111 Inc (YI) 2019 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to the First Quarter 2019 Earnings Conference Call.

(Operator Instructions) I must advise you that this conference call is being recorded today, the 16th of May, 2019.

I would now like to hand the conference over to our first speaker today.

Please take over.

Thank you, operator.

This is Tip Fleming from Christensen.

Hello, everyone, and thank you for joining us today for 111's First Quarter 2019 Earnings Conference Call.

The company's results were released earlier today and are available on the company's IR website, at ir.

111.com.cn, as well as via the news wires.

Also on the IR website is a PowerPoint presentation that accompanies the comments today.

If you -- if you've not already done so, please feel free to download it now.

It'll make it easier for you to follow management's remarks.

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; and Mr. Barry Zhu, Co-COO.

Junling will provide an overview of the company's highlights and business operations, followed by Luke, who'll discuss the financials and guidance.

They will be available to answer your questions during the Q&A session that follows.

I remind you that this call may contain forward-looking statements made under the Safe Harbor Provisions in the Private Securities Litigation Reform Act of 1995.

These statements constitute forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934 as amended as well as defined in the U.S. Private Securities Litigation Reform Act of 1995.

These forward-looking statements can be identified by terminology, such as will, expects, anticipates, future, intends, plans, believes, estimates, target, confident, and other similar statements.

Among other things, this outlook and quotations from management in this announcement as well as the company's strategic and operational plans contain forward-looking statements.

The company may also make written or oral forward-looking statements in its periodic reports with U.S. Securities and Exchange Commission and its annual report to shareholders in press releases and other written materials and in oral statements made by its officers, directors or employees to third parties.

Such statements are based on management's current expectations and current market and operating conditions, and relate to events that involve known or unknown risks, uncertainties and other factors, all of which are difficult to predict and many of which are beyond company's control.

Forward-looking statements involve inherent risks, uncertainties and other factors that could cause actual results to differ materially from those contained in any such statements.

Potential risks and uncertainties include, but are not limited to: uncertainties as to the company's ability to comply with extensive and evolving regulatory requirements; its ability to compete effectively in the evolving PRC general health and wellness market; its ability to manage the growth of its business and expansion plans; its ability to achieve or maintain profitability in the future; its ability to control the risks associated with its pharmaceutical, retail and wholesale businesses; and the company's ability to meet the standards necessary to maintain listing on both ADS and on the NASDAQ Global market, including its ability to cure any noncompliance with NASDAQ's continued listing criteria.

Further information regarding these and other risks, uncertainties or factors, is included in the company's filings with the U.S. Securities and Exchange Commission.

All information provided on this call is as of today, and 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.

It is now my pleasure to introduce Junling Liu.

Junling, please go ahead.

Thank you, Tip.

Hello, everyone.

In reviewing our strong Q1 performance, I'd like to emphasize a few key points.

The first and foremost, our net revenue was up 98.5% year-over-year at RMB 655.6 million, and up 17.6% quarter-over-quarter, exceeding the high-end of our guidance.

This growth was driven by robust performance in our B2B segment.

Gross profit improved significantly as well, up 43.9% from the fourth quarter 2018, with improvement in both B2C and B2B segments.

Second, let's take a closer look at the growth in our B2B segment, on Slide 4. Over the past few quarters, we kept a fast pace acquiring new pharmacy customers.

In the first quarter 2019, we added 20,000 pharmacies into our virtual pharmacy network and are now serving 170,000 pharmacies.

Our goal is to reach 230,000 pharmacies by the end of 2019, about 50% of the total number of retail pharmacies in the domestic market.

During the quarter, we processed 141,650 orders with a compound quarterly growth rate of 60.7% since the first quarter of last year.

This increase was primarily due to the competitive advantage we have with our Smart Sourcing System and price intelligence system.

Our Smart Sourcing System proactively tracks products and monitors competitive prices using Big Data technology.

The price intelligence system has automatic pricing tracking and the pricing functions to ensure that pharmacy customers are provided with the most cost-effective products.

As a result of the expanding number of pharmacies and the increase in total number of orders, our B2B revenue was up 246.5% year-over-year and a 39.2% quarter-over-quarter at RMB 459.5 million.

Between the first quarter of 2019 (sic) [2018] and the first quarter of 2019, the compound quarterly growth rate of revenue in our B2B segment was 36.4%.

Third, during the quarter, we have made further progress in building our ecosystem, which includes patients, medical professionals, pharmaceutical companies, insurance companies, governments and more.

