Shoppers Drug Mart will reduce capital expenditures and new store openings because of the impact of new provincial drug reform rules, says CEO and president Jurgen Schreiber.

“This reform hurts and you see that in our numbers,” said Schreiber in a conference call with analysts Thursday. “There is a true impact on the business and there will be a continuing impact in the next couple of years.”

The new legislation means the company would have to implement “a number of mitigating tactics and ongoing initiatives” including reducing costs, enhancing operating efficiencies and adjusting its business and service model, said Schreiber.

“No question the new reforms has changed the probability of new stores and reduced capital expenditures,” he said.

Schreiber did not elaborate on how many stores might be impacted, but the Schreiber’s tone was less negative than in an interview with the Star in April, when he said the company had to take “dramatic action” including closing stores and laying off staff.

“I think they are taking a more balanced approach. They understand that they need to keep the service levels up in Ontario and things aren’t perhaps as grave as they thought,” said analyst Robert Cavallo of Mackie Research Capital Corp. “The question for them right now is how do they get back on a good growth trajectory.”

Canada’s largest pharmacy chain reported a 6.2 per cent increase in second quarter profit Thursday.

The chain said earnings were $145 million, representing 66 cents per share, up from $136 million or 63 cents per share a year ago.

Second quarter sales increased 5 per cent overall to $2.4 billion, with 21 new stores opened. On a same store basis, sales increased 2.7 per cent during the quarter. The company also announced a dividend of 22.5 cents per common share payable Oct. 15.

“It’s about what we were expecting, and the outlook is in line with market expectations,” said Cavallo.

However, the solid numbers were achieved before the impact of Ontario drug reform, which came into effect July 1.

Shoppers stock has been trading near 52 week lows after the provincial government announced in April it intended to overhaul the provincial drug benefit plan in an effort to reduce costs.

The regulations, which took effect at the beginning of this month cut the price of generic drugs by half and ended professional allowances paid by manufacturers to pharmacies. British Columbia and Quebec are also introducing their own legislation.

Michael Van Aelst, an analyst with TD Newcrest, estimated that in Ontario 10 per cent of all pharmacies might have to close. Analysts said the regulatory move amounted to a loss of about $750 million in funding to all pharmacies.

However, large chains such as Shoppers with greater economies of scale will have an opportunity to gain market share at the expense of smaller independents.

“The focus of all drug stores must be on increasing script volumes,” said Van Aeist in a report. “Independent pharmacies will find it tougher to do so and the larger chains will outperform.”

Prescription sales accounted for 48.5 per cent of sales for Shoppers in the second quarter alone. The company has more than 1,200 stores across Canada.

Despite the negative impact of the new rules, Shoppers expects total sales to increase by 4 to 5 per cent in 2010. The company forecasts fiscal EBITDA (earnings before interest, taxes, depreciation and amortization) to be within the range of $1.170 billion to $1.190 billion.

“It is also the company’s expectation that its fiscal 2010 cash flows from operating activities will be more than sufficient to fund its capital program and dividend payments,” said Schreiber.

The CEO said it is now possible to grow earnings through next year using “a tremendous amount of discipline and drastic cost reductions.”