TORONTO – Shoppers Drug Mart slashed its outlook for growth in its prescription sales as it braces against new rules in Ontario that the pharmacy chain says could impact its bottom line at stores outside of the province.
Canada’s largest drugstore chain (TSX:SC) saw a six per cent boost in prescription sales in its first-quarter results reported Wednesday, helping boost overall revenue and profits compared to a year ago.
But it expects growth in prescription sales in the coming quarters to slow if Ontario passes a bill that aims to reduce the price of generic drugs through the elimination of professional allowances.
The provincial government says the payments inflate drug costs for consumers, but pharmacists counter the fees help pay for an array of services they provide to customers.
“The changes in pharmacy in Canada will be fundamental. (Ontario’s reforms) will potentially lead to a situation of much more of a commodity business,” Shoppers CEO and president Jurgen Schreiber told investors on a conference call Wednesday.
Shoppers has fought hard against reforms in Ontario, where about half of its stores are located. The chain announced earlier this month a plan to cut jobs, store hours, extra services and new stores in the province.
“There will be different outcomes in the different provinces. There will be provinces which will have tremendous focus on pharmacy and believe strongly that pharmacy is the frontline of health care and others not so,” Schreiber said.
In an updated outlook released as part of its quarterly results, the company lowered its growth expectations for prescription sales this year to between two and three per cent, from earlier guidance of between four and five per cent.
It also said it would cut capital spending this year by $100 million to $460 million, including the cancellation or deferral of retail development projects, in light of the changes.
The company said it was “actively monitoring regulatory developments” in other provinces, and pointed to potential risks it faces in Quebec and Newfoundland.
Legislation in Quebec requires prescription drug prices for the provincial drug insurance program must not be higher than in any other province, while the Newfoundland and Labrador government has announced it will reduce maximum allowable prescription costs to the Ontario public drug program price.
Quebec’s biggest pharmacy chain Jean Coutu (TSX:PJC.A) said Wednesday it is concerned about impending changes in Ontario and expects there will be some impact on lowering prices in Quebec.
Ontario’s plan could also factor in to negotiations between the B.C. government and the pharmacy industry to determine a new contract for generic drug pricing before an interim agreement expires this summer.
Schreiber did not announce any specifics of its plan to offset the loss in revenues, but said the drugstore would likely release details during the second quarter, immediately after the changes are expected to take place.
Shoppers said it earned $116 million, or 53 cents per diluted share, in the first quarter of 2010, up from $107 million, or 49 cents per share a year ago.
Sales grew to $2.3 billion from $2.2 billion last year, as the company benefited from sales growth in all regions, led by Quebec and Western Canada. Same-store sales increased 3.1 per cent in the quarter.
Analysts surveyed by Thompson-Reuters had expected first-quarter earnings of $118 million or 54 cents per share on revenue of $2.3 billion.
Prescription sales increased 6.3 per cent in the first quarter to $1.16 billion, accounting for 49.8 per cent of the company’s sales mix. Same-store prescription sales increased 4.1 per cent.
The company says prescription sales growth continues to be driven primarily by strong growth in the number of prescriptions filled, while the increased use of generic drugs continues to have a deflationary impact on sales.
In the first quarter, generic drugs made up 54.2 per cent of dispensed prescriptions, compared with 52.8 per cent in the comparable period last year.
Meanwhile, sales of merchandise, cosmetics and other products increased 5.1 per cent in the first quarter to $1.17 billion, with the company reporting sales gains in core categories. On a same-store basis, front store sales increased 2.1 per cent.
Shoppers opened 27 drug stores in the quarter, 11 of which were relocations, and closed one smaller drug store. It owns 1,303 stores.
Shoppers shares lost $1.09 or nearly three per cent at $36.15 Wednesday on the Toronto Stock Exchange.