Fufang Tech Aims to Integrate 100,000 Independent Pharmacies and Reconstruct China's Pharmaceutical Distribution Ecosystem

Across various market segments of the healthcare industry, although China’s retail pharmacy channel has undergone nearly two decades of rapid development, it still holds substantial room for evolution in terms of market concentration and operational maturity when compared with the U.S. pharmacy sector, while also harboring immense latent market potential poised for explosive growth.

According to data from Zhongkang CMH, the total market size of retail pharmacies in China reached RMB 309.3 billion in 2015, representing a 9.8% year-on-year increase from 2014. Industry analysts expect that, driven by favorable factors such as population aging and the outflow of prescription drugs from hospitals to retail channels, the market size will easily double to exceed RMB 600 billion.

Moreover, as the health management business matures, the incremental market derived from retail pharmacies—one of the key entry points—will also reach a scale of hundreds of billions.

How to Seize This Market?

The retail pharmacy industry is primarily divided into two major camps: established chain giants and entrepreneurs armed with new technologies, new business models, and capital backing.

Following Yixintang’s IPO in 2014, Yifeng Pharmacy and Laobaixing swiftly followed suit, listing on the capital market in the first half of 2015. Leveraging funds raised through initial public offerings (IPOs), secondary share placements, and short-term financing, these three pharmacy chains amassed financial resources to aggressively pursue cross-regional acquisitions of competitors and expand their market footprint.

The wave of mergers and acquisitions is set against an industry backdrop where, taking 2014 as an example, the top three chain pharmacy operators in the United States accounted for 92% of the market share. In contrast, although China had a vast number of retail pharmacies, market concentration was significantly lower. That year, the combined sales of the top 100 pharmaceutical chain enterprises in China accounted for only 28.1% of total market sales, with the top five companies representing 9.7% and the top ten companies 15.2%.

According to statistics from the China Food and Drug Administration (CFDA), by the end of November 2015, there were 204,800 stores under national pharmaceutical retail chains; 243,200 independent retail pharmacies; and a total of 448,000 retail pharmacy outlets nationwide. Compared with the end of 2013, these figures represented growth rates of 29.5%, -11.4%, and 3.6%, respectively.

Furthermore, the chain pharmacy rate increased by 16% over these two years. It is evident that the footprint of chain pharmacies is expanding rapidly, while independent pharmacies are facing increasingly difficult survival conditions.

On September 7, Guoda Drugstore was officially injected into Sinopharm Accord through the group’s business restructuring and finally listed on the A-share market. After observing the fierce M&A battle in the pharmacy sector for over a year, Guoda Drugstore is also set to join the fray. In August, Zhao Xiaochuan, General Manager of Guoda Drugstore, stated that the total number of stores would expand to 10,000 by 2020. With only 3,268 stores currently, and based on its approximate franchise rate of 30%, there is a gap of more than 4,000 stores to be filled through either self-built outlets or acquisitions. Considering the saturation level of pharmacies in various markets and policy restrictions, acquisitions may account for a larger proportion.

However, with continuous large-scale capital expenditures on acquisitions on one hand and the pressures stemming from poor integration on the other, the M&A process has proven less than satisfactory thus far.

For instance, there have been reports that the majority of stores acquired by Yixintang are sole proprietorships, posing integration risks in areas such as store renovation and upgrades, as well as personnel management. In addition, Yixintang’s recent acquisition announcements have disclosed various risks, including rising rental costs for store premises and the inability to renew leases. Notably, Hainan Guang’antang, which Yixintang acquired in 2015, has recently faced allegations of overdue payments to suppliers.

Such frequent acquisitions have also placed significant financial pressure on the three major pharmacy chains, which quickly turned to other financing methods, such as follow-on offerings, after raising funds through their initial public offerings (IPOs).

O2O indeed spawned a massive bubble. However, in an era where technologies such as mobile internet and big data have already exerted a profound impact on the entire retail landscape—even disrupting certain chain-store models—does the pharmacy industry have any alternatives beyond repeating the consolidation playbooks of decades past?

Wang Yan, Founder of Fufang Technology

There are currently three main models for integration among pharmacies: the direct M&A model—favored by large chain operators; the loose joint procurement model—preferred by independent pharmacies and small-to-micro chains; and the equity-based cooperation model—a format that has never been particularly mainstream in China.

