L Strength Leads To UK Pharma Stock Downgrade

As the New Year began and sterling continued to strengthen, so druganalysts started downgrading their forecasts for UK pharmaceutical company earnings expectations, particularly for those most exposed to overseas export business.

Among these was NatWest Securities, which downgraded its forecasts by some 10% in consideration of a 15% appreciation in sterling against a basket of foreign currencies since last August.

However, analysts Steve Plag, James Dodwell and Franc Gregori at BZW Research say the frenzy of downgrades in the pharmaceutical sector due to the stronger pound should be treated with caution. The major effect of foreign exchange fluctuations on the sector is translational, they say, and not as in other sectors, transactional. In other words, strengthening sterling does not significantly influence the ability to sell products overseas; rather, the impact is an accounting one when translating the sales and profits of overseas subsidiaries into sterling.