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Shoppers Drug Mart shares fall after generic drugs ruling

A Shoppers Drug Mart location at Woodbine and O'Connor Avenues in Toronto.

Deborah Baic/The Globe and Mail/Deborah Baic/The Globe and Mail

Shoppers Drug Mart Corp. could face increased challenges in other provinces following an Ontario Court of Appeal ruling that backed a ban on pharmacies substituting their own brands of prescription drugs for name brands.

"Shoppers Drug Mart is now more exposed to the drug-retailing regulatory backdrop in other provinces," National Bank Financial analyst Vishal Shreedhar wrote in a note to clients on Wednesday.

"For example, if British Columbia, Quebec and/or Alberta ban the sale of private-label generic drugs, Shoppers Drug Mart's ability to negotiate a low national drug price could be increasingly compromised."

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Mr. Shreedhar downgraded his price target for Shoppers shares to $47 with a "sector perform" rating, from $50 with an "outperform" rating, due to the appeal court ruling last week and modestly lower earnings projections.

The appeal court overturned a lower-court decision that said the provincial government had no authority to ban pharmacies from substituting their own discount brand of prescription drugs for name brands.

Shoppers has said that it is reviewing the appeal court decision and considering its options.

The ban was one of a number of moves by the Ontario government to help reduce health-care costs as it struggles to balance its books over the next several years.

RBC Dominion Securities analyst Irene Nattel said investors would likely be disappointed by the ruling, but she noted that she had not included any potential benefits from the sales of private-label generics in Ontario in her outlook.

"We view the decision as neutral in the short to medium term, and would fully expect the industry to appeal the decision," Ms. Nattel wrote in a note to clients.

The company already sells its Sanis brand generic drugs in most of its key markets, including B.C., Quebec and Alberta. However the retailer has not been selling the Sanis drugs in Ontario, where Shoppers has roughly half its stores.

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Big pharmacies have argued that private labelling allows them to cut costs by using their own version of the drugs rather than those bought from a manufacturer, but experts say it's unlikely they'll pass the savings on to customers.

Instead, the pharmacies were expected to use the extra revenue to recover profits that were lost when the so-called professional allowances – or rebates – were also banned.

Pharmacies have said getting rid of those fees cost them an estimated $750-million a year in revenue and they have been looking for ways to get back money in other areas.

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