April 28, 2010 / 7:23 PM / 8 years ago

WRAPUP 1-Canada pharmacy results obscured by reform worries

* Shoppers sees prescription sales growth 2-3 pct

* Cuts capex by C$100 mln to C$460 mln

* Coutu says could be hurt if Quebec copies Ontario

* Shoppers shares off 1.6 pct, Coutu down 0.7 pct

By Scott Anderson

TORONTO, April 28 (Reuters) - Canada’s two big drugstore chains, Shoppers Drug Mart SC.TO and Jean Coutu PJCa.TO, reported higher profits on Wednesday, but worries about an Ontario government plan that would cut revenues from dispensing prescription drugs overshadowed the results.

Ontario unveiled plans three weeks ago to overhaul the way pharmacies would be compensated for dispensing generic drugs, in a move to trim healthcare costs. Pharmacy companies say the changes would cost them hundreds of millions of dollars and have threatened to reduce store hours and other services to offset the lost revenue.

“This has taken the bloom off the rose. It’s entirely the focus right now,” said Candice Williams, a retail analyst at Genuity Capital Market in Vancouver.

“Until Shoppers can help quantify the hit and help people understand what they can do to mitigate it, nobody is going to look at the quarterly results,” Williams said.

Shoppers, which operates 1,303 stores across Canada, disclosed a new outlook to compensate for the dispensing changes.

It sees slower 2010 growth in prescription sales than it forecast previously, now seeing growth of 2 percent to 3 percent, down from 4 percent to 5 percent.

The company slashed its capex budget by C$100 million ($99 million) to C$460 million and sees retail space increasing by 7 percent this year, down from a previous forecast of 8 percent to 9 percent.

Shoppers shares, which have dropped 17 percent since Ontario announced the plan, were off 1.6 percent at C$36.66 on Wednesday afternoon.

The company reported its first-quarter profit rose 8.5 percent to C$115.6 million, or 53 Canadian cents a share, just shy of analyst expectations. Revenue jumped 5.7 percent to C$2.32 billion, paced by sales of prescription drugs, which were up 6.3 percent at C$1.16 billion.

DISPENSING FEES

The Ontario plan is aimed at reducing the province’s annual C$800 million tab for drugs covered under its benefits program, while lowering the price that consumer pay for generics.

The province is eliminating the practice of generic manufacturers paying drugstores to fill prescriptions with their products. In return, it will give the pharmacies a small increase in the dispensing fee they charge customers.

Even with the higher fee, dispensing revenue is seen being much less than what the drugstores reap from the allowances from the drug companies.

The company is reviewing the changes, but said it expects a big hit if the reforms are implemented.

“The net effect of the proposed reforms will have a material adverse impact on (the company‘s) operations and financial performance,” Shoppers said in a release.

There has been speculation that other jurisdictions could follow the lead of Ontario, Canada’s most populous province, and implement similar policies to lower drug costs.

Jean Coutu, which operates some 370 pharmacies, primarily in Quebec but also in New Brunswick and Ontario, said that, as things stand, Ontario’s plan would have little material impact on its results going forward.

However, Francois Coutu, the company’s president and chief executive, told analysts on a conference call that his estimate depended on whether the Quebec government decided to follow Ontario’s lead.

“If measures similar to those proposed in Ontario were to be implemented in Quebec, the company’s consolidated results could be impacted,” Coutu said.

Earlier in the day, the company said it earned C$42.8 million, or 18 Canadian cents a share, in its fourth quarter, ended Feb. 27, just above the average analyst forecast of 17 Canadian cents a share, according to Thomson Reuters I/B/E/S.

Revenue rose 4.9 percent to C$637 million, but was off the C$654.7 million expected by analysts.

Coutu shares, which have dropped 9.4 percent over the past three weeks, were down 0.7 percent at C$9.00.

$1=$1.01 Canadian Reporting by Scott Anderson; editing by Rob Wilson

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