Highlighted stocks include Schering-Plough (SGP), Pfizer Ltd. (PFE), Bristol-Myers Squibb (BMY) and GlaxoSmithKline (GSK).

ForEx Headwinds Likely to Reverse for Pharma in 2009

Large-cap pharmaceutical companies, like many companies with significant international operations, saw financial results in 2008 affected by foreign currency translation.

Through the first half of 2008 the U.S. dollar experienced a significant weakening versus the Euro, falling almost 7% through the end of the 2nd quarter. In mid-July the U.S. dollar reached its lowest level ($1.604) versus the Euro since the currency was introduced in 1999.

However, around the beginning of August, the trend started reverse as the hardships affecting the U.S. economy began infecting those economies throughout the rest of the world. The result was the U.S. dollar strengthening by over 13% in the second half of the year, with the majority of those gains beginning late in the 3rd quarter.

The U.S. $/British Pound exchange rate remained largely unchanged through the first 7 months of 2008. However, from early August through the end of 2008 the U.S. dollar strengthened by an astonishing 36% against the Sterling as economic growth in the U.K. stalled and the Bank of England dropped lending rates.

U.S. companies with significant European operations benefit when the U.S. dollar weakens. A stronger Euro or British Pound means more U.S. dollars when European currency denominated revenues are repatriated to the U.S. and converted to dollars. The opposite is true when the U.S. dollar strengthens.

Schering-Plough (SGP) and Pfizer (PFE) with 70% and 58% of total 2008 sales, respectively, coming from outside the U.S. were among the largest beneficiaries of a weaker U.S. dollar in the large-cap pharmaceutical space.

Schering's revenue benefited by about 6% through the first 9 months of 2008 (3% for the full-year), while Pfizer's revenue benefitted by about 4% over the same period (3% for the full-year).

Bristol-Myers (BMY) is one of the least-exposed large-cap pharma companies to currency volatility with only 41% of revenues coming from overseas.

London, England-based GlaxoSmithKline (GSK), which uses the British Pound as its domestic currency, has 60% of sales coming from outside of England and saw revenue benefit by 10% in 2008 and 19% in the 4th quarter due to currency translation.

The U.S. dollar continues to make gains against both the Euro and British Pound and is currently trading higher against both versus the levels at the end of 2008. If the trend continues, we would expect those U.S. companies that benefited the most from currency translation in 2008 to experience the biggest foreign exchange headwind in 2009.

Look for Bristol-Myers, which posted the strongest operational growth in 2008 among its peers (11%) and a company with low currency exposure, to be one of the least affected by a strengthening U.S. dollar in 2009.

Brian Marckx, CFA contributed to this report.