Shoppers Drug Mart Corporation (TSE:CS) is a pharmacy products and services provider based in Canada. Shoppers Drug Mart Corporation (SDM) operates Canada's largest and only nationwide drugstore chain by gross income and branch locations under the brands Shoppers Drug Mart and Pharmaprix stores (within Quebec). The company earned $10 billion in revenue and $585 million in net income in 2009.
SDM generates income primarily through the sales of merchandise from its front stores (about half of total sales). Front store merchandise categories include over-the-counter medications, health and beauty aids, cosmetics and fragrances, everyday household needs, and seasonal products.
Similar to the acquisition strategy implemented by U.S. pharmacy services provider CVS Caremark Corporation, Shoppers Drug Mart Corporation expands its geographical presence through the partial or full purchase of independent pharmacies. Furthermore, the demand of the drugstore industry in Canada is driven by the graying of the nation's population. As Canada's only nationwide drugstore chain, Shoppers Drug Mart Corporation gains an edge over individual companies by using economies of scale to purchase drugs from large wholesalers and to access large groups of customers (e.g. governments, insurers, and corporate employers).
Shoppers Drug Mart Corporation owns 1,170 full-service retail-drug chain stores. By full-service, Shoppers Drug Mart/Pharmaprix stores primarily sell over-the-counter medications, health and beauty aids, cosmetics and fragrances, seasonal products and everyday household essentials.
The management structure that comprises SDM's store network are individual "associate-owned stores" (variable interest entities, or VIEs), with the company as the primary beneficiary. Associate-owned stores remain separate legal entities and consolidation of these stores has no impact on the underlying risks facing SDM.
Additionally, Shoppers Drug Mart/Pharmaprix stores rely heavily on private label brands in its merchandise offering. For example, the private label and exclusive brand penetration rate is 16.9% of total sold merchandise. Within its retail store network, SDM licenses or owns more than 30 medical clinic pharmacies under the name Shoppers Simply Pharmacy (Pharmaprix Simplement Sant in Quebec), two luxury beauty destinations operating as Murale, and 66 Shoppers Home Health Care stores which sells medical equipment to institutional and retail customers.
The company also owns Shoppers Drug Mart Specialty Health Network Inc., a provider of specialty drug distribution, pharmacy, and patient support services. The company also owns MediSystem Technologies Inc., a provider of pharmaceutical products and services to long-term care facilities in Ontario and Alberta provinces.
Like most drug stores, Shoppers Drug Mart Corporation consists of two segments: "front store sales" and "prescription sales". Note that functions in SDM's business segments overlap between the "retail-drug formats" and "specialty services" seen in the overall structure of the company above.
"Front store sales" primary consist of revenues generated from the merchandise of SDM's drug-retail stores (Shoppers Drug Mart/Pharmaprix). Merchandise includes over-the-counter medications, health and beauty aids, cosmetics and fragrances, seasonal products and everyday household essentials.
Increasing revenue in "front store sales" are driven by three factors: selling space, promotional activities such as SDM's retail loyalty card Shoppers Optimum program, and private label brands. As for promotional activities, SDM's retail loyalty card Shoppers Optimum program continues to be one of the largest retail loyalty card program in Canada with 9.3 million active cardholders. Finally, private label brands allow SDM to sell merchandise at lower prices at higher profit margins. SDM's private label and exclusive brand penetration rate iss 16.9%.
"Prescription sales" primarily consist of revenue generated from specialty medical supplies (equipment, drugs, etc.).
Overall pharmacy sales growth in SDM has consistently been driven by strong growth in the number of prescriptions filled, while increased generic utilization continue to have a deflationary impact on sales growth in this business segment. For example, generic drugs represent 51.2% of prescriptions dispensed.
Shoppers Drug Mart Corporation increases its number of locations in Canada’s fragmented retail-drug store marketplaces mainly through acquisitions. Shoppers Drug Mart Corporation's CEO J rgen Schreiber estimates SDM to spend approximately $575 million CAD to capital expenditures in fiscal 2010, with approximately 75% invested in the store network, including acquisitions of drug stores and prescription files, thereby increasing selling square footage by 10% (or adding 120 to 130 new drug stores to the network).
To operate legally in Canada, SDM adjusts its pharmacy reimbursement policies based on public drug plans that regulate the allowable drug cost of a prescription drug, the permitted mark-up on a prescription drug, and the professional or dispensing fees that are charged on prescription drug sales to patients under the public drug plan. This impacts SDM's sales because besides those without insurance, prescription drug sales are reimbursed or paid by third-party payers, such as governments, insurers, or corporate employers. Moreover, in Canada, federal, provincial, territorial, and local laws and regulations oversee the approval, packaging, labeling, sale, marketing, advertising, handling, storage, distribution, dispensing and disposal of prescription drugs, which often increase compliance costs.
A competitive bid process was implemented by the government through a call for applications for three popular "multi-source" prescription drugs. A "multi-source drug" is a prescription drug that has one or more generic equivalents. Under the call for applications, both brand and generic manufacturers were provided the opportunity to compete for preferential listings ("Preferential listing" of a single drug is a strategy for controlling costs within a drug class) for reimbursement under Ontario’s public drug programs, thereby decreasing the amount of funding available in the public drug plan for public sector sales.
Quebec requires that drug manufacturers provide the provincial government the lowest available price given to any other province. This regulatory change was a response to allow prices of prescription drug products in Quebec to match Ontario's public drug program price.
Under an interim agreement effective from January 1, 2009 to January 1, 2010 between the British Columbia province and the British Columbia Pharmacy Association, the province’s PharmaCare program reimburses pharmacists for new generic versions of brand-name drugs at 50% of the brand price.
In response to the reduction of the maximum allowable cost (the highest unit price at which a drug will be paid) for prescription drug products in Ontario's public drug program, the Newfoundland and Labrador province implemented a similar policy on July 1, 2009.
The Alberta province pays for generic drugs at 70% to 75% of the brand. In response to the pricing and purchasing models in other provinces, executive director of pharmaceuticals for Alberta Health and Wellness Steve Long states the province is considering several policy options such as reducing the price Alberta pays for generic drugs to 50% or less of the brand-name price within the next few years.
The Canadian Post-WWII Baby Boom is defined between the years 1947 to 1966; consequently, the passage of these baby boomers pushes the percentage of senior citizens 65 and older from 13% of the total population in 2006 to 18% in 2020. The effects of a graying population impacts the pharmaceutical industry.
On the positive side, the large influx of Canadians entering elderly age increases demand for pharmaceutical products. As Canada's largest and only nationwide drugstore chain as of fiscal year-end 2008, Shoppers Drug Mart Corporation controls the largest market share by sales ($9.4 billion CAD) of the Canadian drug store market. But on the negative side, the effects of a graying population coupled with the effects of a decreasing workforce presents stress on the funding of public drug programs. Besides prescription sales that are individually paid, SDM's prescription drug sales are reimbursed or paid by third-party payers, such as governments, insurers, or corporate employers. As funding for public drug programs are strained, governments continue to increase regulation for drug costs, making SDM's sales less profitable. Also, in response to the increase in demand, a vacuum in supply creates opportunities for SDM's competing chains, such as Medicine Shoppe Canada owned by The Katz Group, to expand the market (See Competition)
Shoppers Drug Mart Corporation's competitors are not simply restricted to individual Canadian drugstores or chains. Since the largest drug manufacturers cater to a small number of international clients, SDM competes with other large drugstores chains such as Walgreens, even if those chains do not have business within Canada.