TOP CONTRIBUTORS

Lawrence Gu

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 ($9.4 billion CAD and 1,149 stores, respectively as of fiscal-year end 2008) under the brands Shoppers Drug Mart and Pharmaprix stores (within Quebec).^[1][2]

SDM generates income primarily through the sales of merchandise from its front stores (52.4% of total sales in fiscal year 2008).^[3] Front store merchandise categories include over-the-counter medications, health and beauty aids, cosmetics and fragrances, everyday household needs, and seasonal products.^[4][5]

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.^[6] Furthermore, the demand of the drugstore industry in Canada is driven by the graying of the nation's population.^[7] 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).

Company Overview

Structure of Shoppers Drug Mart Corporation^[1]

As of fiscal year-end 2008, Shoppers Drug Mart Corporation owns 1,149 full-service retail-drug chain stores.^[1] 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.^[8]

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 was 16.9% of total sold merchandise in fiscal year 2008.^[9] Other private label brands are shown in the figure depicting SDM's structure. Within its retail store network, SDM as of fiscal 2008 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.^[1]

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.

Business and Financial Metrics

The total sales for SDM in fiscal year 2008 was $9.423 billion CAD compared to $8.478 billion CAD in fiscal year 2007 ($945 million CAD increase, or 11.1% increase).^[10] These increase in sales were primarily due to gains in Quebec through the acquisition of seven pharmacy stores from Centre d’Escomptes Racine in the third reporting quarter of fiscal year 2007.^[11] However, note that the extra week in fiscal 2008 partially offsets the year-to-year increase in sales.

Increasing sales for SDM heavily depend on acquisitions. For example, the 11.1% sales growth in fiscal year 2008 compared to fiscal year 2007 was further aided by SDM's acquisition of Calea Ltd.’s wholly-owned subsidiaries, Information Healthcare Marketing Corp. and HealthAccess division (see Key Trends and Forces).^[11]

Shoppers Drug Mart Corporation financial metrics^[1]

In fiscal year 2008, SDM increased its retail selling square footage by 11.6% to 10.9 million square feet by primarily adding square footage of selling space in Quebec, a region that has been historically underrepresented in SDM's business.^[12] At fiscal year-end 2008, the average selling space per drug store was approximately 9,300 square feet compared to 9,000 square feet at the end of the fiscal year 2007.^[13][14][15]

Q1 2009 Summary

The total sales from the first quarter of fiscal 2009 were $2.195 billion CAD, a 8.5% increase compared to the first quarter of fiscal 2008.^[16] Increased sales are primarily due to greater selling space. For example, during the first quarter of fiscal 2009, 40 drug stores were opened or acquired, 14 of which were re-locations, while one smaller drug store was closed, bringing the total number to 1,174 drugstores (Shoppers Drug Mart/Pharmaprix stores and Shoppers Simply Pharmacy/Pharmaprix Simplement Sant  stores) of 1,242 total stores.^[16]

Q2 2009 Summary

The total sales from the second quarter of fiscal 2009 were $2.289 billion CAD, a 8.5% increase compared to the second quarter of fiscal 2008.^[17][18] However, note that Easter season (a period of increased sales on seasonal front sales merchandise) was included in the second quarter of fiscal 2009, but was included in the first quarter of fiscal 2008.

Increased sales are again primarily due to greater selling space. In the second quarter of fiscal 2009, 27 drug stores were opened or acquired, 8 of which were re-locations, while 2 smaller drug stores were closed.^[19] By the end of the second quarter in fiscal 2009 (June 20, 2009), there were 1,191 drug stores (Shoppers Drug Mart/Pharmaprix stores and Shoppers Simply Pharmacy/Pharmaprix Simplement Sant  stores) of a total 1,259 stores in the system.^[20]

Business Segments

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 (52.4% of total sales, FY2008)

"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.^[11]

"Front store sales" were $4.937 billion CAD in fiscal year 2008 compared to $4.489 billion CAD in fiscal year 2007 ($448 million CAD or 10.0% increase).^[11][21][20] 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. Selling space increased to 10.9 million square feet in fiscal year 2008, a 11.6% increase compared to fiscal year 2007.^[6] 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.^[6][22] Finally, private label brands allow SDM to sell merchandise at lower prices at higher profit margins. In fiscal year end 2008, SDM's private label and exclusive brand penetration rate was 16.9%.^[9]

