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111 Inc (YI -2.86%)
Q2Â 2020 Earnings Call
Aug 20, 2020, 7:30 a.m. ET
Contents:
- Prepared Remarks
- Questions and Answers
- Call Participants
Prepared Remarks:
Operator
Hello, ladies and gentlemen, and thank you for standing by for 111, Incorporated Second Quarter 2020 Conference Call. [Operator Instructions]. After management's prepared remarks, there will be a question-and-answer session. [Operator Instructions]. I would now like to turn the meeting over to your host for today's call. Ms. Monica Mu, Investor Relations Director. Please proceed, Monica.
Monica Mu -- Investor Relations Director
Thank you, Operator. Hello, everyone, and thank you for joining us today for 111's Second Quarter 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, Chief Financial Officer; Mr. Harvey Wang, Co-COO; Ms. Monica Mu, Investor Relations Director; and Mr. Alex Liu, Finance Director.
As a reminder, today's conference call is being broadcast live via webcast. In addition, a replay will be available on our website following the call. The Company's earnings press release was distributed earlier today and together with our earnings presentation are available on the Company's IR website at ir.111.com.cn.
Before we get started, let me remind you that this call may contain forward-looking statements made under the safe harbor provision of the Private Security Litigation Reform Act of 1995. Such statements are based upon management's current expectations and the current markets and operating conditions and relates to events that involve known and unknown risks, uncertainties and other factors, all of which could cause actual results to differ materially.
For more information about these risks, please refer to the Company's filings with the SEC. 111 does not undertake any obligation to update any forward-looking statements as a result of new information, future events or otherwise, except as required under applicable law. Please note that all numbers are in RMB and all comparisons refer to year-over-year, unless otherwise stated. Please also refer to our earnings press release for detailed information of our comparative financial performance on a year-over-year basis.
With that, I will turn the call over to our CEO, Mr. Junling Liu.
Junling Liu -- Co-Founder, Chairman, and Chief Executive Officer
Thank you, Monica. Good morning and good evening, everyone, and thank you for joining our 2020 second quarter earnings call. I would like to start with a quick note on the coronavirus pandemic.
The situation in China has thankfully come under control, and life is slowly returning to some form of normalcy. However, we cannot lose sight of the fact that many parts of the world face an ongoing unprecedented health crisis and a looming recession. We at 111, Inc. continue to stand in solidarity with the global community in the fight against COVID-19. Our heart goes out to those who have been affected by this insidious disease and we express our utmost admiration and gratitude for the front line healthcare workers tending the sick, the scientists researching treatments and vaccines and the essential workers who have kept everyday life running through all.
I'm also proud of the dedication, tenacity and resourcefulness that our employees have demonstrated throughout this challenging period, as they continue to deliver for our clients and provide essential support to our consumers. Before diving into our earnings, I would like to first touch on an important strategic development that we announced today. And that we have completed the capital injections from new investors to invest an aggregate of RMB419.28 million, approximately $60.49 million into our principal subsidiary, Yao Fang Information Technology Shanghai Co., Limited at a pre-money valuation of $1.2 billion, approximately RMB8.33 billion.
In addition, it is our intention to pursue a listing of this principal subsidiary on the Shanghai Stock Exchange's STAR Market. You can find a recap of this announcement with details in Section 1 of the deck. We feel that this move brings many strategic advantages, because firstly, it will bolster the Company's resources to invest in and pursue opportunities for rapid expansions. Secondly, will enable us to tap into new segments of China's Capital Markets and attracting domestic investors who want to participate in a vibrant healthcare sector and the Company's growth.
Thirdly, it will further strengthen our brand as we broaden and deepen our partnership with various stakeholders and the leading domestic pharmaceutical companies critical to our success as omnichannel enabler. Fourth, it will solidify 111's leading position in China's digital healthcare ecosystem. And finally, it will realize the valuation that reflects the strengths and the phenomenal growth prospects at 111.
While we are excited and energized to pursue this opportunity, we're firmly committed to our listing status on NASDAQ, which will be complemented by our subsidiary listing in China. Having our ADS listed and the trading on NASDAQ has allowed the Company to access global capital markets and to maintain a profile that will continue to help us build partnerships with world-leading pharmaceutical companies in their drug commercialization effort in China.
Now, let's move on to our second quarter earnings and you can find the details in Section 2. I'd like to provide an overview of the Company's business and operational performance in this quarter, then hand over to our CFO, Luke for the financial review and the guidance for the third quarter before opening the call for Q&As.
We believe we have a winning formula in our full prolonged strategy outlined on Slide 8. This is evidenced by our tremendous growth since the IPO summarized on Slide 9. Moving on to the overall financial and the business performance. In this quarter, we have kept up the strong momentum to deliver net revenue of RMB1.622 billion, up 93.5% year-over-year. And gross profit doubled over the same period last year to over RMB85 million with non-GAAP net loss continuing to narrow from 10.1% of last year to 4.9% as a percentage of net revenue, another step closer to profitability.
