Jean Coutu may trim financial support for pharmacies

Higher drug rebates paid by its generic drug manufacturing business threaten to further erode its profitability

Quebec pharmacy chain Jean Coutu Group may trim its financial support for pharmacy owners, as higher rebates paid by its generic drug manufacturing business threaten to further erode its profitability.

Provincial legislative changes increased so-called "professional allowances'' that pharmaceutical companies pay to pharmacies in exchange for stocking their products to 30 per cent as of October—but that cap is being entirely eliminated by month's end.

How high those incentives go could depend on the ability of pharmacists to negotiate better payments.

While pharmacy owners stand to get more money, generic drug makers like Jean Coutu's Pro Doc Ltd. will have to increase their professional allowances to remain competitive.

Jean Coutu says it expects to decide in the coming months whether to reduce the support it provides to franchisees.

While prescription sales—which account for 65 per cent of its overall retail sales—have been increasing, its profits have been hurt by mandated decreases in the price of generic drugs and higher rebates to pharmacists.

The company gives pharmacists a break on the royalties they pay to compensate for higher costs associated with the dispensing of more expensive drugs, incentives to renovate their locations and to offset the impact of regulatory changes.

Jean Coutu doesn't disclose how much it pays in discretionary support, but it says the average royalty paid is about 2.8 per cent, less than the five per cent it charges on the first $4 million of sales and four per cent above that threshold.

"We want to make sure it's a win-win situation for both the franchisor and the franchisee,'' chief financial officer Andre Belzile said after Jean Coutu released its third-quarter results.

"So if the franchisee is having a lift in his profitability, we could eliminate some of those support programs. But we will not do it in such a way that we improve our situation and they deteriorate their situation.''

During a conference call, CEO Francois Coutu told analysts there also remains a lot of uncertainty over the implementation of two Quebec laws—one that allows the minister to tender for the provincial supply of individual drugs and another requiring detailed billing for medications that will come into force in September.

He agreed with an analyst who described the lack of detail about the planned changes as "frustrating.''

"Yes, it is. The uncertainty period is prolonged,'' said Coutu.

The pan-Canadian Pharmaceutical Alliance has struck a deal that will, as of April 1, lower the cost of six drugs to 15 per cent of the branded equivalent, down from 18 per cent.

How other Canadian provinces respond to Quebec's tendering process is unknown, analysts were told. They may seek other changes depending on additional savings achieved by Quebec.

Jean Coutu's third-quarter profit dropped 11 per cent despite higher revenues.

It earned $51.2 million or 28 cents per share for the period ended Nov. 26, down from $57.8 million or 31 cents per share a year earlier.

Revenues grew 1.9 per cent to $763.7 million, up from $749.2 million.

Profits decreased mainly due to a lower contribution from Pro Doc, which faced higher professional allowances paid to pharmacists and lower gross sales.

Same-store sales increased by 3.6 per cent in the quarter, including a 4.4-per-cent increase in pharmacy sales and a 2.8-per-cent increase on other items.

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