(Yicai) July 22 -- Cowell Health, a pharmacy chain that used to be the largest in China, is undergoing a major management reshuffle, not least because Hillhouse Capital Group, the owner, is facing the urgency for an exit after staying on board for more than seven years, industry insiders said to Yicai exclusively.

Niu Heyi is no longer the president of the drugstore operator and Li Bo has been replaced by Gong Jianjun, the new chief executive who used to be the head of eastern China, Yicai learned.

Beijing-based Cowell and Hillhouse have not responded to the news.

Formerly known as Cowell Medical, Cowell Health was founded in 2017. It is a brand of Cowell Tianjin Investment, in which Hillhouse holds a 94.8 percent stake.

After more than seven years since the investment, the pressure to reap returns is great, which profoundly affects the retailer's business decisions, insiders said. Cowell received both yuan-denominated and US dollar funding. The yuan funds follow a 5+2 policy so limited partners can exit after five years or postpone for two more years whereas the US dollar funds follow an 8+2 pattern.

The venture capital giant that grabbed shares in Tencent Holdings and JD.Com early is honing its strategies to vet the best candidates for initial public offerings. The secondary market is and has always been Hillhouse’s core product, said a professional close to the firm. In this regard, GL Ventures, an early-stage VC fund managed by Hillhouse, has recently laid off some employees focusing on pharmaceuticals, several investors said to Yicai.

No Digital Disruption, No IPO

After an initial sprint, Cowell has fallen short of expectations. Less than a year since the beginning, it spent tens of billions of yuan to acquire tens of thousands of pharmacies, once becoming China's largest chain drugstore by the scale of stores and revenue.

The company achieved revenue of over CNY20 billion (USD2.7 billion) in 2022, with a considerable profit, Niu revealed late that year. Subsequently, several media outlets reported that Cowell was going to go public but so far no progress can be seen.

Part of the reason is industrywide as sales of brick-and-mortar pharmacies are shrinking. Last year, the nation had over 660,000 drug stores, rising by 180,000 from 2019, but pharmacies earned CNY730,000 (USD100,369) on average in 2023, down CNY160,000 from 2019.

Hillhouse’s investment in Cowell was linked to its big success in footwear retailer Belle International, said Liang Hong, a pharma insider with long experience in the sector. When Hillhouse acquired the seller of women's shoes, it made the 20,000 outlets digital. The investor was trying to follow the same playbook with Cowell but failed, the expert added.

The investment logic in Belle is suitable for other retail industries but not for drugstores, Tu Honggang, chairman of MediCool, said to Yicai. First of all, pharmacies do not have much room for bargaining since the largest buyer of drugs is the medical insurance fund, said the chief of the platform used to manage patient records. Second, the drug retail market is so large that Cowell’s revenue of CNY20 billion accounted for only 2 to 3 percent of the entire market in 2018.

Cowell began to slow its pace of mergers and acquisitions in 2020, shifting its focus to improving the efficiency of existing pharmacies. Industry veterans, such as Niu, gained more control as the former chief of listed retailed Dashenlin Pharmaceutical Group was promoted to president from chief operating officer in 2020 to be in charge of offline business.

The focus on traditional business deviated from the positioning Hillhouse imagined for Cowell, a source close to the latter said. The investor was envisioning the largest scale, the widest layout, and the most solid infrastructure. The chain should have created differentiated core businesses, such as special pharmacies, online hospitals, new retail, and insurance companies, the person added.

Cowell's attempts to increase offline sales in the past few years have not resulted in significant growth, the same source said, adding that if it cannot find other new growth points, the chain will soon fall into the trap of increasing scale but failing to boost profits.

It will take some time to see how the latest change of management will show, the above-mentioned person added.

Editor: Emmi Laine