large amount of Tylenol on the shelves, but the pharmacist said there was no medicine for sale and did not know the price, which triggered criticism from netizens. Eventually, the official clarified that these medicines had not yet been put into storage and could not be sold at the time.

What kind of business is Dingdang Express Pharmacy doing? Why is Dingdang Express Pharmacy unable to attract the attention of the secondary market when its peers are soaring?

Yang Wenlong's plan <br /> Dingdang Express Pharmacy was founded in 2014 by Yang Wenlong, the former chairman of pharmaceutical manufacturer Renhe Pharmaceutical. Renhe Pharmaceutical has created well-known sub-brands such as Fuyanjie and Shining Eye Drops.
Dingdang Express Pharmacy claims that it can place orders 24/7, rain or shine, and deliver medicines to your door within 28 minutes. This value proposition attracted many investment institutions. Before going public, Dingdang Express Pharmacy launched a total of 7 rounds of financing. Since 2016, its financing rhythm has been about once a year, with a total financing of more than 3 billion yuan.
Although Dingdang Pharmacy and Renhe Pharmaceutical have no equity relationship, from the perspective of strategic logic, the former can be seen as the second curve of Yang Wenlong's career.
At a press conference of Dingdang Express Pharmacy in 2017, Yang Wenlong said that Renhe has always insisted on OTC market sales. The reason why it started Dingdang Express Pharmacy in 2015 was more to try to upgrade itself in industry, service and sales. "Renhe's sales used to be industrial production, initially supplied to pharmaceutical companies; later industrial upgrading, from industrial supply to terminal, now directly from industry to users."
It can be seen that Dingdang Express Pharmacy is essentially a pharmaceutical channel derived from Yang Wenlong's pharmaceutical manufacturing. And derivation is the key logic for the birth of the second curve.
But at that time, there were already 400,000 offline pharmacies and nearly 1 million medical institutions of various types across the country. How could Yang Wenlong's channel strategy stand out?
There is a saying that every structural change will bring new business opportunities. This is the case with the emergence of mobile Internet and the O2O model. According to ITjuzi statistics, in 2014 alone, the number of financings in China's O2O field exceeded 260, accounting for about 13% of the total financing.
The so-called O2O can be simply understood as massage, haircut, and even hotpot, which can be ordered online and delivered to your door.
In the pharmaceutical field, Dingdang Express Pharmacy and other companies have also adopted a similar strategy. When Dingdang Express Pharmacy APP was officially launched in 2015, there were already a number of competitors around, such as Kuaifang Express Pharmacy, Yaokuaihao and Yaogeili. The breakthrough point of these companies is the same word - fast. They hope to provide a 1-hour drug delivery service through the Internet platform, so that pharmacies "will not have difficult business" and "patients will not have difficult drugs to buy". In contrast, Dingdang Express Pharmacy's slogan is "28 minutes".
In the early days, pharmaceutical O2O companies all adopted a light-asset platform matching model. The advantages of this model are obvious: it is light-asset and easy to expand quickly.
However, it is difficult to truly guarantee the quality of delivery with this model - if offline pharmacies do not actively cooperate, it will be difficult to achieve 28 minutes, 7*24 hours, and "fast" cannot be satisfied; if pharmacies tend to launch their own high-profit products online, then consumers may not be able to buy suitable products.
Dingdang Express Pharmacy is also aware of this problem. Since 2016, the business logic of Dingdang Express Pharmacy has undergone a fundamental reversal - the business has changed from light to heavy, and it has begun to build its own pharmacies (also known as smart pharmacies) and logistics distribution teams on a large scale. According to the prospectus, as of March 31, 2022, Dingdang Express Pharmacy has established a network of 351 smart pharmacies in 17 cities in China, with a professional delivery rider team of more than 2,600.
From the perspective of participating entities, Dingdang Health has established a collaborative system consisting of participants such as users, delivery teams, pharmacies, pharmaceutical companies and medical professionals.
For example, on the pharmaceutical enterprise side, Dingdang Express Pharmacy has formed an alliance with a number of pharmaceutical companies since 2015, hoping to achieve direct factory-to-consumer delivery, reduce the overall manufacturing procurement costs of alliance members, and thereby reduce drug prices.
Wang Licheng, then CEO of Dingdang Express Pharmacy, said in 2017 that the output of a single Dingdang Smart Pharmacy store was equivalent to that of 3-4 traditional pharmacies at the time, and that the North China region had already achieved profitability.
Under this model, Dingdang Express Pharmacy, as a channel, certainly also provides certain sales conveniences for Yang Wenlong's pharmaceutical manufacturing base.
According to Dingdang Health's prospectus and 2022 semi-annual report, the company purchased drugs from listed company Renhe Pharmaceutical for RMB 144 million, RMB 337 million, RMB 396 million, RMB 190 million and RMB 115 million from 2018 to June 30, 2022, accounting for 41.86%, 41.8%, 27.09%, 7.55% and 8.68% of Dingdang Health's costs, respectively, and 3.3%, 7.44%, 9.8%, 3.92% and 4.5% of Renhe Pharmaceutical's pharmaceutical sales revenue.
In terms of specific business forms, Dingdang Health's core business is pharmaceutical and medical health business, accounting for more than 95%. This part of the business is divided into three parts: express medicine (drug sales), online doctor diagnosis and treatment, chronic disease and health management services. Among them, the latter two provide a certain amount of order conversion for the express medicine business.