In the previous two years, the mobile health sector experienced an explosive boom, giving rise to numerous pharmaceutical B2B projects primarily aimed at replacing “joint procurement.” A significant number of these projects secured financing. However, Wang Yan, founder of Fufang Technology, and his team believe that this transformation in the pharmacy industry was neither thorough nor a systematic innovation. Moreover, traditional B2B websites are fundamentally ill-suited for procurement scenarios involving thousands of SKUs. What he aims to achieve is deep integration of business processes across corporate boundaries, thereby reconstructing the entire pharmaceutical distribution ecosystem.

“Will the customers you serve be the losers or winners of the industry’s future?” This was the question investors posed to Wang Yan before investing in Fufang. Given Fufang’s business model, this was undoubtedly a sharp question with a slightly provocative tone.

In summary, Fufang Technology has developed a smart pharmacy cloud platform—Fufang Cloud—based on multiple functional modules including supply chain models, membership marketing, electronic prescriptions, and online pharmaceutical services. This platform helps independent pharmacies and small pharmacy chains achieve intelligent operational management, rapidly elevating their capabilities in brand enhancement, adoption of new technologies, and economies of scale to levels comparable with large chain pharmacies. Fufang Technology plans to establish Fufang Cloud as the operational platform for 100,000 pharmacies, thereby forming a nationwide virtual pharmacy network, or what can be described as China’s largest smart pharmacy alliance. This vision directly addresses a critical question: The purpose of Fufang’s existence is to ensure that its users emerge as winners in future competition.

From the perspective of expansion efficiency alone, virtual pharmacy networks built on technology and resource-sharing platforms are clearly more efficient than the physical pharmacy acquisition model, which requires substantial capital support.

Concurrently with the integration of pharmacies, or on the premise of successfully incubating disadvantaged groups within the pharmacy sector, Fufang Technology will integrate upstream operations in a bottom-up manner, starting from the consumer end, to restructure and optimize the pharmaceutical distribution supply chain.

Fufang Technology’s Systematic Vision for Transforming the Retail Pharmacy Industry: As Wang Yan Mentioned in His WeChat Moments:

Under the pressure exerted by large pharmacy chains, many regional chains are deeply conflicted about whether to sell or hold their ground, let alone independent pharmacies, which are closing in droves. Data shows that although the total number of pharmacies is increasing, the number of independent pharmacies decreased by more than 10,000 in 2014 and by over 20,000 in 2015.

Of course, there is also an optimistic side to the reality for Fufang Technology. Specifically, among the more than 300,000 independent pharmacies and small-and-micro pharmacy chains, operational difficulties are not universal. Many pharmacies are achieving solid profitability, or possess strong operational foundations with significant potential for improvement.

In Wang Yan’s view, the factors that place independent pharmacies and small micro-chain pharmacies at a competitive disadvantage mainly include three aspects: supply chain bargaining and management capabilities, marketing capabilities, and brand influence. In fact, brand influence is largely determined by the combined strength of the first two aspects.

The positioning of Fufang Yun is to provide integrated solutions in procurement, operations, and marketing for independent pharmacies and small-scale pharmacy chains, leveraging various technological tools and platforms. Meanwhile, it aims to build a nationally influential retail pharmacy brand through “Funian Tang,” enhancing the overall brand image of the pharmacy alliance via chain-brand franchising.

The flagship product—Compound Cloud ERP (available in both standalone and chain-store versions)—is a SaaS-based management software that enables fully online, end-to-end pharmacy operations. Most importantly, the ERP serves as the pharmacy’s exclusive core system, acting as the essential conduit for procurement and sales, and forming the fundamental basis for deep business process integration, cross-enterprise connectivity, and genuine reach to end consumers.

In terms of regulatory compliance: By monitoring the entire pharmaceutical distribution process, it helps enterprises meet GSP certification standards. Furthermore, based on a cloud platform architecture, the system can be elastically upgraded for tens of thousands of pharmacies in real time to align with the latest policy adjustments, significantly reducing system maintenance costs and improving maintenance efficiency.

Compound Yunyi will launch on the e-prescription platform, providing one-stop access to health consultations, e-prescriptions, and online prescription review, while supporting comprehensive integration with local medical insurance systems. This will help pharmacies adopt e-prescriptions and effectively boost sales revenue.

Supply chain management is, of course, a critical component. Pharmacies can significantly reduce costs by placing group-buying orders and engaging in centralized procurement through the platform. Leveraging intelligent inventory control with dynamic tracking and early-warning systems can effectively minimize losses and improve capital turnover efficiency. Moreover, these functional modules require no changes to existing business processes and no purchase of dedicated barcode scanners, resulting in virtually zero upfront investment.

