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TORONTO (Reuters) - Shares of Shoppers Drug Mart fell more than 16 percent on Thursday on concern that Ontario's plan to push down generic drug prices will hit profits at Canada's biggest drugstore chain.
The stock swooned after the Ontario government unveiled sweeping changes to the way pharmacies are compensated for generic drugs they dispense, effectively lowering revenue from filling medical prescriptions. Analysts called the price cuts "draconian" and sharper than anticipated.
Ontario is eliminating the practice of generic manufacturers paying drugstores for filling prescriptions with their products. In return the government will give the pharmacies a small increase in the "dispensing fee" they can charge consumers. Even so, the higher fee is much less than what they would have reaped from the allowances.
What consumers pay for the drug itself, aside from the dispensing fee, will also shrink under the Ontario plan.
"It is clear that the earnings impact, particularly from the elimination of allowances, will be material for Shoppers," Genuity Capital analyst Candice Williams said. "The elimination of promotional allowances will reduce margins at Shoppers."
Williams downgraded Shopper's shares to a "hold" rating from a "buy" and cut her 2010 earnings per share estimate to C$2.80 from C$2.97. She also lowered her 2011 earnings per share estimate for Shoppers to C$2.98 from C$3.20, and her share price target to C$45 from C$49.
Shoppers Drug Mart was down 10 percent at C$38.84 on the Toronto Stock Exchange by early afternoon, after touching C$36.00 earlier in the day.
CIBC World Markets analyst Perry Caicco said the reforms could force Shoppers to reduce store hours and cut the number of new stores as it looks for ways to soften the blow.
The Ontario plan also slashes the amount
The company was not available for comment, but said in a statement on Wednesday that it was reviewing the impact of the changes on its sales and profitability and would comment further at the end of the month when it releases its quarterly results.
It also said it would look at its longer-term strategic priorities and initiatives.
"Part of the review for the company will include the further development and subsequent implementation of contingency plans for its own business and service model in order to ensure that it can continue to generate a fair and adequate return to fulfill its obligations to all stakeholders," Shoppers said in the release.
Caicco dropped his share price target to C$43 from C$47 and his 2010 EPS target to C$2.92 from C$2.96.
"The Ontario government's plan to cut pharmacy reimbursement seriously haircuts drugstore profitability in Ontario," Caicco said.
"The amount taken from drugstores with the slashing of generic prices is not remotely balanced by givebacks in dispensing or other fees."
Shares of Montreal-based Jean Coutu, a drugstore operator with some outlets in Ontario, outside its home base of Quebec, dropped 5.9 percent at C$9.31.
Reporting by Scott Anderson; Editing by Frank McGurty