Please read below and you will understand why sitting at a table with large chains and retailers does not make business sense to independent pharmacy owners. Perhaps the new PANL President could weigh in here and advise Shoppers Drug Mart that they cannot be so overtly aggressive toward independents.
Shoppers Drug Mart hit by drug reforms, but also sees takeover opportunities
TORONTO - Shoppers Drug Mart Corp. (TSX:SC) is bracing for a profit squeeze from more reforms to generic drug sales next year, but also plans to seize the opportunity to buy out independent pharmacies that are even more vulnerable.
"It's the company that's absolutely best positioned to take advantage of opportunities that are going to (result) from drug reform and other macro trends in the Canadian market," Domenic Pilla, the new president and CEO of Shoppers told analysts on a conference call Wednesday.
Changes in several provinces including the huge markets of Ontario, Quebec and British Columbia have reduced generic drug prices to 25 per cent of the price of patented drugs — down from 50 per cent — by cutting professional allowances that drug companies paid to pharmacies for stocking their pills.
The first phase of the reforms, which made generic drugs cheaper for patients on government-assisted plans, has taken a toll on Shoppers revenue this year. It has managed to churn out modest quarterly growth by compensating with more non-prescription sales.
The Toronto-based company reported Wednesday that third-quarter profits rose more than 11 per cent to $172 million as revenue grew a modest 2.1 per cent from the quarter in 2010, due to strong "front of store" sales.
Shoppers has long sold a range of health, beauty and other household items and expanded into grocery in recent years to supplement "back of store" pharmaceutical sales.
Brad Lukow, Shoppers chief financial officer said the full impact of drug reform on Shoppers earnings has not yet been felt.
Legislative reform has yet to take place in a number of provinces, and a second phase will be implemented in Ontario and B.C. in April.
The new changes will expand the cheaper prescription regulations to cover all patients purchasing pills, either out of pocket or using insurance plans.
"That's the negative," he explained. "The positive is, we firmly believe there will be a strong opportunity delivered by drug reform that will allow us in a greater way to be a consolidator of the marketplace."
A similar strategy is being used by Jean Coutu Group (TSX:PJC.A), Quebec's largest pharmacy chain. The two companies compete in some areas of the country but CEO Francois Coutu said recently that he wasn't concerned about facing the larger Toronto-based drug retailer.
Shoppers, which is Canada's largest drug store chain, banded together with independent pharmacies last year to stop generic drug reforms.
Shoppers said the move would cost an estimated $750-million a year in revenue, which it has been working to offset through ramping up front of store sales.
But independent pharmacists warned that in their stores, the consequences would be much more dire.
Local druggists lamented that some would inevitably have to close down because prescription sales make up a bigger percentage of their sales mix and they wouldn't be able to absorb the hit to their profits.
And that vulnerability is where Shoppers sees opportunity in the reforms.
Pilla told analysts Shoppers plans to be "extremely active in the market" as it watches more independents forced into selling as the drug reforms work their way through their balance sheets.
There has so far been no frenzy to buy up smaller chains due to the uncertainty affecting the whole industry, Pilla said.
But he expects a "kick up" in consolidation activity when the second phase of drug reforms hits, creating an "economic perfect storm" for some independent stores.
"What we are seeing is a lot more activity in the market and that augurs well for potentially having a lot more deals done in 2012."
Shoppers earned $172.4 million, or 80 cents per share in its latest quarter, up from $154.7 million, or 71 cents per share, in the quarter a year ago.
Excluding the impact of a $3-million, one-time gain due to a sale leaseback deal at some stores, earnings would have been $170 million, or 79 cents per share.
That was in line with analysts expectations for adjusted earnings, according to Thomson Reuters.
For the third quarter, analysts on average had been expecting revenue of $3.16 billion and the chain delivered.
Revenue was $3.1 billion from $3.05 billion a year ago. On a same-store basis — a key measure in the retail world — sales were up by 1.5 per cent.
Prescription sales rose by 1.5 per cent to $1.5 billion in the third quarter, as the volume of prescriptions improved by 3.6 per cent.
But the growth was largely offset by a decline in the average drug price due to the legislation reducing generic prescription reimbursement rates.
Meanwhile, generic prescriptions continued to grow. The cheaper alternatives made up 57 per cent of prescriptions in the third quarter, compared with 55 per cent a year ago.
As the company works to ramp up growth in other areas of store sales, it reduced its reliance on prescription sales slightly to 48.7 per cent from 49 per cent last year.
Front of store sales were $1.6 billion in the third quarter, up 2.6 per cent, led by strong sales in cosmetics, food and candy and other convenience categories.
The results also reflected the benefits the chain has realized from an efficiency drive to reduce costs and improve productivity.
Those benefits helped to partially offset higher operating expenses associated with its expansion strategy.
The company opened 15 stores in the third quarter and expanded eight others. At the end of the quarter, Shoppers had 1,328 stores.
Pilla, who became the Toronto-based company's chief executive effective Nov. 1, is a McGill University graduate and member of the Quebec Order of Engineers. He was president of McKesson Canada, a major player in Quebec's pharmacy business, just before his appointment.
Shoppers shares were down 36 cents to close at $42.48 Wednesday on the Toronto Stock Exchange.
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