“Compound e-Pharmacy” is a membership integrated marketing platform specifically developed by Compound Technology for retail pharmacies. Integrating membership management, member services, member marketing, and intelligent analytics, it helps retail pharmacies address the three core challenges in membership marketing—information delivery channels and efficiency, promotional campaign effectiveness, and the construction of member service systems—through eight major functions, including micro-consultation, micro-services, micro-management, and micro-events. Fully considering user convenience, Compound e-Pharmacy adopts a modular, wizard-style operational model and setup process to rapidly, concisely, and efficiently achieve precise outreach and two-way interaction in pharmacy membership marketing, thereby effectively enhancing user stickiness and repurchase rates.

The foundation of Fufang Technology’s reconstruction of the pharmaceutical distribution ecosystem is the virtual pharmacy network powered by Fufang Cloud. ButYes, Wang Yan did not intend to rely entirely on “empty” rhetoric.

Previously, Fufang Technology acquired a small-scale chain pharmacy and built its own branded chain, “Funiantang,” on that foundation.

At this point, Wang Yan outlined a pharmacy expansion network primarily structured into three tiers. The top tier consists of approximately 1,000 self-owned brand pharmacies, predominantly large-format and flagship stores; the second tier comprises around 10,000 pharmacies authorized under the “Funiantang” brand; and the bottom tier includes tens of thousands of smart pharmacy alliance members utilizing the Fufang Cloud Platform.

For proprietary-brand pharmacies, the current focus is on small-scale expansion. The primary objective is to undertake the mission of validating and optimizing the Fufang Cloud Platform through the integrated operation of an online technical platform and offline retail business processes, thereby enhancing the penetration rate of Fufang Cloud in the retail pharmacy industry more rapidly with more compelling operational performance.

Furthermore, the implementation of policies such as the separation of prescribing and dispensing, the outflow of prescriptions from hospitals, and the new healthcare reforms has accelerated the restructuring of industry layout and structure. In the future, a pharmaceutical market worth hundreds of billions of yuan will shift from hospitals to community pharmacies. Meanwhile, with the intensifying aging population and changes in residents’ disease profiles, the chronic disease medication market is gradually becoming the main battlefield and a key development opportunity for the pharmaceutical distribution industry. The resulting changes in individual diagnostic and treatment behaviors, along with the growing demand for home-based elderly care, face a significant market gap. Fufang is seizing this opportunity by integrating resources within and across related industries, incorporating chronic disease management, health insurance, health consulting, and financial services into the operational processes of retail pharmacies. This approach aims to improve pharmacy management systems, enhance service quality, and build a nationwide terminal community service network, thereby providing platform-based support for the market explosion and industrial upgrading in the pharmaceutical retail sector.

Undoubtedly, if this round of consolidation among retail pharmacies proceeds gradually, it will naturally drive Compound Technology’s integration of the upstream retail pharmacy sector. Brand manufacturers, distributors, and warehousing and logistics providers will all face a completely transformed industry landscape.

Benefiting from dynamic feedback characterized by ultra-large samples and ultra-high speed at the information level, brand manufacturers will undoubtedly achieve maximal optimization of their production plans and develop marketing strategies based on vast datasets of precisely targeted consumer segments. Meanwhile, distributors will inevitably undergo a round of consolidation, as the Fufang Cloud Platform is poised to significantly enhance efficiency across all aspects of pharmaceutical marketing, distribution, and financial services.

For the owner of the Fufang Technology platform, it is undoubtedly the greatest beneficiary.

This is a rather alarming concept, and also an extremely compelling story.

Fortunately, even amid such a capital winter, investors have been willing to back the company. In May 2016, Fufang Technology secured an early-stage investment. According to business registration records, the investors included Gaoling Capital and Qingliu Venture Capital, among others. Notably, Zhuang Chenchao, former CEO of Qunar.com, appeared on the publicly listed board of directors, underscoring the influence of Fufang’s business model in the investment community and its significant growth potential within the industry.

Founder Wang Yan previously served as CIO of CITIC Pharmaceutical for nearly eight years, possessing deep expertise in the operational dynamics of the pharmaceutical distribution industry and internet platform business models. Furthermore, Fufang Technology boasts an expert-level team across pharmaceuticals, IT, and data analytics. With Zhuang Chenchao’s joining, Fufang Technology is expected to integrate stronger internet DNA, propelling the company onto a broader development platform.