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(Reuters) - Jean Coutu Group Inc (PJCa.TO) reported a 10 percent increase in quarterly profit on strong sales of its Pro Doc generic drugs and the prospect of further gains, sending shares of the Canadian pharmacy chain higher on Thursday.
Sales at Coutu's Pro Doc generic subsidiary rose 12 percent to C$41.4 million ($41.9 million) for the fiscal third quarter that ended December 1, and its contribution to its parent's operating income before amortization rose to C$16.1 million from C$15.4 million a year ago.
Spending on Pro Doc products could rise further, the company said, under a change in Quebec's prescription drug policies.
The province is abolishing the "15-year rule" under which public prescription plans covered the cost of newly listed branded drugs for a full 15 years, even after cheaper generic versions were available.
Chief Executive Francois Coutu said on a conference call that the change would affect 62 drugs starting next week. It may prompt more customers to buy Pro Doc generics.
"It's likely going to lead to more generic penetration," said Canaccord Genuity analyst Derek Dley. "Now that's obviously bad for pricing on the franchising side, but it's good for margins for Jean Coutu."
Dley said the comments were likely boosting the stock despite quarterly results that he said were in line with expectations.
Prescription sales growth at Jean Coutu and rivals such as Shoppers Drug Mart Corp SC.TO have been held back in recent years by a crackdown by provincial governments on generic drug prices and reimbursement rules. But Jean Coutu has said Pro Doc may help boost margins on generics nonetheless.
Shoppers has a similar private-label generic drug unit, but it has been hindered by a regulation in Ontario, its biggest market, that forbids drugstores from selling their own private-label drugs. The bulk of Jean Coutu's network of 405 pharmacies is in Quebec, which has no such rule.
Canada's top court is set to hear a challenge to the Ontario law, brought by Shoppers Drug and closely held competitor Katz Group, in May.
Increasing use of generic drugs has exacerbated the impact of generic-drug reforms. Jean Coutu said 61.8 percent of its third-quarter prescriptions were for generics, up from 57.2 percent a year earlier.
The company said sales at established stores, a key measure for retailers, increased 2.6 percent in the quarter, and rose 2.0 percent for non-pharmacy, or "front-end," goods.
But same-store pharmacy sales, up 2.7 percent, lagged the volume of prescriptions, which rose 4.8 percent on same-store basis.
Net profit for the quarter rose to C$56.2 million, or 26 Canadian cents a share, from C$51.2 million, or 23 Canadian cents, a year earlier.
Analysts, on average, had been expecting 26 Canadian cents a share, according to Thomson Reuters I/B/E/S.
The Longueuil, Quebec-based company's revenue rose 2 percent to C$716.6 million, in line with analysts' average estimate of C$716.1 million. (r.reuters.com/zem25t)
Shares of Jean Coutu rose 2.0 percent to C$14.50 on the Toronto Stock Exchange.
($1 = $0.99 Canadian)
Reporting by Maneesha Tiwari in Bangalore and Allison Martell in Toronto; Editing by Frank McGurty and Maureen Bavdek