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Pharmacy chains coming to grips with generic drug reforms

A pedestrian walks past a Jean Coutu pharmacy in downtown Montreal, April 28, 2010.


Finding ways to squeeze out more profit to offset the impact of generic drug reforms in many parts of the country has become the mantra of the big pharmacy chains.

At Jean Coutu Group (PJC) Inc. , Quebec's biggest drug retailer, tactics to counter the effects of lower generic drug prices include expanding its network of stores and generating more business from its own generic-drug division, called Pro Doc Ltd.

And Canada's biggest chain, Toronto-based Shoppers Drug Mart, has stepped up sales of non-prescription products and is counting on its own line of private-label generic drug products, introduced last year in most provinces. The latter move faces a legal challenge from the Ontario government.

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Laws being introduced by several provincial governments to reduce the cost of generic drugs - particularly those already in place in the key markets of Ontario and Quebec - are taking a bite out of prescription sales.

At Longueuil, Que.-based Jean Coutu, for example, generic drugs' share of drug prescriptions rose to 56.5 per cent in the first quarter of 2012, compared with 51.4 per cent in the year-earlier period.

With their prices lower than brand-name drugs, the result is a "deflationary impact on the pharmacy's retail sales," the company said Tuesday as it reported a better-than-expected first-quarter profit of $49.9-million, or 22 cents per share, up from $43.9-million or 19 cents a year earlier.

Pro Doc's contribution helped boost the bottom line, said Jean Coutu president and chief executive officer François Coutu.

After the annual meeting Tuesday, Mr. Coutu said he's also counting on an aging population to ensure strong sales and profits in years to come.

"We're seeing the use of drugs increase more and more as the population gets older and requires more prescriptions," he said, adding that the greater volume should help compensate for the drop in generic drug prices.

Robert Gibson, a retail analyst at Octagon Capital Corp., said the big drug chains have no choice in the short term but to find more creative ways to improve margins. "We're seeing that with most of the big drug chains, they're able to squeeze out more margins in different areas," he said.

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"Jean Coutu has Pro Doc, Shoppers has their private label. That's the way they've got to go, the way everybody's got to go."

Aidan Hollis, professor of economics at the University of Calgary and an expert in generic drugs, said generic drug reform looks like it's here to stay. That could lead to a consolidation of the drug-store sector as less nimble players, particularly independents, falter.

"Over time you would expect that probably there are going to be fewer pharmacies," Prof. Hollis said. "I don't see governments re-evaluating what they are doing."

Mr. Coutu said the transition to lower generic drug prices in Quebec has been smoother than in Ontario, where changes implemented last year sparked a bitter feud between the provincial government and pharmaceutical industry players and retailers.

Quebec's health-care policy requires the province to match the lowest generic drug price available in Canada. The price of generic prescription drugs in Quebec will be reduced to 25 per cent of the equivalent branded product, starting next April, down from the current 50 per cent.

Rebates paid by generic drug makers to pharmacists are also being reduced, but this is offset somewhat by higher administration fees in Quebec drug stores, as well as other fees to be charged for certain services.

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