Shares of Shoppers Drug Mart Corp. fell roughly 14% in early trading
on Thursday after the Ontario government published proposals to dramatically change
how pharmacists are compensated. The stock declined $6.17 to $36.78
shortly after trading began as analysts downgraded the stock and
trimmed their earnings forecasts.
Calling the adjustments to
pharmacy reimbursement “draconian,” Desjardins Securities analyst Keith
Howlett cut his rating on the stock to Sell from Hold and slashed his
price target to $39 from $50.
After nine months of discussions,
the province says it wants to reduce reimbursement rates for generic
drugs from 50% to 25% of the branded drug cost. It also wants to phase
in by 2014 the same generic drug costs for private third-party payers
and the uninsured, as well as eliminate professional allowances that
see generic manufacturers pay pharmacists for stocking their generic
alternative.
“The proposals are punitive to pharmacies in Ontario,” Mr. Howlett told clients. “Longer-term, this will spur consolidation.”
He
explained that the proposals would eliminate any financial benefit to
Ontario pharmacies from the shift of prescriptions from branded to
generic. In fact, remuneration for generics would be lower than for
branded, which will result in the ongoing market share shift to generic
drugs being a drag on earnings, rather than a driver of earnings as it
has been in the past.
If the proposals are implemented, the
analyst said Shoppers’ current and prospective earnings power will
likely be reduced substantially. His preliminary assessment is that
annual earnings per share could fall by 40¢ to 60¢.
Shoppers plans to provide further analysis and information on its first quarter conference call on April 28.
Mr. Howlett also said the tone of the government’s press release suggests negotiations with the industry have ended.
UBS
analyst Vishal Shreedhar believes the company will respond with reduced
pharmacy services and hours in Ontario. He said Shoppers should be able
to manage the regulatory changes, but it will take time for investors
to see the full impact of the drug reforms on its profit and loss
statement.
The analyst’s largest concern is a potential ricochet
effect as other provinces aim to mimic similar pricing terms as the
Ontario government. He noted that Quebec and Newfoundland and Labrador
have a most favoured nation provision which require that the price
offered to the provincial drug plans be equal to the lowest provincial
drug prices in Canada.
Mr. Shreedhar is surprised that the
Ontario government aims to not allow private label generic drugs. He
left his Buy rating and $49 price target unchanged.
Raymond
James analyst Kenric Tyghe noted that the changes to the Ontario Drug
Benefit Program were significantly more aggressive than widely
expected. He cut his price target on Shoppers share to $45 from $50 and
reduced his rating to Market Perform from Outperform. The analyst also
revised his EPS estimates to $2.52 (from $2.94) in 2010 and to $2.84
(from $3.24) in 2011.
In light of upcoming patent expiration of
some blockbuster drugs, which incentivizes provinces to reduce their
expenditure on generic drugs, he said there is further opportunity for
the federal government to intervene and require more consistent
policies across Canada.
“What is particularly striking with
regard to the changes is the disparity between the measured approach
recently adopted under Alberta’s Conservative government and that of
Ontario’s Liberal government,” Mr. Tyghe wrote in a note.
Jonathan Ratner
