April 28, 2010 / 4:22 PM / 7 years ago

UPDATE 2-Shoppers Drug lowers outlook on Ontario plan

* Sees prescription sales growth of 2 to 3 pct

* Cuts capex by C$100 mln to C$460 mln

* EPS C$0.53 vs year-earlier C$0.49

* Shares down 1.6 pct at C$36.63 (Adds background)

TORONTO, April 28 (Reuters) - Canada's Shoppers Drug Mart SC.TO on Wednesday cut its prescription sales outlook and capital spending budget as it braced for an Ontario government plan that would slash revenue for dispensing generic drugs.

Shares of Shoppers, Canada's biggest pharmacy chain, dropped on Wednesday as the company quantified some of the impact of the Ontario plan, announced April 7. Since then the stock has dropped 17 percent.

Pharmacy companies claim they stand to lose hundreds of millions of dollars in revenue if the changes are implemented. They have threatened to reduce store hours and other services to offset the lost revenue.

The company, which operates 1,303 stores across Canada, disclosed its new outlook while reporting that quarterly profit rose 8.5 percent, just shy of analysts expectations. Revenue jumped 5.7 percent, paced by sales of prescription drugs.

But Shoppers sees slower 2010 growth in prescription sales than it had forecast previously, pegging growth of 2 percent to 3 percent, down from a 4 percent to 5 percent forecast.

It slashed its capex budget by C$100 million to C$460 million and sees retail space increasing by 7 percent this year, down from a previous forecast of 8 percent to 9 percent.

The Ontario plan is aimed at reducing the province's annual C$800 million tab for drugs covered under its benefit program, while lowering the price that consumer pay for generics.

Ontario is eliminating the practice of generic manufacturers paying drugstores to fill prescriptions with their products. In return, the government will give the pharmacies a small increase in the dispensing fee they charge customers.

Even so, the higher fee is much less than what the drugstores reap from the allowances from the generic drug companies.

The company is reviewing the changes, but said it expects a big hit if the reforms are implemented.

"The net effect of the proposed reforms will have a material adverse impact on (the company's) operations and financial performance," it said in a release.

"As a result of these announced changes to the Ontario drug system, the company will also be undertaking a review of its longer-term strategic priorities and initiatives."

There has been speculation that other jurisdictions could follow lead of Ontario, Canada's most populous province, and implement similar policies to lower drug costs.

Profit rose to C$115.6 million, or 53 Canadian cents a share, in the first quarter, from C$106.8 million, or 49 Canadian cents, in the same period a year earlier.

Sales rose to C$2.32 billion.

Same-store sales, a measure of the performance of stores open for at least a year, rose 3.1 percent, with prescription sales rising 6.3 percent to C$1.16 billion.

Shares of Shoppers on Wednesday dropped 1.6 percent to C$36.63.

$1=$1.01 Canadian Reporting by Scott Anderson

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