Will 2009 Be a Year for Pharma Currency Speculators?

Following the depreciation of the British pound against a basket of world currencies in 2008, including a 26% decline against the US dollar, British companies with significant overseas operations are finding themselves in unusually fine fettle despite the global downturn and fall out from the credit crunch. Against the backdrop of a 31% decline in the FTSE 100, AstraZeneca (AZN) put in a sterling performance, gaining 30% (AstraZeneca is star stock of 2008 while Merck loses shine, January 9, 2009).

Whilst AstraZeneca certainly had a good year with a number of key patent victories and significantly raised forecasts for Crestor, the currency benefit was clearly significant considering the ADR listing of AstraZeneca’s stock actually fell 4% in 2008. With the pound expected to weaken further in 2009, with $1.25 to the pound a distinct possibility, coupled with an eventual weakening of the euro, 2009 could be a good year to invest in European companies who generate the bulk of their business overseas.

Weaker pound and euro

With many expecting that the UK government will provide further bailouts to a variety of industries, and even a chance that it may be forced to nationalise a couple of banks, the extra debt burden and the likely printing of more money will combine to further devalue the pound.

Although the Eurozone has maintained a slightly higher interest rate than the Federal Reserve, it is fair to assume that the European Central Bank may be prepared to loosen their monetary policy should it be necessary, thus potentially weakening the euro versus the US dollar.

US exposure

Using geographic sales data from EvaluatePharma, based on the last reported year of sales in 2007, AstraZeneca, GlaxoSmithKline (GSK) and Roche (RHHBY.PK) are the companies with the greatest proportion of US sales as a percentage of total sales.

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These companies could be set to benefit the most from a weakening of the pound, euro, or Swiss franc against the dollar. Conversely, the benefit to German companies Bayer (BAYRF.PK) and Merck KGaA (MRK) will be much more limited.

Looking at forecast US revenues for 2008, the effect of various exchange rate fluctuation scenarios on the US revenues for some European companies is significant.

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To illustrate the point, for GlaxoSmithKline a 20% depreciation in the value of the pound in 2008 would result in a very tidy £2.3bn in extra revenue from the US alone.

Whilst big pharma will, undoubtedly, be hedging to protect their revenues, such a large exposure could result in some huge foreign exchange gains or losses for those companies willing to take a chance on the direction of their native currency.

Similarly, investors with a strong view on forex could be in for a bumpy but potentially profitable ride in 2009.

Stock position: None.