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Jean Coutu says Alberta drug price cuts will prompt another such wave in Quebec

MONTREAL – Jean Coutu’s chief executive says growing sales from generic drugs will help to compensate for another wave of provincial price reductions.

“Obviously, we’re not in complete control as governments are controlling the pricing, but at the same time, I think there will be light at the end of the tunnel somehow for everyone in the industry,” CEO Francois Coutu said Wednesday during a conference call.

The percentage of generic drugs sold by the Quebec-based chain increased to 63.2 per cent of all prescriptions in the fourth-quarter, up from 57.4 per cent a year earlier.

Despite price reductions forced by the Quebec government, sales at its generic manufacturing subsidiary Pro Doc grew nearly five per cent to $43.5 million.

Overall, Jean Coutu’s generic drug revenues grew 26 per cent due to the addition of new molecules.

The company believes an increase in the total number of prescriptions will offset the impact of lower prices and a slowdown in the number of drugs losing their patent protection.

“With the volume that we generate within our chain and the overall Quebec market… I think there’s a bright future for Pro Doc,” he told analysts.

Following a series of price reductions, the Quebec government pays for generic drugs at 25 per cent of the brand name equivalent.

The move has hurt sales for Jean Coutu and its pharmacy rivals.

But the Alberta government will force further cuts with its decision to just pay 18 per cent of the branded drug price, down from 35 per cent.

In addition to six large molecules whose prices have already been cut, Alberta released a comprehensive list of drugs on Wednesday whose prices will be cut effective June 1.

With Quebec policy requiring that the province pay the lowest prices in the country, Alberta’s reductions will prompt further cuts on some generic drugs in two waves in that province in July and October, the company told analysts.

“The prices that will be applied in other provinces will be applied in Quebec — it’s just a question of timing,” Coutu said.

Chief financial officer Andre Belzile wouldn’t say how much the decision will cost Jean Coutu.

But he said a preliminary review of Alberta’s full drug price list suggests that the price of “most of the other important molecules” won’t be reduced in Quebec.

Despite the impact of lower drug prices on revenues and profits, Jean Coutu Group (TSX:PJC.A) said it is increasing its dividend more than 20 per cent.

The Quebec-based operator of more than 400 franchised drug stores in Quebec, Ontario and New Brunswick said it earned a net profit of $53.6 million or 25 cents per share in the latest period, a penny below analyst forecasts.

Profits were down from $62 million or 28 cents per share a year ago. Revenue slipped to $682.7 million from $727.2 million, which included an extra week of business.

Same-store sales — a key measure of retail activity — dramatically slowed from a year ago. Prescription drugs fell 0.1 per cent, while front-end sales increased 1.3 per cent.

For the full, 52-week year, Jean Coutu reported net income of $558.4 million or $2.57 per share on revenue of $2.74 billion.

That compared with net profit of $230 million or $1.03 per share on revenues of $2.73 billion in fiscal 2012, which had 53 weeks.

The company said it would increase its dividend 21.4 per cent to 8.5 cents per share from seven cents, payable May 31 to shareholders of record on May 17.

Based on Jean Coutu’s closing share price of $16.75 on the Toronto Stock Exchange on Tuesday, the issue would produce an annual yield of just over two per cent. The stock closed down 26 cents to $16.49 Wednesday, marginally increasing the yield.

It also plans to purchase up to 8.9 million of its own shares.

“I am satisfied (with the results) in spite of the difficult regulatory environment in which our industry is involved,” the chief executive added.”

Meanwhile, Belzile said the company will look for other opportunities to further reduce its holdings in U.S. pharmacy retailer Rite Aid. The company last week reduced its stake to 11.7 per cent following the sale of 72.5 million shares for US$158.5 million.