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Shoppers Drug Mart (MARK BLINCH)
Shoppers Drug Mart (MARK BLINCH)


Shoppers picks a fight that it will not win Add to ...

You can't blame Jurgen Schreiber for being upset with the Ontario government. But as a shareholder, you should be horrified about the way he's handling it.

Smart people never pick a fight with powerful politicians, and in provincial politics they don't come much more powerful than the minister of health. You can't win that scrap at the best of times and this is far from the best of times.

Mr. Schreiber, chief executive officer of Shoppers Drug Mart, doesn't get it. His stock has been bludgeoned since Ontario said it would radically alter the pharmacy business.

Some say the retailer's shares are cheap. Since other provinces will likely follow suit I'm not so sure, but at any rate I'd think twice about investing in a company whose CEO instigates a public relations battle against a government - especially a government trying to cut costs because it's nearly broke and everyone knows it.

There's no question that the changes Ontario Health Minister Deb Matthews introduced are going to batter Shoppers' bottom line. The government is effectively cutting the price of generics in half and banning professional allowances. That's a big drop in revenue and it flows straight to the bottom line (before taxes are factored in). Shoppers will suffer more than anyone else because of its big share of the market.

Mr. Schreiber, as well as investors and analysts, sounded shocked by Ms. Matthews' move, which in and of itself is surprising. Shoppers' own financial reports says that the primary risks to the company are "adverse changes to … pharmacy reimbursement programs and the availability of manufacturer allowances."

Shoppers was as right about that danger as it's wrong about the way it's dealing with this blow. Ms. Matthews implies that these "allowances" are kickbacks. Shoppers' senior vice-president John Caplice takes umbrage, saying that "Minister Matthews' wholesale accusation of impropriety is nothing more than a smear campaign to which we, and others, take great offence."

Give me a break. The Competition Bureau took a hard look at the generic drug industry and found that while there is competition, consumers aren't benefiting. One reason? Those allowances come from generic drug manufacturers to "entice" drugstores to stock their pills.

But these are generic drugs, indistinguishable from one manufacturer to the next. In a commodity business, you can only compete on price and service. But the generic drug makers are not. And those kickbacks aren't free. The generic makers just add them to the price of the drugs, which consumers pay for either directly or with tax dollars. The pharmacy industry says the allowances are spent on customer services. That's clearly not true: Analysts all say that the loss of allowances will sharply cut profits.

These legal kickbacks put a lot of money in the jeans of Shoppers shareholders - $150-million annually, according to one analyst. But even Mr. Schreiber knew that revenue was at risk. It was nice while it lasted, but it's over now. Move on.

Mr. Schreiber could have taken the high road and stressed the potential positives. He could have made a case for hard work and a nimble response to all this adversity. Instead he petulantly stuck a pole in a beehive.

As for cutting generic prices, governments are not stupid, and when it comes to their own finances, they're amazingly clever. Ontario is facing enormous and lasting deficits. Health spending is out of control, so cutting there makes obvious sense.

Here's an easy way to do that: With a lot of blockbuster drugs coming off patent soon, generic demand for those molecules is going to surge. So cut the cost of generics.

That doesn't just help the government. It makes it cheaper for everyone, including, crucially, auto makers, who are shedding jobs. The industry says health insurance has been one of the fastest rising costs of doing business. So the province is helping the auto makers too, and they're way more important politically than drugstore chain shareholders.

Mr. Schreiber doesn't get it though. He thinks he can intimidate Ms. Matthews by reducing service in her riding and threatening not to open new stores in the province.

Says an angry Ms. Matthews in response:

"I remain absolutely committed, in fact more committed than ever, to move forward with the reforms that will clean up a system that has been open to abuse, that will bring down the cost of generic drugs."

Those are fighting words and she carries a big stick.

Mr. Schreiber could have taken the high road and stressed the potential positives, as some analysts have. He could have made a case for hard work and a nimble response to all this adversity.

Instead he petulantly stuck a pole in a beehive. Shoppers shareholders should hope he wakes up or the next thing you know the government might threaten to get into the business of dispensing drugs itself.

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