Prescription Sales (47.6% of total sales, FY2008)

"Prescription sales" primarily consist of revenue generated from specialty medical supplies (equipment, drugs, etc.). "Prescription sales" in fiscal year 2008 were $4.486 billion CAD compared to $3.989 billion CAD in 2007 ($497 million CAD or 12.5% increase).^[11]

"Prescription sales" continued to post increased gains in the first and second reporting quarters of fiscal 2009 for SDM.^[17] As of June 20, 2009 from fiscal year-to-date, "prescription sales" increased by 10.7% to $2.195 billion CAD and accounted for 49.0% of Shoppers Drug Mart Corporation's total sales.^[17]

Overall pharmacy sales growth in SDM has consistently been driven by strong growth in the number of prescriptions filled, while increased generic utilization continued to have a deflationary impact on sales growth in this business segment. For example, in fiscal year 2008, generic drugs represented 51.2% of prescriptions dispensed compared to 47.8% of units dispensed in fiscal year 2007 (an increase of 7.1%).^[11] In the second reporting quarter of 2009, generic drugs represented 52.7% of prescriptions dispensed, compared to 50.9% of prescriptions dispensed in the second reporting quarter of 2008.^[17]

Key Trends and Forces

SDM Extends Geographic Expansion Primarily through the Acquisition of Competitors' Stores

Shoppers Drug Mart Corporation increases its number of locations in Canada’s fragmented retail-drug store marketplaces mainly through acquisitions. In fiscal 2008, SDM spent about $244 million CAD in capital expenditures for business acquisitions. As seen in the related graph, this figure is increasing.

Shoppers Drug Mart Corporation business acquisitions^[3]

Shoppers Drug Mart Corporation's CEO J rgen Schreiber estimates SDM to spend approximately $575 million CAD to capital expenditures in fiscal 2009, 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).^[6]

HealthAccess and Information Healthcare Marketing Corporation

On July 2, 2008, Shoppers Drug Mart Corporation acquired the specialty drug assets of the HealthAccess business of Calea Ltd. and 100% of the shares of Calea Ltd.’s wholly owned subsidiary, Information Healthcare Marketing Corp., which operates a related call center business.^[23] After the acquisition, the business operates as Shoppers Drug Mart Specialty Health Network Inc. and provides patient support services for specialty pharmaceutical needs. The total cost of the acquisition in cash, including costs incurred in connection with the acquisition was approximately $89 million CAD.^[23]

Centre d’Escomptes Racine

On September 25, 2007, Shoppers Drug Mart Corporation purchased seven stores from Centre d’Escomptes Racine, a pharmacy chain in Quebec.^[12] The acquisition increased SDM's selling space by about 61,000 square feet in Quebec, a region that has been historically underrepresented in SDM's business.^[12] The total cost of the acquisition in cash, including costs incurred in connection with the acquisition, was about $77 million CAD.^[24]

Other Acquisitions

Throughout fiscal 2008, SDM opened or acquired 142 new drug stores, 37 of which were re-locations.^[6] The total cost of the acquisitions was approximately $155 million CAD, including costs incurred in connection with the acquisitions.^[24]

The Sale of Prescription Drugs are Susceptible to Canadian Federal and Provincial Laws

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.^[25] 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.^[25] 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.^[26] In fiscal 2008, the following legislative changes in the provinces below lowered drug costs incurred by public drug plans, affecting SDM's store branches in the corresponding regions:

SDM Drug Store Network by Province^[27]

Ontario

A competitive bid process was implemented in mid-2008 by the government through a call for applications for three popular "multi-source" prescription drugs.^[28] A "multi-source drug" is a prescription drug that has one or more generic equivalents.^[29] 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^[30]) for reimbursement under Ontario’s public drug programs, thereby decreasing the amount of funding available in the public drug plan for public sector sales.^[25]

Quebec

Quebec requires that drug manufacturers provide the provincial government the lowest available price given to any other province.^[31] This regulatory change was a response to allow prices of prescription drug products in Quebec to match Ontario's public drug program price.

