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Image source: Visual China

Contributing author | Zhang Ye

Editor | Wang Weikai

Produced by | Prism·Tencent Xiaoman Studio

The chain drugstore industry is constantly in turmoil.

ContinueDasanlin(603233.SH) actual controller sentenced and interviewed by the National Medical Insurance AdministrationIsshindo(002727.SZ), another chairman of “Wandian Pharmacy” was detained.

On July 31, Laobaixing Pharmacy (603883.SH) announced that Xie Zilong, the actual controller and chairman of the company, was detained and investigated by the Hunan Provincial Supervision Commission on July 28, 2024. The announcement clarified that Xie Zilong's investigation had nothing to do with the company and stated that the matter would not affect the company's operations.

But the capital market did not accept this argument. When trading opened the next day, the share price of Laobaixing Pharmacy fell sharply by 9.98%, almost reaching the limit.

Compared with the fluctuations in the secondary market, the chain drugstore industry has already been in turmoil. In June this year, a senior industry insider revealed to the author of Prism that Xie Zilong and the Laobaixing Pharmacy he founded "will sooner or later encounter trouble."

Amid the storm of chain drugstore supervision, for Laobaixing Pharmacy, the investigation of the actual controller may be just one of the many challenges.

Worth 5.2 billion, former chairman of the Provincial Photographers Association

In the field of chain drugstores, Xie Zilon is recognized as the number one figure.

He not only pioneered the affordable pharmacy business model in China, but also pioneered the membership system, open shelf self-selection and other distribution models. Even competitors would admit that Xie Zilong is a disruptor of the industry when they mention him.

Xie Zilong is not a person who follows the rules. In 1995, at the age of 29, he gave up his iron rice bowl at the Xiangtan Traffic Police Brigade and entered the pharmaceutical industry, engaging in the wholesale business of medicines. At that time, the country had just opened up the way for individual drug operations and issued relevant policies in 1992, allowing drugs to be sold at a 15% markup.

Sensing a business opportunity, Xie Zilong plunged into the pharmaceutical retail industry, which he was unfamiliar with, and partnered with others to open a pharmaceutical company in Changsha, which was the predecessor of Laobaixing Pharmacy.

In 2001, after figuring out the business model of chain pharmacies, Xie Zilon opened the first affordable drug supermarket - Laobaixing Pharmacy near Xiangya Hospital in Changsha. He launched the slogan that the drugs he sold were 45% lower than the national approved retail price, which shocked the entire industry.

Low prices do not mean no profit. Xie Zilong increased his profit margin by reducing drug circulation links and lowering operating costs. According to media reports, this not only reduced drug prices in Changsha by about 20%, but also triggered a nationwide wave of drug price cuts.

The affordable pharmacy strategy became Xie Zilong's trump card. This also enabled Laobaixing Pharmacy to gradually become a national chain and a leading enterprise that took the lead in entering the "10,000-store era" from a single private pharmacy in Changsha.

In 2015, Laobaixing Pharmacy was listed on the Shanghai Stock Exchange. With the pharmaceutical retail empire he created, Xie Zilong also became a frequent visitor on the rich list. In October 2023, Xie Zilong and Chen Xiulan ranked 1157th on the "2023 Hurun Rich List" with a wealth of 5.2 billion yuan.

"Mr. Xie is popular and very generous." A senior industry insider who has come into contact with Xie Zilon revealed to the author of Prism.

Xie Zilong is a straightforward person. He once spent 4 billion yuan to build a hospital and 150 million yuan to build an art gallery. Tianyancha shows that in addition to being the chairman of Laobaixing Pharmacy Chain Co., Ltd., Xie Zilong also serves as the executive director of Hunan Women and Children's Hospital Co., Ltd. and Hunan Xie Zilong Image Art Co., Ltd.

The companies under his name are involved in industries such as hospitals, pharmaceutical factories, logistics, art galleries, advertising companies, and even tourism and beekeeping.

Public information shows that Xie Zilong holds 43.95% of the shares of Hunan Mingyuan Bee Industry Technology Co., Ltd. He also invested in the Hongjiang Ancient Commercial City Cultural Tourism Industry Investment Company in Huaihua, Hunan, and served as a director.

