Jean Coutu beats forecasts with help from generic drug manufacturer

MONTREAL – Jean Coutu’s generic drug manufacturer continued to help the pharmacy chain successfully adjust to government-ordered price cuts as the threat of more pain looms on the horizon.

Pro-Doc’s gross sales increased by 11.5 per cent to $41.7 million in the fourth quarter, contributing $17.2 million of pre-tax operating earnings, or about 70 per cent of EBITDA growth in the quarter.

“Despite the deflationary impact on gross sales of the price reductions of generic drugs, volume increases allowed Pro-Doc to maintain strong results,” chief financial officer Andre Belzile said Thursday during a conference call.

Lower generic drug prices reduced pharmacy sales growth by 0.8 per cent in the quarter, while previously announced government price reductions cut sales by an additional 1.8 per cent.

The last scheduled decrease in generic drug prices was implemented in April.

But the Ontario government recently said it would further cut prices for the top 10 molecules. That is expected to put pressure on the Quebec government to follow suit because it has a rule requiring it to match the best prices in Canada.

“We need, first of all, more clarification about this Ontario proposal. It looks like it’s still up for discussions (but) once this is accepted or not, then obviously Quebec will follow,” said CEO Francois Coutu.

Jean Coutu (TSX:PJC.A) increased its quarterly dividend by 16.7 per cent to seven cents per share and says it will also repurchase up to 9.4 million shares over the next year.

On the Toronto Stock Exchange, its shares gained 35 cents, or 2.5 per cent, to $14.55 in morning trading Thursday.

Meanwhile, the company said Pro-Doc’s performance helped it to report improved results in its fiscal fourth quarter that beat analyst estimates on both profit and revenue.

The Montreal-based company also attributed the improvement to an additional week of operation in the latest period as well as the reversal of $8.1 million of tax.

Jean Coutu earned $62 million or 28 cents per share in the period ended March 3, compared with $46.5 million or 20 cents in the same 2011 period. The tax reversal represented a three-cent gain.

Revenue was $737.2 million, up from $659.8 million.

The average estimate of analysts polled by Thomson Reuters had been for earnings of 24 cents per share on $673 million of revenue.

Same-store prescription drug sales increased by 4.4 per cent, while front-end merchandise sales grew by 4.2 per cent.

For the full year (53 weeks), the company earned $230 million or $1.03 per share on revenue of $2.73 billion, up from $182.6 million or 78 cents per share on revenue of $2.61 billion. That also beat estimates of 88 cents per share on $2.7 billion of revenues.

The additional week of operation increased volumes and profits by about two per cent.

Irene Nattel of RBC Capital Markets said Jean Coutu delivered a solid performance in the quarter, helped by a mild winter and an extra week of operation.

“Jean Coutu delivered very strong same-store sales, well above trend, possibly benefiting from better weather throughout the period in the province of Quebec,” she wrote in a report.

Quebec’s largest pharmacy retailer recently sold another 56 million of its 234.4 million shares in Rite Aid Corp. for total proceeds of US$83.6 million.

It will record a $265.2 million gain from its investment in the chain of 1,854 Brooks and Eckerd drugstores in the first quarter reflecting the fair value of its investment, which is categorized for accounting purposes as being available for sale.

Belzile said Jean Coutu sold its shares in Rite Aid as part of a strategy to reduce its exposure to risk. It could further sell down the investment in the U.S. retailer if Rite Aid’s price increases amid a corporate turnaround.

Francois Coutu said turmoil in the Canadian pharmacy industry will force the company to focus on its base in Quebec instead of pursuing expansion in Ontario.

“But once that dust has settled I think it will be time for us to move on.”

The Jean Coutu Group employs nearly 19,000 people and operates a network of nearly 400 franchised stores in Quebec, New Brunswick and Ontario under the banners of PJC Jean Coutu, PJC Clinique, PJC Sante and PJC Sante Beaute.