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A bitter pill to swallow Add to ...

The pharmacy at Lovell Drugs in Oshawa, Ont. is a beehive of activity on a weekday morning. No bigger than a studio apartment, there are seven people behind the counter working in tight quarters, meting out pills.

Before the day is done, they will fill 300 prescriptions, about one every two and a half minutes. There are three pharmacists on duty, along with three pharmacy technicians to help fill bottles and blister packs with drugs, and a cashier to ring through the purchases.

From this huddle of white coats, Rita Winn emerges wearing dark-coloured business attire that sets her apart. A pharmacist by training, she is also the general manager of Lovell Drugs, a chain of 11 small pharmacies in Ontario, some tiny enough to fit inside the cosmetics department of a Shoppers Drug Mart.

It's been a tough week for Ms. Winn and her staff. The pharmacy business has suddenly turned into a place of intense mudslinging between drug store chains and the Ontario government in a fight that could soon spread across Canada. Ms. Winn is trying to remain as calm as she can.

"I could see half my stores closing within the year," she says. "And the other ones that survive, it will be a different model."

Proposed changes by the Ontario government to the way generic drugs are priced have left Lovell Drugs reeling, and have pitted pharmacies, led by industry giants Shoppers Drug Mart Corp. and Katz Group's Rexall, against the province.

The fight with the province over drug prices has exposed a business model that the pharmacy industry has counted on for decades. Ontario plans to eliminate professional allowances - payments that generic drug manufacturers make to pharmacies as an incentive to use their products over those made by a rival drug company.

These payments, which amount to hundreds of millions of dollars a year for the retailers, are how the pharmacy operations of most drugstores make their profits.

But while some drugstores call the payments rebates, the Ontario government says they inflate drug prices, and eliminating them will cut its annual generic drug tab of more than $1-billion in half.

Fuelling the battle over generic drugs is the increasing clout they are playing in medicine cabinets across the country. In the next five to seven years, some of the most-prescribed drugs in Canada will be coming off patent, meaning the name-brand manufacturer will give way to generic versions that can be sold cheaper.

Lipitor, Advair, Crestor and Nexium are just a few blockbuster medicines that will likely be produced in generic form soon, meaning more of the population will be on generics than ever before - and governments will see their spending on generic drugs soar.

Now the drug tussle in Ontario has become a flashpoint for pharmacy owners across the country. Every province is looking at ways of reducing burgeoning generic drug costs as they grapple with a spiralling health tab.

The stakes are highest for the smallest stores - ones like Lovell that do most of their business in prescriptions rather than branching out with cosmetics and electronics departments. These stores rely on professional allowances to cover everything from salaries to heating bills. These small players say they could find themselves out of business.

The bigger players have diversified well beyond prescriptions and traditional drugstore fare, and boosted their profitability with everything from high-end cosmetics to iPods.

"For all pharmacies, it's going to be harder, absolutely," said John Tse, vice-president of pharmacy and cosmetics at B.C.-based London Drugs, the dominant chain in Western Canada. "But if your business mix is purely pharmacy versus other business portfolios then, yes, they will be impacted."

Professional allowances: An industry game changer

Professional allowances have long been the pharmacy industry's de-facto business model. Governments went along quietly; Ontario waded in with regulations in 2006 that put some restrictions on these allowances and ensured that most of the cash went into helping customers - from free delivery of prescriptions to education programs in the store.

Since the profit margin on drugs is limited by government regulations at about 8 per cent, which mostly covers wholesaling and distribution costs, the payments from drug companies is where pharmacies get their extra profit.

At Lovell, Ms. Winn estimates each of her stores gets about $300,000 annually from generic drug makers, in exchange for exclusively stocking their products. Like it or not, she says, without that money there are no funds to keep operating, since the margin on the drugs is minuscule; dispensing fees - the $10 to $12 that she collects on each prescription of which $7 is covered by Ontario for its public plan - have not been increased in years.

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