Shoppers Drug MartMARK BLINCH
Shares of Shoppers Drug Mart Corp. plunged almost 10 per cent in Thursday morning trading after Ontario unveiled plans to slash generic prescription prices and analysts warned of a deep profit hit.
Analysts have already cut their ratings of Shoppers' stock and profit outlooks.
"Suffice it to say, it just became a lot less profitable to run a pharmacy in Ontario and, eventually, probably Quebec as well," wrote Michael Van Aelst, a vice-president and analyst at TD Newcrest.
"Now, the question becomes: to what degree do other provincial governments follow what is, in our opinion, a dangerous precedent? Quebec, for one, is likely to be first."
He dropped his stock recommendation it to "hold" from "buy," noting that because he thought the stock would drop materially on the open, "it seems pointless to recommend selling at this point."
Referring to the "draconian nature" of Ontario's proposals, Keith Howlett, analyst at Desjardins Securities, lowered his stock recommendation to "sell" from "hold," and his price target to $39 from $50., not.
And Credit Suisse analyst Winston Lee reduced his rating to "neutral" from "outperform," noting that Ontario's decision "was a surprising negative development" spurred by the government's attempt to "score political points."
On the Toronto Stock Exchange, more than a million shares were exchanged in the first few minutes after the open, when the price dropped by $4.92 to $38.25.
In a bid to save health costs, Ontario is cutting the price of generic prescriptions in half, to 25 per cent of the equivalent brand name drug, from the current level of 50 per cent. The move has thrown drugstores into turmoil because it chops a major source of their prescription profits. They had not expected the government to reduce prices for prescriptions to cash-paying customers and those covered by private health plans - a major source of the retailer's profit.
The pharmacies had simply expected price cuts to be introduced for prescriptions covered by public health plans, which cover elderly and disabled patients.
Drugstore executives are livid about Ontario's move, warning that they may be forced to let go staff, close stores and drop services such as patient counselling to offset the losses.
Ontario's move is "a heavy blow," wrote analyst Perry Caicco at CIBC World Markets. "The Ontario government's plan to cut pharmacy reimbursement seriously haircuts drugstore profitability in Ontario," he said. "The amount taken from drugstores with the slashing of generic prices is not remotely balanced by givebacks in dispensing or other fees."
Ontario Health Minister Deb Matthews announced the plan Wednesday, saying the province scrapping is an allowance pharmacists that receive on generic drugs.
Ms. Matthews said the goal was to reduce drug costs by half and make prescription medications available to more people.
And while the consequences for Shoppers could be dire, analysts note that it's in a relatively strong position as the largest drugstore chain in Canada in a growing prescription market. The "devil will be in the details," wrote Irene Nattel, retail analyst at RBC Dominion Securities, noting many important elements of Ontario's plan have not been disclosed.
She reduced her price target for the stock to $48 from $52; she cut her earnings per share forecast by 3 per cent to $2.94 from $3.02 for 2010 and by 13 per cent to $2.95 from $3.41 for 2011.