Hello, ladies and gentlemen, and thank you for standing by for 111, Inc.'s Fourth Quarter and Fiscal Year 2020 Conference Call. As a reminder, today's conference call is being recorded. I would now turn the meeting over to your host for today's call, Ms. Monica Mu, Investor Relations Director. Please proceed, Monica.

Thank you, operator. Hello, everyone, and thank you for joining us today for 111's Fourth Quarter and Fiscal Year 2020 Conference Call. 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, CFO of our major subsidiary; Mr. Harvey Wang, Co COO; Mr. Barry Zhu, Co COO; Ms. , IR and VD -- Senior VP; Ms. Monica Mu, Investor Relations Director; and Mr.

Good morning, and good evening, everyone. Thank you for joining this call today for our fourth quarter and full year 2020 results. Let me begin with an update on the COVID-19 pandemic. The past year plus has been difficult for all of us. But the global efforts and the commitment to overcome this terrible disease has also shown the resilience of the human spirit. We'll continue to be in awe of the first responders working tirelessly throughout this unprecedented times, and together, we will persevere and beat this disease. With the hard work from our dedicated employees and the safety and other operational protocols we have put in place, 111 has been able to service our customers and deliver critical care to patients without interruption throughout this difficult period. With the vaccine rollout, we're optimistic that an end to the pandemic is in sight, as we continue to stay vigilant for the potentially more dangerous variants of the coronavirus. Moving on to our earnings. I'll begin with a brief look back on what we accomplished in 2020, our extraordinary journey of growth in Section 1 of the deck, and a look ahead on 2021 and beyond.

Thank you, Junling, and good morning or evening, everyone. I want to begin by thanking all of our colleagues for their resilience and hard work over fiscal 2020 as we navigated a challenging environment for making operational changes at the onset of the pandemic to support our fast-growing business. We remained resolute in our focus on taking care of all our stakeholders, including our staff, customers, partners and shareholders, and it was this focus that enabled us to report another phenomenal fourth quarter and fiscal year results today. Moving to the financials. My prepared remarks will focus on a few key business and the financial highlights.

Your first question comes from the line of Zoe Bian of Citi.

This is Zoe Bian from Citi. May I ask the management 3 small questions. The first is, how many pharmaceutical companies now partners with you? And other than procurement, have you seen any progresses or other ways of cooperation such as e-prescription or your marketing services? And my second question is on your B2B segment. Want to check if you have -- we have seen a rising turn of the scale of procurement from 111 in single retail pharmacy. And what are the levels in change versus independent pharmacies? Is there a cap? And the third question is about the progress of your subsidiary, with Yao Fang Shanghai listing on the STAR board.

Zoe, let me first answer your first question. You probably have seen that lately, we have started to partner with many pharmaceutical companies worldwide. We also announced that we have a direct strategic partnership with 330 pharmaceutical companies. So we start to become the preferred partner for pharmaceutical companies due to several major reasons. One is that we have -- we are fully compliant and we have a high-efficiency and transparency, and we have provided digital solutions. Pharmaceutical companies and us have complementary strength. They can offer products, the medicine experts and the medical expertise. And certainly, they have their pain points of coverage, how they will commercialize their products through all regions and channels. So we have the capability. So we are the preferred choice for pharmaceutical companies for their omnichannel product commercialization and for more regional coverage and channel coverage. And also our data can help the pharmaceutical companies to provide customer insights and also our systems, for example, our CRM system can help them to improve the customer medicine compliance and duration of treatment. So I'd probably like Harvey answer the other questions?

The second question -- this is Harvey, I will take the second question regarding the procurement from pharmacies, I think, including both chain stores and independent pharmacies. In the past quarters, we have been seeing our customers keep increasing their purchase volumes quarter-over-quarter since they became our customers. According to the sales data of 2020, existing customers contribute about 80% of our sales. So both chain store and independent pharmacies are increasing their purchase volume. Moving forward, with the further expansion of our supply chain network, we will offer more selection with a better price and provide them service. We strongly believe there are still a large room to enhance our cooperation and to improve the wallet share from our customers.