By leveraging this ecosystem, we aim to improve drug accessibility and eventually reduce costs.

Slide 5 shows some of the concrete steps we accomplished during the quarter.

We're now directly sourcing from 98 pharmaceutical companies.

We signed a memorandum of understanding on strategic corporation with Eli Lilly, a global pharmaceutical company, to rollout a fourth sales channel solution by focusing on Big Data, e-prescriptions, doctor services and patient medication education, and we successfully co-hosted and presented at the “Internet + Healthcare” Development Summit during the World Health Expo in Wuhan in early May.

Turning to Slide 6. We've made further progress in strengthening our smart supply chain management.

We're playing an important role in the transformation of pharmaceutical distribution by leveraging our extensive experiments in Supply Chain Management, and our large user base and technological resources.

We've continuous improvements in our 4 operating centers in North China, West China, East China and the South China.

Our fulfillment cost as a percentage of net revenue decreased from 4.3% in the first quarter last year to 3.2% this quarter.

As shown on Slide 7, we're doing business differently.

Our innovative and scalable cloud-based platform is built upon the technology infrastructure that is capable of analyzing massive amounts of data to facilitate customization.

As a result, we gained better knowledge of pharmacies shopping patterns and behavior.

Compared to traditional drug distributors, we've been able to reach pharmacies in more effective and efficient ways, such as 1 Drug Mall app, physical field visits and telesales.

Our built-in Smart Sourcing System has also helped to simplify the shopping process and improve customer experience.

Last but not least, I will talk about the initiatives we're taking in our B2C business.

We're now focusing more on medical-type users who are high-value customers rather than consumer-type users.

In the quarter, we've enhanced our chronic disease CRM system, which has made it possible to move from passive repurchasing across our network to continuous prescription management, providing in-depth service to patients with chronic conditions.

The health care delivery model in China will be transitioning from hospital and doctor-centric to a patient-centric model, and we're building a platform which is patient friendly.

Our B2C business will be focusing on building the capabilities as a patient life cycle management, with modules such as patient education, drug adherence management, automatic refills, and so on.

One of the trends worth noticing in the health care space in China is that commercial insurance will be experiencing rapid growth.

We are uniquely positioned to provide PBM type of services to commercial insurance companies so they can have clear visibility into the whole process from drug purchasing to patient service.

In conclusion, we're embracing the recent health care reforms initiated by the Chinese government, and it is our belief that China will ultimately have one of the most efficient health care systems in the world.

111, Inc.

is ideally positioned to benefit from this, given the unique capabilities we have built, including: our Smart Supply Chain; the nationwide footprint of our virtual pharmacy network, the largest in China; and our integrated B+

C platform.

Our value proposition remains focused on the basis of transparency and efficiency.

As the leading integrated online and offline healthcare platform in China, we play a crucial role in enabling the pharmaceutical ecosystem through our unique T2B2C business model to provide improvements in both customer and business -- consumer and business-oriented health care services.

Before I pass the call over to Luke, I'd like to take a moment to announce that Dr. Leon Lian Yong Chen is joining our Board of Directors.

He will be replacing Harry Hui who, unfortunately, has decided to step down for personal reasons.

I would like to thank Harry for his dedication and substantial contribution to 111 during many years he served on our board.

However, we couldn't be happier to welcome Leon.

Leon has extensive knowledge and expertise in life sciences, pharmaceuticals and the biotech sector as well as broad experiences in management, strategy and the capital markets.

He will make a great addition to the team.

With that, I will hand the call to Luke, to walk through our financial results in this quarter.

Thank you, Junling.

If you have not already done so, I would encourage you to download the financial slides we posted concurrently with our press release earlier today in our Investor Relations section of our website.

So moving to the financials.

The details for the first quarter 2019 ended March 31, 2019, have been published in our earnings release, and you can see them in Section 2 of this presentation in slides 8 to 12.

I would like to highlight the key business and the financial metrics and our focus on year-over-year comparisons with all numbers in renminbi unless otherwise stated.

In the first quarter of 2019, net revenues increased 98.5% to RMB 655.6 million.

Product revenue from our B2B segment were up 246.5% to RMB 459.5 million from RMB 132.6 million.

Product revenues from our B2C segment decreased 1.1% to RMB 192.3 million from RMB 194.4 million.

Turning to Slide 10.

