Calling the provincial government’s proposed changes to the Ontario Drug Benefit program “anything but progressive,” Scotia Capital analyst Patrica Baker says they will likely destabilize Ontario’s pharmacy industry and seriously impact patient access to services and pharmacists.
“The reforms in aggregate were more harsh than expected and although much rhetoric in related speeches was addressed to large chains, it’s the little guy here who has been dealt the hardest blow,” she told clients.
After more than nine months of discussions, Dalton McGuinty’s Liberal government says it wants to reduce reimbursement rates for generic drugs from 50% to 25% of the branded drug cost. It also wants to eliminate professional allowances.
Ms. Baker says this will cripple independent pharmacies. “Where we are perplexed is in the government’s assertion that their priority in this process (beyond saving money) is to broaden access for patients. These changes as proposed, alas, will see anything but and as such they will have failed in their mandate, in our opinion.”
In the absence of available offsets, she expects profitability at Shoppers Drug Mart Corp. will be seriously curtailed. However, the analyst noted that reimbursement pressures – as demonstrated in the United States over two decades – favour large scale players, so Shoppers should prevail over time.
The company has been preparing for this situation for some time but has now indicated that it will review longer-term strategic priorities and initiatives. Ms. Baker expects this relates to any targeted plans for expansion in Ontario and any capital injection in that market.
Despite the extended period of uncertainty as these proposals are digested, she left her Sector Outperform rating and $54 one-year price target on the stock unchanged. The analyst sees downside support at $40 to $42 and says Shoppers should be able to make adjustments to protect returns within its robust operating model.
However, she did note that in the absense of any ability by the company to offset the margin impact, earnings per share in fiscal 2011 could be impacted by as much as 59¢.
Shoppers closed down 10% at $38.92 on Thursday.