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Shoppers profit hit by generic-drug reforms

Deborah Baic/Deborah Baic

Shoppers Drug Mart Corp. is stepping up its investments to woo more senior citizens, after having failed to attract enough of them.

Late last week, the country's largest drugstore chain started to waive the $2 co-payment that it charges seniors and people on social assistance who are covered for their prescription purchases under the Ontario Drug Benefit plan. The change is expected to pinch the retailer's bottom line at a time when it's feeling the pain of generic drug reforms. But it should also help shore up its share of the growing and potentially lucrative seniors business in Canada.

On Thursday, chief executive officer Domenic Pilla said Shoppers' pharmacists are focused on providing counselling and other services for older customers to keep them coming back. The company is also launching new non-prescription products that cater to their needs, including smaller food portions for seniors, whose households tend to consume smaller amounts than those of younger people.

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"The senior segment – either aging baby boomers or people that are over 65 – are an important segment for us," Mr. Pilla told an analysts' conference call.

Drugstores are viewed as a stable business partly because the aging population needs more prescription medications, making the stores a destination where customers can also pick up food, cosmetics and even cellphones. But Shoppers and other pharmacies feel the pressures of provinces increasingly adopting drug reforms that are lowering generic prescription prices and squeezing pharmacies' profits.

Now Mr. Pilla, in the top job since last fall, has placed an urgency on chasing seniors in a crowded market. His move to waive the $2 fee that seniors pay for their drugs in Ontario – by far the chain's largest market – follows the lead of other drugstore retailers, including discounter Wal-Mart Canada Corp. and grocer Loblaw Cos. Ltd.

The Ontario drug benefit plan is the fastest-growing prescription segment in the province, "hence the imperative for [Shoppers to]protect its share of the market at a time when the majority of competitors in the province already waive the fee," retail analyst Irene Nattel said in a report this week.

The $2 fee at Shoppers stopped many seniors from shopping at its stores in the past. "Clearly one of the impediments was the co-pay, and we tried to remove that impediment," Mr. Pilla said.

Now, at both the pharmacy counter and in other non-prescription aisles, "we'll be very sensitive to the competitive dynamics, or regulatory dynamics, so that we are attractive to that segment," Mr. Pilla said.

On Tuesday, Peter Sklar, retail analyst at BMO Nesbitt Burns, estimated that Shoppers' move to drop the co-payment will cost it about 12 cents a share annually. But that doesn't take into account additional sales the retailer may gain in luring more Ontario Drug Benefit plan members.

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He calculated that another initiative by the Ontario government – a plan to reduce further generic drug pricing – will hurt Shoppers profit by about 2 cents a share. Over all, he revised his 2012 profit-per-share outlook down to $2.88 from $2.98.

Shoppers needs all the business it can get. In its first quarter, it missed analysts' consensus expectations by a penny, hit by the effects of generic-drug price reforms and a weak cold and flu season, which reduced the number of drugs customers purchased.

Its profit rose to $119-million or 56 cents a share from $118-million or 54 cents for the same period last year. Sales grew to $2.39-billion from $2.35-billion, driven by modest sales growth in its pharmacy business and stronger results in its front-of-the-store non-prescription aisles.

"This is a solid performance and a good start to the year in what remains a challenging economic and regulatory environment," Mr. Pilla said.





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