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Shoppers Drug MartDeborah Baic/The Globe and Mail

The battle is heating up between big drugstore chains and the Ontario government over generic drug reform.

Ontario decided on Friday to seek leave to appeal a controversial court decision that gave Shoppers Drug Mart Corp. and rival Katz Group Canada Ltd., which runs Rexall drugstores, the green light to launch their own profit-enhancing private-label generic drugs.

The chains want to roll out store-brand generic prescription drugs to offset an estimated $750-million-a-year hit to their bottom lines. That squeeze came last year after Ontario outlawed professional allowances - or rebates - that generic drug companies paid pharmacies in exchange for stocking their products. Other provinces are following suit, to varying degrees.

Last year, Shoppers Drug Mart, the country's largest drugstore retailer, became the first chain to launch its own private-label generic prescriptions. The move was intended to streamline its purchasing of generics from pharmaceutical companies in a bid to help recapture profits lost to the ban on rebates. Shoppers introduced its Sanis private label in most provinces, but not Ontario, which had also banned store brands as part of its generic drug reforms. Shoppers and Katz both challenged the ban in court, which ruled this month in the retailers' favour.

But Ontario Health Minister Deb Matthews is concerned that the private labels will generate savings for the pharmacies that will not be passed on to consumers or the government, which is seeking to lower the tab for its drug plan. The reforms in Ontario - and other provinces - are aimed at reducing generic prices and government costs.

"Private labelling does not benefit Ontarians," Ms. Matthews said in a statement.

Lisa Gibson, a spokeswoman for Shoppers, said the company is "disappointed with the government's decision and will continue to pursue legal action."

Last year's drug reforms in Ontario slashed the price of generic prescriptions in half, to 25 per cent of the price of their branded equivalents from 50 per cent previously.

As a result, drugstores are racing to find ways to make up the losses. Shoppers is revving up its non-pharmacy businesses such as cosmetics and food, as well as bolstering its Sanis line, which it has launched in seven provinces so far.

"It will be more efficient for us," Jurgen Schreiber,chief executive officer of Shoppers until this week, said recently about Sanis.

The generic private labels could generate $8.4-million of earnings before interest, taxes, depreciation and amortization (EBITDA) this year - and $15.1-million EBITDA in 2012, Perry Caicco, retail analyst at CIBC World Markets, has estimated.

Still, Shoppers could face roadblocks in rolling out its private-label generics, Mr. Caicco said in a recent report. For example, Shoppers will incur both early and continuing costs of running the program; it will also have to grapple with its franchise owners - who may not be on board with prescribing the medications because the extra profits will go into the corporate coffers rather than their own, and their incomes have already been slashed by the reforms.

What is more, "the Ontario government may not give up the fight easily, since it has an argument that [Shoppers']pharmacists could favour Sanis [products]over others, thus reducing patient and doctor choice," Mr. Caicco said.

Shoppers may get "a sizable boost" from its Sanis business by convincing private insurers to agree to use the private label exclusively. Nevertheless, the strategy "may draw unwanted regulatory attention," Mr. Caicco said.

Ontario is asking leave to appeal the Ontario Superior Court's early February ruling. The court said the private-label ban interferes with the pharmacies' commercial freedom and right to trade, and is outside the legislation's scope.