Gross profit in the quarter decreased by 19.1% to RMB 33.3 million.

And the gross margin was 4.1% for the quarter as compared to 12.5% in the same quarter last year.

The decrease was mainly due to the margin decrease in our B2B segment.

Gross margin in our B2B segment was 0.9% this quarter as compared to 6% in the same quarter last year, which was primarily due to our investment to rapidly expand our B2B business.

However, gross margin for both segments has improved substantially this quarter as compared to the previous quarter.

Turning to Slide 11, for a detailed breakdown of operating expenses.

Total operating expenses were up 67.8% to RMB 139.8 million.

As a percentage of net revenue, total operating expenses were 21.2%, down from 25.4% in the same quarter last year, and we have seen this scaling effect.

Fulfillment expenses increased 48.4% to RMB 21.2 million, primarily as a result of growth in our B2B business.

Fulfillment expenses as a percentage of net revenue was 3.2%, down from 4.3% in the same quarter last year.

And sales and marketing expenses increased 79.8% to RMB 75.5 million, mainly due to the increase in the number of sales staffs and the expenses associated with expansion of our B2B business.

Sales and marketing expenses as a percentage of net revenue was 11.5%, down from 12.7% in the same quarter last year.

G&A expenses increased 93.6% to RMB 27.5 million, mainly due to the increase in managerial staff, the share-based compensation expenses.

And the G&A expense as a percentage of net revenue was 4.2% of net revenue, and down from 4.3%.

Technology expenses increased 13.6% to RMB 15 million, primarily due to investment in platform and product development, including the recruitment of technology-related staff.

Technology expenses accounted for 2.3% of net revenues, and down from 4%.

Turning to Slide 12.

Net loss attributable to ordinary shareholders was RMB 118.5 million compared to RMB 42 million in the same quarter last year.

And non-GAAP net loss attributable to ordinary shareholders were RMB 96.3 million compared to RMB 33 million in the same quarter last year.

As compared to non-GAAP net loss attributable to ordinary shareholders at RMB 119.6 million in the previous quarter, the net loss narrowed down sequentially.

As of March 31, 2019, the company had a cash and cash equivalents, restricted cash and short-term investments of RMB 1 billion compared to RMB 1.1 billion as of December 31, 2018.

For the second quarter of 2019, the company expects total net revenue to be between RMB 770 million and RMB 805 million, representing a year-over-year growth of approximately 92.1% to 100.9%.

This forecast is based on current market conditions and reflect the company's current and preliminary estimate of the marketing -- market and the operating conditions and the customer demands, which are all subject to change.

This concludes our prepared remarks.

Thank you.

So operator, we are now ready to begin the Q&A session.

(Operator Instructions) We have our first question coming from the line of Erdong Hua from 6 Dimensions.

Thanks, Junling and Luke, for the update.

This is Erdong Hua from 6 Dimensions Capital.

I have 2 questions actually.

Number one is, what's your view of the private commercial health insurance development in China?

And what role can 111 can play?

Number two is, as Junling just mentioned, in terms of the health care delivery, China is in the process of transform you from hospital and doctor-centric model to a patient-centric model.

So could you please elaborate on your comments about the patient-centric model?

Thank you, Erdong.

Let me just address the first question on the private or commercial health insurance in China.

And I think one can safely bet that this will be experiencing rapid growth in the next few years as we have spoken to many different health care insurance providers because the state will primarily won't be Medicare, or the state-run Medicare to provide the most basic care and primary care to its citizens.

And there are many incentives out there from government policies, including tax reductions if you purchase commercial insurance, and obviously, we're very uniquely positioned in the space, given the capabilities we have today.

Every single insurance provider we have spoken to, all require or would like to look for partners who can help them to do expenditure management and the way -- and the position to be able to provide a transparent full visibility from drug purchasing, to the prescription appropriateness to the individual patient management, or the life cycle management.

And I think this is going to be a major area for us to focus in the foreseeable future, and we're very bullish on the development in this space, and we have already made investment with a dedicated team.

So we want to take advantage of this rapid-growth opportunity.

With regards to your second question, what I mean by a patient-centric model, as everybody understands in China today, the only way for you to receive Medicare or health care is to visit the hospital to queue-up to get a registration number, and you see a doctor who will spend a few minutes with you and then give you the prescriptions or give you a whole bunch of tests, and then eventually give you prescriptions and so on.

So that is basically the only way.

There aren't that many other available means for patients to receive care.