Our multi-faceted growth strategy is driving robust performance across all of our business segments. In our B2B segment, revenue grew by 113.7%, to RMB1.39 billion. We continue to lead with the most expensive pharmacy network in the country covering over 50% of the total drug stores in China. In the quarter, the Alliance expanded to 280,000 retail pharmacies, an increase of 47% year-over-year. On the back of a wider network and a strong consumer demand, pharmacy orders saw an increase of 188.6% over the same period last year, underpinning this growth in orders and revenue are several services and capabilities designed to better meet customer's needs and enhance their stickiness with us.
One, our unparalleled supply chain management system that helps our customers reduce inventory turnover days and enhanced product sourcing and assortment. Two, supply chain financing services that frees up cash flow for our customers and help them achieve greater operational efficiency. Three, virtual consultations through our online hospital and e-prescription services that enable retail pharmacies to fill drug prescription seamlessly for patients.
Four, a partnership with Meituan that allows our pharmacy customers the ability to open an online store via 111's 1 Drug Express on meituan.com. Our retail pharmacy customers benefit from an expanded customer base, enhanced traffic, increased sales and access to Meituan's delivery capabilities.
In turn, we gain more data on consumer demand and the purchase behaviors, which helps us improve our machine learning capability to better serve our pharmacy customers and ultimately further their stickiness with us. In our B2C segment where the lifetime value of a customer is largely driven by recurring services such as online consultations and e-prescriptions, in this quarter, service revenue grew by 46% year-over-year to RMB6.2 million, while product revenue showed steady growth over the last two quarters, supported by our best in class CRM system.
We serve patients with chronical diseases with a refill rate exceeding 60%. The value of our services to patients continues to grow as we add breadth and depth to our offering. The number of strategic partnerships we have formed with domestic and global pharmaceutical companies continued to grow, up 108.9%, to 259 in the first half of 2020.
In addition to direct sourcing, which lowers prices for end consumers, these partnerships also bring to our patients the latest innovations in pharmaceuticals. We provide omnichannel support to our strategic partners in their drug commercialization efforts with services such as brand and product promotion, patient education and the customer analytics and pricing monitoring.
These services have shown only promises as seen from the encouraging results of two of our multinational partners, Eli Lilly's diabetes drug Trulicity and Novartis' Cosentyx. Both drugs are blockbusters in their respective categories. We're confident that we can help them achieve their potential in the Chinese market.
Driven by the strong demand from the pharmaceutical product online retailers, revenue from our e-channel segment grew by 112.8% year-over-year to RMB64 million, while the number of orders increased by 216% over the same period last year. As we grow this network of partners, we expect revenue for this segment to continue its upward trends. We also believe that the strength of this segment will further enhance our ability to support our strategic pharmaceutical partners in their drug commercialization efforts by providing them an additional proven digital platform for sales.
Beyond our three core segments, we are continuously exploring new strategic opportunities that can leverage our existing infrastructure while deepening our core competency in digital healthcare. In particular, we believe that helping patients in ongoing diseases management and not just the one-time treatment presents a vast opportunity both in terms of improving health outcomes and fulfilling a tremendous unmet market need. In a country of 1.4 billion people, we cover a 1 billion of -- with over a 1.4 billion people who are living in Tier 3 to 6 cities with insufficient access to healthcare. We believe that our mission to digitally connect patients with drugs and healthcare services will meaningfully impact the life of many.
And we are well positioned to do so with our expertise in cloud-based supply chain management, AI analytics and an omnichannel drug commercialization platform that brings together retail pharmacies, online and retail platform partners, doctors and the pharmaceutical companies in service of patients who otherwise can't get quality care in their localities.
Virtual medical consultations and in home drug delivery clearly provide tremendous value for hundreds of millions of patients across the country. But the power of this model will only be fully realized when extended beyond today's focus on treatment of minor ailments to a support system for patients, particularly for ongoing management of medical conditions.
We at 111 are committed to building the capability and offering for this comprehensive healthcare management model, one that allows us to take a comprehensive view of each patients. The benefits of such a model to both the patients and our Company are affirmed by the recently announced merger between Teladoc Health and Livongo.
As proof of our belief in and commitment to this opportunity, we have recently launched in Shanghai, the lung cancer patient care program for holistic management of the disease. The program spearheaded by the China Primary Health Care Foundation offers diagnostic and the treatment services and the resources for lung cancer patients delivered via full lifecycle doctor patient interactive platform to be established and operated by 111, patients can access disease education materials, medicare guides, online consultation, follow-up consultation, and the clinic visitation.
So far, the program has attracted the participation of 20 domestic and international pharmaceutical and medical equipment companies with an interest in lung cancer. As we further strengthened our digital healthcare infrastructure, we bring ever greater value to our stakeholders as shown in Slide 16. One, for the pharmaceutical companies for whom we provide drug commercialization support, our data driven cloud-based system allows for better targeting and profiling of patients, so that more personalized products and services can be delivered to them resulting in faster updates of new drugs and greater commercial success.
