October 9, 2013 / 11:55 AM / 5 years ago

UPDATE 2-Jean Coutu misses estimates; generic drugs take bite

* 2nd-qtr adjusted earnings C$0.24/shr vs est. C$0.25

* Same-store sales fall 0.1 pct

* Stock falls as much as 6 pct (Adds CEO comments, details on share buyback and dividend, industry background, analyst comment, updates stock price)

By Sneha Banerjee and Solarina Ho

Oct 9 (Reuters) - Canadian pharmacy chain Jean Coutu Group Inc reported a lower-than-expected quarterly profit on Wednesday, hurt by ongoing regulations that have capped the prices companies can charge for generic drugs.

The results sent shares down as much as 6 percent, though the shares pared some of the losses by afternoon.

Government-imposed price controls for generic drugs, aimed at cutting costs for government and private health programs, have hurt Jean Coutu and rivals such as Shoppers Drug Mart Corp , which is being acquired by Loblaw Co Ltd.

The C$12.4 billion ($11.93 billion) Loblaw-Shoppers deal, spurred by increasing competition in the Canadian retail landscape, has also sparked questions about how industry consolidation could affect Jean Coutu.

Jean Coutu executives reiterated their interest in expanding in Ontario and other provinces, adding that any acquisitions would likely be minor, such as buying independent drug stores.

“The dust hasn’t settled yet. It will,” said CEO Francois Coutu, referring to a wave of industry consolidation. “And for us, being a drugstore operator I think we have to seize an opportunity eventually, and like I said, we have the capital.”

“We have the will also to expand,” said Francois Coutu, speaking on a conference call. “It just has to be done in the right way. If it is not this year, well, we will be patient.”

Late on Tuesday evening, the company also announced a share buyback plan for 22 million shares and declared a one-time special dividend of 50 Canadian cents.

“In our view, while the return of capital to shareholders is a positive, it points to limited acquisition opportunities available to the company,” said Derek Dley, an analyst with Canaccord Genuity. “This, coupled with what were essentially flat year over year earnings results during Q2/F14, suggests a low-growth environment for Jean Coutu looking forward.”

The company also said it is assessing the impact of Target Corp on its business. The U.S. retailer, which opened its first Canadian stores this year, also runs in-store pharmacies and began operating in Quebec this fall.

Québec-based Jean Coutu, which operates 411 franchised stores in Québec, New Brunswick and Ontario, said 67.2 percent of prescriptions were for generics during the fiscal second quarter ended Aug. 31, up from 61 percent a year earlier.

The company said the difficult regulatory environment hurt sales and that the introduction of new generic drugs cut retail pharmacy sales growth by 2.2 percent in the last quarter, while the price reduction of the generic drugs trimmed it by another 1.1 percent.

Revenue fell slightly to C$653.8 million ($633 million) from C$658.7 million a year earlier. Same-store sales, a key measure for retailers, fell marginally, compared with a 2.6 percent rise a year earlier.

Net profit rose to C$208.2 million, or 99 Canadian cents per share, for the three months ended Aug. 31, from C$51.2 million, or 23 Canadian cents per share, a year earlier.

Excluding gains from the sale of its stake in drugstore chain Rite Aid Corp in July, Jean Coutu earned 24 Canadian cents per share.

Analysts on average had expected adjusted earnings of 25 Canadian cents per share on revenue of $651.60 million, according to Thomson Reuters I/B/E/S.

Jean Coutu shares were down 3.7 percent at C$18.21 on Wednesday afternoon in Toronto, off an earlier low at C$17.73. ($1 = $1.0398 Canadian) (Reporting by Sneha Banerjee in Bangalore and Solarina Ho in Toronto; editing by Jeffrey Hodgson and Matthew Lewis)

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