On Thursday, shares of Shoppers Drug Mart fell nearly 10% based on news of changes the government of Ontario announced to generic drug prices.
Basically, the new legislation cuts the prices on generic drugs to 25% of the branded equivalent down from the current 50%. The changes apply to all generic prescriptions including those made under private health care plans and cash paying patients.
This would be a huge hit to the profitability of SDM and other drugstore chains in Ontario. If the naysayers are to be believed, this legislation could be quickly adopted by the other nine provinces.
The impact to SDM’s bottom line is likely to be significant.
According to SDM’s 2009 Annual Report, two-thirds of dug store shoppers take at least one prescription medication per day. Further to that, pharmacy makes up 51.7% of sales and in 2009, generics made up 53.0% of prescriptions dispensed (up from 51.2% in 2008).
In short, this announcement could impact more than 12% of SDM’s top-line sales if the legislation is adopted nationally.
Even if the changes are restrained to Ontario, where SDM has about 50% of its 1,200 stores, it could affect 6-7% of SDM’s top-line.
As a CPG supplier to SDM you might be saying “so what”?
Well, the most important impact will be determined by how SDM plans to recoup these sales and profit reductions.
SDM has already said that they will cut staff, store hours, new store openings and intern programs in Ontario in order to cuts costs and make up the profit losses.
However, some pressure will have to shift to front store sales to maintain the top-line and drive profits – with more aggressive pricing and more pressure on suppliers to bolster margins.
However, front store sales growth at Shoppers has not been keeping up with total sales growth since 2005.
In order to maintain its share price, SDM may have to get MUCH more aggressive in the front shop than they have been in recent times.
That would make for interesting times for suppliers and retailers alike.
Read more here.