Jean Coutu says rate of generic drug sales will continue to climb above 67%

MONTREAL - The Jean Coutu pharmacy chain said more than two-thirds of the drugs it dispensed in the fourth quarter were lower-cost generic alternatives to patented drugs, a ratio it expects will continue to climb as more medications are added each year.

"We can expect another four molecules added to that list probably every year for next couple of years," said chief financial officer Andre Belzile, referring to generic drugs.

Jean Coutu said Wednesday it's raising its dividend as its net profit grew 7.9 per cent to $57.7 million in its fourth quarter. The company earned 30 cents per share in the quarter ended March 1, one cent above analyst forecasts and compared with $53.5 million, or 25 cents per share, in the same quarter of 2013.

Revenues were up slightly to $685.4 million in the fourth quarter compared with $682.7 million in the same quarter last year.

Much of the profit increase was due to the performance of its generic drug manufacturer Pro Doc, which earned $22.4 million on $49.1 million of sales in the quarter, up from $16.7 million on $43.5 million of sales a year ago. Despite lower generic prices, Jean Coutu boosted Pro Doc's margins to 45.6 per cent from 38.4 per cent because of volume increases and cost concessions from suppliers.

Belzile said the company expects further price declines as additional cost savings pursed by governments could reduce Pro Doc's margins to a still healthy 40 per cent. But he said the rate of price declines is diminishing, providing pharmacy chains with more predictable pricing.

"The deflationary impact on generic drug prices is not going to be as bad as we experienced in the last four to five quarters," he said during a conference call.

While most customers on Quebec's public drug program are required to substitute for lower cost generics, Jean Coutu (TSX:PJC.A) still sees volume growth opportunities from those on private drug plans.

The shift could help to further narrow the gap with the U.S., where generic drugs accounted for 81.4 per cent of all prescription drugs sold last year according to U.S. retailer CVS Caremark. The proportion of generic drugs sold by Jean Coutu grew by four percentage points to 67.2 per cent in the fourth quarter. That compared to a rate of 47.4 per cent in fiscal 2009.

Chief executive Francois Coutu said he expects provinces will rely on the pan-Canadian Council of the Federation to negotiate future generic price decreases after efforts by British Columbia and Alberta to act alone were unsuccessful.

"I think it's to the advantage of the province to go with that coalition because it's co-ordinated and they may get more that way than on their own," Coutu told analysts.

The coalition negotiated that four more drugs would be added to the list of 10 generics that charge 18 per cent of the patented drug prices as of April 1, down from 25 to 40 per cent provinces and territories have been paying. Price reductions for 10 commonly used generic drugs is expected to save public drug plans $150 million a year.

Irene Nattel of RBC Capital Markets said generics have been a strong contributor for Jean Coutu, accounting for all of its EBITDA growth in the fourth quarter and more than offsetting lower underlying contributions from franchising operations.

"Jean Coutu remains a regional powerhouse enjoying a 33 per cent share of all prescriptions dispensed in Quebec," she wrote in a report.

The chain said its quarterly dividend will rise 17.6 per cent to 10 cents, above the analyst's forecast for a 12-per-cent boost. It also received TSX approval to double its share purchase program next year to 8.2 million shares.

For the full year, Jean Coutu earned $437 million or $2.12 per share, compared with $558.2 million or $2.57 per share in 2013. Excluding one-time items including gains from the sale of its investment in U.S. retailer Rite-Aid, Jean Coutu earned $224.3 million or $1.09 per share, compared to $211.3 million or 97 cents per share a year earlier.

Revenues amounted to $2.73 billion, compared with $2.739 billion last year, a decrease of 0.2 per cent, due lower generic drug prices.

The Jean Coutu Group operates a network of 413 franchised stores in Quebec, New Brunswick and Ontario under the banners of PJC Jean Coutu, PJC Clinique, PJC Sante and PJC Sante Beaute.

On the Toronto Stock Exchange, its shares gained 23 cents at $21.88 in midday trading.

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