Xie Zilon has also made great achievements in the field of photography. Not only was he elected as the chairman of the Hunan Photographers Association, but he was also approved for special allowances for his outstanding contributions to the field of culture and art, and held important positions in the provincial Federation of Literary and Art Circles and the national Photographers Association.

"Art and business management are completely connected." Xie Zilong once said in an interview with the media that photography requires "having a picture in mind" before considering how to create, control and post-process. The same is true for running a business. You need to plan the strategy first, then consider how to implement it tactically, and finally reflect on what problems there are in the process of implementing the strategy and tactics.

He called his "three works" - Laobaixing Pharmacy, Xie Zilon Image Art Museum and Hunan Women and Children's Hospital - a trinity "healing community", hoping to warm and heal people's bodies and minds with the power of medicine and the beauty of art.

Now, Xie Zilong, who has been detained and investigated, may need to heal his body and mind. After all, in July last year, the "predecessor" Dasanlin's actual controller Ke Jinlong was detained. After investigation, the illegal facts were clear. He was sentenced to three years and six months in prison for the crime of corporate bribery and fined 500,000 yuan.

According to incomplete statistics, since the second half of 2023, there are alsoWeining Health、Seron Biotech、Wohua PharmaceuticalandHuaxia OphthalmologyAnd other listed companies.

Laobaixing Pharmacy did not disclose the reasons why Xie Zilong was detained and investigated. According to the information disclosed by the above-mentioned companies, the reasons why the chairman was detained mainly involved four aspects: "suspected of bribery", "suspected of duty crime", "suspected of violation of law" and "personal reasons".

Lawyer Zhang Yong, founder of Yifahui, said that detention investigation usually means that the supervisory authority has already obtained some of the facts and evidence of the individual's illegal and criminal activities, and there are still important issues that need further investigation.

Regardless of whether the reason for Xie Zilon's detention is related to the listed company, as the founder, he has a direct connection with the company's reputation.

Goodwill risk after land grabbing

In the chain drugstore market, in order to expand the scale as quickly as possible, the leading players have been "racing to grab land", and Laobaixing Pharmacy has taken the lead in opening 10,000 stores.

In June 2022, the 10,000th store of Laobaixing Pharmacy opened in its "base camp" Taojiang County, Hunan Province, which also means that the chain pharmacy industry has entered the "10,000-store era."

Under the huge retail system, the crisis began to surface.

On the one hand, the management problems brought about by rapid expansion made the company unable to pay attention to the "capillaries", so that its subsidiaries were fined for illegal operations many times, involving the production and operation of medical devices whose instructions and labels did not comply with regulations, the sale of inferior drugs, the illegal publication of prescription drug advertisements, and the bundling and price gouging of Lianhua Qingwen Capsules.

On the other hand, with the occurrence of multiple acquisitions, their goodwill value has surged in the past few years as these acquisitions involve multiple goodwill assets.

Financial report data shows that between 2020 and 2023, the goodwill of Laobaixing Pharmacy was 2.809 billion yuan, 3.695 billion yuan, 5.493 billion yuan and 5.836 billion yuan, respectively, accounting for 58.45%, 77.32%, 77.39% and 80.06% of net assets, respectively, far exceeding the recognized safety line of less than 30%.

In recent years, Laobaixing has made many large-scale mergers and acquisitions.

In August 2021, Laobaixing planned to acquire the Hebei Huatuo Pharmacy project with its own funds of 1.428 billion yuan at a premium of 11 times. It is worth noting that due to the excessive premium, the company also received an inquiry letter from the Shanghai Stock Exchange and terminated the acquisition in March 2022.

In March 2022, Laobaixing acquired 72% of the equity of Huairen Healthcare, the most influential pharmacy in Xiangxi, for RMB 1.637 billion, marking the largest acquisition in the company's history.

In addition to the surge in goodwill, the problem of high debt cannot be underestimated.

