Jean Coutu Slumps Most in 7 Years on Proposed Drug Reform

  • Quebec proposes tender-bidding system for generic drugs
  • New system `material negative impact' to Jean Coutu: Analyst

Jean Coutu Group Inc. plunged the most in seven years after the Quebec government introduced a bill that would open up a bidding system for the manufacture of generic drugs, potentially cutting profit at the drug firm.

Shares of the Longueuil, Quebec-based company, which operates retail pharmacies and manufactures generic drugs through its Pro Doc Ltd. unit, sank 8.4 percent to C$18.80 at 4 p.m. in Toronto, the biggest drop since October 2008. The company’s stock has slumped 34 percent this year, on track for the worst annual loss since 1994.

“The proposal could have a material negative impact on Pro Doc’s business,” Keith Howlett, an analyst at Desjardins Capital Markets, said in a note to clients Thursday. “We speculate that there will be some eventual downward pressure on Pro Doc’s EBITDA in the future, magnitude unknown.”

Under the new system, manufacturers would bid for the exclusive right to produce drugs on a drug-by-drug basis in the province, replacing the previous approach in which generic drugs are priced at 25 percent of the branded drug price. This results in high profits for some drugs and little or no profit for others, Howlett said.

“The presumed outcome of the proposed bid process would be to reduce the prices and profits of the most lucrative and high-volume generic drugs,” Howlett said.

Howlett rates the stock a hold, one of six analysts with the same rating. There’s also one buy and four sells for Jean Coutu, according to data compiled by Bloomberg.

Pro Doc currently makes “many of the more remunerative” generic drugs, generating more than C$90 million ($68 million) of earnings before interest, taxes, depreciation and amortization annually, or about 35 a share, he said. It’s unlikely Pro Doc would be the winning bidder in a competition with other physical manufacturers, Howlett said.

Helene Bisson, a spokeswoman at Jean Coutu, declined to comment.

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