For our retail pharmacy customers, our AI based smart sourcing system, machine learning capability, and cloud-based e-Prescription Service translate into more effective sourcing and a better inventory management, leading into greater cost efficiency, optimal product assortment and a broader market reach.
For our marketplace merchants, our Business Intelligence Portals provides a real time picture of sales, delivery status and the customer feedback, all of which are critical for superior sales management and high customer satisfaction. Clearly, when our customers succeed, we succeed also. And our digital capabilities also provide a more direct benefit to our operations. Empowered by this industry leading tools, our business development team is able to provide better service to prospects and the customers alike achieving higher conversion rates and customer loyalty.
In conclusion, our results in the first half of 2020 once again demonstrated the power of our technology enabled and integrated model and the effectiveness of our disciplined execution. Looking forward to the rest of the year and beyond, we will continue to stay focused on executing against our four growth pillars to deliver long-term value to our shareholders.
With our strengthened financial resources from the capital injection, we'll have a greater ability to seek out and capitalize on strategic market opportunities, further strengthening our leadership in China's digital health market accelerating our growth and expediting our next phase of expansion.
Thank you. With that, I will pass on the mic to Luke.
Luke Chen -- Chief Financial Officer
Thank you, Junling. Moving to the financials, you can see the details for the second quarter 2020 in Section 3 of our presentation from Slide 18 to 20. I would like to highlight a few key business and financial metrics and I will focus on year-over-year comparisons. All numbers are in RMB unless otherwise stated. Let's start with our performance for the second quarter. Total net revenues for the quarter grew 93.5% to RMB1.62 billion, which was driven by the continued strong momentum across all our business segments. Our B2B segment revenue which includes product revenue and a service revenue grew 113.7% to RMB1.39 billion.
The strong growth in B2B segment was attributed to the increase in number of pharmacy orders, which reached 557,000 with growth rate at 188.6% year-over-year as well as the newly added pharmacies in our network. Our B2C segment revenue also include product revenue and service revenue grew 6.4% to RMB167 million, among which our B2C part of revenue grew 5.3% to RMB161 million for the quarter, while our B2C service revenue grew 46% for the quarter. The increase in B2C service revenue was mainly due to the increase in our digital marketing service provided to the pharmaceutical companies for the patient education and management. Our e-channel segment revenue grew 112.8% to RMB64 million for the quarter, which was mainly driven by the strong demand from pharmaceutical product online retailers.
Overall, our gross profit grew by 101.3% to RMB85 million and combined gross margin was 5.2%, up from 5% a year ago. Compared to the same quarter last year, gross margin in our B2B segment was 3.2%, up from 1.1%. Our B2C segment margin was 12.1% -- 21.1% up from 20.9%, and our e-commerce segment was 6.9% similar to last quarter.
The improvement in gross margin was directly relating to our improved business scale, our smart pricing and assortment management as well as our sourcing capability. Total operating expenses for the quarter was up 24.2%, to RMB177 million. As a percentage of net revenue, total operating expenses for the quarter was down to 10.9% from 17.1% as we continue to improve our operating leverage and optimize our operational efficiency.
Fulfillment expenses as a percentage of net revenue for the quarter was 2.7%, down from 3.3%. Sales and marketing expenses as a percentage of net revenue for the quarter was 5%, down from 9% in the same quarter of last year. G&A expenses as a percentage of net revenue for the quarter was 2.4% down from 3.4% in the same quarter last year. And the technology expenses accounted for 1.1% on net revenue, down from 1.5% in the same quarter last year.
As a result, non-GAAP net loss attributable to ordinary shareholders for the quarter narrows to RMB78 million as compared to RMB85 million in the same quarter last year which accounted for 4.9% of net revenue, down from 10.1%. As to the guidance for the third quarter 2020 on Slide 22 of Section 4, the Company expects total net revenue to be between RMB2 billion and RMB2.17 billion representing a year-over-year growth of approximately 80.1% to 95.4%.
The above outlook is based on the current market conditions and reflects the Company's current and preliminary estimates of the market and operating conditions, as well as customer demand, which are subject to change. Please refer to Slide 24 to 26 of Section 5 for our selected financial statements.
A quick note on our cash position as of June 30, 2020. We had a cash and cash equivalents, and restricted cash of RMB743.5 million compared to RMB697.7 million as of December 31st of 2019. This concludes our prepared remarks. Thank you.
Operator, we are now ready to begin the Q&A session.
Questions and Answers:
Operator
Certainly. Ladies and gentlemen, we will now begin the question-and-answer session. [Operator Instructions]. We have a question coming from the line of Bingyu Chen from Citi. Please go ahead.