And obviously, there are many other companies like us who came into this space with Internet background.

And the platform we are building is much more patient-centric because we came from the B2C background, and our business model is basically built towards the patient.

So if you look at our view of a patient life cycle management, in addition to the care a patient can receive from the hospital or a doctor, and there has to be many other things that needs to be done.

For instance, the patient education.

Today there is no other places for the patient to receive care.

And the adherence management or the drug enforcement, and -- today, the patient will have to go back repeatedly to visit hospitals to get a refill.

And one of the recent hospital visits we had with the administrator of the hospital, we were told that 2/3 of the patients were refill patients and that created tremendous wastage of our medical resources.

And with the ecosystem we have built out, and we believe we can actually complement the doctor and the hospital service with our modules like the patient education, the automatic refill, and the adherence management and so on.

So that's what we mean by a patient-centric model, and there aren't that many companies out there in the space with the same capabilities like we have.

So I hope I have addressed your question, Erdong.

(Operator Instructions) We have our next question coming from the line of Leon Chik from JP Morgan.

Congratulations on the results.

So can you just walk us through the marketing expenses because it is up 82% year-on-year.

However, I believe that you're not really adding to our sales force.

So just trying to look for the rest of the year and going forward, how should we expect marketing sales to -- marketing expense to grow in the next few quarters and also next year?

Leon, yes.

The sales and marketing expenses for the quarter is around RMB 75 million.

If you're looking back for quarter 3 last year, the sales and marketing was around RMB 77 million and quarter 4 is RMB 78 million.

Although, if you compare year-over-year with the first quarter last year, it seems to increase substantially.

But if you recall that in the first quarter last year, we just kicked off the B2B in this expansion, right.

So we believe, our team is basically there, and we will be able to continue to keep that level of investment.

And with continued expansion on the top line, as a percentage of net revenues, sales and marketing will continue to go down.

But we don't expect to -- adding more and more marketing expenses in this regard.

Let me just add a follow-up.

I roughly estimate your annual ARPU, like revenue per drug store, it's about RMB 12,000.

So that's pretty big improvement from the same period last year.

Just can you just walk us through maybe -- after you sign a new drugstore, typically what happens as they get used to your platform?

How does the growth for customer can be achieved over time?

Sure.

Our COO, Haihui is going to pick up this question.

Thanks for the question.

For customers, for typical customer, for example like having them (inaudible) once, as long as they register in our [IDP] and we need to exchange couple of certificates, and so -- which is required by the law.

And after that, normally they will place a small order.

The order volume is about RMB 1,000 to RMB 1,500 as the first order, and normally, it's about 3 to 4 SKUs.

And after that, the next one is about 2 days or even less than 2 days.

Probably the next day they will receive the goods.

And after that normally, within the next week they will continue to place the second order.

And the order quantity as well as the volume of the order will continue to increase up as the time goes on and as they're familiar with our platform, familiar with our products.

So we're seeing typical customer, their ARPU will increase about 2x to 3x in 2 months.

Like -- how about like a year after?

I mean, what -- I mean, like from the first 2 months to say a year later, I mean, what typically happens to the -- is this still a very small part of their purchase, right?

So we just want to see how they ramp up in terms of buy more stuff from you guys?

So very early stage, I think about one year ago, actually we haven't really started the so-called single store pharmacy business.

At that time they were chain stores, but as I remember, based on the record, in about 6 months for typical 1 Drug Mall customer, they are -- purchase on their ARPU about -- will be about 4x to 5x compared to their first month.

Yes, Leon, I think that's a good question.

And in the real world, obviously, we're in the very aggressive mode of acquiring new customers.

And there will be attrition because once we finish the initial -- all the paperwork to clear all the obstacles to have an order placed or to have the order fulfilled, they will forget us -- about us and our sales team would have moved on, right?

So obviously, we'll have a pretty good CRM system, and we track some of the customers who went dormant.

We need to have wake-up programs and so on.

So our anticipation is that on the quarter-over-quarter basis, at a grand scheme of pictures, the ARPU will grow on a quarter-over-quarter basis.

Even though, let's say Q1 versus Q4 is a down quarter.

We still showed a pretty strong growth from Q1 over Q4, given we have almost a month off in Q1 during the Chinese New Year.

Obviously, at a grand scheme level, we expect the ARPU growing very nicely, and we're anticipating that, that ARPU will continue to grow.

