By MARINA STRAUSS
Tuesday, May 22, 2018
Pharmaceuticals veteran Domenic Pilla got an unwelcome surprise soon after he took the helm at the company that had just acquired the Rexall drugstore chain.
The chief executive officer of McKesson Corp.'s Canadian division, which snapped up Rexall for $2.9-billion in late 2016, was hit this year with sweeping new rules that slashed prices on generic drugs.
At the same time, Mr. Pilla's company was grappling with other changes to health-care regulations and higher minimum wages in Ontario and Alberta, all hurting drugstores' profits.
"These things have happened before, but never to the degree and to the co-ordination that we've seen across Canada," Mr. Pilla, past CEO of archrival Shoppers Drug Mart Corp.
who assumed that role at McKesson Canada in early 2017, said in an interview.
Today, Rexall is closing underperforming stores - almost 10 per cent of its 450 pharmacies. Its parent, San Francisco-based health-care giant McKesson, warned last month it would take an after-tax asset-impairment charge of between US$600-million and US$1.98-billion, tied partly to its Rexall business and underlining the challenges at the chain.
Rexall joins other drugstore retailers in Canada wrestling with profit-pinching health-care reforms that are forcing them to cut costs and find new ways to operate amid rising labour and other expenses.
Under new leadership and shifting strategies, Rexall is now counting on McKesson's deep pockets and resources to help the retailer run more efficiently and increase profit from helping Canadians take care of their health. Rexall is focusing on fewer products and freeing up pharmacists to spend more time with customers.
Among other moves, Rexall is tying its recently acquired Well.ca online drugstore to its bricksand-mortar stores, cross-stocking their merchandise and allowing customers to pick up their online orders at physical outlets or have them delivered to their homes. It is also dropping the Pharma Plus brand in favour of Rexall to help create a more consistent look to the chain.
"It's about reinvesting in our future," said Beth Newlands Campbell, the new president of Rexall.
Other drugstore players also feel the pain of generic-drug price reductions, cutbacks in government subsidies for pharmacists' services (such as medication counselling) and higher minimum-wage laws. Loblaw Cos. Ltd., which owns Shoppers - the country's largest drugstore chain - expects health-care reforms alone this year to squeeze its operating profit by $250-million.
"It's a lot to take in one year, and I wouldn't say that was part of our long-term outlook," Loblaw CEO Galen G. Weston said recently.
In January, the pan-Canadian Pharmaceutical Alliance, which represents the provincial, territorial and federal governments, and the Canadian Generic Pharmaceutical Association agreed that prices of almost 70 commonly prescribed generic drugs would be discounted by up to 90 per cent of their brand-name equivalents, beginning April 1.
In the past, provinces had individually, and at different times, lowered their generic-drug prices, but this year all the provinces made the move at once.
Sobeys Inc., which owns Lawtons drugstores, anticipates up to a $40-million pinch from healthcare reforms. "We're lucky that we have ... an ability to reduce costs at a higher rate than our competitors," said Michael Vels, chief financial officer at Sobeys, which is in the midst of a broader cost-cutting plan.
Clint Mahlman, chief operating officer of London Drugs Ltd., said the company was recently was forced to stop running a blood-clot testing clinic it had operated in Vancouver for a decade because it couldn't afford it any more.
"We can't continue to offer too many things for free and continue to have a viable business," he said.
He said the biggest fallout from lower generic prices is a shortage of some drugs as their makers cut back supplies to Canada.
Other drugstores are grappling with the changes. "The last round of price cuts is the biggest single cut in the industry's history," said Jim Danahy, CEO of pharmacy think tank and training firm AdhereRx, which coowns a drugstore in Gibsons, B.C.
"At some point there will be fewer pharmacies."
Mr. Danahy said Rexall has been a lagging performer among its peers in Canada as a result of insufficient investment in the business by former owner Katz Group of Edmonton.
That may be changing. Rexall's Ms. Campbell said it is spending $50-million in the next 12 months to refresh stores, starting with a test in Ottawa. It's working on bringing the same look to its outlets, adding its distinctive "poolside blue" hue to all its stores to replace its deepblue-and-orange colours. It began rolling out the aqua-blue redesign about five years ago, but only completed 30 per cent to 40 per cent of Rexall's outlets, she said.
And it's stepping up its offerings of more profitable privatelabel lines such as Be Better vitamins, aiming to have its own brands make up more than 50 per cent of sales eventually, from less than 25 per cent today, Mr. Pilla said. The company is even testing running one of its stores - executives wouldn't say which one - with only private labels.
They can be less expensive for consumers and generate higher margins for the retailer.
Together with Well.ca, Rexall is launching more natural, environmentally friendly and organic products in the food, skin care and home-leaning aisles - items that can also yield higher margins than traditional lines. It's expanding its Well.ca home delivery to allow for "click and collect" pick-up of orders at stores.
Still, a key weapon of choice is putting the pharmacists at the core of the business, encouraging them to move out from behind the counter and advise customers, Ms. Campbell said. Rexall's research found that while customers still recognize the Rexall brand and trust pharmacists, they want more advice from them. As a result, the retailer is building or renovating private consultation rooms in stores.
And it is giving pharmacists training in responding to questions about using cannabis, opioids and Naloxone, a medication used to block the effects of opioids.
Rexall is catering especially to chronic-condition sufferers, caregivers and those needing expensive specialty drugs, Mr. Pilla said. "The pharmacist can be at the centre of the care, help you navigate your condition and the health-care system.
"That's a differentiator because today nobody is providing that co-ordination of care," he said.
To improve the shopping experience, Rexall is expanding its store hours, introducing reserved seniors parking spots and accessible washrooms and piloting pharmacist follow-up calls after a medication is dispensed.
Along with Rexall, McKesson has other drugstore chains, including IDA, Guardian and Medicine Shoppe. While the company doesn't break out its Canadian results, trade publication Chain Drug Review estimated McKesson Canada retailers rang up US$3.95-billion of sales last year, second after Shoppers. McKesson is searching for more pharmacy acquisitions; last year it bought the 380-store Uniprix.
Still, in many respects Rexall is merely catching up to its rivals.
For instance, it is moving to "central fill" automated drug dispensing to free up pharmacists to speak to customers rather than count pills. But Shoppers, London Drugs and others already have centralized automated dispensing.
Mr. Pilla said Rexall will have an edge because of its access to McKesson's resources and advanced technological capabilities.
"Our strategies will be much more about health-care services and much less about consumer products," he said. "We don't want to catch up - we want to leapfrog" the competition.
MCKESSON (MCK) CLOSE: US$146.50, DOWN US$2.42
Under new leadership and shifting strategies, Rexall is now counting on McKesson's deep pockets and resources to help the retailer run more efficiently and increase profit.
KEVIN VAN PAASSEN/THE GLOBE AND MAIL