Bingyu Chen -- Citi -- Analyst
Hello, good morning, good evening. Thanks for taking my question. I have three questions. First of all, we noticed that the Company has established a a full life cycle doctor-patient interaction platform for lung cancer patients, and what's the recent development? How you value this platform? And will this model be replicated to other diseases? Is just the first question.
And the next question is about, we saw that the B2B segment is developing rapidly. And what's the reason behind, and how will you maintain the growth momentum going forward? And the last question is about the -- how you arrive at a pre-money valuation of about $1.2 billion for the Yao Fang Technology where your market cap of the parent company is around the $550 million. Thanks.
Junling Liu -- Co-Founder, Chairman, and Chief Executive Officer
Okay. Thank you, Bingyu. I think I'll take on the first question.
Yes, in July, in Shanghai, we launched the lung cancer patient care program. The Chinese name for that is called [Foreign Speech]. We launched this program together with China Primary Health Care Foundation and the platform offers the diagnostic and the treatment services for cancer patients. And it has a full lifecycle doctor-patient interactive platform, and the platform will be operated by 111, and on this platform patients can access disease education materials, medication guides, online consultation and follow up consultation, clinic visitation, etc.
Although it is at very early stage, it is showing great potential. The feedback from the doctors who are using the platform said great things about it, and they feel pretty excited by it, and of course the launch attracted many pharmaceutical companies and so far, about 20 domestic and international pharmaceutical companies and the medical equipment companies showed very strong interest. And of course, this is our first step in building this doctor-patient interactive platform and it will be replicated into other disease types and we feel very excited by it, and this links back to the digital platform we are building, and which ultimately goes back to our mission statement which is digitally connecting patients with drugs and healthcare services.
So, I'll pass on the mic to, I think Harvey for the second question.
Harvey Wang -- Co-Chief Operating Officer
Yeah. Second question regarding the B2B growth, I think basically the B2B is developing pretty good. The growth is mainly coming from, I would say from two path. One is our digital marketing capabilities, the other is the enhancement of our supply chain. And for the digital marketing side, we can see, you know we are offering a total solution to pharmaceutical companies to commercialize their drugs through our digital marketing tools. For example, we enable our B2B clients with cloud-based digital services such as cloud pharmacy services, cloud clinic, and cloud imagery and cloud BIM.
We also developed the Hawkeye and Turbo tools to use big data and Internet technology to build up a mechanism for our sales taskforce to acquire new small customers to activate existing customers and also improve BAU and ARPU, especially in the lower-tier cities, which contribute to a major part of our B2B sales model.
And, on the supply chain side, we are getting more and more direct sourcing from our partnership from -- with those pharmaceutical companies, and also our enhancement, our continued investment on our logistics network, help us to provide better services to our B2B customers. And last but not least, as Junling just mentioned, we also provide supply chain financing services that frees up cash flow for our B2B customers and help them achieve greater operational efficiency.
Thank you.
Luke Chen -- Chief Financial Officer
Yeah. This is Luke. Let me answer the question on the pre-money valuation of this $1.2 billion. We believe, currently we are significantly under-valued with a market cap around like $500 million in the NASDAQ. So this pre-money valuation of $1.2 billion is similar to when we got listed back to two years ago in September of 2018. But if you look at our business size, it's more than doubled. In fiscal year 2018, we had -- the Company had a net revenue of around RMB1.8 billion. And in 2019, we achieved net revenue of more than close to RMB4 billion. In the first half six months of 2020, we already achieved a net revenue of RMB3.2 billion. So we've more than doubled the business size. And we are very happy to see that those -- those investors fully recognize our value and have confidence in this Company and we are very excited to complete this round of financing. Bingyu, hope we answered your questions.
Bingyu Chen -- Citi -- Analyst
Yeah. Thank you, so much. Thank you, Junling, Luke and Alex. Thank you so much.
Junling Liu -- Co-Founder, Chairman, and Chief Executive Officer
Thank you.
Operator
We have the next question coming from the line of Sherry Yin from J.P. Morgan. Please go ahead.
Sherry Yin -- J.P. Morgan -- Analyst
Thank you for taking my question and congratulations on the great result again. This is Sherry from J.P. Morgan. I have two questions. The first question is about our STAR Market IPO plan. Could you share more about expected IPO timeline and potential strategic plan change after the capital ratio? And my second question is about the e-channel business segment. We saw this segment maintained a very outstanding growth, both in first quarter and second quarter and also very stable margin, could you help us understand what's the market appetite of this segment, and gross margin trend compared with our B2B business in the long term? Thank you.
Junling Liu -- Co-Founder, Chairman, and Chief Executive Officer
Yes. Thank you, Sherry for your question. First of all, with regards to the timeline, obviously we need to meet the Chinese regulatory requirements, and I would encourage you to refer to our press releases as we continue to disclose the progress of the process. And with regards to the strategic plan, obviously, our strategy has been very clear with this new round of financing, obviously, we are very, very confident to continue to execute on the strategy, and with the extended reach to the domestic market, that's going to put us in a better position. And the money will be well spent on innovative technologies, will be spent on our supply chain capabilities to really further generate more growth of our business.
