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2024.07.22

Word count: 5107, reading time: about 9 minutes

Introduction: In response to various rumors, Gaoji Health and its operator Hillhouse Capital did not respond further and remained silent. People who are silent must have experienced or are experiencing something.

Author |First Financial News Consulting

Recently, "Health News Consulting" learned from multiple sources that Gaoji Health has undergone sudden personnel changes. Niu Heyi is no longer the president of Gaoji Health, and Li Bo is no longer the CEO of Gaoji Health. The new CEO of Gaoji Health is Gong Jianjun, who was previously the head of Gaoji Health's East China region.

An insider close to Gaoji Health said, "Gaoji has always been run by two groups of people, Li Bo is in charge of online operations, and Niu Heyi is in charge of offline operations. These two groups have different styles and work goals, so there has never been a very good synergy effect." The actual impact of this sudden personnel change on Gaoji Health may take some time to be seen.

Gaoji Health (formerly known as Gaoji Medical) was established in 2017. For a long time, Gaoji Health was regarded as a "barbarian of drug stores" by the pharmaceutical retail industry. In less than a year, it spent hundreds of billions of yuan to acquire tens of thousands of drug stores, and once became the largest drug store chain in China in terms of store size and revenue.

At the SIP conference at the end of 2022, Niu Heyi, then president of Gaoji Health, revealed that the company's revenue for that year was over 20 billion yuan, and it had made considerable profits. Many industry insiders told "Health News Consulting" that it was the first time that Gaoji Health had achieved annual profitability. After that, several media outlets broke the rumors of Gaoji Health's listing, disclosing relevant information such as "the expected valuation communicated by Gaoji and securities firms is in the range of 40 billion to 50 billion yuan", but to this day, Gaoji Health has not been able to submit its prospectus to the Hong Kong Stock Exchange.

In response to various rumors, Gaoji Health and its operator Hillhouse Capital have not made any further responses, and are in a state of silence. People who are silent must have experienced or are experiencing something.

Several investors revealed to Health News that some staff members of Hillhouse Capital's pharmaceutical group were also laid off. A colleague close to Hillhouse commented to Health News that "from the beginning to the end, the secondary market is actually Hillhouse's core product."

For the "project" of Gaoji Health, Hillhouse has invested and operated it for more than 7 years and will inevitably face great pressure to exit. The urgency of the exit will profoundly affect a series of business decisions of the operator.

However, players in the chain drugstore field, in addition to competing in a series of internal capabilities such as operational capabilities, organizational capabilities, scale capabilities, and capital utilization efficiency, must also face a series of changes in macro policies and industry environments, such as anti-corruption in the pharmaceutical industry and the liberalization of online medical insurance payments.

From the current perspective, this is a bloody battle that is still ongoing: the air is filled with smoke, the outcome is hard to tell, there are no winners, and there is no way to quit.

Anxiety and silence

Before talking about the personnel changes at Gaoji Health, let us first bring the narrative back to the pharmaceutical retail industry in which it is located.

In the past 3-5 years, the situation of drugstores has been far worse than before. A few figures can describe the low tide of this industry very specifically: in 2023, the total number of retail drugstores in China will exceed 660,000, an increase of 180,000 from 2019; the average sales of physical drugstores in 2023 will be 730,000 yuan, a decrease of 160,000 yuan from 2019; among the six major listed drugstore chains, two will see a decline in profits in 2023, with a drop of more than 40%.

In the first half of this year, the National Medical Insurance Administration took "drug price control" as a breakthrough point and successively promoted the implementation of policies such as special price control of "four identical drugs", encouraging online and offline drug price comparison, and accelerating the opening of medical insurance online payment, with the aim of squeezing out the water in the offline drug retail link. Affected by this, in the first quarter of this year, the profits of three listed chain drugstores fell, with the largest drop exceeding 80%.

Being in the industry, Gaoji Health, which is under the water, obviously cannot remain immune. Many industry insiders told "Health News Consulting" that after achieving a short-term profit in 2022, the business performance of Gaoji Health's core segment - offline retail business in 2023 is not optimistic.

