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Jean Coutu fears new Quebec drug rules will hurt results and confuse patients

Pharmacist' profit falls on tax hit, Q1 profit falls 6.5% to $50.6 million

Drug store chain Jean Coutu says impending changes to the way pharmacies are compensated in Quebec will hurt its financial results and confuse patients.

The province reportedly plans to eliminate the 15 per cent cap on professional allowances paid by to pharmacies by generic drug manufacturers, which would allow the pharmacies to negotiate higher rates.

The move, which still needs to be ratified by the government, is designed to soften the blow of a $177-million-a-year cut in fees currently paid to pharmacies by the province, equivalent to about $100,000 per store.

Jean Coutu told shareholders Tuesday that the change will hurt its Pro Doc generic drug subsidiary and overall financial results. However, the company refused to disclose the potential hit until details of the deal between the government and the association representing pharmacist owners are disclosed.

Since cheaper generic drugs now account for 69 per cent of all prescriptions sold, Pro Doc has been a growing driver of the company's profits.

Chief executive Francois Coutu says its too soon to say if the steady growth since 2008 will end as pharmacists try to negotiate the best deal they can get.

"At Pro Doc, we will try to be competitive, hoping that people will remain loyal,'' he told reporters after the annual meeting.

Irene Nattel of RBC Capital Markets estimates that each one per cent rise in professional allowances would cut overall company earnings by one cent per share.

Company chairman and founder Jean Coutu said the changes will create confusion for patients.

Although all generics are essentially the same, he said it's going to be difficult for pharmacists to explain they are switching a patient's medication to another brand because it's more profitable for them.

"When people are sick they are very suspicious about the things they are given. That's very normal,'' he said.

A 20 per cent cap on profession allowances was introduced in 2008 to offset the declining price the province was will to pay for generic drugs. Prices for generics have since gradually fallen from 54 per cent of the cost of original brand name versions to 25 per cent, and to 18 per cent for high volume formulations.

Professional allowances vary by province. In Ontario, professional allowances aren't permitted, but the province recently allowed pharmacies to raise dispensing fees by $1 per prescription.

Meanwhile, the Jean Coutu Group reported Tuesday that its first-quarter net profit decreased 6.5 per cent to $50.6 million. The change was due to a $4.7-million tax provision resulting from a recent judgment by Quebec's highest court. The company is seeking permission to appeal at the Supreme Court of Canada.

Jean Coutu said revenue for the 13 weeks ended May 30 was up 3.5 per cent from a year earlier, rising to $712.4 million from $668.6 million. Same-store sales growth was 4.4 per cent.

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