Wind data shows that Laobaixing's current liabilities have climbed from 6.291 billion yuan in 2020 to 11.155 billion yuan in 2023. Among them, at the end of 2023, short-term loans were 800 million yuan, and non-current liabilities due in one year were 1.484 billion yuan. At the end of 2023, Laobaixing's monetary funds balance was only 1.975 billion yuan.

In order to solve the problem of "lack of money", Xie Zilon pledged a large number of shares in his hands.

An announcement released on June 12, 2024 showed that the pharmaceutical group controlled by Xie Zilong and his wife has pledged a total of 88.38 million shares, accounting for 57.86% of their shares and 15.11% of the total share capital of Laobaixing.

As stock prices have continued to fall in recent months, many pledged stocks have reached the liquidation line.

Taking the 19.5 million shares pledged to China Merchants Bank Co., Ltd. on May 28, 2024 as an example, the closing price on the pledge day was 24.04 yuan per share, the warning line was 16.03 yuan per share, and the liquidation line was 14.02 yuan per share. As of August 5, the closing price on that day was 13.94 yuan per share.

The industry is so competitive that 90 new pharmacies are added across the country every day

The pharmacy business is not easy to do. Even if chain pharmacies such as Laobaixing have become the leaders in the industry, their net profit margin is only between 5% and 6%, which is much lower than that of the liquor, medical beauty and other industries.

As the number of pharmacies increases, they earn less and less. As the industry's revenue approaches the ceiling, the profit margins of pharmacies are further squeezed.

Data from the National Medical Products Administration shows that as of the end of 2023, there will be more than 380,000 pharmaceutical retail chain stores and more than 280,000 single-store pharmacies across the country, meaning that the total number of pharmacies nationwide will exceed 660,000; at the end of 2020, this number was only 560,000.

This means that over the past three years, an average of more than 90 new pharmacies have been added in the country every day.

There are so many drugstores on the street that they are almost catching up with milk tea shops. In a residential area in Tianhe District, Guangzhou, within a distance of less than 500 meters, there are more than a dozen drugstores, including Dasanlin, Neptune Star, Jianmin Pharmaceutical, Laobaixing, and Derentang. There are even two different drugstores next to each other, competing head-to-head for customers.

According to statistics from MinEnet, the sales volume of physical drug stores (including drugs and non-drugs) in 2023 will be 622.9 billion yuan, with a year-on-year growth rate of only 1.8%, the lowest in the past decade. According to statistics from Zhongkang CMH, from January to May this year, the national drugstore retail market size was about 217.8 billion yuan, a year-on-year decline of 3.7%.

There are too many people and too little porridge, the industry's growth rate has slowed down, the market size has shrunk, and the average income of a single pharmacy has also plummeted.

According to Zhongkang CMH data, the average sales of physical pharmacies across the country in 2023 was 730,000 yuan, a decrease of 140,000 yuan from 2020; in the first half of 2024, the average sales per store fell again by 10.6% year-on-year.

In the view of many practitioners, the increasingly competitive pharmacy industry presents both opportunities and challenges.

"For chain pharmacies, service and professionalism have become our compulsory courses." A senior executive of a leading chain pharmacy told the author of "Prism" that in order to better undertake prescription and chronic disease management business to increase revenue, his chain pharmacy has set up special posts for chronic diseases and increased the number of professional personnel such as practicing pharmacists.

Chain industry expert Wen Zhihong also pointed out in an interview with China Newsweek that compared with developed and mature pharmaceutical retail markets such as the United States and Japan, the current chain rate of China's pharmacy industry, especially the development of chain pharmacies, still has a lot of room for development.

"In the long run, our domestic chain drugstores still need to develop and combine diversified merchandise structures. For example, they can refer to Japan's drugstores and American drugstores' supermarket-like or hypermarket-like formats to promote the continued profitability of their stores," said Wen Zhihong.

With the advancement of medical reform, the focus of supervision has shifted from the in-hospital market to the out-of-hospital market, and pharmacy retail has become an important area of ​​supervision.

In the short term, the drugstore retail industry is in a negative situation. However, with the implementation of the outpatient coordination system in various places, relevant policies can accelerate the outflow of prescriptions, and the drugstore industry will take on the huge market growth behind it and usher in a favorable situation.