Quebec riles drug makers with price cut

The Quebec government's decision to lower prices on generic drugs has ignited angry reaction from manufacturers and threatens the profits of the province's pharmacy leader, Jean Coutu.

Generic drug manufacturers warned Tuesday that they could be forced to reduce investment and employment in Quebec in response to the province's decision to ensure it continues to offer the lowest drug prices in Canada.

The manufacturers also told a news conference they would submit a $60-million bill for distribution costs they have absorbed if they don't receive offsets.

"Less products to manufacture and fewer products to develop risks to hinder the growth of the generic drug industry, which has nearly 5,000 direct jobs in Quebec," warned Yves Dupr, Quebec executive director of the Canadian Generic Pharmaceutical Association.

He said the industry would review investment projects and reassess employment levels as a result of what Quebec Health Minister Yves Bolduc has called a "paradigm shift" for the industry.

Quebec requires lowest price

The Quebec government announced last Friday that it expects to save $164 million a year from lower prices on generic drugs. The move follows a similar initiative taken earlier by the Ontario government that ignited opposition from the drug industry in that province.

Meanwhile, Quebec has so far not disclosed possible offsets for the makers and sellers or generic drugs, which could be months away and may be developed only after officials meet with pharmacies and manufacturers.

Quebec's drug policy requires the province to offer the lowest price in Canada. Ontario decided that as of Thursday, generic drug prices will be 25 per cent of the price of patented drugs, down from 50 per cent before the change.

Threatens pharmacy profits

Besides the hit to the bottom lines of generic manufacturers, the change by Quebec also threatens the profits of drug stores, including Jean Coutu, which operates Quebec's largest network of pharmacies along with growing generic drug manufacturer Pro Doc.

Michael Van Aelst of TD Newcrest lowered his 12-month price target for Jean Coutu by $1 to $11 and reduced earnings estimates for fiscal 2011 and 2012.

Van Aelst expects the chain will earn 71 cents per share this year, down from 76 cents in an earlier forecast. Next year's estimate drops 10 cents to 74 cents.

The change assumes that Quebec also decides to eliminate professional allowances and introduces some modest offsets, he wrote in a report.

"Of course, should Quebec simply drop the generic prices without eliminating generic rebates which seems unlikely to us it would be a more serious hit of about 25 cents (before internal offset) since Jean Coutu's Pro Doc division would lose a critical offset."

Jean Coutu declined to comment on the generic drug association's warnings or the potential impact on its business of the price cuts.

Spokeswoman Helene Bisson said company officials will discuss the issue at its annual meeting next Tuesday.

Van Aelst said he expects Jean Coutu's pharmacy results will remain solid in the first quarter, although increased generic penetration will continue to pressure prescription sales growth.

He is forecasting Jean Coutu will earn 18 cents per share, up two cents from last year.

In addition to threatening investment and jobs in Quebec, the drug industry also suggested that some drugs may be less available because they will be less profitable.

Michel Robidoux, president of generic manufacturer Sandoz Canada, said the company will be forced to freeze job creation and will have to withdraw some products from the market that are no longer profitable at the lower price. Sandoz employed 800 workers in Boucherville, Que., in 2008.

Pharmascience president Mario Deschamps said his company, which had to eliminate 100 positions in May following Ontario's new pricing policies, now will have to reassess its investment and employment in Quebec.

Jean Coutu shares were down 27 cents at $8.25 in afternoon trading on the Toronto Stock Exchange.