Strong Dollar's Impact on Pharma vs. Generics

Merck & Co. (MRK) is advancing its use of RNA for making medicines more efficient and marking new frontiers in fighting and preventing diseases. The company is benefitting from a diabetes drug as well as from profitable joint ventures with other pharmaceuticals. Merck also noted that some of its top earners are facing sluggish sales in the face of competition from generic drug manufacturers.

On its recent guidance call, the company spent an inordinate amount of time discussing the effects of FOREX on its bottom and top line. The weak dollar helped U.S. exports at the onset of this manufacturing recession, and likely kept its effects at bay while it lasted.

The tailwind of a strong dollar is hitting now. In the case of generic drug-makers, it could have a double benefit. Generic drug manufacturer Teva Pharmaceuticals (TEVA), for example, is based primarily outside of the U.S. and is enjoying the benefits of a strong dollar over a weaker shekel.

From Merck’s guidance conference call:

At first a weak dollar was helpful:

In 2008, in fact, foreign exchange we anticipate on a full year basis will likely have benefited our revenue line by about 3 points of growth, so that's been a tailwind, quite frankly, for 2008 that we're going to be lapping as we go into 2009 and that converts into a headwind, if you will. And clearly, the hedging gains that we've seen have helped stabilizing Q3 and Q4, and yes, we have seen pretty significant gains from that.

Now:

Exchange is expected to have a negative 3% impact on our top line and a negative 6% impact on our bottom line.

Our 2009 non-GAAP EPS growth rate of negative 5% to plus 1% versus 2008 has been negatively affected by approximately 6 percentage points of foreign exchange.

About 45% or so of our revenue is earned in currencies outside the U.S. And, you know, if you think about that, that's probably about half euro and then the next largest currency is the yen.

Given the decline in U.S. interest rates relative to foreign currency rates, we anticipate an increased cost of our translation hedging program in the range of $50 to $100 million.

We tend to have more expenses in the U.S. than we do outside the U.S.

In 2009, we’re getting a big impact from FOREX.