Zoe, it's Luke. To answer your question on our progress on the STAR listing. Yes. First of all, we are making progress according to the schedule. We have achieved a couple of milestones. One is in December 2020, we have completed a new round of capital injectment from third-party strategy investors. And we have, in total, raised close to USD 143 million or close to RMB 1 billion. And the second one financing was at the pre-money valuation of RMB 10 billion, which is approximately $1.53 billion. Now with this third-party invest introduced, we have -- according to the law we convert this limited company to stock-holding company, which is pre required for STAR listing. And the third party investors, including Shanghai Strategy Fund, which under Shanghai and, which is under Shanghai they are both investment vehicles under Shanghai municipal government. There are also investors, namely Shanghai Science and Technology Venture Capital, Zhangjiang Technology Venture Investment and the Pudong Science and Technology Venture Capital as well. They are the tech investment arm in Shanghai, together with independent PE funds like, like Stifel, like U.K. Investment. Currently, we are -- with assistance from the security firm, Haitong, and the accounting firm, Deloitte & Touche, and the law firm is . So we are making progress according to the schedule, and we will also make formal and public announcement in due course. Zoe, we hope we answered your questions?

Your next question comes from the line of Rachel Yang of HSBC.

And congratulations for another very strong quarter. Actually, I have 2 questions. The first one is to Luke. Can you help us to understand the overall GMV side -- size of your B2B model? And how you are reporting booking the revenue of service fees versus the overall CapEx -- I mean the top line? How you are going to looking at them and what is the structure? The second question is on your promotion model. I understand you started to promote Trulicity in the Cosentyx -- for Lilly and Novartis, and it has been a while. So how the 2 drugs have been performing? And is there any possibility that we will strengthen our collaboration with all our partners to make them an exclusive partnership? Yes, this is my -- those are the 2 questions from me.

Rachel, can you repeat your first question?

The first question is regarding the structure of your B2B business and overall GMV model -- GMV size. I understand that you put some of the revenue as a revenue -- as a service fee, i.e. you're only charging half of the net profit of facility provided to them. And some of the revenue, you are booking as -- you're booking the top line the sales side -- booking revenue at the sales price. So I just want to understand how big the overall GMV is? And among your revenue, what part of that you expect that revenue? And what part of it is a top line sales?

Okay. If you look at our earnings release, I think in the Page 3, we have disclosed our segment revenues. We have not disclosed the GMV because our main -- major business is self-operating business. We have marketplace business as well. But overall the size is not big. So if you want to know the GMV, I think one way is -- you can use our revenue times the VAT, which is 13%, to come up and a quick question -- I mean quick answer. In terms of structure, our major part of revenue contribution is due from 2B business, which is the revenue to the retail pharmacies, private clinics, private hospitals, some distributors, et cetera. We have 2C business as well. The proportion is like 93% to 7%. Yes, we are now derive income -- or service revenue from our digital marketing with pharma companies, the commission from those marketplace vendors as well as some service fee from our supply chain service. Now we believe with our S2B2C model, we will continue to see more and more revenue coming from the service side. So that's something we are expecting.

Rachel, I'll take your second question about promoting drugs. In China, by law, we are not allowed to promote any drugs, but we do help pharmaceutical companies in commercializing their drugs. So that's why we've built out the omnichannel platform for us to help those pharma guys to launch new drugs and follow that lifeline of that particular drug. So initially, once a pharma company obtains NDA from CFDA, so they launch the drug, but it usually takes a fairly long time for the drug to be able to gain access to hospitals. So there has to be a start up hospital supply chain to help the pharma guys to maximize sales in a limited time window. And that's why we have been trying to build a supply chain platform. And our supply chain platform enables us to actually help the pharmaceutical company from day one to get the drugs delivered to customers' homes or to clinics or to hospitals. And you referenced a few pharma companies. And of course, our list is growing every quarter. And we are pretty confident that the model we have been building is going to be a great tool for all the pharmaceutical companies when it comes to new drug launch or even after they gained access to hospital, we'll have digital reps to help them continue to disseminate the medical information. And even when they get to VPP, or into retail, of course, our over 300,000 pharmacies across the country will be a great channel for them to capture more sales. Thank you.

Okay. So how well the 2 drugs have been doing, Trulicity and Cosentyx?

So Trulicity and what's the other one, Novartis?

It's Cosentyx.

