Oct. 29 (Bloomberg) -- Jean Coutu Group Inc., Canada’s second-largest pharmacy chain, plans to at least double generic drug sales in the next five years as the company attracts new customers and patents expire on widely prescribed medicines, Chief Executive Officer Francois J. Coutu said.

“For us, it’s clear that generics are an area that will grow quickly,” Coutu said in an Oct. 27 interview at company headquarters in the Montreal suburb of Longueuil. It depends on the speed with which patented drug formulations become available for copying, often as cheaper versions, “but we think doubling or even tripling revenue in the next few years is a realistic target,” he said.

Jean Coutu, which has 364 franchised stores in Quebec, Ontario and New Brunswick, expanded into the generics business in 2007, when it acquired closely held Canadian manufacturer Pro-Doc Ltd. for an undisclosed amount. Pro-Doc had revenue of C$22.7 million ($22.1 million) in its fiscal second quarter, a fourfold increase from the same period a year earlier. Jean Coutu’s revenue for the quarter totaled C$608.7 million.

Drugs set to lose patent protection by March 2011 include Pfizer Inc.’s Lipitor, which has annual sales of C$1.8 billion in Canada, and Norvasc, with sales of C$825 million, according to an Oct. 6 research note by Perry Caicco, an analyst at CIBC World Markets Inc. in Toronto. Pro-Doc sells both to Jean Coutu franchises and independent drugstores.

“Coutu turned a possibly negative situation into a positive when they expanded into generics,” David Hartley, an analyst with BMO Capital Markets in Toronto, said in a telephone interview. “They are going all out to defend their market share, and they are executing well.”

Quebec Initiative

Generic drugs are part of a plan to counter larger rival Shoppers Drug Mart Corp. in Quebec, Canada’s second-most populous province. More than 330 of Jean Coutu’s pharmacies are there and the company plans to add more than 80 in the next five years through acquisitions or store openings.

“We will get to 450 stores overall within five years because there is still a lot of room for growth in our backyard,” the 54-year-old CEO said. “After covering urban areas, we can bring our concept to smaller communities. Several independent pharmacists will probably retire and we can buy their businesses.”

Jean Coutu’s widely traded Class A shares rose 2 cents to C$8.97 at 4:10 p.m. today in Toronto Stock Exchange trading. The stock has gained 8.1 percent this year.

Franchised stores, averaging about 8,255 square feet of retail space, are typically located on street corners or in strip malls. About half have been opened, modernized or reconfigured in the past five years, according to Jean Coutu’s April 2009 annual information form.

Store-Branded Products

The company has boosted sales by introducing new cosmetics and store-branded products, such as razors and biodegradable dishwashing liquid. Still, drugs last year represented about 62 percent of revenue; merchandise and over-the-counter medicines accounted for the rest.

Quebec drugstores had combined revenue of C$5 billion last year, trailing only Ontario’s C$7.5 billion, according to Statistics Canada, a federal agency. Quebec drugstores each fill an average of about 90,000 prescriptions a year, more than double the 40,400 average for stores in the rest of Canada, figures compiled by BMO Capital’s Hartley show.

Toronto-based Shoppers Drug continues to see “a tremendous amount of potential left” in Quebec, Chief Executive Officer Jurgen Schreiber, 47, told investors Sept. 22. Shoppers Drug had 171 stores in Quebec as of Oct. 10, up from 102 at the end of 2006.

Tougher Competition

“Competition is tougher than it ever was,” said Coutu, whose father, Jean, opened his first pharmacy in 1969. “We have seen Shoppers come in with new pharmacies, and we are not resting on our laurels.”

The company’s biggest shareholder isn’t worried by its rival’s growth plans. “The Jean Coutu brand in Quebec is extremely strong,” Stephen Jarislowsky, 84 and chairman of Montreal-based Jarislowsky Fraser Ltd., said in a telephone interview. “If you get into the hinterland, it’s their market. Shoppers Drug cannot command the same loyalty from their customers in Quebec that Jean Coutu can.”

Jarislowsky Fraser owned almost 16 million Jean Coutu shares as of May, according to data compiled by Bloomberg.

Jean Coutu estimates it accounts for about one-third of all prescriptions filled in Quebec. Prescription drug sales in the province will probably increase 8 percent to 10 percent a year as the population ages and new, more effective drugs are developed, the chief executive said.

“Quebec is a healthy market,” he said. “There is room for other banners, but we fully intend to remain the leader.”

To contact the reporter for this story: Frederic Tomesco in Montreal at tomesco@bloomberg.net.

Last Updated: October 29, 2009 17:11 EDT