Tuesday, January 29, 2013

Currencies Continue Significant Drag On Pfizer's (And Thus Merck's) Foreign Revenue

Pfizer soundly beat the average estimates for top-line and bottom-line 2012 growth, this morning.

As I wrote last night, however, I am more interested in what happened at the foreign exchange line for the fourth quarter, as that will likely be a clear window into Merck's results on Friday. Translating non-US sales into US dollars produced a seven per cent erosion in revenue. Seven percent on $15 billion. . . is a big down-draft. That's just over a billion dollars. Wow.

This is very significant, and is likely to continue -- at both Pfizer and Merck.

Both companies employ "natural" hedging (in addition to market-instrument hedging), which means that they hold property, plant and equipment "in-country" -- in order to partially offset the effect of translating those sales back into local US currency, at quarter-, and year-end. In fact, Pfizer was able to reduce its overall S, G & A expenses by 12 percent in Q4 2012, but two per cent of that was currency translation, on natural hedges -- so the actual (repeating) expense reduction was really only 10 per cent.

I'm not sure that Merck will beat at the top-, or bottom-lines on Friday, but I'd look for similar trends at the foreign exchange lines, out of Whitehouse Station later this week -- from the notes to Pfizer's release:

. . . .In addition, reported cost of sales in fourth-quarter 2012 reflects the unfavorable impact of foreign exchange of 7%, while reported cost of sales in full-year 2012 reflects the favorable impact of foreign exchange of 3%. . . .

Stay tuned for Friday. Separately, the Scheinberg Fosamax ONJ bellwether case has reached the point where Merck is putting on its defense -- and Rhoda Scheinberg has rested the plaintiff's case in chief. So, we could have a verdict by the end of the week, there. I'll keep you apprised.

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