They're doing exceedingly well. So usually, you do a CAGR, right? So -- but we do actually on a monthly compounded growth rate. So both drugs actually the -- I think for the limited time we had it since last May. It's been growing at a monthly growth rate close to 70%.

I know we're introducing many more new drugs. As you can see that we just partnered -- announced the partnership with Beijing and also the -- we are launching new drugs through our platform.

Yes. Yes, we also noticed that. So how many new drugs we can expecting for the year of 2021?

Many more.

Many more. Many more to come.

Your next question comes from the line of Christopher Lui of Jefferies.

This is . I'm asking questions on behalf of Chris from Jefferies. And my first question will be on the whole industry outlook. What do you think is the biggest change for the internet healthcare industry today compared with 10 years ago, especially with the new norms of reimbursement regulation extended. And how do you see those opportunities for pharmaceuticals within the context of the Internet industry? And my second question is about competition. We see that after nearly 10 years of development, some of the players in this industry have grown big and some failed and vanished. What do you see our company's positioning in today's internet healthcare market? And how shall we compete with those big players like AliHealth or JD Health? And how do we differentiate ourselves? And what market share are we expecting in the long term? And my last question will be on the company's new progress in the construction of smart supply chain. That's all from me.

So let me answer your first question, and then Junling answer second question. So first of all, we are -- we feel very, very fortunate. So we are facing unprecedented window of opportunities. You can see that the whole health care industry is growing double-digit for the past few years and for the next decade to come. And in 10 years, the whole health care industry will exceed the automobile and real estate industry to become the largest industry in China. So certainly, we need to grab that window of opportunity. Certainly the reasons are very apparent. One is the rapid agents in China. Second is that disposable income is increasing every single year. And more importantly, the government policy start to favor telemedicine, online health care. So I think added advantages are the penetration of a mobile Internet and also now the digitization -- digital technology. So we must grab this opportunity and heavily invest our digital health technology, especially really boost our S2B2C model to build our core competency. So I'll leave to Junling to answer second -- probably have answered the first question.

Right. So competition. Yes, you referenced AliHealth and JD Health. And first of all, I think we admire the market cloud they commend, of course, the traffic they have is tremendous. But our path is very different. As we have explained in my remarks, our model is actually a S2B2C, the supply chain platform to enable businesses to service or better service consumers. And our focus is actually to create value for pharmacies and doctors. Those are the 2 Bs we want to empower. So by working together with the supply side, such as the pharmaceutical companies, the distributors and marketplace vendors and other service providers, to have a better supply platform. And companies like us, without the background, with super big companies, we can only rely on our own ability to innovate and our ability to execute. And the fact that we survived to date proved our ability to innovate and execute.

So the third question is about our supply chain infrastructure. So we probably -- we were a bit conservative before, and we didn't anticipate such a fast growth. So now we are -- I think it became a bottleneck, the supply chain infrastructure. So we added new 2 fulfillment centers, 1 in Northeast, 1 in Northwest. And the other 6 are all in the process of enlarging capacity and throughput. So we are really drastically improve our total capacity. At the same time, we are upgrading our supply chain management systems. So we are optimizing -- where we're optimizing our supply chain network, we're also optimizing our categories and assortments. So all these optimizations are done through data models and algorithms. So we formed a new team called BPI, Business Process Improvement, really applied lean processes to apply to every single of our business process. So I -- we foresee that we'll have continue to improve not only our infrastructure, but also our processes.

Your next question comes from the line of of CIBC.

Hi. This is from CIBC. Congratulations on the company progress. Well, actually I have 2 little questions. And the first 1 is well, actually, I noticed that the company has achieved high-growth since IPO in 2018 and reporting around 9-fold increase in revenues over the past 3 years. So I just wondered what has been the key driver for this growth? And what is the -- and on the other hand, what is the new revenue stream of the company in 2021? What should we expect in 2021? And this is my first question. And my second question is about your B2B business. Well, we see that B2B represents a large portion of our business revenue type. And how is this B2B business different from additional distribution businesses? And what makes you outperform those traditional . That's my question.

