TSX Commentary

Veritas Research: Jean Coutu Group (PJC.A) – $9.59 – Deflecting the Legislative Sword
Buy, Intrinsic Value Estimate: $11.20
This report outlines the impact of pending legislative changes in Ontario on the Jean Coutu Group (PJC), given the fact that changes in Ontario will also affect legislation in Quebec. Quebec benefits from a ‘Most Favoured Nation’ clause which stipulates that the sale price of prescription drugs to Quebec’s public drug plan be no more than that paid by any other province. In other words, where Ontario goes, Quebec will follow with Bill 130, as in 2006, when Ontario enacted Bill 102. Unlike Ontario, Quebec regulates both public and private plans, with professional allowances currently capped at 20% of generic prices. In Ontario,
there is currently no oversight over privately funded drug plans, and professional allowances are currently as high as 88% of generic prices. Lower allowable generic invoice prices will reduce available ‘mark-up’ dollars (6% mark-up) at the wholesale level. At the same time, retail sales will decline, meaning that PJC’s RFFR revenue, calculated at about 7% of sales at the retail level, will be reduced. PJC’s exposure to changes to the drug legislation is muted by its low exposure to generic drugs, relative to other provinces. Veritas’s intrinsic value assumes that the Ontario government moves to reduce generic pricing to 25% of branded prices, versus 50% currently. Veritas expects legislative changes to become effective 2011 (i.e. F2012 for PJC). Veritas maintains its Buy recommendation on Jean Coutu with an intrinsic value estimate of $11.20 per share.