Analysis and Solutions to the Low Gross Profit Margin Issue in Yunnan Baiyao's Pharmaceutical Commercial Sector

Now I have completed a comprehensive data analysis. Below is the in-depth analysis and solutions to the low gross profit margin issue in Yunnan Baiyao’s Pharmaceutical Commercial Sector:

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Yunnan Baiyao’s business exhibits obvious characteristics of “imbalance between scale and profitability”. Based on 2024 financial data[0]:

Business Sector	2024 Revenue (RMB 100 million)	Revenue Contribution Ratio	Gross Profit Margin	Gross Profit Contribution
Provincial Pharmaceutical (Pharmaceutical Commercial)	246.07	61.46%	~6.5%	~16
Pharmaceuticals Business Group	69.24	17.29%	65.93%	~46
Health Products Business Group	65.26	16.30%	~65%	~42
Chinese Medicinal Resources Business Group	17.51	4.37%	~20%	~4

The pharmaceutical commercial sector contributes

but only approximately , making it the main factor dragging down the company’s overall gross profit margin (27.77%)[0][1].

Low gross profit margin is a common characteristic of the pharmaceutical commercial sector:

Company	2024 Gross Profit Margin	Net Profit Margin	Business Characteristics
Sinopharm Group	7.74%	1.78%	China’s largest distribution network
Shanghai Pharmaceuticals	~7.5%	~2.1%	Commercial + industrial synergy
Yunnan Baiyao Provincial Pharmaceutical	~6.5%	~1.5%	Regional leader
Industry Average	6-8%	1.5-2.0%	Low-profit operation

The net profit margin of the pharmaceutical commercial industry has long remained in the

range, representing a typical “scale economy, thin profit with high turnover” model[2][3].

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1. Normalized Volume-Based Drug Procurement Compresses Gross Profit Margins
   : The volume-based centralized drug procurement policy continues to deepen, significantly compressing profits in the circulation segment, with the gross profit margin of winning bid products dropping to 3-5%

2. Intensified Peer Competition
   : National leaders such as Sinopharm Group and Shanghai Pharmaceuticals are accelerating regional penetration, leading to increasingly fierce competition within Yunnan Province

3. Product Structure Skewed Toward Generic Drugs
   : Among the products represented by Provincial Pharmaceutical, low-gross-profit generic drugs and essential drugs account for an excessively high proportion, while high-gross-profit innovative drugs and medical devices are underrepresented

1. Room for Improvement in Supply Chain Efficiency
   : Inventory turnover days are relatively long, leading to high capital occupation costs

2. Insufficient Digitalization Level
   : Compared with the smart logistics systems of leading enterprises, Provincial Pharmaceutical’s digital transformation is still in the advancement stage

3. Weak Value-Added Service Capabilities
   : Revenue from high-value-added services such as CSO academic promotion and SPD in-hospital logistics accounts for a relatively low proportion

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Strategy	Specific Measures	Expected Outcomes
Introduce New Products	Establish strategic cooperation with innovative pharmaceutical companies to obtain Yunnan Province agency rights for new drugs	Increase the proportion of high-gross-profit products to 30%
Optimize Product Structure	Gradually phase out low-gross-profit competing products and increase the proportion of exclusive/patented products	Increase gross profit margin by 0.5-1 percentage points
Strengthen Medical Device Business	Leverage the policy dividend of medical device “trade-in” and expand SPD business	Increase medical device revenue contribution to 25%

• Layout Strategy
  : Leverage the brand advantage of Baiyao to expand DTP specialty pharmacies in core cities of Yunnan Province
• Target Customer Group
  : Receive diverted prescriptions and provide professional services for chronic disease patients
• Expected Outcome
  : Increase out-of-hospital revenue contribution from the current ~15% to 30%, with gross profit margin rising to 10-12%

According to the company’s investor research records, Yunnan Baiyao is advancing digital upgrading[1]:

1. Intelligent Replenishment System
   : AI-based demand forecasting with a target accuracy rate of over 85%
2. Smart Logistics System
   : Build intelligent warehouses to shorten order response time to 4 hours
3. Omnichannel Inventory Management
   : Integrate online and offline inventory to realize unified allocation

: Reduce operating costs by 8-12% and shorten inventory turnover days by 5-10 days

Measure	Content	Outcome
Unified Negotiation and Procurement	Leverage scale advantages to conduct centralized bargaining with upstream suppliers	Reduce procurement costs by 3-5%
Strategic Cooperation	Sign long-term agreements with core suppliers	Lock in high-quality supply sources and stabilize price fluctuations
Vertical Integration	Learn from the experience of the Chinese Medicinal Resources Business Group to extend upstream	Gain control over key raw materials and achieve cost controllability