I think there is another part of the question, I think Harvey can take on.
Harvey Wang -- Co-Chief Operating Officer
Yeah, for the question regarding e-channel, as you just mentioned, we are seeing a very good trend on this e-channel business growth. The reason I think is that more and more pharmaceutical companies are willing to authorize us as sales channel for these e-channel management. To elaborate this business model, the pharmaceutical company, we are -- signed strategic cooperation with us, and then we deliver a well-designed service packages to these business partners, including a very important inventory management, as well as the price management with them, especially for in online business.
We have now expanded our customers to almost all mainstream online drug sales platform. Through our supply chain system and our price management PIS system, we help our customers, those pharmaceutical companies to better control their inventory turnover and also better monitor and manage the price in each online sales platform which is -- they call this, the price management lock, as you can imagine, because in the online sales platform, it is very difficult to better control price. But we have a tool called PIS system where we can real time monitor the price changes and to see any discrepancy.
We believe the strength of our e-channel services will further enhance our ability to support the strategic partnership with those pharmaceutical company, in their job commercialization efforts, by providing them a total solution on a new digital platform for sales. Thank you.
Sherry Yin -- J.P. Morgan -- Analyst
That's very clear. Thank you.
Operator
We have the next question coming from the line of Xipeng Feng from CICC. Please go ahead.
Xipeng Feng -- CICC -- Analyst
Hi, this is Xipeng from CICC, and thank you for taking my questions. Actually I have two little questions and my first one is about the Company's digital capabilities. Well, I see that the Company keeps strengthening the digital capabilities in some ways, such as digital marketing and other digital healthcare infrastructure. So, could you please share some more insights on this field? And this is my first question about the digital capabilities. And my second question is about your subsidiary, Yao Fang. I noticed that you mentioned about Yao Fang. So, could you please share some more color on this subsidiary? Including its main operating business? Besides, I also wonder why you guys choose to be listed under STAR market instead of Hong Kong market? Thanks.
Harvey Wang -- Co-Chief Operating Officer
Okay. This is, Harvey. I'll take the first one on the digital capabilities. And our digital capabilities, including digital marketing and there are several part of it. We enable our pharmaceutical companies both services like Cloud DTP services and digital marketing services. As for our customers like those B2B pharmacies, we provide cloud-based services, for example, 1 Drug Express as Junling just mentioned, with our partnership with Meituan and our cloud pharmacy services, cloud inventory services and also cloud clinic services and cloud CRM. For our marketplace partners, we provide them a Business Intelligence Portal and for the internal stakeholders, as I just mentioned in the previous question regarding B2B, we have our Hawkeye system, our Turbo system to help on our sales force to commercialize those drugs from pharmaceutical companies. With all these systems, we have built up a robust mechanism on drug commercialization of both online and offline channels, which we believe we will create great value for this industry and replace the traditional drug sales processes, which require a very heavy investment on manpower, a very heavy investment or marketing dollars, and also having investment of inventory.
Luke Chen -- Chief Financial Officer
I'll take the second question, [Technical Issues] Yao Fang is a wholly owned subsidiary of 111, and why we choose the STAR Market instead of Hong Kong, first of all, we all know that the STAR market has been very hot since its launch. It features some of China most prominent technology companies. So that means listing on the STAR market will allow us to tap into new capital resources in China capital market and provide opportunities for domestic investors to participate in rapid growing health sector especially investing in transformative and innovative company such as us.
And thirdly, Junling also mentioned that we are committed to maintaining our service in NASDAQ, because we believe that it give us a global brand, it give us a very rigorous corporate governance and allow us to partner with multinational pharmaceutical companies on their commercial -- drug commercialization efforts.
Why not Hong Kong? We believe that the STAR market will provide direct access to local capital to support our China operation, and also we saw that we believe that the STAR market is an excellent source of cash to fund our growth in China. Second, we feel that the valuation is relatively attractive. Although that there is no guarantee, but we have seen that the trend and the past successes of other companies like us. And also we believe that the STAR market listing will allow us to raise our profile with our business and investment community in China and the broader region.
Hope that answers your questions.
Xipeng Feng -- CICC -- Analyst
Okay. That helps a lot and very clear. Thanks.
Luke Chen -- Chief Financial Officer
Thank you.
Operator
We have the next question coming from the line of Andrew Lam from Mitsubishi. Please go ahead.
Andrew Lam -- Mitsubishi -- Analyst
Hi, management. Just wondering whether you can hear me well.
Junling Liu -- Co-Founder, Chairman, and Chief Executive Officer
Yeah.
