Analysts slice targets on Shoppers Drug Mart amid new generic pricing

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Inside the Market's roundup of some of today's key analyst actions

Shares in Shoppers Drug Mart Corp. dropped like a rock Friday afternoon on news that most Canadian provinces have lowered generic drug pricing again. Today, it's the analyst price targets that are dropping.

Canaccord Genuity analyst Derek Dley cut his price to $42.50 from $43.50 and reiterated a "hold" rating. Desjardins Securities analyst Keith Howlett reduced his target to $42 from $43 and also maintained a "hold" recommendation.

Shoppers fell 5.2 per cent on Friday within seconds of the news that all Canadian provinces, with the exception of Quebec, planned another stage of reductions to generic drug pricing. Starting this April, prices for the top six generic drugs will be reduced to 18 per cent of their branded equivalents. Provinces previously paid between 25 and 40 per cent.

These top six generic drugs represent about 20 per cent of generic sales, and the spending cuts are expected to cut into pharmacies' bottom lines by reducing their profit margins.

Mr. Dley estimates that the new pricing formula will reduce Shoppers' earnings per share by about 11 cents during 2013 and by 14 cents in 2014. "The announcement of further reductions to generic drug prices supports our view that Shoppers continues to face additional headwinds related to generic drug legislation as governments look to reign in health-care spending costs," Mr. Dley said in a research note. "Therefore, we are comfortable remaining on the sidelines."

Mr. Howlett reduced his 2013 earnings per share forecast to $3 from $3.16, commenting that "while Shoppers should remain a long-term leader in retail pharmacy in Canada, earnings per share growth will likely be constrained for several years."

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Desjardins Securities analyst Tim Murray upgraded Surge Energy Inc. to a "top pick," believing that the stock's recent slide offers "very compelling valuation."

Surge recently announced a number of operational problems that have hurt production, as well as investors' confidence in management's ability to deliver on growth targets.

"Given the stock is trading well below the small-cap peer group, we believe the recent sell-off is overdone and that its discount valuation is now too compelling to ignore," Mr. Murray said.

He cautioned, however, that Surge is still a "show me" stock, "where missing production guidance over the next couple of quarters could put this story in the penalty box indefinitely."

Upside: Mr. Murray, who previously rated Surge a "buy," trimmed his price target to $8.50 from $10.

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RBC Dominion Securities analyst Michael Harvey downgraded Trilogy Energy Corp. to "sector perform" from "outperform," citing the stock's recent rally. He's also encouraged by "strong" production results from Trilogy's Kaybob Montney oil pool in Alberta.

Upside: Mr. Harvey maintained a price target of $32.

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Canaccord Genuity analyst Nicholas Campbell downgraded Golden Minerals Co. to "hold" from "speculative buy" after its fourth-quarter production fell short of his forecasts.

Increased labour competition hindered throughput at the Velardena mine in Mexico during the quarter, and the operation remains understaffed, he noted. In addition, "it seems as though AUM is still trying to figure out the best way to optimize the Velardena mine," he said.

Upside: Mr. Campbell cut his price target to $4.75 from $7.

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AuRico Gold Inc. reported disappointing production results for the fourth quarter and full-year 2012 due to higher-than-expected cash costs at the Young-Davidson mine in northern Ontario, noted Desjardins Securities analyst Adam Melnyk.

Some of the increase in cash costs was due to an accounting change, but management did not quantify how much.

Upside: Mr. Melnyk cut his price target to $8.50 from $9 while maintaining a "hold-above-average risk" rating.

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For more analyst actions, breaking investing news and analysis, follow Darcy Keith on Twitter at @eyeonequities