Billionaire Jean Coutu Takes on Quebec in Unusual Public Spat
Billionaire Jean Coutu Takes on Quebec in Unusual Public Spat
(Bloomberg) -- Tensions between Quebec’s government and one of the province’s most recognizable companies burst into the open when the 89-year-old billionaire patriarch and his son turned unusually vocal.
The backlash from Jean Coutu Group Inc., which intensified last week when the founding family vented its frustration during a rare TV interview, has stoked the debate over drug prices, reignited merger speculation about the $2.8 billion pharmacy chain and played on notions of French Canadian pride. At stake are tens of millions of dollars in profit and a stock that has lost favor with investors in the past two years.
Jean Coutu
The Coutus -- Jean, the founder and chairman, and his son Francois -- said the Quebec government ignored proposals from the private sector when conceiving bills to cut health-care costs. The measures now in place created uncertainty in the industry that could jeopardize their company’s future development in the province, and raised questions within the family about selling the business, the Coutus said.
“You have business partners who want to contribute, find solutions, and they get rejected with the back of the hand,” Francois Coutu said during the interview with French-language TVA Channel’s “J.E.” show. “That’s what’s insulting.”
‘Hungry Wolves’
The strong statements from a company that had until now stuck to mild criticism prompted Health Minister Gaetan Barrette to respond that he was open to a meeting, which, according to his spokeswoman, should be be scheduled soon. Meanwhile, Jean Coutu’s dramatic comments during the Jan. 24 TV show about “hungry wolves” circling the company he created 48 years ago rekindled takeover speculation among analysts.
“The family may have done this interview solely for the benefit of swaying Minister Barrette, but capital markets investors cannot completely ignore a founder/controlling shareholder musing this way in public,” Dundee Capital Partners analysts Tal Woolley and Nino Hizon wrote in a note to investors titled “Messrs. Coutu would like a moment of your attention.”
While the outcry over ballooning drug prices has been raging on south of the border -- with President Donald Trump accusing drugmakers of “getting away with murder” and threatening to force them to a bidding war for government business -- Canada has also been trying to rein in expenses in its government health-care system.
Profits Fall
At the center of the Coutus’ criticism are bills passed in Quebec in the past two years. One measure led generic-drug makers like Jean Coutu’s Pro Doc unit to offer bigger rebates on their medicines, eroding profit. The discounts are now no longer capped by law, and if they climb to 60 percent, Pro Doc’s profits could fall to zero, according to Barclays estimates.
Jean Coutu operates more than 400 franchises stores, mostly in Quebec and in the neighboring province of New Brunswick. But the government measures are mostly hurting its Pro Doc division, which, while smaller than the main franchise business, is hurting the bottom line of the entire company. In the nine months through Nov. 26, the latest period available, Pro Doc’s operating income fell 17 percent to C$57.1 million, accounting for about a quarter of the company’s total.
Uncertainty
Another bill will enable the tendering of generic drugs, although the government hasn’t yet given specifics about it.
“Investors shunned us a little bit lately. I understand them, there’s uncertainty,” created by the government, said Francois Coutu, 61, who is the company’s chief executive officer. “That’s making us reconsider lots of things.”
Barrette’s spokeswoman, Julie White, said Tuesday that a meeting with the Coutus would be organized soon, without being more specific. Jean Coutu spokeswoman Helene Bisson declined to comment.
The stock has dropped 21 percent in the past two years, while the S&P/TSX Composite Index, Canada’s benchmark index, gained 3.3 percent. Under a dual-class share structure that’s common in Canada, the Coutu family controls 93 percent of voting rights.
The company just moved to a new C$194-million ($148 million) headquarters and distribution center in a northern suburb of Montreal -- the kind of investment decision made years ago that could now be jeopardized by the government’s recent actions, the Coutus say. During the interview, the TV channel followed the company’s patriarch to the place where he opened his first drugstore in 1969 -- in a neighborhood east of Montreal that was then blue-collar -- before expanding by buying large volumes to lower prices.
Coutu, who was ranked by Forbes last year as Canada’s 19th richest man, said the family is disappointed by perceptions that the pharmacy business is making too much money.
‘Extremely Generous’
Pharmacists benefited for years from an “extremely generous” drug reimbursement policy in Quebec until recently, said Marc-Andre Gagnon, a professor of public policy at Carleton University in Ottawa. On top of measures on generics, another policy will require drugstores to disclose professional fees, enabling customers to shop around for lower costs, he said.
While Francois Coutu said in the interview the family could be weighing a sale, it “is unlikely unless the profit outlook deteriorates meaningfully more,” according to Michael Van Aelst, a Montreal-based analyst with TD Securities.
Jean Coutu himself signaled he’s not ready to give up.
“If you knew all the hungry wolves circling around our company -- but we are French Canadian enough to say ‘no,”’ he said.
Later in the program, he added, jokingly: “Before I turn 100, we’ll make a couple of acquisitions.”
To contact the reporter on this story:
Sandrine Rastello in Montreal at srastello@bloomberg.net
To contact the editors responsible for this story:
Crayton Harrison at tharrison5@bloomberg.net
