Slowing revenue growth hurts online drug platform YSB

The B2B drug distributor posted higher annual revenues and swung to an adjusted profit, but disappointed investors still sent the firm’s stock down 9% on the day after the earnings

Key Takeaways:

• The gross margin on the company’s proprietary drug distribution business, its main revenue source, edged down to 6.1% last year
• With the pharma market already well developed, several distribution giants have muscled onto YSB’s turf as suppliers to pharmacies and smaller clinics

By Molly Wen

Drugs-trading platform YSB Inc. (9885.HK) is feeling the pain from a stock sell-off after delivering its first annual results since listing on the Hong Kong stock market last year.

China’s vast online pharmaceutical market counts digital heavyweights such as Alibaba Health (241.HK) and JD Health (6618.H) among its players, but YSB inhabits a niche with relatively tight profit margins as a B2B platform mainly serving smaller pharmacy chains and clinics.

Earnings released early last week highlighted the challenge for YSB.  Rising revenues last year and even a profit on an adjusted basis could not prevent a sharp fall in the stock price.

YSB describes itself as the biggest digital provider of comprehensive out-of-hospital drug services in China. Its gross merchandise volume (GMV) rose 18.9% last year to 46.9 billion yuan ($6.5 billion), while operating income rose at the same rate to 16.97 billion yuan.  The firm’s annual net loss widened to 3.21 billion from 1.5 billion yuan in 2022, as earnings took a one-off hit from the conversion of preferred shares after the IPO.

Using a more representative gauge of business health, the company logged an adjusted profit of 131 million yuan in 2023 against a loss of 125 million yuan the previous year. Gross profit rose 21.3% to 1.74 billion yuan while gross margin edged up to 10.3% from 10.1%.

Investors, however, were unimpressed by those healthier numbers. YSB’s shares plunged 9.1% the day after the results and, although they later recovered some ground, suffered a 4.6% fall over four trading days. The stock closed at HK$9.98 last Friday, only half the IPO price of HK$20 last June.

The past six months have been a roller coaster ride for YSB. The company enjoyed a two-month honeymoon with Hong Kong investors after the listing, when the share price reached a high of HK$64.5. However, the price turned south and plummeted 46% in a day after the end of the lock-up period, as the market turned bearish on the company’s prospects. YSB’s founder and chairman, Zhang Buzhen, announced a 180-day extension to the lock-up but the downward spiral persisted.

YSB’s business model in the drugs space is similar to that of e-commerce giant JD.com, connecting drugs factories with pharmacies and clinics via an online trading platform. By the end of 2023, YSB could boast that around 8,100 sellers and more than 650,000 downstream buyers had used its platform.

Like most pharma platforms, as a service provider YSB charges a percentage of transactions as commission. GMV derived from the platform rose 25.8% last year to 28.47 billion yuan, accounting for 60.7% of the total. However, the limited commission rate meant only 870 million yuan in revenue was generated.

YSB gets a bigger revenue boost from its proprietary business, in which it buys drugs from suppliers and distributes them to customers from its own warehouses. Operating income from the self-operated business rose 18.6% last year to 16.04 billion yuan.

The company has built an intelligent supply chain system covering 22 self-owned warehouses in 21 cities. Using the logistics platform, orders can be delivered within a few hours or a day of the order being placed, easing inventory pressure on buyers, the company said. The proprietary business operates on a large scale, but its profit margins are tight: gross margin on this segment dropped 0.1 percentage points to 6.1% last year.

Competition intensifies

YSB’s revenues are still growing but the pace of acceleration is slowing. Revenue growth fell from 63.7% in 2021 to 41.4% in 2022, slowing further to 18.9% in 2023. The revenue growth rate for YSB’s proprietary services dropped to 18.6% from 41% in 2022, while the rate for the online marketplace business fell to 25.8% from 41.9% in 2022.

Higher commissions charged via the platform and reduced business subsidies may have been factors in the slowdown. The average commission rate rose from 2.9% in 2021 to 3.1% the following year and 3.2% in 2023, calculated as the platform’s cut divided by GMV. But the subsidy provided to platform buyers fell from 0.8%, to 0.7% and 0.6% over the same period.

Fiercer competition within the B2B pharma market is squeezing the earnings performance. In the past, big pharma enterprises barely paid any attention to the supply of drugs outside of leading hospitals, which was a relatively small and fragmented market. However, the giants have since joined YSB in its B2B niche, piling on the pressure.

Internet medicine supplier JD Health has launched a pharmaceutical B2B platform, “yao.jd.com”, while traditional distribution giants Jointown Pharmaceutical (600998.SH) and Shanghai Pharmaceuticals (601607.SH)haveset up their own B2B platforms, “youngjoin” and “yiyaogo.com”.  In September last year, Jointown Pharmaceutical said it had established 17 “companies across the country to provide B2B e-commerce services for small chains, single pharmacies, clinics and other customers.

In the past, market watchers believed Internet platforms could transform the business of drugs distribution and deliver handsome returns. However, over time it has become clear that even the market leader, JD Health, can only turn a profit under non-GAAP standards. The distribution of medicines appears to be stuck in an earnings rut.

Currently YSB commands a price-to-sales (P/S) ratio of about 0.34 times, lower than the 0.78 times for traditional pharmaceutical distributor Sinopharm Group (1099.HK) as net profits remain out of reach. Investors will have to wait and see if YSB can maintain an edge in an increasingly competitive part of the market.

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