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Quebec drug changes likely to weigh on Coutu Add to ...

Coutu , Quebec's largest drugstore chain, has a little more clarity on the provincial government's plan to slash the price of generic drugs as analysts begin to assess the potential damage.

Coutu can at least take some comfort from the fact that the Quebec government drug-price reform will be phased in over several years, giving it and other companies time to adjust.

The province said Friday it is moving ahead with previously announced plans to reduce the price of generic drugs to 25 per cent of the cost of brand-name drugs. But it will phase in the price cuts over 16 months rather than introduce them in one fell swoop.

The move follows the lead of Ontario, which is also cutting the price of generics to 25 per cent of brand-name drugs.

Quebec has yet to say what it intends to do to compensate for lost profit margins of wholesalers and distributors of generics, as well as to what extent it might decide to cut the so-called "professional allowances" - or rebates - the generic manufacturers pay to pharmacists. Such allowances have been banned in Ontario.

"We still don't have all the elements to know what the big picture will be, to measure the full impact," said Coutu spokeswoman Hélène Bisson.

The price cuts are to be phased in as follows: to 37.5 per cent of brand-name prices by January, 30 per cent by April, 2011, and 25 per cent after April, 2012.

Keith Howlett, an analyst with Desjardins Securities, said in a research note Monday that the changes will have a negative impact on Coutu's earnings per share (EPS).

"As yet, we do not know if there will be any compensating change to the wholesaler margin on generic drugs, or any reduction in the allowable professional allowances (currently capped at 20 per cent) paid to pharmacists," he wrote.

He estimates the full incremental negative impact on Coutu's EPS in fiscal 2014 at 15 cents, subject to offsetting changes to the wholesaler margins and professional allowances.

The hit Coutu would take reflects a reduced generic-drug manufacturing margin at its subsidiary, Pro-Doc Ltée, as well as a reduced margin from its wholesale activities and lower generic-drug sale royalties from its franchisees, he said.

Coutu charges the equivalent of a markup on generic drug prices.

Vishal Shreedhar, an analyst with UBS Securities Canada Inc., said in a note Monday that Coutu should not suffer too much under the province's regulatory changes and there should be "no meaningful changes to EPS.

"We believe that PJC's distribution/franchise business model largely insulates against drug reform given limited direct exposure to professional allowances and limited gross profit generated solely through the sale of generic drugs [excluding Pro-Doc]"

The Quebec government, which has said it is beholden by law to offer the lowest generic drug prices available in Canada, is expected to unveil the rest of its generic-drug reform package over the next few weeks.



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