In addition, rumors have also emerged in the industry that "Hillhouse wants to withdraw from Gaoji Health."

The rumors are not groundless. One of the reasons is that the "Gaoji Project" has been going on for 7 years. If the fund raising time is taken into account, it will be even longer. According to the practice of the fund industry, both the RMB fund (5+2) and the US dollar fund (8+2) are about to reach the exit period, and Hillhouse will inevitably face certain exit pressure.

In fact, since 2023, there have been constant rumors about Gaoji Health's listing in Hong Kong, but after verification by multiple sources, there has been no clear progress on this matter so far.

But Gao Ji's health concerns have been clearly laid out on the table.

Open Gaoji Health's official website, and the homepage banner is a huge investment poster with white characters on a red background saying "Smart new pharmacy, more flexible franchise", and a franchise hotline of 400 attached below. Jumping to the next screen, there is still an advertisement of "sincerely invite to join", listing the four major advantages of "smart terminal delivery, direct supply from branded pharmaceutical factories, green policy support, and new retail empowerment".

In June this year, a chain pharmacy under Gaoji Health published an article on its official account, announcing that Gaoji Pharmacy is opening up franchises nationwide, with a total of 17 provinces (autonomous regions and municipalities). Taking Henan as an example, it only costs 15,000 yuan in franchise fees, 15,000 yuan in deposits, and 7,000 yuan in annual management fees to hang up the Gaoji Health sign.

A person close to Gaoji Health told Health News that before 2023, the development of franchises was not a strategic focus of Gaoji. At that time, Gaoji had less than 300 franchise stores, which was a very low proportion compared with other traditional chains. The change occurred at the mid-year meeting in 2023, when the management proposed for the first time that the company should achieve sustained and rapid expansion through the three-wheel drive of "new openings + franchises + mergers and acquisitions".

The day after the mid-year meeting, Niu Heyi and Li Bo led more than 100 core members of Gaoji to complete an 11-kilometer hike in the Gobi Desert of Dunhuang. They set the theme of this hike as "Salute to Entrepreneurs" to express goodwill to the bosses of small and medium-sized chain stores.

"To put it bluntly, franchising means expanding scale at a lower cost, because the investment in the franchise store is paid by the franchisee himself." Liang Hong (pseudonym), a senior medical professional, said that its disadvantage is that the management is looser and there is a certain brand risk. Gaoji Health's promotion of franchising at this time should be a major strategic transformation.

Ambition and ability

Gaoji Health was founded in 2017.

This year, the pilot program of comprehensive reform of urban public hospitals was fully launched, the "two-invoice system" reform was implemented, the 30% drug share assessment for public hospitals was clarified, and drug markups were completely abolished. The intensive introduction of a series of policies all point to the same thing - separation of medicine and pharmacy.

Under the rigid policy, starting from the autumn of that year, hospitals in many parts of China stopped purchasing drugs and limited the supply of drugs, forcing patients to turn to retail pharmacies. In June of that year, Gaoji Pharmaceutical, a subsidiary of Hillhouse Capital, emerged. In less than a year, it spent hundreds of billions of yuan to buy nearly 10,000 pharmacies, making itself the No. 1 domestic pharmaceutical retailer.

There is no doubt that the policy opportunity of the separation of medicine and pharmacy is the biggest reason why Hillhouse is willing to re-enter the pharmaceutical retail industry. However, if we look closely at Gaoji Health's early external statements, it is easy to capture a kind of capital's inherent strength, which comes from Hillhouse's judgment on the current pharmaceutical retail industry. "Current practitioners in the pharmaceutical retail industry are generally small in scale, with low operating efficiency and seriously insufficient service capabilities, and cannot help consumers solve practical problems."

The above description comes from the press release after Gaoji Health completed its first acquisition in August 2017. At that time, Hillhouse believed that the three major pain points of the industry, namely scale, efficiency, and service capabilities, could be solved in a short period of time with the help of capital and technology. At least in the traditional retail sector, this is a business model that has been verified countless times by them, such as Bestore, New Ruipeng, Belle International... Each one is a textbook-level post-investment case.

