. . . .While this development makes travelling to Europe more appealing (forgetting the economic pinch, which causes people to be fearful of spending, generally) to tourists originating from inside the United States (i.e., cheaper goods) — it also spells a potential Q4 disaster for largely unhedged multinational US companies like Schering-Plough.
CEO Hassan often crows that more than 70 percent of Schering’s sales are made in other than US currencies — the euro chief among these. “Russia, too!”, as he often says. Well, when the dollar strengthens against the euro (and the Rouble), Mr. Hassan brings home fewer dollars of revenue, for the exact same volume of sales, in Europe, and Russia.
It is as though his drugs are being sold at an involuntary — and accelerating — discount, throughout the weakening-currency countries (essentially everywhere on Earth, except Japan), at the moment. The sharp decline in the euro (and the Russian Rouble) has been so abrupt, and alarming, that even the New York Times now is suggesting — perhaps — a currency “intervention” may be in order:
. . . .So great are the concerns among policy makers about the turmoil in currency markets that it has prompted talk of a coordinated intervention by the leading industrial countries in coming days, to quell the soaring dollar and put a floor under emerging-market currencies.
Such a move — in which the Federal Reserve and other central banks would sell dollars and yen and buy other currencies — has been used extremely sparingly by the United States in recent years.
“The risk is huge, but it is appropriate at this point, because if the emerging markets go into default, the consequences would be catastrophic,” said Kenneth S. Rogoff, an economist at Harvard. . . .
As is almost always the case, such an intervention will do almost nothing to improve Mr. Hassan’s — and Schering’s — fourth quarter malaise. [Recall that Russia is also a explosively-growing foreign currency exposure problem for Schering — see graphic, above.]
This is why going largely unhedged, or naked, is a rather foolish long-term approach to financial risk management at any large US-based multi-national. Sure, in times of a weak dollar, companies like Schering enjoy a currency “tailwind” — it is as though each sale in euros, Roubles and yen is made at a premium price point, and Schering need do nothing to “earn” it — it was just “forked over” by the foreign-exchange gods, and goddesses (a tailwind that would be eliminated by effective hedging — but so too would any later arriving “headwind” be eliminated).
But now — in times of a strong, and strengthening, dollar — the illusion of growing sales volumes reverses — and Schering may actually book sales declines — not just lower growth in sales — in the fourth quarter of 2008. A triple whammy — (1) Vytorin/Zetia swoons, (2) slower (to no) FDA approval of new drugs (think Sugammadex, here), and (3) evaporating currency advantages.
Live by the sword — die by it too, Fred. Die by it, too.