Consumer stocks Loblaw, Jean Coutu and drug prices

The cash-strapped Quebec government’s move to introduce a tendering system to lower generic drug prices dragged down the share price of top retail grocery chains Loblaw Cos. and Jean Coutu Group Inc. In a bid to reduce healthcare spending, the province plans to introduce a tendering system to decide which generic drug makers would become exclusive suppliers for specific medications.

Both the shares of Loblaw Companies (TSX─L) and Jean Coutu Group (TSX─PJC.A) have come under pressure from ongoing developments in Quebec healthcare reform that will negatively impact the share prices of some healthcare stocks, especially those associated with some top consumer goods stocks.

The most recent of these developments is the Quebec government’s intention to set up a tendering system for generic drugs. In late November, the government introduced draft legislation calling for a tendering process that would determine which drug manufacturers would be sole suppliers of individual medications.  The intention, of course, is to lower generic drug prices.

Such legislation is expected to have a negative impact on the profits of both companies’ drug retail businesses, though it’s too early to tell by how much their earnings will be hurt. One thing is clear, though, Jean Coutu, which is more concentrated in the Quebec market than Loblaw, has more to lose.

What’s more, Jean Coutu’s drug manufacturing subsidiary, Pro Doc, is relatively small. This raises the concern that Pro Doc will be unable to effectively compete against larger drug manufacturers with superior economies of scale. Under these circumstances, the subsidiary could incur significant loss of income.

Loblaw, on the other hand, with its greater geographical and product diversification should be less affected. Though we continue to like both companies, Loblaw is our preferred buy.

 

Money Reporter, MPL Communications Inc.
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