BUSINESS
10/04/2011 08:04 EDT | Updated 12/04/2011 05:12 EST

Jean Coutu Group second-quarter profits rise to $66.4 million, revenues up

MONTREAL - The head of Jean Coutu said Tuesday he's not concerned that rival pharmacy chain Shoppers Drug Mart has hired a CEO with deep knowledge of the Quebec market.

"Shoppers, we've known them for 42 years so I don't see why a new CEO would change anything," Francois Coutu said in an interview Tuesday after the company posted its second-quarter results.

Toronto-based Shoppers (TSX:SC), the country's largest pharmacy chain, announced Monday that Domenic Pilla will become its chief executive effective Nov. 1.

A McGill University graduate and member of the Quebec Order of Engineers, Pilla is currently president of McKesson Canada, a major player in Quebec's pharmacy business.

Coutu said he's known Pilla a long time from his role at McKesson Canada, which is an arm of a San Francisco-based company, but couldn't forecast how his appointment could translate into any changes in the competition between two of the province's largest pharmacy brands.

Shoppers spokeswoman Tammy Smitham said there's no immediate plans to change the chain's direction in Quebec.

"We do have a strong offer in Quebec already with 174 Pharmaprix stores," Smitham said in an interview.

Pharmacy retailers constantly try to lure independent pharmacists to their fold in order to expand their networks and add patient files.

Coutu told analysts that pharmacist profits are being squeezed by new government rules limiting professional allowances paid by drug manufacturers. He said the financial hit may prompt independents to sell to retailers like Jean Coutu.

Lower generic drug prices continued to squeeze Jean Coutu's results in the second quarter, even though its profit soared on the sale of a portion of its stake in U.S. pharmacy chain Rite-Aid.

Quebec's largest pharmacy network said its net profit rose to $66.4 million from $43.4 million a year earlier in the three months ended Aug. 27.

The increase is largely from Jean Coutu's (TSX:PJC.A) sale of about one-tenth of its sizable stake in Rite-Aid for $22 million, or a gain of 10 cents per share.

On a per share basis, Jean Coutu's quarterly earnings were 29 cents, up from 18 cents in the comparable period a year ago. Stripping out the gain from the Rite-Aid shares sale, earnings were 19 cents per share, in line with analyst expectations, according to Thomson Reuters.

Jean Coutu, which remains Rite-Aid's largest shareholder, has said it continues to view Rite-Aid as a long-term investment despite plans to dispense with part of its stake in the chain.

However, the sale of the shares will put its ownership below a 20 per cent threshold so it will no longer have to report Rite-Aid's results among its own. Jean Coutu had already completely written down its investment in the U.S. chain.

Quarterly revenues increased to $635.2 million from $625.6 million a year ago. Same-store sales, a barometer for growth in the retail sector, were up 1.2 per cent.

Irene Nattel of RBC Capital Markets said Jean Coutu recorded solid operating results despite a "slight headline miss" in the quarter.

"Although headline earnings per share fell short of forecast due to the negative impact of generic price reductions, franchise operations delivered a solid quarter," she wrote in a report.

Prescription same-store sales were up only 0.8 per cent as it took a 2.3 per cent hit from increasing sales of lower priced generics and a 3.6 per cent impact from new government rules which reduced generic prices.

Non-prescription drugs or front-end sales increased by two per cent.

Sales volumes of its generic drug company Pro Doc continue to increase as new molecules are added, but revenues decreased to $24.9 million from $39.2 million a year ago, reflecting the negative impact of generic price reductions. Pre-tax profits decreased in half to $10.2 million.

Quebec reduced how much pharmacists can receive in professional allowances from generic drugmakers to 16.5 per cent of the drug's price, down from 20 per cent. The allowances fall to 15 per cent in April 2012.

The Quebec association representing pharmacist owners is about to begin negotiating with the provincial government to increase dispensing fees paid to pharmacists.

The current fees range between $7.89 and $8.44 per drug depending on the number of prescriptions filled by outlet.

General manager Normand Cadieux expects the government is willing to increase payments by six per cent over five years, the same change it has given to other professionals.

The Jean Coutu Group operates a network of 394 franchised drugstores in Quebec, New Brunswick and Ontario and employs more than 19,000 people.

On the Toronto Stock Exchange, its shares fell 30 cents, or 2.5 per cent, at $11.59 in afternoon trading.