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Shoppers Drug Mart increases profit in third quarter, revenues up

TORONTO - Shoppers Drug Mart Corp. (TSX:SC) posted higher profits as more people filled their prescriptions at the retailer, but changes to generic drug pricing in Alberta, and potential changes in Ontario, left investors with a tepid response.

TORONTO - Shoppers Drug Mart Corp. (TSX:SC) posted higher profits as more people filled their prescriptions at the retailer, but changes to generic drug pricing in Alberta, and potential changes in Ontario, left investors with a tepid response.

In its financial earnings, the company also warned investors about changes to payments that pharmacies receive for stocking generic drugs, that it said "may have an adverse impact on the company's business, sales and profitability."

Last month, the Alberta government nearly halved the prices of newly listed generic drugs, which comprise a notable part of drug sales, while the province is exploring the possibility of extending the plans to existing generic drug prices.

Meanwhile, the Ontario government is exploring a similar initiative for all generic drug prices, with reforms likely to be in place by spring 2010.

The plans from both provinces offer both pros and cons to pharmacies because while drug price cuts would be considered a revenue setback, pharmacies could also benefit from other changes allowing them to administer flu shots and fill prescriptions on their own.

"There is nothing to be speculated at this point about any kind of impact," said Jurgen Schreiber, Shoppers' president and chief executive officer, reassured analysts in a conference call.

"We're still together, we're negotiating and everything is in line with our expectations at this point."

The Toronto-based retailer reported Wednesday a profit of $171 million or 79 cents per share for the quarter ended Oct. 10, missing analyst expectations of 80 cents per share, according to Thomson Reuters.

The earnings marked an increase from profits of $160 million or 74 cents a year ago. Revenues totalled $3 billion, up from $2.8 billion last year.

The company's shares fell 69 cents to close at $43.79 on the Toronto Stock Exchange.

Research Capital analyst Robert Cavallo said it was still too early to determine how future changes to drug pricing would affect operations.

"It really is just a wild guess at this point," he said.

"Long-term it's in the benefit of everyone for the pharmacy to become a bigger part of the health-care system. I think that will factor into whatever changes the government tries to implement."

Cavallo said it's reasonable to expect that the government wouldn't drastically alter revenue models for pharmacies without coming up with a plan that would compensate them in another area.

In the quarter, prescription sales accounted for nearly half of the sales mix, and moved up almost 10 per cent to $1.5 billion.

The company said overall profits were partially offset by increased amortization and higher expenses as it continues to expand its store network and step up investments in pricing and promotional activities.

It's widely expected that the H1N1 flu is expected to drive sales of cold and flu medications as well as hand sanitizer, though Schreiber said the sales uptick wasn't necessarily evident in the third quarter.

On a same store basis, prescription sales rose 5.8 per cent, boosted by growth in the number of prescriptions filled. However increased generic drug use continued to hurt sales growth in the category.

Front store sales grew by 6.2 per cent during the quarter to $1.5 billion, with sales gains experienced in all categories except tobacco.

 
 
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