Strong US Dollar to hit revenues but strategic CROs may see lower costs

By Dan Stanton

- Last updated on GMT

Strengthening US Dollar could hit CRO toplines, but benefit strategic deals
Strengthening US Dollar could hit CRO toplines, but benefit strategic deals

Related tags United states dollar

The strengthening US Dollar will reduce CRO revenues, say analysts, but firms which have global strategic deals could benefit from reduced operational costs.

Contract research organisations (CRO) are preparing to present their Q4 financial results over the next couple of weeks, but currency movements resulting in a historical high for the US Dollar against the Euro, could affect topline figures.

“The strengthening of the US dollar that began last May has accelerated over the last couple of months. Consequently, the year-on-year differences in the primary European currencies and the Japanese Yen will act as a significant headwind to CRO revenue growth during both 4Q14 and 2015,”​ Jefferies analyst David Windley said in a note.

Icon and Parexel, for example, could find the strengthening dollar acting as a headwind to sales growth as almost half the firms’ revenue is denominated in currencies other than dollars, he said. However, as a similar proportion of costs are also doled out in foreign currencies there will be little impact on earnings despite a drop in revenue.

Fellow analyst John Kreger from William Blair was also wary of the strong dollar's impact on the topline, favouring PRA Health Sciences as the CRO “has the least exposure to a stronger Dollar and may actually see a benefit given a higher percentage of costs versus revenue denominated in currencies other than the Dollar.”

Strategic Advantage

The trend for CROs to strike global strategic partnerships with pharma firms could, however, reap benefits from the recent exchange rate changes.

“Over the last five plus years, global programs and strategic relationships have moved toward contracting in US Dollars, even when work is being executed and operating costs incurred in foreign currencies,”​ Windley explained.

“As a result, many CROs have some mismatch when translating revenue and costs back to US Dollars for reporting purposes. In a strong dollar environment, as we have seen recently, revenue and expenses are reduced on translation.”

This is particularly true for Quintiles, he added, as the CRO receives 62% of its revenue in US Dollars with much of its operational costs in Euros, Yen and British Pound.

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