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Squeezed by drug reform, Shoppers turns to export market

Jurgen Schreiber is moving Shoppers Drug Mart into the export business as one way to make up for the pinch of new drug reforms that have dealt the company its first profit drop since going public in 2001.

The chief executive officer of the country's largest drug-store chain has started to sell its private-label generic drugs outside Canada. He's also looking at exporting many of the high-margin retailer's store-brand products.

The initiatives are among a number he is mapping out over the next few years amid generic drug changes in Ontario and other provinces, including Quebec and British Columbia, that will hit pharmacies' profits.

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"There's a big challenge coming to us over the next few years," Mr. Schreiber said on Wednesday after releasing Shoppers' third-quarter results, which exceeded analysts' forecasts but saw profit fall below last year's. "We know what it is - we know the numbers …We're pretty bang-on on target."

In focusing on private labels, the CEO is pumping up a lucrative segment of Shoppers' business. Store labels are attractive because their gross margins can be 15 per cent higher than those of national brands. And private labels can help make stores a destination, while limiting the need to mark down prices to match rivals.

Mr. Schreiber began to feel the pressure for change in the spring, when Ontario unveiled dramatic new generic drug proposals that banned an estimated $750-million a year in so-called professional allowances that pharmacies collected from generic drug firms to stock their goods. Mr. Schreiber led a high-profile fight to oppose the new rules, threatening to shorten stores' opening hours and reduce free pharmacy services, but Ontario adopted the new rules in the summer. Other provinces have since followed suit with their own drug reforms, including Quebec and British Columbia, while still others are expected to introduce restrictions.

Shoppers felt the pain of the changes in its third quarter, the first period in which the impact of the new Ontario legislation surfaced. The Toronto-based chain of 1,310 stores reported its first quarterly year-over-year profit drop since it became a public company in 2001, said Rob Cavallo, retail analyst at Mackie Research Capital. And it probably won't enjoy another quarterly increase until the second half of 2011, he added.

Now Mr. Schreiber is racing to introduce new initiatives, including the exporting of private labels, and bolster others.

Mr. Cavallo said there are "definitely" opportunities there, but "it's a bit of a way's away."

Mr. Schreiber told analysts on Wednesday that Shoppers has signed its first contract to sell private-label generic drugs to a foreign company. He has hired a team of specialists in the categoryto develop the segment, which Shoppers only rolled out this year. "I see that as a very nice and very good opportunity," he said. "But it obviously will take us some time to build that up."

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He faces bumps in the road in Ontario. The new legislation bans pharmacies from selling their own store-brand generic drugs. This summer Shoppers challenged the provision in court and is awaiting a judgment. But Shoppers has started to stock the private-label drugs in seven provinces, and plans to carry them across Canada, except Ontario. Mr. Schreiber also mentioned exporting other private-label products. Nineteen per cent of its non-pharmacy sales consist of store-brand business, he said.

The chain is expanding its other non-pharmacy sales, including cosmetics, over-the-counter drugs, baby products and foods. Early next year, it will unveil a re-fashioned beauty boutique for its stores.

The need for new initiatives became apparent in Shoppers' third quarter. The drug reforms hit Shoppers' business at the pharmacy counter, with prescription sales at stores open a year or more rising just 0.2 per cent. Shoppers' third-quarter prescription sales overall increased 0.8 per cent to almost $1.5-billion, but represented a smaller portion of total sales compared with a year earlier - 48.3 per cent against 49.1 per cent in the previous year.

For the 16 weeks ended Oct. 9, Shoppers' profit fell to $159-million, or 73 cents a share, from $171-million, or 79 cents a share. Sales rose 2.6 per cent to $3.093-billion. Excluding a pre-tax charge of $10-million to settle a legal dispute, profit in the latest quarter was $167-million, or 77 cents a share.

Analysts had expected Shoppers' to report third quarter share profit of 74 cents excluding one-time items, according to a survey by Thomson Reuters.

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