Andrew Lam -- Mitsubishi -- Analyst
Yes. Great. Sure. So, yes, thanks for taking my question and congratulation on the great results. I just have one question. I wanted to understand the key driver of the increased wallet spending per pharmacy for your B2B business. To my understanding, the logic is when you have increased the number of pharmacies, in terms of the wallet spending or the average order value, it should be quite scalable as you just penetrate into more product or more volume growth. But is there any underlying key drivers for example, the increase in wallet spend depends on the SKUs you have available, which again goes down to the number of cooperating upstream drug manufacturing partners that you have. Is that increasing and the rationale of that is, is this kind of like a margin side of kind of control? So yeah, this is my question, if I had explained it well.
Junling Liu -- Co-Founder, Chairman, and Chief Executive Officer
Okay, Andrew. Let me take the question. I think one of your assumption is valid and that is the SKU, we are offering more and more SKU to our B2B customers. And furthermore, we are not using the traditional supply chain model. Actually this is a brand new so called supply chain model, we call it JDP treatment [Phonetic] model. And we have various suppliers and those suppliers they join this JDP program and they join the program, each of them bringing thousands of SKUs. So these program help us to quickly expand our SKU with a very promising margin and efficient inventory turnover.
So with this JDP program, we have bringing about 30,000 SKUs, which is -- help provide a much better so called selections for our B2B customers. And furthermore, as I mentioned previously, our digital marketing capability also help us to improve the wallet share of our customers. For example, we get the so called -- we help the pharmaceutical company to commercialize their drug and our sales taskforce will get a much better -- we can get a much better price from the pharmaceutical companies to direct sourcing. So we also offer so called good price for those B2B customers.
And so they don't have to buy from traditional channels it probably already goes through three or four layers. And furthermore and supply chains financing services also help our B2B customers to better manage their cash flow and help them to buy more from them. I hope I answered your question.
Andrew Lam -- Mitsubishi -- Analyst
Yes, yes. That is great. Yes. So I have no more questions, thank you very much.
Junling Liu -- Co-Founder, Chairman, and Chief Executive Officer
Okay. Thank you, Andrew. Operator, next question?
Operator
Our next question comes from John from RightCapital [Phonetic].
John -- RightCapital -- Analyst
Hi management. This is John from RightCapital. Congratulations. Just a small -- two small questions. One, I noticed that your -- I noticed that your cost of goods sold continue to -- the percentage continue to trend down as well as, as well as your fulfillment expense ratio, very impressive. Wanted to sort of gauge can this fulfillment expense ratio continue to go lower? Or are we close to being almost as efficient as we possibly can?
And in terms of being able to breakeven, how does this translate toward eventual profitability for us? And the second question, could you sort of elaborate a little further on collaboration with Eli Lilly and whether or not sort of the basic business model for me. Thanks. Thanks very much.
Junling Liu -- Co-Founder, Chairman, and Chief Executive Officer
Okay. I'll take that question, John. So first of all, we'll talk about the fulfillment cost, why are we probably seeing growth, why we're seeing growth, We've been doing fantastic in supply chain management. The fulfillment cost reduction comes from several main factors. One is that our scale has been doubling almost every year and the economy of scale starts to transpire. All the fixed costs including those of the capex investments and technology investments have been diluted. So that's certainly one factor.
Second that we have more and more direct sourcing. Right now, we start to direct source from 258 pharmaceutical companies. But certainly start to get rid of all middle layers. Also we build, since last year, we build three new fulfillment centers. So those fulfillment centers will share the volume, and we'll also get closer to our customers that will also reduce our costs.
Also, as you can see that our orders start to double, more than double every year and that give us more [Indecipherable] to partner with third-party logistics, came at a much better price. And lastly, we, our systems, we have invested a lot of technology, investment in technology especially supply chain authorization technology to optimize our investment returns, optimize our fulfillment cost.
So for various PTI [Phonetic] systems, we believe that we can further reduce our fulfillment costs. So that's the first question. Second question you asked about the partnership with Eli Lilly. I think that this type of model where we'll duplicate similar partnerships with many other pharmaceutical companies.
Basically, we formed a partnership with specialized hospital, especially on diabetes. And we have all the diabetes experts or doctors registering and serve on this platform and we can give diabetic patients conversations on platform and give you a prescription like Trulicity. We can directly send the medicine to a patient's home or and then pick up at the designated store. So this type of partnership has been really truly a win-win for Eli Lilly and us. We're so exited they gave us another drug to commercialize and we are in the process of signing many, many more similar job with other pharmaceutical companies, the same [Indecipherable] model will be duplicated.
John -- RightCapital -- Analyst
Thank you.
Operator
Thank you. We have the next question coming from the line of Rachel Yang from HSBC. Please go ahead.
Rachel Yang -- HSBC -- Analyst
Okay. Thank you for taking my question, and congratulations for another very strong quarter. Actually I had three questions. The first one is on the B2B business, gross margin. We noticed that there is a material improvement in margins. So what we have done in the past quarter to improve the margin?
