Jean Coutu sees eventual benefit in Quebec changes

Thu Feb 17, 2011 9:45pm GMT

Quotes

   

* CEO sees higher generic sales volumes over time

* Says volumes will compensate for lower prices

* Looks to expand in Ontario, possibly through deals

(Adds more CEO comments, background)

By S. John Tilak

TORONTO, Feb 17 (Reuters) - Canada's Jean Coutu Group Inc (PJCa.TO) expects growth in the volume of generic drug sales at its pharmacy chain to compensate over time for changes in government programs designed to lower prices.

Reforms put into effect last year by Quebec's provincial government will drive more sales of generic drugs in the long term, said Francois Coutu, chief executive of Longueuil-based Jean Coutu, which mostly operates in the French-speaking province.

"Obviously it has a negative impact. But it should be compensated to us over the years with the additional volumes that we will make," Coutu said on Thursday in an interview with Reuters.

"If we manufacture more and distribute more generic drugs, we will make it up even though we will have lost some margins there because of the new reform."

Jean Coutu runs about 389 drug stores mostly in Quebec, as well as in New Brunswick and Ontario, under such banners as Jean Coutu, Clinique, Sante and Sante Beaute. Its rivals in Quebec include Shoppers-owned Pharmaprix.

The company has previously said the impact of the changes will begin to show up in results for the current fourth quarter ending in February. Coutu will see further impact in the first quarter, but will aim to make up for the slowdown in the next three quarters, he said.

The reduction in pricing will hold back its Pro Doc drugmaking unit for about a year, Coutu said. The company, which got into manufacturing three years ago with the Pro Doc acquisition, expects volumes to crank up after that.

ACQUISITIONS ARE POSSIBLE

Shoppers Drug Mart SC.TO, which operates Canada's largest pharmacy chain, is looking to market its own private-label generic drugs to try to offset the impact of regulatory reform in the province of Ontario, where many of its stores are located.

Francois Coutu, 55, has served as CEO of the company since 2007. A qualified pharmacist who began his career in 1982 as an intern in Hollywood, Florida, he is the son of Chairman Jean Coutu, who founded the company in 1969.

The chief executive said 60 percent of the company's prescription drugs were being paid in part by the government and it was no surprise to see them get involved.

One way the company could ease the pain is to make acquisitions. "We would love to," Coutu said. "We have the capital to do so."

Jean Coutu may eventually expand its footprint in Ontario, Canada's most populous province, as well as in the Atlantic provinces, possibly through deal-making, the CEO said.

"I don't think we'll do an acquisition like Eckerd in the U.S., but it all depends," he said. In 2004, the company signed a deal with J.C. Penney Co Inc (JCP.N) to acquire 1,549 Eckerd drugstores for $2.5 billion. Jean Coutu later sold the Eckerd and Brooks chains to Rite Aid (RAD.N).

Jean Coutu could buy Katz Group, the owner of the Rexall and PharmaPlus drugstore chains, a CIBC analyst said last month in a research note.

These are "strictly rumors," Coutu said, declining further comment.

Analysts have also speculated the company, which owns 28.4 percent of Rite Aid, could bring down its stake in the U.S. pharmacy chain.

"Rite Aid has new management. They're working hard to get some good result from their initiatives. At this time we're supporting them," Coutu said.

(Editing by Frank McGurty)

(john.tilak@thomsonreuters.com; +1 416 687 7918) Keywords: JEANCOUTU/