Healthcare investors are served best by focusing on products, pipelines, and profitability, but currency fluctuations following the U.K.'s decision to leave the EU mean that investors might want to spend extra time considering the short-term potential tailwinds and headwinds exchange rates cause. That's especially true for Britain-based biopharmas such as GlaxoSmithKline (NYSE:GSK) and AstraZeneca (NYSE:AZN). Will these companies suffer because of weaker European currencies? The Motley Fool's Kristine Harjes and Todd Campbell take up currency conversion's impact on healthcare stocks in this clip from Industry Focus: Healthcare.
A transcript follows the video.
This podcast was recorded on June 29, 2016.
Kristine Harjes: Let's take another look at currency. I know that the financials crew covered it on Monday's episode of Industry Focus. It's worth reiterating some points that relate specifically to healthcare. Something that I want to emphasize is that currency is a consideration that is really largely focused on the short term.
Look at, for example, Johnson & Johnson (NYSE:JNJ) and their struggles all last year fighting currency headlines. Every single time you hear The Motley Fool and anybody with a long-term perspective cover this company, it's like, "Guys, you can't look at this at face value. You have to strip away the effects of the currency, because these things go up and they go down and it doesn't really impact the underlying business." That being said, it could be a pretty strong tailwind for these U.K. companies, in the short term, at least.
Todd Campbell: It depends a lot on how they report their currencies. A company like GlaxoSmithKline, which reports in pounds, could see a big benefit. It produces a lot more product in the U.K. than it generates in revenue in the U.K. As a result, if you look at their Q1 results, both on the top and bottom line, I think the top line had a 3% tailwind because of exchange rates. The bottom line had a 6% tailwind because of exchange rates.
That was because of converting the weak pound to a strong dollar. Since the pound has weakened even more since then, I think investors could probably say, "Well, the tailwind in currency is probably going to continue for them."
On the other side, however, you've got AstraZeneca. They reported, back at the end of the Q1, that they were going to face a 2% headwind because of currency exchange. You have to look at each individual company independently when you're considering the currency exchange impact.
You and I have talked about this a lot on this show previously. The things you want to consider in evaluating biopharma stocks is product, pipeline, and profitability. You'll notice currency is not one of those three. Yes, you do not want to use currency as the dominant reason for buying or selling a stock. However, it can be helpful to know. You can guarantee, or at least I would bet that during these upcoming conference calls, management of these biopharma companies are going to be talking a lot more of the potential headwinds or tailwinds because of this currency conversion issue.
Harjes: This is not something that's limited to just companies that are based in the U.K. Almost every single U.S.-based company has some business in the EU. One example of a company that has a lot of European revenue coming in would be Celgene.
Kristine Harjes owns shares of Johnson and Johnson. Todd Campbell owns shares of Celgene. The Motley Fool owns shares of and recommends Celgene and Johnson and Johnson. The Motley Fool has the following options: short October 2016 $95 puts on Celgene. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.