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Oct 12, 2017

Jean Coutu profit down, revenue up as Metro takeover awaits

Jean Coutu shareholders are winners in Metro deal, says second largest shareholder

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MONTREAL -- As it prepares to join the Metro grocery chain network, Quebec pharmacy company Jean Coutu Group Inc. anticipates some stability after years of provincial government intervention in a bid to lower generic drug costs.

A ceiling on professional allowances paid to pharmacists by generic drug manufacturers such as Jean Coutu's (TSX:PJC.A) Pro Doc will be restored to 15 per cent next week.

And a new law limiting pharmacists to buying half of their total generic drug purchases from one generic drugmaker is expected to have little impact on its pharmacist owners.

Most of Jean Coutu pharmacists already meet this threshold and will be able to maintain their current purchases from Pro Doc, which mainly supplies large volume generic drugs, chief financial officer Andre Belzile said Thursday during a conference call to discuss second-quarter results.

"We don't expect any additional reform so we should have a much better view on the impact on our earnings and the earnings of Pro Doc going forward now that we will have that stability for the next five years," he told analysts.

The Quebec-based pharmacy chain earned $47.8 million in its latest quarter, down from $51.5 million a year ago even as revenue improved.

The drugstore retailer said the profit amounted to 26 cents per diluted share for the three-month period ended Sept. 2, two cents per share above analyst forecasts and down from 28 cents per diluted share in the same period a year earlier.

It attributed the drop in earnings to a lower contribution from Pro Doc following a lifting of professional allowance caps in January.

Revenue increased six per cent to $744.3 million, up from $701.2 million.

Irene Nattel of RBC Capital Markets said Jean Coutu's outlook of stability is good for Metro shareholders.

"Sustaining momentum as we move through the approval process for the proposed transaction remains critical, particularly in light of ongoing pressure on profitability of the generic drug unit," she wrote in a report.

Last week, Jean Coutu agreed to a $4.5-billion takeover offer from grocery store chain Metro Inc. (MRU.TO) that is expected to close in the first half of 2018.

Jean Coutu shareholders are being offered a combination of cash and stock worth about $24.50 per share.

Metro announced Wednesday that it expects to receive $1.55 billion in proceeds from the sale of more than 27 million shares in Alimentation Couche-Tard (ATDb.TO) to help fund the Jean Coutu purchase.

Meanwhile, while some analysts fear that the liquidation of Sears will hurt other retailers during the busy holiday season, CEO Francois Coutu anticipates some longer-term benefits.

"With the problems that Sears is having, I think this should benefit also all the retailers who will probably benefit from this clientele who will have to find other places to go," he said.