One word popped up over and over when Big Pharma reported earnings last month: Venezuela. The association wasn't positive. Executives blamed losses there for hundreds of millions in currency-related hits to their financials.
|Novartis CFO Harry Kirsch|
Novartis ($NVS) saw net income drop 18% year-over-year, partly because of "exceptional charges in 2015 mostly related to our Venezuela subsidiaries," Novartis CFO Harry Kirsch said during the Swiss drugmaker's Q4 earnings call--charges that so far amounted to $337 million.
Sanofi ($SNY) EVP Peter Guenter, who oversees emerging markets, called a €240 million foreign exchange loss in the country "the Venezuela effect," and said the company sees another €100 million to come.
Pfizer ($PFE) says it's expecting an $800 million currency hit from Venezuela--"roughly the same size as 2015," according to CEO Ian Read, when the Venezuela problem reduced 2015 earnings by $0.07 per share.
It's no secret that the Venezuelan economy has been in the tank, and Sanofi, in particular, has a big presence in there, partly in thanks to its 2012 Genfar acquisition. Novartis and another company that experienced the "Venezuela effect," Bayer, have substantial sales there, too.
But what happened, exactly? As pharma has been forced to do in other countries suffering debt crises--Greece, for one--these companies took payments worth much less than Venezuela's outstanding bills.
But in Venezuela, the mechanism was somewhat different, Reuters reports. In one example, Novartis was paid in the local currency, bolivars, for their products, and currency controls effectively trapped that cash. So, the companies negotiated to use those bolivars to buy bonds issued by the state oil company, PDVSA, denominated in U.S. dollars.
The exchange rate to dollars in that deal was, to put it mildly, poor, thanks to a recent devaluation of the currency and hence losses via foreign exchange. But there was another loss. When the company sold the PDVSA bonds, it was for about 37 cents on the dollar, Reuters notes, for another $127 million hit.
The other drugmakers engineered similar deals and sold the bonds for as little as a third of their face value. Pharma's bills in Greece were also paid in bonds, via a special bond issue, but those bonds were euro-denominated. The companies involved there--including Roche ($RHHBY)--sold those bonds at a big discount.
Pharma companies are still holding on to bolivars, and they're forced to take bolivars for ongoing drug bills, despite the deteriorating currency. Getting that cash out of Venezuela will trigger more losses. Pfizer's $800 million "negative impact" related to Venezuela in both 2015 and projected for 2016 stems from a change to a 200 bolivars-to-the-dollar exchange rate.
"[W]e thought that the timing of that adjustment was appropriate, given oil prices, given what's going on in Venezuela economically, given the dollars that are coming out of Venezuela," Read said during the Q4 earnings call, adding that the previous exchange rate was 6.3 to 1. He didn't mention oil bonds as playing a role.
|Pfizer CFO Frank D'Amelio|
CFO Frank D'Amelio says Pfizer is optimistic about Venezuela in the long run. "[W]hen Venezuela passes through this crisis and they re-establish a normal economy, we would expect Venezuela to grow back to be between 200 and 400 million a year," D'Amelio said.
And pharma's outlook for Latin America in general is strong enough that drugmakers are scouting acquisitions there. Sanofi, Pfizer and Abbott Laboratories ($ABT) were rumored to be weighing a buyout of Mexico-based Rimsa last year until Teva Pharmaceutical ($TEVA) snapped up the company for $2.3 billion.