Shoppers Drug Mart Corp. plans to acquire western Canada drug chain Paragon Pharmacies Ltd. for $75 million (Canadian).

Shoppers Drug Mart, Paragon Pharmacies, Canada drug chain, western Canada drug chain, retail pharmacies, Domenic Pilla, R. Gordon Gooding, drug stores, central fill pharmacies, Martin Weinberg, Russell Redman, Paragon's board

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Shoppers Drug Mart to buy Paragon Pharmacies

May 23rd, 2012

TORONTO – Shoppers Drug Mart Corp. plans to acquire western Canada drug chain Paragon Pharmacies Ltd. for $75 million (Canadian).

Announced late Tuesday, the cash deal includes Paragon's 19 retail pharmacies and its three central fill pharmacies in British Columbia, Alberta and Manitoba.

Shoppers Drug Mart said the addition of Paragon's drug stores and central fill facilities, which serve the long-term care market, will boost its presence in western Canada and pave the way for its MediSystem Technologies Inc. business to enter the British Columbia and Manitoba markets.

"This acquisition is a very good fit for Shoppers Drug Mart and is consistent with our stated growth objectives in retail pharmacy and long-term care," Domenic Pilla, president and chief executive officer of Shoppers Drug Mart, said in a statement. "We look forward to welcoming the pharmacists and employees of Paragon to the Shoppers family and together, continuing to meet the needs of the patients and customers they serve."

A publicly traded company on the TSX Venture Exchange (stock symbol "PGN"), Kelowna, B.C.-based Paragon has more than 400 employees and nine drug stores in Alberta, eight in British Columbia and two in Manitoba. It also operates three walk-in health clinics in Calgary, Alberta, plus central fill facilities in Winnipeg, Manitoba, and in Kelowna and Richmond, B.C.

The acquisition is expected to close in the third quarter, pending approval of Paragon's shareholders, acceptance by the TSX Venture Exchange and other closing conditions. Under the agreement, Paragon has agreed to provide Shoppers Drug Mart with a 20-day due diligence period, during which Shoppers may propose one or more purchase price adjustments, subject to a maximum of $7 million.

Paragon said Wednesday that although the chain has made big strides in improving its operations and attracting new customers to its pharmacies, the company's ability to grow the business will be challenged by regulatory reform, stiff competition from larger pharmacy chains and access to capital. As a result, the board decided a sale of the company was the best option for maximizing shareholder value.

"This transaction with Shoppers represents a significant premium to the stock's trading price over recent years and recognizes the underlying strength of Paragon and its people in these challenging times," stated Martin Weinberg, chairman of Paragon's board. "The terms of the transaction clearly affirm the changes that were initiated by the board of directors and implemented by management team over the last several years."

For its 2011 fiscal year ended Aug. 31, Paragon reported revenue of $76.69 million, down 6.7% from $82.22 million in fiscal 2010. The company said pharmacy sales were impacted by generic drug price reductions, stemming mainly from regulatory reform in British Columbia, as well as from increased generic utilization rates. Front-end sales also were negatively impacted by competitive pressures in fiscal 2011, the chain said. Operating income was virtually flat, up just 0.7%, while EBITDA (earnings before interest, taxes, depreciation and amortization) fell 19.6%. The company, too, posted a net loss of $3.24 million, 24.8% more than in 2010.

Results improved in the fiscal 2012 second quarter ended Feb. 29. Total sales were roughly flat at $19.68 million. Comparable-store sales dipped 1.4% in the pharmacy but grew 4.1% in the front end. EBITDA rose 39.4% to $1.3 million, and the net loss plummeted to $47,000 from $600,000 a year earlier.

"The continued commitment and focus from the entire Paragon team has brought about a significant improvement in the results for the first half of the fiscal year and in particular the second quarter," Paragon CEO R. Gordon Gooding stated late last month when reporting second-quarter results.

In announcing the Paragon acquisition, Shoppers Drug Mart didn't say whether it would retain the chain's brand and its management. Paragon began in 1975 as Black Mountain Pharmacy, located in Kelowna, B.C.

Canada's largest drug chain by sales, Shoppers Drug Mart operates 1,206 drug stores nationwide under the banners Shoppers Drug Mart and Pharmaprix. It also has 57 medical clinic pharmacies under the names Shoppers Simply Pharmacy and Pharmaprix Simplement Santé, eight Murale luxury beauty stores and 63 Shoppers Home Health Care stores.