Once we finish the acquisition priority by the end of this year, we would have 230,000, and obviously, we're going to be turning back to make sure that all those who have signed on, we need to make sure that every single one of them gets activated.

And our focus by then will be making sure that all of them are going to be active.

And also we need to look into different geographies and how we can gear up their ARPU.

In other words, we would rather use the terminology like shared wallet to measure how we're progressing in relation to whatever they need and whatever services we're providing.

Thank goodness, we have all those technology to actually get a better view on what they truly need, and our technology can give us the guidance on what type of assortment management we need to have based on the customers in different geographies.

Should we move to the next question, sir?

We have our next question comes from the line of John Yung from Citibank.

This is John Yung calling from Citi.

Well thanks for the presentation.

I have just a few questions.

Let's start with first 2 quite easy ones, and then I have 2 follow-up questions on the business model.

First of all, could the management just clarify a little bit on what is the medical-type customers?

Could you give me a more granular breakdown on what these customers -- who are they really are?

Because I actually want to see what is the breakdown of pharmacies and hospitals.

And please elaborate on that.

Second clarification question that I have is what is the room for operating leverage?

I'm seeing a good trend that the margins are getting better.

What should we expect on the future trend from now and on?

That's the second question.

And 2 follow-up questions on the business model.

Could you please compare the rest of market competitors?

Do anyone of those specifically have the similar integrated B and C platform that we're using right now?

Business plus consumer.

Could you please elaborate on what's the difference between the competitors and us?

And beyond that, I would like to ask a follow-up question on our business end.

On our business, I see the smaller retail pharmacies are facing competitions from larger retail pharmacy chains, and they have the choice to actually collaborate with us or get themselves consolidated.

And when they made their decision to either get acquired or work with us, what is actually behind their mind?

Please elaborate on that.

Thank you, John.

Great set of questions.

Maybe, I'll have a shot at first, and see if my team has other comments.

So with regards to your first question on the typical customer profile, we don't really work to service the biggest chains.

If you take away all the big guys out there in the market who has pretty much all the capabilities they think they needed to have, a typical customer would be a small chain, would be a standalone store, because if you look at their challenges today, they have to have a sales team.

They have to buy from a whole heap of distributors.

And the prices they buy usually are fairly lousy because they simply do not have the reach to even get to the Tier 1 or Tier 2 distributors, let alone the pharmaceutical companies.

And their inventory days on hand is actually -- are pretty high.

Based on our research, if you have 180 days, that is actually pretty good because we've seen 300 days, 400 days, et cetera.

And the service we actually offered to those pharmacies -- the first service we offer to them is actually inventory-on-demand.

Basically, we move all the inventory over the cloud.

It's just like, companies like us today, we don't actually have our servers anymore.

We put all our servers, our storage into Ali Cloud.

And Ali buys all the servers and all the storages and so on.

So it is a similar concept, except we actually do it in the harder way.

And we're going to have our supply chain to support us in doing that.

By having access to that service, we create tremendous value for those little guys.

And if you look at the market landscape, there are 450,000 pharmacies out there, more than half actually are standalone stores.

And the biggest guy, only has about 5,000 stores.

That is slightly over 1% of the total market.

So the fragmentation is the real issue.

And we believe that by consolidating all those little guys and consolidating all their demands, and we'll help them to do the negotiation, we'll help them to manage the supply chain, we create tremendous value for their business.

And in terms of the operational leverage, basically it's a volume game.

And if you look at our revenue growth, we still anticipate pretty robust growth in the foreseeable future.

And in the meantime, we are not really adding proportional people or deploy proportional capital, infrastructure across the country in order to service, all those little customers across the country.

So obviously, the operating leverage will be done through the volume play.

And we anticipate that in terms of the cost to fulfill, in terms of the sales and marketing, in terms of general expenditure, all the G&A.

They are not going to grow as fast as our revenue and that's where we're going to achieve the operating leverage, and I am looking forward to presenting those numbers in future quarters.

And in terms of the business model, as far as we can see, there isn't anyone out there who has exactly the same capabilities like we do.

We believe we're the only one with the integrated B+

C platform out there.

And if you look at the big players, there are 3 listed companies out there today in our space.

You got AliHealth, you got Ping An Good Doctor who are primarily B2C models.

And you also see that JD Health, they also are B2C platform.

Although they claim they're doing B2B, it's still a platform play.

And they don't really play the first-party game on the B2B space.

And it's really facilitating transactions on their platform.

