(Reuters) – Johnson & Johnson surprised investors by detailing the degree to which a strong dollar will hurt sales abroad this year, and industry watchers say Wall Street is underestimating the likely hit to other U.S.-based rivals such as Pfizer Inc and Merck & Co.
J&J, the first large U.S. drugmaker to report fourth-quarter results, on Tuesday said sales fell 0.6 percent to $18.25 billion, but would have risen 3.9 percent if not for the stronger dollar. The 4.5 percent foreign exchange hit compared with an average 0.9 percent headwind in the first three quarters of the year.
The diversified healthcare company now expects a foreign currency hit to earnings in 2015 of as much as 42 cents per share, versus the 15 cents to 20 cents it forecast in October.
“Foreign exchange will be a focal point for the whole drug group” in the fourth quarter and 2015, said John Boris, an analyst with Suntrust Robinson Humphrey. He predicted the stronger dollar will take a bigger bite out of other drugmakers’ earnings than many expect, and said Pfizer and Merck are among the most vulnerable because they both derive more than 60 percent of their sales outside the United States.
A spokeswoman for Pfizer declined to comment, saying the company will discuss the impact of foreign exchange when it reports quarterly results on Jan 27. Merck officials could not immediately be reached for comment.
J&J shares fell 2.6 percent on Tuesday, while the ARCA Pharmaceutical Index of U.S. and European drugmakers was little changed.
“The market today is very much focused on J&J, but companies like J&J with a big global footprint are also at risk,” said Atlantic Equities analyst Richard Purkiss, who cited Pfizer as among the most vulnerable.
Indianapolis drugmaker Eli Lilly said earlier this month it expects foreign exchange “headwinds” in 2015, but would not give details until it reports quarterly earnings on Jan. 30. Almost 55 percent of its sales are from outside the United States.
The dollar gained nearly 13 percent against a basket of major currencies in 2014, its strongest performance since 1997. For U.S.-based companies, the stronger dollar hurts the value of sales in overseas markets.
Boris said sales of innovative new drugs from J&J and rival drugmakers – such as treatments for cancer, diabetes and hepatitis C – could still mitigate the foreign currency impact and help them deliver double-digit industry earnings growth over the next five years.
(Reporting by Ransdell Pierson; Editing by Leslie Adler)