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Despite respectable third-quarter financial results, Shoppers Drug Mart Corp.'s shares dropped on Wednesday amid investor concerns that new drug regulatory reforms in Alberta - and similar proposals in Ontario - will bruise the retailer.

The changes would reduce allowances paid to pharmacies by generic drug manufacturers for stocking their drugs, although it also would reward them for new services that pharmacists would be able to offer, such as filling prescriptions on their own and giving flu shots.

"I think that's why the stock is down - people think it's going to be a negative," said Robert Gibson, head of research at Octagon Capital Corp.

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Some analysts have said that the Ontario reforms alone, which eventually could spread to all provinces, could shave earnings per share by between 20 and 35 cents. But Mr. Gibson said the impact is still difficult to calculate.

On Wednesday, Shoppers, in releasing its third-quarter results, provided a warning signal about the reforms. It said the changes in Alberta "may have an adverse impact on the company's business, sales and profitability." And it said the Ontario reforms are likely to be implemented next spring.

In Alberta, new rules, which went into effect on Oct. 20, cut the pricing of generics for drug stores by almost half, Mr. Gibson said. Generic drugs represent about half of all prescriptions but just one-third of actual sales, because they are less expensive than branded drugs.

"The larger concern is that everybody else is going to do it," Mr. Gibson said, referring to other provinces.

As well, at least one third-party insurance coverage payer, Telus Health Solutions, decided recently to reduce its pricing to drug stores in Ontario, as of Nov. 24. "We expect other benefits managers to follow suit," he said in a recent report. "Shoppers' profitability on branded drugs will suffer. The magnitude is hard to judge."

Shoppers shares, which have dropped about 7 per cent in the past year amid worries about the reforms, fell 1.55 per cent to $43.79 on the Toronto Stock Exchange midday on Wednesday.

Shoppers said its profit, at $170.9-million or 79 cents a share, rose from $160.3-million or 74 cents a share a year earlier. Revenue rose to $3.01-billion from $2.79-billion, while same-store sales gained 4.8 per cent at outlets open a year or more. Same-store sales are considered an important retail measure.

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Analysts had expected, on average, that earnings would be 80 cents, according to Thomson Reuters IBES.

Prescription drug sales on a same-store basis gained 5.8 per cent. Total prescription sales climbed 9.7 per cent to $1.48-billion, accounting for 49.1 per cent of the company's sales mix, up from 48.3 per cent for the same period last year.

Front-of-store sales, which include products such as cosmetics, candy and over-the-counter medications, jumped 6.2 per cent to $1.53-billion, excluding tobacco, on a same-store basis.

"They continue to do a great job driving pharmacy sales and front-end sales continue to be strong," Mr. Yarbrough said. "When you look at the kind of sales that they are putting up on the front end, considering the tough economic environment, it's pretty impressive, compared with what else is going on out there in retail."

Shoppers opened or bought 37 drug stores in the quarter, including 15 relocations. At the end of the quarter, the company had 1,282 stores, including 1,212 drug stores and 66 Shoppers Home Health Care stores, which supply medical equipment and devices, and four Murale stores, a stand-alone luxury beauty brand the company launched last year.

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About the Author
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

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