TORONTO — Executives at Shoppers Drug Mart (SDM) say that the recent rollback in pharmacy reimbursement rates across Canada is likely to slow the retailer’s growth in the coming years.

“It is our assumption at this point in time that it’s absolutely possible to grow earnings over the next few years,” president and chief executive officer Jürgen Schreiber said in a news conference after the release of the company’s second quarter results late last month. “It just takes discipline, very vigorous changes — many of them are already in place.”

While Schreiber says SDM will continue to add stores, the pace of expansion will be slower than in recent years. At the start of 2010, the chain said it would allocate $560 million to capital expenditures, with 70% of that increase earmarked for store openings and upgrades. That investment was expected to increase selling space by about 8% or 9%.

In light of the reimbursement rollbacks, however, SDM has been forced to trim its capital expenditures $430 million for the year, with an expected increase in square footage of about 7%.

The reimbursement changes that are expected to have the greatest impact on SDM were unveiled in May by Ontario’s Minister of Health and Long Term Care.

Professional allowances to pharmacists from generic drug manufacturers — which account for a significant portion of pharmacies’ income in the province — were eliminated for drugs dispensed under the Ontario Drug Benefit Plan (ODBP) beginning July 1. For drugs dispensed for the private sector, the allowances are slated to be phased out by April 2013.

Limits were established on the price of generic drugs. For most drugs dispensed under the ODBP, the limit as of July 1 was set at 25% of the equivalent branded drug. For private sector purchases, the limit effective July 1 was set at 50% of the branded drug price, and that percentage is slated to decline, in stages, to 25% by April 1, 2013.

In addition, the new plan prevents pharmacies from introducing private branded generics.
SDM executives say they were surprised by the generics ban. A few weeks before the introduction of Ontario’s new reimbursement regulations, SDM announced a private branded program for generics.

In an effort to offset the losses from the rollback in the reimbursement rates, Ontario regulators agreed to increase dispensing fees. The new fee structure will be phased in over the next four years.

In addition, the province has set aside $75 million to help pharmacies transition from the old reimbursement scheme to the new plan.

Critics say that although pharmacies in Ontario are likely to find new revenue streams in the coming years, the new sources of income will not come close to replacing those to be lost as a result of the regulatory changes.

Since Ontario rolled out its new pharmacy reimbursement program, two other provinces have said that they plan to introduce similar plans. And those two provinces, Quebec and British Columbia, are not expected to simply reproduce the Ontario model.

Quebec, for instance, already had a provision in its regulations that calls for it to pay the equivalent of the lowest drug prices found elsewhere in Canada.

In early July, Quebec minister of health Yves Bolduc said this directive would require a cut in reimbursement price for generics adhering to the same formula of 25% of branded price now applicable in Ontario.

However, he also stated that his department would conduct discussions in August with all of the players in the pharmacy sector to consider which accompanying measures might be appropriate.

Quebec pharmacy leaders say they are hopeful that the additional measures will take account of the reduced income stream that the generic pricing decision will cause.

Meanwhile, Kevin Falcon, British Columbia’s minister of health services, unveiled the details of the province’s new pharmacy reimbursement program early last month. Under the plan — which was created following negotiations between the province, the British Columbia Pharmacists Association and the Canadian Association of Chain Drug Stores — the price of generics will drop to 35% of the price of the equivalent branded drug, down from the current 65%. The price cuts are set to be phased in over three years.

To compensate for the lower-priced generics, dispensing fees are slated to rise from $8.60 to $10.50 by April 2, 2012.

On October 1, the permitted markup on the price of prescription drugs dispensed under the government-funded PharmaCare program will be increased from 7% to 8%.

SDM’s Schreiber told analysts that the company’s ability to project continued growth in revenue and earnings — even if somewhat reduced from previous projections — was due to the “outstanding job” performed by SDM’s planning teams who developed the company’s strategies for the next three to four years.

Schreiber says SDM’s responsive strategies fall into four groupings: efficiency and effectiveness gains, a drive for market share and improved patient care, innovation and certain transformational projects.

He noted that these efforts will pay off in the long run. “We shall see the products of our hard work,” Schreiber said.