If we look at it from the channel perspective, Dingdang Health’s core revenue comes from online, accounting for nearly 70%.

However, although Dingdang Express Pharmacy became one of the few companies that survived and went public among that group of players, the company did not perform well.

Burning money for growth

Looking at the financial report, we will find that Dingdang Express Pharmacy’s revenue growth is very fierce.

In 2018, Dingdang Express Pharmacy's revenue was only 585 million yuan, but by 2021 it had grown to 3.679 billion yuan, an increase of more than five times in three years, and it seems to be a solid growth stock.

But this growth comes at a price. While revenue is growing, Dingdang Express Pharmacy's losses are also expanding like a flood. From 2018 to 2021, Dingdang Express Pharmacy's net profit was -108 million yuan, -277 million yuan, -924 million yuan, and -1.579 billion yuan, respectively. The net profit margin looks unbearable, expanding from -18.4% to -42.9%.

Of course, this loss is disturbed by preferred shares and equity incentive expenses, but even after deducting the above factors, Dingdang Express Pharmacy's performance is still not optimistic.

Where did the money go? We can find the answer from three major factors: gross profit margin, fulfillment expenses, and sales expenses.

Gross profit margin is a key indicator that reflects the profitability of an enterprise. It means how much money can be used to pay for various expenses during the operating period (such as research and development, marketing promotion), and thus generate profits, after deducting sales costs from every 1 yuan of revenue.

Dingdang Express Pharmacy's gross profit margin is generally on a downward trend. From 2018 to the first quarter of 2022, the gross profit margins were 41.1%, 36.8%, 34.4%, 31.6% and 33.9% respectively.

Dingdang Express Pharmacy has its own explanation for the decline in gross profit margin.

The first is the change in product mix, more specifically, the proportion of its low-gross-margin businesses is increasing.

Dingdang Express Pharmacy's core business is drug sales, including prescription drugs and over-the-counter drugs, of which the gross profit margin of prescription drugs is lower than that of the latter. The main reason for the low gross profit margin of prescription drugs is that the national medical insurance cost control and centralized medicine procurement have made the prices of prescription drugs more strictly regulated than those of over-the-counter drugs.

Dingdang Express Pharmacy stated in its prospectus that the overall gross profit margin of the prescription drug market in 2021 will be between 10% and 20%. However, Dingdang Express Pharmacy said that the outflow of prescription drugs is a trend, and in order to capture the trend, the company has increased the proportion of prescription drug sales. (Note: The so-called outflow of prescription drugs means that after the hospital issues a prescription, the patient can use the prescription to get the drug outside the hospital.)

Secondly, subsidies are also a key factor in suppressing gross profit margins. In other words, Dingdang Express Pharmacy's growth is the result of burning money. From 2018 to 2021, the total amount of subsidies provided by Dingdang Express Pharmacy to users through online direct sales rose sharply, reaching 82.8 million yuan, 208 million yuan, 412 million yuan, and 723 million yuan, respectively. The subsidy ratios for online direct sales were 17.5%, 18.7%, 19.6%, and 21.9%, respectively.

It should be noted that the subsidy amount for each online direct order of Dingdang Express Pharmacy is increasing, from 8.8 yuan per order in 2018 to 12.8 yuan in 2021.

In addition, Dingdang Express Pharmacy's sales and marketing expenses and fulfillment expenses are also quite expensive.

Since 2018, the sales and marketing expenses of Dingdang Express Pharmacy have accounted for more than 20% of its revenue all year round, and were 24.1%, 21.8%, 19.8% and 22.7% in 2018-2021 respectively. This figure is significantly higher than that of its peers JD Health, Ali Health and Ping An Good Doctor. This has caused the average user acquisition cost of Dingdang Express Pharmacy's self-operated online platform to soar from 5.9 yuan in 2018 to 18.2 yuan in 2021.

Finally, let’s look at the fulfillment costs of paying riders and third-party carriers. In 2018, this expense ratio for Dingdang Express Pharmacy reached 16.7%, and in 2011 it still reached 11.2%.

We will find that Dingdang Express Pharmacy is a typical model of burning money for growth, and judging from the gradually increasing subsidy amount per order and customer acquisition cost, the efficiency of burning money is gradually declining.

Why is this happening? The answer is, of course, fierce competition.

“Add bricks and tiles” to the big platform?

There is an old joke about business competition: On a commercial street, if the people coming are Jews, A will open a car repair shop, B will open a restaurant, C will open a supermarket... In short, different Jews will do different businesses and are used to avoiding competition.

In recent years, there have been constant opinions in the entrepreneurial community emphasizing that entrepreneurs should compete in a staggered manner, especially avoid going head-on with giants, or at least avoid being targeted by giants in the early stages.

