Loblaw shares downgraded to hold after new generic drug deal reached
A Loblaw grocery store in Toronto is shown on May 2, 2013. (Aaron Vincent Elkaim/The Canadian Press)
Aleksandra Sagan, The Canadian Press
Published Tuesday, January 30, 2018 11:54AM EST
Last Updated Tuesday, January 30, 2018 4:51PM EST
Pharmacy owners are bracing for "an industry-wide impact" from lower generic drug prices coming in April, the CEO of Metro Inc., which has a deal to buy Quebec's largest pharmacy chain, said Tuesday.
The pan-Canadian Pharmaceutical Alliance -- which represents the provincial, territorial and federal governments, and the Canadian Generic Pharmaceutical Association -- announced Monday that they have reached an agreement that will see the prices of nearly 70 commonly prescribed generic drugs discounted by up to 90 per cent of their brand name equivalents.
"There will be an impact on sales as prices go down," said Metro chief executive Eric La Fleche Tuesday after the company's annual general meeting.
"It's an industry wide-impact," he said, noting the effect on his company will be much smaller as its presence in Ontario is smaller than Quebec, where a similar agreement was reached last year.
The company operates 74 drugstores in Ontario and 184 in Quebec. Its pharmaceutical network will grow further after its purchase of pharmacy chain Jean Coutu Group Inc., which is expected to close this spring.
"We're concerned by any impact," La Fleche said.
The company's shares were relatively unchanged after markets closed, down 0.3 per cent to $40.75, on the same day the Montreal-based retailer announced a nearly 11 per cent boost to its quarterly dividend after profits surged in the first quarter.
Meanwhile, Loblaw, which owns the Shoppers Drug Mart chain, saw its stock downgraded once details of the drug reform emerged. Its shares fell more than three per cent Tuesday.
Desjardins Group lowered its target price for the grocery-and-pharmacy retailer to $76 per share, from $84, and cut its recommendation to hold.
"Loblaw has experienced a confluence of headwinds," wrote Keith Howlett, an analyst with Desjardins Capital Markets in a note Tuesday. He pointed to a $190 million impact due to rising minimum wage, somewhere between $75 million and $150 million in initial costs to address its participation in an alleged industry-wide bread price-fixing scandal, and the impact of drug reform.
Desjardins estimates drug reform will add $220 million in costs for Loblaw.
The severity of the reduction in generic drug prices announced earlier this week is at the high end of the range that the industry expected, wrote Irene Nattel, an analyst with RBC Dominion Securities Inc. She dropped her target price to $84, from $87.
Loblaw shares shed 3.16 per cent to $67.03 after reaching a daily low of $65.98 Tuesday on the Toronto Stock Exchange.
The company had started to implement measures to mitigate the impending drug reform, but until Monday the details of the plan were unclear, said Nattel, pointing out the benefit of removing that uncertainty.
Loblaw declined to comment, but management has previously noted the possible impact of generic drug pricing changes.
Loblaw expected additional health-care reform to significantly impact its pharmacy business, Richard Dufresne, Loblaw's then-chief financial officer, said during the company's third-quarter conference call in November.
No single initiative will offset "the significant industry headwinds," he said, but the company has made progress to mitigate them.
"But, depending on how health-care reform plays out, we expect we have not covered all of it."
With files from Ross Marowits