Jean Coutu expects strong growth from its generic drug manufacturer Pro Doc

By Ross Marowits, The Canadian Press

MONTREAL - Jean Coutu (TSX: PJC-A.TO) hopes to extend its position as Quebec's leading pharmacy chain by adding new stores and reaping growing returns from its generic drug manufacturing subsidiary.

The Montreal-area company sees big opportunities to profit by offering blockbuster drugs that are slated to lose their patent protection in the coming few years.

"The ones that are going forward will be the ones that we're counting on for fuelling the sales and the volume," chief executive Francois Coutu said during a conference call about second-quarter results.

Scores of drugs worth billions in sales are slated to lose their patent protection around the world by 2016.

The Pro Doc subsidiary is expected by industry observers to generate more than $100 million in sales next year. That's key for Jean Coutu, which looks to recover some of the profitability it loses as pharmacist owners benefit from improved generic drug margins.

Jean Coutu can't offer lower prices or any inducements to franchisees. But the company said it expects franchisees will turn to Pro Doc to eventually supply more than 70 per cent of their drug needs.

Jean Coutu's pharmacists, who are free to order from any generic manufacturer, currently rely on Pro Doc to supply about 60 per cent of their needs for a lineup of some 300 drugs, or molecules as the company refers to them.

During the second quarter, growing Pro Doc sales helped the Quebec pharmacy giant offset on its books the final impact from losses generated by a big investment in the U.S.-based Rite Aid (NYSE: RAD) chain.

Pro Doc reported gross sales of $22.7 million in the quarter, up from $5.2 million a year earlier. First-quarter sales were $19 million, up from $2 million a year earlier.

The company wouldn't disclose which patented drugs Pro Doc will produce, but said the drugmaker has made great strides in building enough inventory to supply its pharmacy network.

"We've certainly doubled the number of molecules that were ready to be sold to our franchisees prior to the very beginning of this adventure," said Francois Coutu.

Jean Coutu has finally written off its 28 per cent stake in Rite Aid, as losses exceeded the carrying value of the investment. During the quarter, its share of the U.S. chain's losses amounted to $24.3 million compared with $73.1 million a year earlier.

Overall, Jean Coutu earned $14.9 million, or seven cents per share, in the period ended Aug. 29. That compared with a loss of $39.1 million or 16 cents a year earlier.

"Our organization showed a solid operating performance and retail sales increased significantly despite the economic slowdown," the CEO told analysts.

Earnings before specific items and share of loss in Rite Aid was 16 cents per share, up two cents from the second quarter of 2009.

Revenues grew by 7.3 per cent in the quarter to $608.7 million, up from $567.5 million in the year-earlier period.

Sales for stores open a year grew by 3.8 per cent, including a 1.3 per cent gain for non-prescription drugs. Total sales were up 6.7 per cent, including an increase of 9.1 per cent for prescriptions and 3.7 per cent for front-end sales.

The Jean Coutu network had 362 franchised stores by the end of the quarter. It plans to add at least 25 locations this year and more than 100 within five years.

"We want to make sure that we don't lose sight and that we actually invest back in our market and probably invest a lot more than most of our competitors and that's why we stay No. 1 in this market," Coutu told analysts.

Irene Nattel of RBC Capital Markets said the results were in line with expectations, "driven by stable performance from store operations and incremental contribution from Pro Doc."

Same-store pharmacy sales grew by 5.8 per cent during the quarter, reflecting solid prescription sales as Quebec's universal drug coverage cushioned any negative impact of the recession, she wrote in a note to clients.

On the Toronto Stock Exchange, Jean Coutu shares closed down 22 cents at $9.65 Tuesday.