British Columbia

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.^[31]

Newfoundland and Labrador

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.^[25]

Alberta

As of August 2009, the Alberta province pays for generic drugs at 70% to 75% of the brand.^[31] 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.^[31]

As Canadian Post-WWII Baby Boomers Increasingly Enter Elderly Age ( 65), Demand for Pharmaceutical Products Rises

Canada's 2005 Population Pyramid^[32]

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.^[33] The effects of a graying population impacts the pharmaceutical industry.^[34]

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.^[2] 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.^[25] 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)

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. For example, in Fiscal Year 2007, Caremark generated 11% of McKesson's total revenues.^[35] Therefore, SDM competes with both domestic and international drugstores.

• Katz Group Canada Ltd. is a subsidiary under the Katz Group, and is a holding company of drugstore chains in Canada with more than 1,800 pharmacies across the country.^[36] The company's drugstore chains include Medicine Shoppe Canada Inc., Pharma Plus Drugmarts Ltd., Rexall Drug Stores Ltd., Meditrust Pharmacy, and Propharm Limited. The Katz Group is not a publicly traded company.

• Jean Coutu Group Inc (PJC.A) operates franchised drugstore chains under the names PJC Jean Coutu, PJC Sant  Beaut , and PJC Clinique in Canada with 353 stores in Quebec, Ontario and New Brunswick (Eastern Canada) as of February 28, 2009.^[37] In December 2007, the Jean Coutu Group acquired Pro Doc Ltd (“Pro Doc”), a Quebec based subsidiary specialized in manufacturing of generic drugs.^[38] In fiscal 2009, PJC drugstores filled 63.3 million prescriptions, and has a penetration rate of 10.4% for company's front-end retail sales coming from the sale of 3,050 private label and exclusive products.^[38]

• The Familiprix Group is a Canadian group of independent pharmacists in Quebec and New Brunswick, specializing in the distribution and retailing of pharmaceutical products. Together, the subsidiary Familiprix Inc. groups about 270 owner/pharmacists of small (Familiprix succursale sant ) or medium-sized (Familiprix) pharmacies.^[39] By creating a single organization, Familiprix Inc. is the only group of independent-owner pharmacists in Canada to have its own distribution center, thereby allowing the group to compete with drugstore chains such as SDM. The Familiprix Group is not a publicly traded company.

• CVS Caremark Corporation is a U.S. provider of prescriptions and pharmacy services. CVS/pharmacy is the nation's largest retail pharmacy chain by store locations, with approximately 6,900 CVS/pharmacy and Longs Drug stores.^[40] On October 20, 2008, CVS Caremark acquired Longs Drug Stores Corporation, a U.S. drugstore chain, and RxAmerica LLC, a U.S. pharmacy benefit and management services provider.^[41] The company operates in two business segments: Pharmacy Services and Retail Pharmacy.

• Walgreen Company is a U.S. drug-retail chain that sells prescription drugs and general merchandise. As of August 31, 2008, Walgreens operated 6,934 locations in 49 states, the District of Columbia, Guam and Puerto Rico.^[42] In December 2008, Walgreens acquired McKesson Corporation's specialty pharmacy under McKesson's Specialty division. In fiscal 2008, Walgreens filled approximately 617 million prescriptions, with prescription sales accounting for 64.9% of sales.^[42]

• Rite Aid is the third largest U.S. retail drugstore chain by revenues and number of stores as of fiscal 2009 (about $26 million USD or 4,901 stores, respectively, as of February 28, 2009).^[43] On June 4, 2007, Rite Aid acquired Jean Coutu USA from Jean Coutu Group for $2.31 billion USD in cash and 250 million issued shares of Rite Aid common stock.^[44]

• Note: SDM and Jean Coutu Group Inc.'s financial data are given in CAD, whereas all other companies are in USD. For purposes of comparison, all data are translated to USD using the average CAD/USD exchange rate for 2008 (0.9434 CAD/USD).^[46]