And secondly, is on the B2C business that we -- we all understand that B2B is actually a major strategic focus that we also know this B2C business started to recover and started to grow in second quarter. So what is the driver behind and what is our strategy to develop our B2C business in the future? Especially considering we also have the kind of strategic collaboration with upstream manufacturers like Eli Lilly.
So maybe elaborate a little bit more about your business strategy. And thirdly is actually on the more general industry trend. Just curious, have you -- have you noticed any signs that the prescription just [Phonetic] for sales outflow from hospitals has accelerated, have you noticed this kind of trend? This is my question. Thank you.
Junling Liu -- Co-Founder, Chairman, and Chief Executive Officer
Okay. I'll take the first two about B2B margin and B2C. Regarding B2B margins besides the business growth on B2B, the sales volume growth, we're also seeing even faster growth on B2B gross profit. And I think there are basically three reasons. One is our direct sourcing relationship with our pharmaceutical companies, which you can -- they would get much better terms from those direct partnership. And secondly, our PIS systems view that as smart pricing mechanism to improve profit while without any negative impact to our sales growth and expansion.
And the number three, I think is the supply chain innovation. I just mentioned, we have a JDP project, this project has attracted a number of suppliers to join. And it helped us to quickly expand our SKU, but with very promising margin, and also the efficient inventory turnover and the JBT portion of our so called B2B business is increasing regularly.
And on B2C side, we are happy to see our B2C business back, coming back to a growth momentum. And this growth comes from our business restructured in the past year. We continue to focus on customer lifetime management, leveraging our online chronical disease management system to improve customers' refill rate, and we are seeing a significant improvement on customer on-time refill rate with this chronical disease management tool, which is also a part of our CRM.
At the same time, we have reapply our chronical disease management system and CRM system to B2B offline pharmacy customers to enable their transformation from pharmacies to auto health services provider. I think that will be a direction for us. I hope I answered your questions.
Luke Chen -- Chief Financial Officer
And the last question probably, I'll just -- we're running out of time, I'll briefly answer. And I think the last question with regarding the industry is very timely. I think today, we just saw reports that the third VBP has been completed. And from what we digested, the high end of the discount went up as far as 94% and they were making comments like, it's going to cost you more to use the water to take the drugs than the drug itself. We absolutely anticipate that the Rx drugs will be outflowed more and more out of the hospitals, and 111 is actually in a great position to benefit from that. Thank you.
Rachel Yang -- HSBC -- Analyst
Okay, thank you.
Operator
Thank you. Shall we move to the next question, sir? Shall we move to the next question, sir?
Junling Liu -- Co-Founder, Chairman, and Chief Executive Officer
Yes, right. Go ahead.
Operator
The next question is from the line of Raymond Cheng from SBQ Asia. Please go ahead.
Raymond Cheng -- SBQ Asia -- Analyst
Thanks for taking my questions. [Indecipherable] OK. Excellent result this quarter. I have a broader questions to ask regarding the current situations, regarding the US and China tension. Whether that would be a concern to you? Whether you have any contingency plan what is the [Indecipherable] delisting for US securities, Chinese securities and whether you see this troubled time there's any opportunity that would favor your Company going forward? Thank you.
Junling Liu -- Co-Founder, Chairman, and Chief Executive Officer
Let me [Technical Issues]. First of all, our business is not impacted by the China-US relationship. As you know that we mainly focus on the China market, although that's our market value, since we are listed in the NASDAQ, so our market value is impacted, we didn't hide it, due to our listing in NASDAQ. Now almost the same as other [Indecipherable] Chinese companies. So we definitely hope that the relationship will soon be improved or restored. But I think we maintain our commitment for the NASDAQ listing. We believe that it's a global market and it benefits both us and our investors.
Raymond Cheng -- SBQ Asia -- Analyst
Okay, thank you very much.
Junling Liu -- Co-Founder, Chairman, and Chief Executive Officer
Thank you.
Operator
Thank you. We have the next question coming from the line of Marco Rodriguez with -- from Individual -- he's an Individual investor. Please go ahead, sir.
Marco Rodriguez -- Individual Investor -- Analyst
Hello. Yes. I have two questions. Number one could you briefly discuss the Company's cash position. And the second question is what's the general outlook after the COVID-19 outbreak? And whether it's had any impact on the Company, both positive/negative. Thanks.
Junling Liu -- Co-Founder, Chairman, and Chief Executive Officer
Yeah. In terms of cash position, we -- we have very strong cash position. As of June 30, we have cash balance around RMB750 million, and also we just completed the new round of capital injection around RMB420 million, and we are more pleased to see that we are generating, what we call the operating positive cash flow, which means that the -- the payment we made for the purchase and the cash we see is much less than the cash we see from the sales. So we see that positive signs, and we -- we fully believe with the expansion of business scale, we will see more of those positive cash inflow of with this operation.