It is hard to say whether it is a good thing or a bad thing. Dingdang Health has jumped into the digital health track, which is full of giants.

The good news is that China has a huge digital health market. According to a report by Frost & Sullivan, the market size in 2021 was 467.4 billion yuan, and it is expected to grow rapidly to 1.6 trillion yuan in 2025, with a compound annual growth rate of 35.2% from 2021 to 2025.

The digital health market has many sub-segments, mainly including digital retail pharmacies, online diagnosis and treatment, online consumer healthcare, and healthcare information technology infrastructure. In terms of transaction volume, the digital retail pharmacy market accounts for the largest share, with a transaction value of RMB 262.6 billion in 2021 and an expected value of RMB 692.3 billion in 2025, with a compound annual growth rate of 27.4% from 2021 to 2025.

But such a huge market obviously has more than one player. There are three Hong Kong-listed companies in China that have vertical businesses: JD Health, Ali Health, and Ping An Good Doctor. In addition, Meituan and Ele.me are also eyeing the market.

According to iMedia Consulting data, the top five Chinese pharmaceutical e-commerce platforms in terms of usage rate in the first half of 2021 were Ali Health (46.8%), Meituan (38.3%), JD Health (37.9%), Dingdang Express Pharmacy (25.3%), and Jianke.com (17.2%).

In terms of revenue volume, as of 2021, the revenues of JD Health, Ali Health, and Ping An Good Doctor were 30.827 billion yuan, 20.578 billion yuan, and 7.334 billion yuan, respectively. In comparison, Dingdang Express Pharmacy's revenue in 2021 was only 3.688 billion yuan.

Dingdang Health also admitted in its prospectus that competitors may have a longer operating history, higher brand awareness, better supplier relationships, a larger user base, higher regional penetration or more financial, technical or marketing resources than itself; competitors may be able to obtain more favorable conditions from suppliers, devote more resources to marketing and promotional activities, adopt more aggressive pricing or inventory policies, and devote more resources to the development of their websites, mobile applications and systems.

This may explain why Dingdang Express Pharmacy’s capital utilization efficiency has declined.

In addition to the huge gap in size and resources between it and its competitors, and the lack of competitive advantage, Dingdang Health is also dependent on third-party platforms, a powerful competitor, which poses a hidden danger to its long-term development.

In Dingdang Express Pharmacy’s order distribution channels, the online part is divided into self-operated platforms and third-party platforms.

The so-called third-party platforms are represented by Meituan and Ele.me. The strategy of these platforms is to open a separate "buy medicine" channel on the homepage and integrate a number of chain and local retail pharmacies. Dingdang Health also has offline stores, so it also chose to settle in the above platforms.

This means that Dingdang Health and Meituan are in a competitive partnership. For every order from Meituan and other platforms, Dingdang Health must pay a certain percentage of commission to the latter. This fee is listed as a technical service fee in the details of Dingdang Health's market promotion expenses. According to Dingdang Health's prospectus, nearly 100 million yuan in commissions were paid in 2021 alone. Combined with its 1.795 billion yuan in revenue from third-party platforms in 2021, it can be calculated that the commission rate of the above third-party platforms is about 5.6%.

It is worth noting that Dingdang Health's dependence on third-party online platforms has been rising sharply. From 2018 to the first quarter of 2022, the proportion of sales order revenue from third-party platforms in total online direct sales revenue has increased year by year from 48.0% to 72.6%, and it seems to have become a vassal of the big platforms.

In contrast, the average monthly active and paying users of its own platform are even declining. As of the first quarter of 2022, these two sets of data were 1.7 million and 700,000, respectively, down 10% and 22% year-on-year.

With the easing of the epidemic at the end of 2022, the demand for online medicine purchases has surged, and Dingdang Medicine Purchase has also used some means to divert users to its own platform.

During the period of rapid growth, it is understandable to increase exposure and sales revenue by using new traffic channels. However, the degree of dependence on third-party platforms has reached more than 70%. Once the platform policy changes, it will also have a significant impact on Dingdang Health.

Therefore, Dingdang Health is an awkward existence. It seems to be growing rapidly, but in fact it is burning money endlessly. It seems to have unique value propositions, but in fact its fate is tied to a larger third-party platform, contributing to the prosperity of the larger platform.

Now that the whole nation has achieved immunity, Internet medical companies seem to have another opportunity for development. Can Dingdang Health get out of the quagmire of burning money and relying on large platforms?

As a winner of Toutiao's Qingyun Plan and Baijiahao's Bai+ Plan, the 2019 Baidu Digital Author of the Year, the Baijiahao's Most Popular Author in the Technology Field, the 2019 Sogou Technology and Culture Author, and the 2021 Baijiahao Quarterly Influential Creator, he has won many awards, including the 2013 Sohu Best Industry Media Person, the 2015 China New Media Entrepreneurship Competition Beijing Third Place, the 2015 Guangmang Experience Award, the 2015 China New Media Entrepreneurship Competition Finals Third Place, and the 2018 Baidu Dynamic Annual Powerful Celebrity.