Thursday, July 22, 2010

EU Pricing Pressure Sure To Impact Hemostasis Market

"European governments grappling to reduce large budget deficits are focusing their cost-cutting on a large spending item - pharmaceuticals," The Wall Street Journal reports. "Several countries in recent weeks, including Spain, Germany and Italy, have proposed or enacted reductions in what they will pay or taken other cost-control measures for various drugs. ... In Europe, state healthcare systems pay for the bulk of drug purchases. European governments have long been known for their frugality when negotiating prices with drug companies, but the latest cuts are more severe than usual. Europe is the second largest market after the U.S. for many drug companies."
The European Federation of Pharmaceutical Industries and Associations, the industry's main lobbying body in Europe, is warning of the economic consequences. In a statement, the group said the cuts would "sharply diminish revenues to manufacturers...with an impact on their R&D investments. This in turn will impact European economic recovery and employment"
The dollar's climbing value threatens to pressure sales in coming quarters for U.S. medical-device and drug makers that are big exporters to Europe.
The greenback's rise--it's up about 15% against the euro this year--compounds worries already brewing that cash-strapped European governments, pressured by a debt crisis on the continent, will cut back on health-care spending.
For device companies, Piper Jaffray analyst Matt Miksic called the currency impact "manageable for most" because of hedging plans. He sees a 1% to 2% earnings impact this year.
The currency effects can be very complex. Many companies routinely give sales estimates that exclude the currency impact so that the business' performance isn't shrouded. Also, they typically employ a mix of natural and financial hedges to protect earnings, even if sales take a big hit.
Natural hedges can include overseas manufacturing capacity, which can put the cost of production in the same currency as sales. For big multinational companies doing business around the globe, currency values in different countries can sometimes have an offsetting effect. Then there are foreign- exchange contracts companies can enter to manage risk.
But the dollar's strength still adds strain. JPMorgan noted a trend over the past decade of device stocks performing better than the broader market when currency rates add to sales, but worse when currency is a negative factor. "In short, MedTech stocks seldom outperform in the face of an FX headwind," analyst Michael Weinstein said.
Some of the dollar's gains have come since companies reported first-quarter results in April; however, device-maker Medtronic's recent report offered some fresh perspective. The company, which posted sales of $15.8 billion for its year ended April 30, said exchange rates at Monday's level would dent sales by $400 million to $500 million in the new fiscal year.
But the company also said its hedging strategy should mostly shield earnings.
The backdrop to currency concerns is the threat European sales also will decline because of government spending cuts. But some big companies have downplayed this risk.
This is "spooking investors," Abbott Laboratories (ABT) Chief Executive Miles White said at a recent conference. He explained that Abbott factored pressure in Europe into its 2010 financial forecasts and that he doesn't plan to change them directly due to European woes.

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