The impact of exchange rate volatility on a company depends mainly on the company’s business structure, both legal and operational, its indus- try profi le, and the nature of its competitive environment. This article recounts how Merck assessed its currency exposures and reached a decision to hedge those exposures.
After a brief introduction to the company and the industry, we discuss our methods of identifying and mea sur ing our exchange exposures, the factors considered in deciding whether to hedge such risks, and the fi nan- cial hedging program we put in place.
An Introduction to the Company
Merck & Co., Inc. primarily discovers, develops, produces, and distributes hu- man and animal health pharmaceuticals. It is part of a global industry that makes its products available for the prevention, relief, and cure of disease throughout the world. Merck itself is a multinational company, doing business in over 100 countries.
Total worldwide sales in 1989 for all domestic and foreign research- intensive pharmaceutical companies are projected to be $103.7 billion. Worldwide sales for those companies based in the United States are projected at $36.4 billion—an es- timated 35% of the world pharmaceutical market; and worldwide sales for Merck in 1989 were $6.6 billion. The industry is highly competitive, with no company holding over 5% of the worldwide market. Merck ranks fi rst in phar- maceutical sales in the United States and the world, yet has only a 4.7% market
This chapter was previously published as an article in Journal of Applied Corporate Finance Vol. 2, No. 2 (1990): 19–28. The authors would like to thank Francis H. Spiegel, Jr., Se nior Vice President and CFO of Merck & Co., Inc., and Professors Donald Lessard of M.I.T. and Darrell Duffi e of Stanford for their guidance throughout.
This document is authorized for use by Suhan Patel, from 1/7/2018 to 4/7/2018, in the course: MBA 7294: Advanced Financial Analysis – John Bish 2018, Wilmington University.
Any unauthorized use or reproduction of this document is strictly prohibited*.
share worldwide. The major foreign competitors for the domestic industry are Eu ro pe an fi rms and emerging Japa nese companies.
Driven by the need to fund high- risk and growing research expenditures, the U.S. pharmaceutical industry has expanded signifi cantly more into foreign markets than has U.S. industry as a whole. In 1987, the leading U.S. pharma- ceutical companies generated 38% of their sales revenues overseas; and 37% of their total assets were located outside the United States. In contrast, most U.S. industry groups report foreign sales revenues in the range of 20% to 30%. Merck, with overseas assets equal to 40% of its total and with roughly half of its sales overseas, is among the most internationally oriented of U.S. pharma- ceutical companies.
The U.S. pharmaceutical industry also differs in its method of doing busi- ness overseas. In contrast to U.S. exporters, who often bill their customers in U.S. dollars, the pharmaceutical industry typically bills its customers in their local currencies. Thus, the effect of foreign currency fl uctuations on the phar- maceutical industry tends to be more immediate and direct.
The typical structure is the establishment of subsidiaries in many overseas markets. These subsidiaries, of which Merck has approximately 70, are typi- cally importers of product at some stage of manufacture, and are responsible for fi nishing, marketing, and distribution within the country of incorpora- tion. Sales are denominated in local currency, and costs in a combination of lo- cal currency for fi nishing, marketing, distribution, administration, and taxes, and in the currency of basic manufacture and research—typically, the U.S. dollar for U.S.- based companies.
Identifi cation and Mea sure ment of Exposure
PLACE THIS ORDER OR A SIMILAR ORDER WITH NURSING TERM PAPERS TODAY AND GET AN AMAZING DISCOUNT