• Business Positioning
  : Provide academic promotion and marketing services in Yunnan Province for upstream pharmaceutical companies
• Service Content
  : Academic conferences, patient education, channel management
• Profit Model
  : Charge service fees or sales commissions
• Expected Outcome
  : Achieve 30% annual growth in service revenue, with gross profit margin reaching 30-40%

• Project Expansion
  : Add 10-15 SPD projects in tertiary hospitals
• Service Upgrade
  : Extend from simple distribution to in-hospital material management and intelligent equipment operation and maintenance
• Value Proposition
  : Enhance customer stickiness and form exclusive partnerships

According to the company’s strategic plan[1]:

• Integrate upstream and downstream service resources to provide services covering the entire commercial cycle and all channel types of pharmaceuticals
• Customer-oriented supply chain value-added service solutions
• Market-oriented innovative business models

Management Direction	Specific Measures	Target
Expense Control	Continuously optimize sales expense ratio and administrative expense ratio	Reduce expense ratio by 1-2 percentage points
Personnel Efficiency	Improve per capita output and reduce the proportion of labor costs	Increase personnel efficiency by 15%
Capital Management	Shorten accounts receivable collection period and optimize prepayment management	Reduce cash conversion cycle by 8 days

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Phase 1 (2025): Lay a Solid Foundation
├── Complete the construction of a digital infrastructure base
├── Optimize product structure and increase the proportion of high-gross-profit products by 5%
├── Launch 3-5 DTP pharmacy pilots
└── Reduce expense ratio by 1 percentage point

Phase 2 (2026-2027): Capability Enhancement
├── Achieve 50% revenue growth in SPD business
├── Exceed RMB 200 million in CSO service revenue
├── Increase out-of-hospital revenue contribution to 25%
└── Raise gross profit margin to 7.5-8%

Phase 3 (2028 and Beyond): Model Innovation
├── Build a closed-loop "diagnosis and treatment ecosystem"
├── Achieve 15% service revenue contribution ratio
└── Stabilize gross profit margin in the 8-10% range

1. Strategic Resolve
   : Maintain strategic consistency and avoid wavering in transformation determination due to short-term performance pressure
2. Resource Investment
   : Sustained investment is required for digitalization and talent team building
3. Synergistic Effects
   : Form synergies with the Pharmaceuticals and Health Products Business Groups to leverage the Baiyao brand advantage

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• The company’s gross profit margin increased by 1.29 percentage points year-on-year in 2024, proving the effectiveness of the improvement path[0]
• Galaxy Securities predicts that the gross profit margin will reach 28.5%, 28.9%, and 29.3% in 2025-2027 respectively[4]
• There is significant room for improvement in the pharmaceutical commercial sector, and marginal improvements will contribute significantly to profits

• Sustained high pressure from the volume-based drug procurement policy may further compress gross profit margins
• Significant investment in digital transformation will affect the expense ratio in the short term
• Intensified industry competition as national leaders accelerate regional penetration

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The low gross profit margin issue in Yunnan Baiyao’s pharmaceutical commercial sector is essentially the result of the combined effects of

. Addressing this issue requires:

1. Short Term
   : Improve operational efficiency and reduce costs through digitalization and refined management
2. Medium Term
   : Adjust business structure to increase the proportion of high-gross-profit products and value-added services
3. Long Term
   : Build differentiated competitive advantages and transform from a traditional distributor to a “pharmaceutical commercial service provider”

Through systemic solutions, the gross profit margin of the Provincial Pharmaceutical sector is expected to gradually increase from the current 6.5% to the

, corresponding to a gross profit increase of approximately , which will significantly improve Yunnan Baiyao’s overall profitability and investment value.

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[0] Jinling API Data - Financial Analysis and Market Data of Yunnan Baiyao (000538.SZ)

[1] Investor Research Meeting Minutes of Yunnan Baiyao Group Co., Ltd. (April 2025) - http://static.cninfo.com.cn/finalpage/2025-04-03/1223004263.PDF

[2] 2025 Annual Tracking Rating Report of Sinopharm Group Co., Ltd. - http://file.finance.sina.com.cn/211.154.219.97:9494/MRGG/BOND/2025/2025-6/2025-06-24/22740613.PDF

[3] 2025 Annual Strategy Report for the Pharmaceutical and Biological Industry - https://aigc.idigital.com.cn/djyanbao/【信达证券】医药行业2025年年度策略报告-2024-12-31.pdf

[4] Sina Finance - 2025 Yunnan Baiyao Research Report: Steady Development of Four Business Segments (June 2025) - https://finance.sina.com.cn/stock/relnews/cn/2025-06-11/doc-inezsqme4740787.shtml

[5] Securities Times - Selling More but Earning Less: Growth Anxiety of Century-Old Pharmaceutical Enterprise Yunnan Baiyao (December 2025) - https://app-new.sxwbs.com/pages/2025/12/05/9bf0b086cc3d4bedb4e8534f70ff3547.html