Thank you. I think let me take the questions. So we really enjoyed the growth in the last 3 years. It's really the S2B2C model that's propelling the growth. For any business to sustain this level of growth, we've got to have a model to propel that growth. So secondly, it's really the execution of the model. For instance, we started the S2B2C business in the middle of 2017 from 0. We made it a strategic imperative to take on more than 50% of all pharmacies across China. And within 3 years, we're serving more than 300,000 pharmacies. Of course, it's one thing to formulate a strategy, and it's another to execute the strategy. 111 is very proud of its capability and execution. Because of the above 2 factors mentioned, I think we're very confident in sustaining a high-growth rate in future years. And obviously, we had such a wonderful market. It will be a long time before we can reach the ceiling of the industry. The new revenue streams, really, obviously, we already have a fantastic revenue stream. But we have very innovative models by building that supply platform. We should expect not only revenue streams, but also profit streams or margin streams. And we're going to extract more margins out of our e-commerce, the traditional e commerce, as everybody else does, that's easily understood. And of course, we want to create a lot of service modules where we can receive fees. For instance, we have a business model or a business unit internally called JBP, or and if you translate it into English, it's called the treasure box, where we attract a lot of -- little distributors on our platform, and we charge them a fee for providing logistical services and marketing services for them. And of course, we also can build revenue streams out of commercialization for pharmaceutical companies. And there's also digital services and marketing fees, et cetera. So your last question about the B2B's representation in our revenue and the differences with other distributors and so on. It's a very interesting one. I want to approach your question from this angle. If you look at a traditional distributor, it is just a one big B, we are talking about Sinopharm or Shanghai Pharma or et cetera, right. And there are many limitations for one big B in servicing customers in today's digital world. And obviously, 111, is a technology company, and our focus is to build a supply platform to enable small Bs on our platform as well. So we can actually service consumers collectively. I want to give you an example to better illustrate our differences. I spoke about the treasure box or the in our internal organization. So in that business unit, if you look at what we do is that we allow those commercial distributors to put their inventory into our fulfillment centers and they manage their own stock -- in-stock rate, out-of-stock rate and also they manage their own prices. And once an order is placed, we aggregate that order and deliver to the customer in 1 package. So we have thousands of those partners on our platform. So before this particular distributor, he or she can only service the pharmacists in the local city. And now they suddenly have access to over 300,000 pharmacies across the country. Even if it is a single item, we can also deliver in 1 package with minimum marginal cost. But let's also look at the impact on the pharmacy side. Before, they have to work with a few dozens of those distributors. And now they can simply place 1 order on our app and everything will be delivered in 1 order. So instead of a dozen orders, they just need to handle 1 order. And think about the moment when they receive the package, just 1 instead of many. Every order they have to go through quite a number of steps administratively to be compliant according to the regulations here in China. So not only do we help the distributors, the pharmacies, the customers or the consumers, we also create tremendous value for the industry. And think about how much shipping costs we can save over time. So the traditional distributors are not really doing business the way we do. Thank you, I hope that answered your question.

Yes. That's very clear and exactly the pain points after clear . And we -- I think we can be more excited on the future achievement of the company. And congratulations again on the company's progress.

Your next question comes from the line of .

Hello. Kudos to everyone at 111 for the strong performance last quarter. I have a question. What are your projected revenue and gross margin for 2021? And when will you become profitable?

Thank you for the question. We have given a guidance on revenue on a quarterly basis. So for Q1 2021, our guidance for the revenue for the quarter is between RMB 2.53 billion to RMB 2.6 billion. So that will represent -- if you're taking out the onetime pandemic impact for the first quarter last year, that will represent like 87% to 93% growth. So internally, we continue to drive this business close to 100% growth, so that's our aim. You have seen that we rapidly expand our business scale while steadily improve our margin, especially on the B2B segment. We believe we will be able to do that -- continue to do that because we are building more and more direct sourcing partnership with pharm companies, and we ask the team to focus on more on those profitable items, drug items, selling through the channel. In terms of profitability, I mean, if you look at our OpEx for the year 2020, it's around 10%. If we double our size again in 2021 and our expenses normally grow like 20% to 30%, so that OpEx will be lower to like 5% to 6% of total net revenue. So if we improve our margin from 4.5% now to 6%, then you see that we are almost a break-even status. So we do not have an exact date for when turning profit, but we think it's quite near. And we are very optimistic about it.

Your next question comes from the line of of IDG Capital.

Hello? Can you hear me?

Yes, please go ahead.