Luke Chen -- Chief Financial Officer
Yeah. I'll probably take the second part of the question, Michael. With regards to the outlook after or post COVID-19 or during the COVID-19, our anticipation is that this pandemic is going to create fundamental changes, and we just want to take on the advantage of one particular phenomenon that is, we bet that the Chinese healthcare industry is going to go through a digital transformation. And that is going to be the biggest trend we're betting on.
And obviously through this pandemic people realized or some people are forced as a patient to actually go online to receive consultation to get to online refill, and to get better information, because they are afraid of going to hospitals. And in the past there have been some resistance from the doctors because they're too busy, receiving patients offline. Through this pandemic, all those doctors actually got a taste of using online services to care for their patients.
Not to talk about the Chinese government's policy shift to encourage the online players to play a much bigger role, especially in the chronicle diseases area. So I think we are betting on those trends, and we believe that 111 is very uniquely positioned to actually take advantage of those trends. Thank you.
Marco Rodriguez -- Individual Investor -- Analyst
Thanks. Good luck to you going forward.
Junling Liu -- Co-Founder, Chairman, and Chief Executive Officer
Thank you.
Operator
Thank you, sir. We have the next question. This is coming from the line of Kai Wong [Phonetic] from China Renaissance. Please go ahead.
Kai Wong -- China Renaissance -- Analyst
Thank you for accepting my question. Congratulation on your well deserved results [Phonetic]. I have two questions, first one is that with e-commerce giants like Alibaba and JD.com actively developing their online B2C pharmaceutical business, what advantages do 111 have to make us stand out from the competition? The second one is that how drug procurement reform in China will affect 111, especially for the B2B platform? Thank you.
Junling Liu -- Co-Founder, Chairman, and Chief Executive Officer
Sorry, I didn't quite catch the second question.
Luke Chen -- Chief Financial Officer
Healthcare reform.
Junling Liu -- Co-Founder, Chairman, and Chief Executive Officer
Oh, healthcare reform, OK? Okay. So, we actually never compete against Ali and JD Health. Obviously, they are typically the e-commerce players, and if you look into our business, 70% of our business is actually prescription drugs. And what we do is really we provide a lifetime value for chronicle patients and what we really focus on to service those patients with chronicle conditions and we want to provide a platform for those patients to receive the disease related information, education, the online prescription, and the also online retail. So we hope the pharmaceutical companies to really manage the DOT, the duration of treatment. So obviously, Ali Health and JD Health have their tremendous traffic. I mean, obviously, we don't have those traffic. We've got to play in different spaces. And our strategy is to really to be the integrated online, offline platform and Ali and JD don't have really 280,000 pharmacies across the country. And our focuses are rather different.
And this is a very, very big market with a RMB2 trillion run on an annual basis, and I think 111 is very comfortable to find a space where we do best instead of competing against those giants.
Luke Chen -- Chief Financial Officer
Kai, let me answer your second question you mentioned, are we -- the impact of Chinese government healthcare reform to us, I think almost all part of this are in favor to us. Because when we think about the new policies, numerous [Phonetic] new policies that we launched since last year, example, the online drug sale, prescription drug and we're [Phonetic] allowed to sell online. And the Medicare insurance, where we're allowed to cover online. And the encouragement of online conversation, online drug purchases. I think those, all of this, and most [Indecipherable] like a two [Indecipherable] policy, the drug going out of hospital, the separation of drug and the accommodation services. Those policies all I think is favorable to us. And its a [Phonetic] clean structure [Phonetic] on how and [Indecipherable] where it will [Indecipherable] either online or offline pharmacy. We have online pharmacy, we directly partner with 280,000 offline pharmacies. So we basically catch all the opportunity. I think that's -- this is a great timing for us. And that this is the reason that we -- we didn't shift the focus on strategy execution.
Kai Wong -- China Renaissance -- Analyst
Thank you. That's very helpful.
Junling Liu -- Co-Founder, Chairman, and Chief Executive Officer
Operator?
Operator
Hello, sir. We do not have any further questions at this moment back to you.
Junling Liu -- Co-Founder, Chairman, and Chief Executive Officer
Thank you.
Monica Mu -- Investor Relations Director
Thank you, Operator. In closing, on behalf of the entire 111 management team, we'd like to thank you for your interest and 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.
Operator
[Operator Closing Remarks].
Duration: 68 minutes
Call participants:
Monica Mu -- Investor Relations Director
Junling Liu -- Co-Founder, Chairman, and Chief Executive Officer
Luke Chen -- Chief Financial Officer
Harvey Wang -- Co-Chief Operating Officer
Bingyu Chen -- Citi -- Analyst
Sherry Yin -- J.P. Morgan -- Analyst
Xipeng Feng -- CICC -- Analyst
Andrew Lam -- Mitsubishi -- Analyst
John -- RightCapital -- Analyst
Rachel Yang -- HSBC -- Analyst
Raymond Cheng -- SBQ Asia -- Analyst
Marco Rodriguez -- Individual Investor -- Analyst
Kai Wong -- China Renaissance -- Analyst
