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Pharmacies take hit as Ontario cuts generic drug payments again

In an unexpected move, the Ontario government said late Friday that it is lowering the price it will pay for the top 10 generic drugs to 20 per cent of their brand-name equivalents, from 25 per cent previously. The initiative will save the province $55-million in public drug-plan costs, which can be redirected to 'more important priorities,' it said in a background paper.

Deborah Baic/The Globe and Mail/Deborah Baic/The Globe and Mail

Shoppers Drug Mart Corp. has been hit with yet another round of Ontario cuts in generic prescription drug prices while still grappling with earlier profit-pinching drug reforms.

In an unexpected move, the Ontario government said late Friday that it is lowering the price it will pay for the top 10 generic drugs to 20 per cent of their brand-name equivalents, from 25 per cent previously. The initiative will save the province $55-million in public drug-plan costs, which can be redirected to "more important priorities," it said in a background paper.

The cutback inevitably will mean lower revenue for Shoppers and other drugstore retailers. "It's not good," said Robert Gibson, head of research at Octagon Capital Corp., who follows Shoppers. "The implication is negative."

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The decision is among an array of generic-drug pricing changes Ontario has implemented over the past two years that have slashed prescription sales revenue for pharmacy chains such as Shoppers, which count on generic drugs to bolster their profits.

An estimated 45 per cent of prescribed drugs are financed by the public sector with the remaining 55 per cent financed by the private sector, according to the Canadian Institute for Health Information

Ontario had already banned hefty professional fees that generic drug companies had paid to retailers to carry their medications. Other provinces are following suit, squeezing revenues at pharmacies.

As a result, Shoppers has scrambled to cut costs and find new sources of revenue, such as launching its own, more lucrative, private-label generic prescription drug line Sanis – which is being legally challenged by the Ontario government. And the chain is bulking up on non-prescription products such as cosmetics and food, many of them private labels which generate higher margins.

On Thursday, when Shoppers reports its first-quarter results, it is expected to shed more light on the effects of the reforms thus far. But the move to reduce even further the price of generic drugs surfaced as part of Premier Dalton McGuinty's provincial budget talks and wasn't anticipated, said Peter Sklar, retail analyst at BMO Nesbitt Burns.

He calculated the reduction will cut 1.8 per cent – or 18 cents per prescription – from total revenue of about $10 per prescription under the public drug plan.

And the latest measure in Ontario "could prompt other provinces to reduce their generic drug prices," Mr. Sklar warned.

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Ontario said the price cuts will generate enough savings to raise social assistance (Ontario Works) and disability payments by 1 per cent each. The change stems from negotiations with the New Democratic Party, which is asking for concessions to approve the proposed budget. The price reduction will be implemented through a regulatory change, a spokeswoman for the Finance Minister said.

Domenic Pilla, chief executive officer of Shoppers, recently predicted that the pressures created by drug reforms will persist for another two years as provinces continue to look at scaling back payments to pharmacies.

British Columbia, for example, has torn up its generic pricing plans and is starting anew, saying it is not saving enough money. B.C. Health Minister Mike de Jong has said his legislation will be modelled on Ontario's drug-pricing changes.

"B.C. may be the first, but it won't be the last," Octagon's Mr. Gibson said in a note last month. "We expect other provinces to follow suit to lower their drug costs."

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About the Authors
Retailing Reporter

Marina Strauss covers retailing for The Globe and Mail's Report on Business. She follows a wide range of topics in the sector, from the fallout of foreign retailers invading Canada to how a merchant such as the Swedish Ikea gets its mojo. She has probed the rise and fall (and revival efforts) of Loblaw Cos., Hudson's Bay and others. More

Karen Howlett is a national reporter based in Toronto. She returned to the newsroom in 2013 after covering Ontario politics at The Globe’s Queen’s Park bureau for seven years. Prior to that, she worked in the paper’s Vancouver bureau and in The Report on Business, where she covered a variety of beats, including financial services and securities regulation. More

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