One detail that is talked about a lot is that in the first year after Hillhouse Capital acquired Belle, it achieved real-time digitization of its 20,000 stores. Once, a brand under Belle found through the backend big data system that the try-on rate of a certain shoe was extremely high, but the actual purchase conversion rate was very low. After investigation, the company found that the problem was that the shoelaces were too long and easy to fall off. Later, after a modification and re-stocking, this shoe became a hit of the season, and a prediction model created a value of tens of millions of yuan.

Liang Hong told Health News that the reason for the Gaoji project was related to Hillhouse's great success in Belle International. "Because Zhang Lei (referring to the founder of Hillhouse Capital) felt that Belle International was very successful, he wanted to apply this model to the pharmaceutical retail field, which seemed to have a more stable operation, higher risk resistance, and should be easier to succeed."

To some extent, Hillhouse's series of actions in retail pharmacies are indeed based on Belle. According to people familiar with the matter, when Hillhouse was first established, the first department it set up was the investment and acquisition department, and the second was the technology department, which corresponded to the company's two major strategies - first, through capital acquisitions, launching a blitzkrieg to quickly reach a scale of 10,000 stores; second, through the support of technology, using self-developed ERP as a breakthrough point to complete the digital transformation of the store end.

But this time, the magic of "technology empowering traditional retail" failed to reappear. Public data shows that by the end of 2018, Gaoji already had more than 10,000 stores and annual revenue of more than 20 billion yuan. Four years later, in 2022, the number of stores and revenue figures disclosed by Gaoji remained unchanged.

In contrast, in the past four years, listed chain drugstores represented by Laobaixing and Dasanlin started from more than 3,000 stores and less than 10 billion yuan in revenue, and successively entered the 10,000-store club, exceeding 20 billion yuan in revenue, which eliminated the size gap between them and Gaoji in one fell swoop.

"Gaoji initially used the same strategy used in the Internet industry, which was to pour money into it, expand itself, squeeze out others, and finally rely on market share to negotiate prices with upstream industries."

Tu Honggang, chairman of Yiku and senior researcher in the pharmaceutical industry, told Jianwen Consulting that this logic is valid in other retail industries, except for pharmacies. First, the largest buyer of drugs is not individual consumers, but medical insurance funds, so pharmacies cannot have much room for bargaining. Second, the pharmaceutical retail market is too large and there are too many players. Even in 2018, when Gaoji was the most outstanding, its 20 billion yuan revenue only accounted for 2%-3% of the entire market.

From the perspective of Hillhouse itself, the management team lacks medical background and lacks understanding of industry rules, which gradually emerged in the later integration process. According to a person close to Hillhouse, the early management team of the company basically came from the fast-moving consumer goods industry and had no experience in the pharmaceutical industry. They paid great attention to their image and details, and spoke in a very obvious foreign company style. They were more able to talk to investors and felt distant from the front-line business.

As a result, in the past few years, although Gaoji has swallowed up tens of thousands of pharmacies, it has never been able to manage them effectively. The problems encountered include but are not limited to: after the full acquisition, the original pharmacy controllers set up their own business and took away all the customer resources; the project companies did not obey the management of professional managers and directly confronted the headquarters; the internal management systems were varied and the digitalization process was not as expected, etc.

A senior person in the pharmaceutical industry commented: "Gao Ji had no intention of hiring people from the industry from the beginning, because he felt that you were not doing a good job and I came here to get rid of you. He didn't expect that he would suffer such a big setback."

Correction and bottlenecks

All signs indicate that Gao Ji's self-correction occurred around 2020.

On the one hand, Gaoji slowed down its pace of mergers and acquisitions and began to shift its focus to improving the efficiency of existing pharmacies. On the other hand, veterans in the retail pharmacy industry, represented by Niu Heyi, began to have a say in the company's business. This year, Niu Heyi was promoted from chief operating officer to president, fully responsible for offline pharmacy business.