References

1. ↑ ^{1.0 1.1 1.2 1.3 1.4 1.5} Shoppers Drug Mart Corporation 2008 Annual Report, Pg 3
2. ↑ ^{2.0 2.1} Shoppers Drug Mart, Hoovers, Company Overview
3. ↑ ^{3.0 3.1} Shoppers Drug Mart Corporation 2008 Annual Report, Pg 4
4. ↑ Shoppers Drug Mart Corporation 2009 2nd Quarterly Report ended June 20, 2009, Pg 5
5. ↑ Shoppers Drug Mart Corporation 2008 Annual Report, Pg 6
6. ↑ ^{6.0 6.1 6.2 6.3 6.4} Shoppers Drug Mart Corporation 2008 Annual Report, Pg 13
7. ↑ Minister of Public Works and Government Services Canada, "Canada’s Aging Population", 2002
8. ↑ Shoppers Drug Mart Corporation 2008 Annual Report, Pg 59
9. ↑ ^{9.0 9.1} Shoppers Drug Mart Corporation 2008 Annual Report, Pg 8
10. ↑ Shoppers Drug Mart Corporation 2008 Annual Report, Pg 12
11. ↑ ^{11.0 11.1 11.2 11.3 11.4 11.5} Shoppers Drug Mart Corporation 2008 Annual Report, Pg 31
12. ↑ ^{12.0 12.1 12.2} Shoppers Drug Mart Corporation 2008 Annual Report, Pg 20
13. ↑ Shoppers Drug Mart Corporation 2008 Annual Report, Pg 28
14. ↑ Shoppers Drug Mart Corporation 2008 Annual Report, Pg 32
15. ↑ Shoppers Drug Mart Corporation 2008 Annual Report, Pg 14
16. ↑ ^{16.0 16.1} Shoppers Drug Mart Corporation 2009 1st Quarterly Report ended March 28, 2009, Pg 1
17. ↑ ^{17.0 17.1 17.2 17.3} Shoppers Drug Mart Corporation 2009 2nd Quarterly Report ended June 20, 2009, Pg 9
18. ↑ Shoppers Drug Mart Corporation 2009 2nd Quarterly Report ended June 20, 2009, Pg 7
19. ↑ Shoppers Drug Mart Corporation 2009 2nd Quarterly Report ended June 20, 2009, Pg 13
20. ↑ ^{20.0 20.1} Shoppers Drug Mart Corporation 2009 2nd Quarterly Report ended June 20, 2009, Pg 1
21. ↑ Shoppers Drug Mart Corporation 2009 1st Quarterly Report ended March 28, 2009, Pg 9
22. ↑ Shoppers Drug Mart Corporation 2008 Annual Report, Pg 38
23. ↑ ^{23.0 23.1} Shoppers Drug Mart Corporation 2008 Annual Report, Pg 66
24. ↑ ^{24.0 24.1} Shoppers Drug Mart Corporation 2008 Annual Report, Pg 67
25. ↑ ^{25.0 25.1 25.2 25.3 25.4} Shoppers Drug Mart Corporation 2008 Annual Report, Pg 46
26. ↑ The Essential Guide to Establishing a Business in Ontario, Baker & McKenzie
27. ↑ Number of SDM Drug Stores by Province, updated July 22, 2009
28. ↑ 2008 Ontario Budget, Ministry of Finance
29. ↑ Washington State Health Authority
30. ↑ Medicine Now/Preferential-formulary-listing-of-a-proton-pump-in/ArticleStandard/Article/detail/569883 Preferential formulary listing of a proton-pump inhibitor (PPI): Compliance with policy in a Canadian military population
31. ↑ ^{31.0 31.1 31.2 31.3} Canadian Medical Association
32. ↑ Canadian Population Pyramids
33. ↑ IN DEPTH: CANADA 2020 The baby boomers' tab
34. ↑ Immigration Policy and Its Impact on Demographic Transition
35. ↑ Wikinvest, Key Trends and Forces on McKesson (MCK)
36. ↑ The Katz Group
37. ↑ Jean Coutu Group Inc. 2009 Annual Report ended February 28, 2009, Pg3
38. ↑ ^{38.0 38.1 38.2} Jean Coutu Group Inc. 2009 Annual Report ended February 28, 2009, Pg4
39. ↑ Organization of Familiprix
40. ↑ CVS FY2008 10-K, Item 1: Business, page 3
41. ↑ ^{41.0 41.1} CVS FY2008 10-K, Item 1: Business, page 6
42. ↑ ^{42.0 42.1 42.2} Reuters, Walgreen Company
43. ↑ RAD FY2009 10-K, Item 1: Business, page 26
44. ↑ ^{44.0 44.1} RAD FY2009 10-K, Item 1: Business, page 28
45. ↑ MHS 2008 10-k, Item 6: Selected Financial Data, page 36
46. ↑ CAD/USD Exchange Rates