Strong dollar plus strong franc equals worries for global Big Pharma

Print 22 January 2015
Tracy Staton, FeircePharma

When it comes to currency, it's not been a good couple of weeks for multinational drugmakers. Switzerland's move to decouple the franc from the euro last week raised questions about the effects on Basel-based Roche ($RHHBY) and Novartis ($NVS). And now, Johnson & Johnson's ($JNJ) fourth-quarter results and 2015 forecast are triggering more foreign exchange worries.

J&J faces some headwinds from the strong dollar in the coming year, and its Q4 numbers suffered because of the foreign exchange hit. As Reuters notes, the company now predicts that currency could take up to 42 cents per share out of earnings, compared with the 15- to 20-cent hit it forecast back in October.

Analysts are extrapolating from J&J's announcement, figuring that other U.S.-based Big Pharmas will face similar predicaments. Companies with the biggest proportion of international sales stand to suffer most, of course. "The market today is very much focused on J&J," Atlantic Equities analyst Richard Purkiss told Reuters, "but companies like J&J with a big global footprint are also at risk."

"Foreign exchange will be a focal point for the whole drug group," SunTrust Robinson Humphrey analyst John Boris told the news service. Both analysts see Pfizer ($PFE) as among the most vulnerable, and Boris identified Merck ($MRK) as another pharma with a big chunk of overseas sales.

Meanwhile, after Switzerland's central bank decided to stop pegging the Swiss franc to the euro last week, several drugmakers saw their shares drop, including Roche, Novartis and Actelion ($ATLN). But Roche says its results won't suffer dramatically on the franc's rise; its costs and revenues are both spread out geographically, which will help limit the damage.

"Roche generates significant revenues in the euro zone," a spokesman said Thursday. "At the same time, Roche also incurs an important part of its costs in euros ... this helps mitigate the currency impact on Roche's cash flow."

Still, Roche's reported sales will take a hit when revenue from U.S. and Europe have to be converted into francs for its financial statements. Novartis reports its results in U.S. dollars, which means its results would take a hit on a stronger franc versus the dollar. Like Roche, the company incurs plenty of costs in currencies besides the franc, ratings agency Fitch said in a Monday note. Plus, it collects a large chunk of sales in the U.S.

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