Niu Heyi is from Inner Mongolia and has a marketing background. He once served as president of the listed company Dasanlin and is one of the most experienced operators in the pharmaceutical retail industry.

"Mr. Niu is a pragmatic person with strong performance management capabilities. He is not the type of person who is a pushover. He will be harsh when criticism is necessary and everything depends on performance." An interviewee who once worked with Niu Heyi told Jianwen Consulting that according to his understanding, after Niu Heyi came to Gaoji, he spent a lot of energy on information integration. "Gaoji took some detours in this regard, and it is much better after he went there."

After becoming the president of Gaoji Medical in 2020, Niu Heyi began to transform the company on a large scale. This transformation is not limited to business, but also includes organizational structure and decision-making process. In Niu Heyi's view, there are three core graspers to integrate the resources of tens of thousands of pharmacies, namely system, supply chain and organization. Among these three things, the system and supply chain are directly related to the business flow, have strong certainty, and are relatively easy to straighten out. The most difficult thing is the organizational structure.

In terms of building systems and supply chains, Niu Heyi and the Hillhouse team share the same ideas, and digitalization is the tool he relies on most. He once gave an example that when managing 10,000 pharmacies, one will inevitably encounter the problem of grouping goods by store type, that is, managers must accurately classify the stores and then match the corresponding product catalogs. In Niu Heyi's view, no one's experience will work for this matter, and real-time measurement of big data is necessary to make accurate dynamic adjustments to 10,000 stores.

In terms of organizational structure, he followed Zhang Lei's advice and adopted the model of "centralizing power for major events and decentralizing power for minor events." What the outside world can perceive is that in recent years, Gaoji's stores across the country have a more consistent style in terms of decoration and lighting, which makes them look more upscale. The deeper change is that the original small shareholders of these platforms distributed in various provinces are gradually withdrawing, and are replaced by a team of managers dispatched by the headquarters.

"Up to this stage, Gaoji has almost 'digested' the drugstores it acquired in the early stage." Liang Hong told Jianwen Consulting that the performance of a large number of chain stores in the industry has declined by 20%-30%, while the number of Gaoji's red stores (referring to stores with good profitability) is still growing. "It can be said that the integration work it has done in the system, procurement and organization in recent years has shown results."

On the other hand, under the operation of insiders, Gaoji Health's business model is becoming more and more similar to other traditional chain drugstores. The aforementioned person close to Gaoji said that this development trend is different from Hillhouse Capital's positioning of Gaoji. "Investors have two positionings for Gaoji. One is that it has the largest scale, the most extensive layout, and the most solid infrastructure. The other is that you must have differentiated core businesses, such as specialty pharmacies, Internet hospitals, new retail, and insurance. In short, you must have new stories to tell."

The source said that Gaoji has also made many differentiated attempts in the past few years. For example, it obtained the Internet hospital license very early and introduced online diagnosis and treatment to provide patients with follow-up and prescription renewal services; it also planned a number of very targeted hospital-side stores, whether it is drug display or pharmaceutical services, which better reflect the specialty characteristics of the nearby hospitals. However, these attempts have not brought significant sales growth to offline businesses.

"If they can't find other new growth points, drugstore chains will soon fall into a trap of becoming larger and larger with thinner profits."

Liang Hong said that in terms of prescription drugs, chain drug stores are facing attacks from grassroots community medical institutions, especially after the outpatient coordination, community health centers can more smoothly take over the outflow of prescriptions from public hospitals and get very cheap prescription drugs at the collective purchase price. In terms of over-the-counter drugs, online medical insurance payment has infinitely magnified the convenience of O2O, and the retail sales of some offline drug stores have dropped by about 10%.

Obviously, under the current situation, simply turning Gaoji Health into a larger-scale, better-managed pharmacy can no longer meet Hillhouse's positioning and expectations for it. However, at a time of change in the industry, can Hillhouse Capital, which has replaced Niu Heyi and Li Bo, play a better card?

WeChat Editor| Su Xiao