There are a few potential online B2B players, and all they have is a B2B marketplace model.

So based on our intel in the market, we're the only one with the integrated B+

C platform.

That draws to really our mission.

Our mission is to build the integrated online and offline health care delivery service -- model, right?

So that platform today in China is very, very unique.

And with the macro trend of the health care reform the country is carrying out, we believe we're uniquely positioned to benefit from that.

And you've brought up a very interesting point about the consolidation of the market, and it is also our belief that the consolidation will continue to take place, and we're not surprised because the big guys are on the hunt of great targets to acquire.

Obviously, we were in that game in the past as well.

But if you look at the real problem of that consolidation strategy is that there has been no lack of effort in the past 7 years.

And the biggest guy today only got to 5,000 stores.

And there is tremendous difficulties in consolidating all those guys through equity.

Why?

If you look at those -- let's say, small chains, let's not talk about the standalone stores, right?

Typically, the way they make money, it's not through having good purchasing prices.

It's having very effective or efficient operations.

It is because they do it through evading taxes, through really squeezing their employees' social benefits and so on.

For a money-making business on the reports, once you acquire them and you make everything compliant, they will become a money-losing business.

So that is where the tremendous difficulty is.

Why to date China does not have a nationwide brand?

Every big player, the so-called big player is still very regional.

It's still at a provisional level.

If you look at the biggest guy, (inaudible) in [Yunnan] Province.

If you look at LaoBaiXing in Hunan province and so on, right?

So we actually studied the market, and we realize that consolidating the market through equity is actually a very heavy way of doing things.

And we came from Internet background, we believe it is a far more scalable thing to do, if we acquire, or if we consolidate supply chain instead, right?

So do not have their equity just to help them to provide the most critical services to them.

What is there biggest pain?

The biggest pain is to really having the right assortment, and having the right prices to better service their consumers.

And we are in the position to use our technology to really enable those small Bs of small businesses to better service their consumers.

And obviously, we're having whole number of projects underway, just to making -- just to make an effort we believe there is a chance for us to build a nationwide virtual network initially at least.

And that virtual network potentially could become a real network given our ambition is to build this integrated online and offline platform.

We've already got the biggest virtual network across the country and with footprints pretty much across all levels of cities.

And remember, we are the pioneer of online pharmacy, that is our B2C capability, and we want to extend our B2C capabilities to those small chains or medium chains and the standalone mama, papa pharmacies.

So to enable them to better service their consumers.

I think I'll pause there, John.

I want to see if my team has other points to add.

Yes.

John, let me add on the operating leverage.

So the total expenses as a percentage of net revenue for this quarter is around like 21.2%.

If you look at our top line growth, quarter-over-quarter, it's around 36%.

So we believe we'll continue that trend.

Internally, we think the -- as a percentage of net revenue, the total operating expenses will be -- continue down, hopefully every quarter by 1% or 2%.

Then we'll probably stay at like first quarter, something around 15%.

That's a rough estimate.

So we'll see because in the past, we already see a very significant leverage when the revenue booming up.

So the operating leverage is very clear in this business model.

And back to your first question, I know you were talking about -- we -- because our B2C business, we continue to put a lot of emphasis on a B2C business.

But the way we're doing is very different from the previous.

We focus more on those high quality medical type consumers, when we talk of medical types, we're looking at disease type.

We group them on the disease type, and we offer them chronic disease management.

We're not doing those like price promotions, online marketing, you want to try those consumer-type.

They're shopping one time, they are young, but they are off.

So that's the difference we're talking about.

We have our next question coming from the line of Rachel Yang from UBS.

Sorry, I was muted.

Actually I have 3 questions.

The first one is related to the regulatory change.

As we know, the GPO package has been in place for at least 2 months.

So I would like to ask the management, do you see any change on the retail market as we are into the GPO package?

And what is the impact on our business?

And my second question is on our fulfillment cost, which is extremely low.

It looks extremely low to me.

So maybe can you elaborate a little bit about how we achieve such low fulfillment rate?

And last question is a much bigger question.

So what we are going to be like 5 years from now?

Okay.

Great questions, Rachel.

I think probably I'll take the first question.

And I'll leave the second question to our COO to talk about.

And then we can come back to the 5-year big question.

In terms of a regulatory change and -- it's a great question.

We have lots of regulatory movements, especially in the last 2 years and the buzz word in the industry today is really the 4+7, which means the 11 [cities] trial on the bulk purchase.

