In the fourth part of this blog series, Natasha Lala of OANDA Solutions for Business examines how finance professionals in the pharmaceutical industry are managing their FX exposure.
FX volatility is somewhat bitter-sweet for the global pharmaceutical sector. Low currency prices are boosting growth figures for firms focused heavily on exporting, while high currency prices are having the opposite effect for their not-so-lucky competitors domiciled in countries such as the US. The pharmaceutical market is headed for $1.3 trillion globally by the end of the financial year and many companies are heavily invested internationally. The challenge with this is that when much of your profit is tied up overseas, FX exposure can seriously affect bottom lines.
Macroeconomic events such as the EU referendum and a Fed rate rise are influencing global currencies, spelling prosperity for some and disaster for others. Take the UK first. Boasting a competitive pharmaceutical market, the UK is a significant player in the industry. And, as Sterling continues to fall as the EU referendum approaches, UK pharmaceutical firms are reaping the rewards of internationally competitive export prices.
On the other hand, the US is the biggest manufacturer (and consumer) of pharmaceuticals globally. Unlike Sterling, the US Dollar is performing well. And, with a Fed rate rise expected this summer, the Dollar will continue to strengthen. US pharmaceutical firms with subsidiaries, investments and operations in numerous countries globally, will feel the effects of a stronger dollar. The US’s largest export markets are situated in Europe and Asia, with these markets accounting for almost 40 per cent of revenue for some US firms. Therefore, a stronger Dollar will make their goods more expensive, affect margins for companies that did not hedge for American economic recovery and an increasing Dollar. All of which will undoubtedly hit their profit margins.
When considering pharmaceuticals, it is definitely worth keeping in mind emerging markets. On the surface, falling currency prices in countries such as India seem beneficial, as they are net exporters. However, it must also be remembered that many pharmaceutical firms in emerging markets such as South America have loans priced in Dollars. Therefore, a rising Dollar presents exchange-rate risk as interest repayments steadily increase.
Clearly, FX volatility causes both opportunities and problems across pharmaceuticals - so, how can finance professionals within these firms hedge against FX volatility?
Firstly, financial directors should ensure that they have the most accurate FX rates. In an industry that is so heavily integrated internationally, small movements in currency prices can improve or ruin profit margins. Therefore, financial controllers, CFO’s and directors should ensure they have a wide data pool of global currencies. Coupled with this, controllers should also adopt automated data feeds, an integrated data platform and a continuously updated FX data feed.
Alongside this, financial directors in pharmaceutical firms should look to use options and futures to lock in, or hedge against, strong and weak currencies. For example, a firm in the UK benefiting from the low Sterling price could lock in an attractive foreign-exchange rate for a fixed term in anticipation of an upswing that could reduce its competitive prices. Of course, companies based in any country should adopt forwards and options in order to protect themselves against surprise macroeconomic events and currency volatility.
Overall, pharmaceutical companies that have been prudent in their hedging are reaping the rewards. But, those heavily exposed to FX volatility are truly feeling the squeeze. Clearly then FX volatility can be both a blessing and a curse. The industry should consider wide data pools, automated feeds and futures and options to manage their exposure.