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Cost-lowering drug reform expected to hit Shoppers Add to ...

RETAILING REPORTER

Proposed drug reforms in Ontario could pinch the bottom line of Shoppers Drug Mart Corp. and other pharmacies - and eventually have a ripple effect on drugstores across the country.

The Ontario government quietly introduced proposals this month that could reduce funding it provides to pharmacies while promoting new ways of pricing and distributing drugs in a bid to lower provincial drug costs.

Yesterday, Shoppers, the country's largest pharmacy chain, flagged the reforms as ones which "may have an adverse impact on the company's business, sales and profitability," while releasing its second-quarter results, which were respectable amid the recessionary climate. The proposed reforms could be implemented as early as this fall.

Jurgen Schreiber, chief executive officer of Shoppers, told analysts it's too early to assess the impact. But he said Shoppers also wants to trim pharmacy costs, so he welcomes the discussions with the Ontario government over the next month to find "joint solutions."

He hinted that Shoppers may be forced to reduce its Ontario work force of 25,000 to find savings. "If it comes to reductions, we don't know at this point in time ... we have to be able to take steps to reduce the costs. We hope we don't have to do that."

He pointed to other examples of high pharmacy costs. In Ontario, it costs $14 to dispense a drug with just a $7 reimbursement from the province. In Europe, drugstores have a more streamlined dispensing system in which pharmacists hand over prepacked pills to customers, he added. In Canada, practitioners set up a personal file on the customer, count the tablets and put them in bottles.

Industry observers picked up on the potential pitfalls of the proposals for drugstores, suggesting the effects could be even more widespread due to the possibility of other provinces following suit.

"One's got to believe there's risk here that the earning power of pharmacy in Ontario could be weakened by new regulations," said David Hartley, managing director of equity research at BMO Nesbitt Burns.

"This may be just the beginning as the government will be under increased pressure over time to keep a lid on health care costs, and it appears that there is room to lower those costs via increased regulation of pharmacy. Other provinces will likely follow Ontario's lead."

It's not the first time that Ontario has tried to squeeze more from pharmacies to pay for burgeoning drug costs. A few years ago the province introduced legislative reforms that lowered the price it pays for generic drugs under public drug benefit plans.

Some analysts predicted at the time the changes would hurt Shoppers, which has about half of its more than 1,000 pharmacies in Ontario, as well as other drugstores. In the end, however, Shoppers found that the new law actually bolstered it profits by revving up sales of cheaper generic drugs, which carry bigger margins than branded ones.

The proposals that were introduced in Ontario on July 10 could be more sweeping, some analysts warned yesterday.

"The Ministry of Health is looking to save the government money, which means cheaper drugs," said Robert Gibson, head of research at Octagon Capital. "It's going to come out of somebody's pocket. ... Definitely there's a big red flag going up that there could be a problem."

SHOPPERS DRUG MART (SC)

Close: $47.25, down 24¢

******

Shoppers Drug Mart

Q2 2009 2008

Profits $136.1-million $126.6- million

EPS 63 cents 58 cents

Revenue $2.3-billion $2.1-billion

SOURCE: Shoppers

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