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Jean Coutu says Quebec rule change for branded drugs will help generic subsidiary

MONTREAL - Jean Coutu expects that next week's elimination of price protection for dozens of brand-name drugs in Quebec will boost its growing generic drug company and help offset future government cuts.

The provincial government announced in its November budget the elimination of safeguards implemented in 1994 that protect brand-name drug producers from generic alternatives for 15 years.

As a consequence, the government now will only reimburse the lower generic rate for 62 previously protected molecules in a move it estimates will save $160 million per year. The most popular drugs include cholesterol medication Crestor, anti-depressant Celexa, blood-clot preventer Plavix, Seroquel for bipolar depression and blood pressure medication Diovan.

"The cancellation of the 15-year program is definitely beneficial to the generic industry," CEO Francois Coutu said Thursday during a conference call to discuss third-quarter results.

The Montreal-area company (TSX:PJC.A) says its net profit increased by nearly nine per cent to $56.2 million, largely due to the continued growth in sales for its generic drug company Pro Doc.

The percentage of generic drugs dispensed in its stores increased three percentage points in the year to 61 per cent as Pro Doc's net sales grew to $41.4 million from $37.4 million a year earlier.

Overall revenues grew to $716.6 million from $700.1 million a year earlier despite a further reduction last April in the amount the province pays for generic drugs.

Same-store prescription drug sales increased 2.7 per cent despite generic price cuts and the negative impact on revenues of lower price generic sales. Sales of non-prescription drugs in stores open at least a year grew two per cent.

Meanwhile, the British Columbia government's decision to reduce drug prices is expected to continue to put pressure on Quebec to further lower prices in order to make good on its policy of having the lowest fees in the country.

Jean Coutu said in July that Quebec's new policy on generic drugs would hurt its results since generic drugs account for 20 per cent of the dollar value of its drug sales and 40 per cent of sales based on volume.

In 2011, Quebec reduced how much pharmacists can receive in professional allowances from generic drugmakers to 16.5 per cent of the drug's price, down from 20 per cent.

The allowances fell to 15 per cent in April 2012.

"I don't blame governments for negotiating better pricing because the volumes are going up quite steadily so that's why I think it's an equilibrium that is good for everybody," Coutu said of the elimination of the 15-year rule.

The government also negotiated a six per cent increase in dispensing fees phased in over five years, retroactive to 2010.

The volume of prescriptions isn't huge, but is helpful to Pro Doc, added chief financial officer Andre Belzile.

"The volume is not going to grow Pro Doc by 20 per cent next quarter, but this will have a positive impact," he added.

Pro Doc has increased its sales as several blockbuster drugs such as Lipitor and Crestor have come off patent protection. While a few more brand-named drugs will lose their protection this year, Coutu acknowledged that the pipeline is not as good as it has been over the last two years.

Jean Coutu earned 26 cents per share for the period ended Dec. 1, up from 23 cents per share a year ago when net profits were $51.2 million.

The results were in line with analyst expectations.

The gains were realized before the flu season struck, which Coutu said is boosting over-the-counter drug sales in the current fourth quarter.

"We are very satisfied with the results of the third quarter of fiscal 2013 and with the excellent performance of our network whose sales have reached over $1 billion during this period."

He said positive results from its investment in the Rite Aid pharmacy chain in the United States, which is forecasting higher profits "allow us to look forward to next year with optimism."

Even before Target opens up in Canada, Jean Coutu is facing increased competition from the conversion of 12 Zellers' stores to Wal-Mart locations.

"Our neighbouring stores need to be more aggressive that's for sure. We had a specific strategy for these stores and we'll hold our position that's for sure," he told analysts.

Irene Nattel of RBC Capital Markets described the results as "solid" as retail operations grew seven per cent and Pro Doc's contribution increased 4.5 per cent despite lower generic pricing.

"Overall, the results highlight the stability of Jean Coutu's business model but underscore the challenge of generating growth in this mature segment still facing regulatory headwinds," she wrote in a research note.

On the Toronto Stock Exchange, Jean Coutu's shares closed at $14.57, up 35 cents, or 2.46 per cent in Thursday trading.


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