The United States is the planet's biggest market for medicine, but Europe accounts for a big chunk of revenue for U.S. biotech goliaths, including Celgene Corp. (NASDAQ:CELG). Since Celgene generates a lot of its revenue by selling drugs across the pond, a weaker pound and euro may result in an unwelcome surprise to sales and earnings for the remainder of the year. Currently, Celgene is guiding for sales of at least $10.7 billion. Can Celgene sidestep its currency exchange risk? Motley Fool contributor Todd Campbell joins analyst Kristine Harjes to discuss the issue in this clip from Industry Focus: Healthcare.
A transcript follows the video.
This podcast was recorded on June 29, 2016.
Kristine Harjes: One example of a company that has a lot of European revenue coming in would be Celgene. This is the company that has a ton of currency hedges in place. They're using options to try to minimize their risk. It's going to be a really important part of their business.
By the way, I mentioned options. It got me thinking in the back of my head about how this is a complex topic that has a lot of misunderstandings around it. I just want to throw it out there that The Motley Fool actually has a free Options University course. Reach out! Feel free to reach out to us via email, Twitter -- firstname.lastname@example.org is the email address to get the link. You'll have to enter an email address when you get it as it is an emailed series. It's a really fantastic way to learn from the pros, in a very accessible way, how to use options from an individual investor standpoint, which might be a little bit different than the way Celgene does it, but it could help you understand Celgene's use, too.
Todd Campbell: All of these companies, it's important to know that all of these companies, if they're doing business globally, they're hedging some of that exposure. However, because no one has a crystal ball, oftentimes trying to hedge it, you can't hedge it perfectly. That's how you end up with companies reporting both currency-adjusted and operational results in their quarterly numbers.
Companies like Celgene do get a lot of business from Europe. Think about this for a second. The United States spends the most on medicine. That's typically where companies like Celgene focus initially. "Let's get approval by the FDA so we can launch our drugs here in the United States."
However, Japan and Europe are also major consumers of drugs. Those are significant markets for Celgene. It gets about 37% of the revenue for its top-selling drug, Revlimid, from markets outside of the U.S. As a result, it does face some currency headwinds when it converts those dollars, that other money back into dollars.
Last quarter, or I should say last year, it was about a 2% drag that they had to deal with because of the strong dollar. Who knows what it'll be now. You'll want to watch for their conference call and listen to management and figure out what they think that might mean for guidance for the rest of the year.
Harjes: This is, fortunately, something that companies are very transparent about. It's not terribly difficult to try to figure out the underlying business movements, whether they're going up or down without the effects of currency involved. It's certainly something that, going forward, we're going to hear about in these earning calls.