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Selling private-label Life toilet paper and popcorn has proven to be a significant profit generator for Shoppers Drug Mart Corp. Now the retailer wants to get the same kind of lift at its pharmacy counter.

Shoppers will soon start stocking store-brand generic drugs in a bid to offset potentially pinched margins from government pharmaceutical reforms. The move is an attempt to benefit from the rising shift to high-margin generic-drug sales.

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"This could significantly change the ball game," said Robert Gibson, an analyst at Octagon Capital. "It could offset [possible]government regulations."

Drug store retailers in Canada are racing to ease the pain they anticipate they'll endure as provincial governments consider ways to save health-care costs, partly by changing the amount of money pharmacies collect from generic drug producers.

Ontario, where most of Shoppers' almost 1,200 stores are located, is looking at reforms that could reduce allowances paid to pharmacies by generic drug manufacturers for stocking their drugs. Changes in that province alone could shave Shoppers' profit by between 20 and 35 cents a share, some analysts warned last year.

Yesterday, Shoppers said it will soon take more control of generic drug production by contracting it out to manufacturers that will make private labels for the chain. It's part of Shoppers' efforts to find "alternative sourcing and procurement models for generic drug products."

"We had a look at this for quite some time," chief executive officer Jurgen Schreiber told analysts. "Our idea is to have a really top quality product ... with a very significant, different design [of the] packaging, which leads to patient safety."

The goal of the private-label drug program also is to introduce packaging that makes it easier for pharmacy technicians to count and bundle pills - and generate labour savings, he said. "We have too much labour costs in the pharmacy." The company gave no further details.

The trend to generic drugs is picking up as a growing number of branded drugs are coming off their patents and being converted to cheaper generics. This year, the patent expires on the top-selling anti-cholesterol drug, Lipitor, opening the way for another surge in generic drug sales.

At Shoppers, those sales are expected to jump to 56 per cent of its prescriptions filled in 2010, up from 53 per cent last year and 51.2 per cent in 2008. Overall, Shoppers' prescription sales rose 7.5 per cent last year to $4.82-billion, representing almost half of the company's overall revenues.

Now Shoppers wants to cash in even more on generics. The first private-label drugs will be stocked behind the pharmacy counter by early this year, Mr. Schreiber said.

Brian Yarbrough, an analyst with Edward Jones, said the private-label strategy is an inventive way to try to save costs and potentially offset anticipated regulatory changes in Ontario.

Other provinces also are expected to consider reforms.

Private-label margins vary in different sectors but, in the grocery aisles, can be 10 percentage points higher than those of branded products.

Rival Jean Coutu Group already has found savings by buying its own generic drug manufacturer. It has set its sights on becoming the dominant player in generic drugs in its home province of Quebec, where Shoppers is expanding under the Pharmaprix banner.

Its small generic drug maker, Pro Doc, has been an important contributor to Coutu's financial performance, its executives said. Its sales in the most recent quarter jumped to $26.8-million from $9.2-million a year earlier.

SHOPPERS DRUG MART (SC)

Closed: $42.75, down 12¢

******

Shoppers Drug Mart

Q4 / 2009 / 2008

Profit / $171.1-million / $166.5-million

EPS / 79¢ / 77¢

Revenue / $2.49-billion / $2.5-billion

Source: Company reports

Follow on Twitter: @MarinaStrauss

 

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