I have -- yes, sorry. I have 3 questions. So my first question is, as you just mentioned, there's a big opportunity for the digital transformation of health care industry in China. So -- but we know there's like very fierce competition between companies, especially for those big players, even though you just mentioned that the big players are not being the tempting as the company. But I think -- I assume that it's quite easy for them to just like enter the market as the company. So what do you think is biggest entry barrier for those companies -- those competitors? And my second question is, so you -- in the future, do you consider the company as a -- like 100% SaaS tool -- as a tool in the future, like you only charge the service fees instead of the -- like the -- instead of the current business model? And my third question is, so I think there are a lot of -- I know there are a lot of small pharmacies in China. But I think there's a big trend for the big pharmacies to acquire those small ones. So what do you think about that? Like if the big ones acquire the small ones, I think there will be like smaller opportunities for the company. That's my question.

Thank you, . Let me try to provide some answers to your questions. First of all, on the competition in the digital transformation. That's great news, right? So we have many, many companies participating in that transformation, and 111 is being one of them. And how do we differentiate? I'll provide some answers just now, and obviously, you want to dig deeper. Obviously, nobody is going to take the whole piece of the cake and even if you are the biggest player in the health care space. So our focus is really on drug commercialization of medicine. And if you look at our mission, it's very different from others. If you look at the naming of the company, when you talk about whatever health, that is a very obvious B2C play. And our positioning is a S2B2C. So obviously, we focus on doing the best job in drug commercialization. And that is our differentiation, that is our view because the supply side can be pretty big and complex. And one company has always got limitations. So in the traditional sense, B2C and B2B play quite an important role. But we anticipate that moving forward, a more innovative model is going to be asked to S2B2C. That is why we're investing in resources in building that supply platform. With regards to if we're going to be a pure SaaS company? I would say, no. We are a technology company, but being a SaaS player, obviously, that's not something we are guiding the company towards to. So we're not going to be a software company, although software is going to be an important part of our business. So the way we see in the future is that our basic model is S2B2C. But within that model, there is going to be an element of SaaS. And we're actually having very encouraging adoption from many, many pharmacies, and we already signed up a lot of them. And we are expecting more and more of them are going to some of the SaaS services we provide. And the third question about the market consolidation. I have to agree with you that the consolidation is taking place. And obviously, it's not anything new. Over the last 10, 15 years, that consolidation has been taking place. But even if you look at where we are today, the fragmentation is still the main theme, even if you take the top 5%, top 6%, even the top 10%, I would say that only takes about 10%, 12% of the total market share. And the 80% plus, close to 90% of the market are still single stores and small chains. And obviously, the bigger chains are becoming bigger, but these fragmentation will still going to be the reality, and they are not going to go away completely. But we like fragmentation as a technology company because we believe our S2B2C model is a perfect fit to help those smaller guys to stay in business by having access to a variety of services on our supply platform. And that's the way we see forward. Okay, the bigger are getting bigger, but the smaller ones are still going to be there for a long time, and that is our view.

Let me also add a point that more than 50% top 100 pharmacy channels are enjoying our services.

That's also true.

I have a little question regarding your answer. So does that mean that like following this trend of consolidation, the remaining pharmacies are not that in good condition. So the remaining market for us is not that big. And also for the first question, so do you think that because the digitalization thing, so do you think like the big players have more database and data -- consumer data -- larger consumer database the company, so they have a big advantage for the digitalization of the health care industry?

I'll happen to hold the view, no. Obviously, they have more consumer data. But for patient data, it is not the same as consumer data. And it is one thing to sell a whole bunch of nutrition products or food supplements, et cetera. But when it comes to prescription drugs, I do not -- B2C is the wrong model because when it comes to prescription, it is always the doctor to issue those prescriptions. That is why we define pharmacies and doctors as our B. And our model is very much focused on really enable those small B's to better service consumers or patients in that matter.

As there are no further questions, I would now like to hand the conference back to Ms. Monica Mu for any closing remarks.

Thank you, operator. In closing, on behalf of the entire 111 management team, we'd like to thank you for your interest and the participation in today's call. If you require any further information or have any interest in visiting us in China, please let us know. Thank you for joining us today. This concludes the call.

Ladies and gentlemen, you may now all disconnect your lines. Thank you for participating.