So the state authority for Medicare insurance is taking charge, and obviously they want to replace all the generic drugs with cheap suppliers, and we can see the effect is very, very obvious.

And the first batch of SKUs -- the GPO had discounts ranging from minimum in the mid-50s, even as high as to 93%, 94%.

And that is bad news for a lot of those regional manufacturers in that space because many of them will face the challenge of that -- their drugs will be delisted from the hospital.

Even if the doctor want to give them prescription, it's not even available anymore.

Obviously, they'll be looking for ways of selling those drugs outside of the hospital space and where can they go?

And obviously, there are only a number of places they can go to.

First of all, the offline pharmacies, and the other clinics, other private hospitals, and also online pharmacies.

This is ideally the place where we play.

Not only do we service consumers directly, we also have this (inaudible) platform, that's our B2B platform, precisely built to help those little guys to find good products to sell.

And obviously, we loved that policy, and we have been chased by various different pharmaceutical companies to work with them.

And as a matter of fact, we put a team together just to specifically target that opportunity.

And all those big pharmaceutical manufacturers will also need to relook at their retail strategy.

And that's, where we believe we can actually be of great help to them.

So maybe, Harry you want to take on the fulfillment.

On the fulfillment cost.

(technical difficulty)

So Rachel, did you hear the answer to question #3?

Sorry, I actually lost the audio to the second question.

But for the sake of time, actually we can take it offline.

Maybe I just briefly address the last question.

Okay.

Sure, thank you.

If I may, yes.

So -- and obviously, I want to make 2 statements.

Statement number one is that the Chinese health care system is broken today.

And the second statement I want to make is that in less than 10 years' time, China is going to have one of the most efficient health care systems in the world.

If you look at 111, we have a mission statement, which is to build the largest integrated online and offline health care platform in China powered by technology.

And we're in the space of delivering care to patients, and with the capabilities we've built, if you ask me where we want to be in 5 years' time, we want to be one of the most important players in the Chinese health care system.

The reason being, we're the only one today who has built the capabilities of B2C, of B2B, and we're the only one with the largest virtual pharmacy network.

We have a footprint across the whole country, and we play the role of being enabler of the overall health care ecosystem.

So we have every opportunity in the world to do well in that space.

So we're excited to be where we are, and we are looking forward to updating the progress over the next quarters, years.

Thank you.

Okay.

For the short-term, my understanding is we will continue to cover more standalone pharmacies to increase our share in the retail market, in the B2B market?

Yes.

We have our next question from the line of Xipeng Feng from CICC.

This is Xipeng Feng from CICC.

Can you hear me?

Barely.

Better.

Okay.

Congratulations on the financial results of our Q1 results.

And I have just got 1 little question.

As I noted in the Slide Page 4, the number of orders each quarter is smaller of the number of pharmacies each quarter.

Does it mean that some of the pharmacies contributed 0 quarters -- 0 orders each quarter?

And will this trend continue?

Yes.

You are right.

It's a good catch.

Yes, now we are serving 130,000 pharmacies.

Last quarter, I mean, this quarter -- the first quarter 2019, we fulfilled 141,000 orders.

So there are some pharmacies that are not placing orders in the quarter.

Like Junling mentioned before, in order to get all those pharmacies to do business with, we need to do a lot of logistic works, like changes certificate, permits, et cetera, and get them going.

But of course, now those -- some pharmacies, they're also shopping around.

They're comparing pricing, comparing selections, et cetera.

Also, we need our field team to kind of react at some pharmacies.

So that's a work we're -- continue doing.

That's the way we look at our business.

One is, of course, we are recruiting more and more pharmacies into our network.

And we estimate by end of this year, there will be 230 of them.

And at the same time, we want all the pharmacies in our network, placing orders more frequently, with more SKU purchase from us.

And of course, we need to provide them with better selections.

But you are right.

Some pharmacies did not place order in the quarter.

And we are -- the team is working very closely with them to make sure that they are satisfied with our selection, the pricing, and service and et cetera, but it's a lot of work to do.

We have no further questions at the moment.

I would like to hand the conference back to Tip.

Please take over.

Thank you very much, operator.

In closing, on the behalf of 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 do let us know.

Again, thank you for joining.

This concludes the call.

Thank you, sir.

Ladies and gentleman, that does conclude our conference for today.

Thank you for your participation.

To end this phone call, kindly hang up your lines.

Thank you.