The Pharmaceutical Industry in the U.S., with a market size exceeding $550 billion by the end of 2023, continues to drive innovation globally, which in turn adds FX exposures that can be mitigated.
International wire fees, conversion spreads, and market movements for U.S. firms are often overlooked as the ‘costs of doing business’ for Finance and Treasury teams. Funds coming into the US from other countries for investment or going out for employees, supply chains, or manufacturing are ways FX can truly affect costs. This article will address how FX exposures can and should be addressed to ensure effective cash management.
Understanding FX Exposures
Selling products abroad involves selling a foreign currency and converting it back to the US Dollar. If the USD increases in value during that sales cycle, the decreased value of the foreign currency erodes profits. Conversely, if employees are domiciled outside of the USA, the operation costs will decrease with the depressed value of the foreign currency.
Sales and Operations are just two global considerations for Life Science firms. Sourcing or manufacturing from other countries adds other layers of FX exposures. Since the products needed for production are priced in the country’s currency, the impact of market movements can affect overall profitability.
While all costs for any firm are challenging to forecast, many will be budgeted before the fiscal year. The constant in the Global Currency arena is that there will be movements over time. Successful Finance or Treasury teams take this ‘constant’ very seriously and use hedging products to lock in rates so that any adverse market move will be diminished. Knowing that market moves in the firm’s direction will not be enjoyed in the future, fixed costs tend to be more critical to finance teams rather than rolling the dice on volatile rates.
FX Strategies to Implement:
To mitigate risks, Life Science Companies should research the following strategies:
- Hedging: Options and Forward contracts are the most common products that provide predictability in financial planning and budgeting. By locking in exchange rates (forwards) or providing a maximum cost for future payments (options), decision-makers can stabilize future cash flows.
- Diversification: Since US companies are dollar-based and all currencies are exchanged with USD, diversifying the losses in one region with gains in another reduces the overall exposure of one single currency movement.
- Strategic Pricing and Timing: Having a dedicated, award-winning forecasting team that uses historical analysis and economic fundamentals can help guide teams in making decisions about when the best time to trade in the markets and what rates will be advantageous.
- Monitor and Adjust: Frequent and active management of FX exposures allows for adjustments to rate forecasts, providing another layer of future stability during market disruptions.
Conclusion
Life Science companies face a litany of challenges now and in the future. R&D costs, Pricing Pressures, market access, supply chain issues, and public trust are just a few of the worries that leaders deal with daily. The industry’s global nature presents another problem that can be addressed by applying risk management strategies with an FX partner. As the industry grows and evolves, individual firms’ long-term sustainability and profitability will depend on how agile their leaders are regarding risk mitigation, especially in the FX space.
