Medical Device Makers Eyeing Dollar U-Turn

This year’s rally in the U.S. dollar has had an impact on the heady foreign sales gains for Orange County medical device makers.

But the effect of the dollar’s rise has been somewhat muted for a couple of reasons: sophisticated hedging strategies and the steep decline in the dollar in the previous few years.

Shifts in currency have several effects on companies that sell or make products out of the country. If the U.S. dollar strengthens against a foreign currency, products made here and sold elsewhere become less appealing to those foreign buyers.

However, U.S. companies that make products elsewhere and ship them back to the U.S. for sale will benefit from a rising dollar because their cost of production is lower.

China’s a recent example. Two weeks ago the country agreed to raise the value of its currency by about 2% versus the U.S. dollar. The move will make Chinese exports more expensive, but will make U.S.-produced goods a little more attractive to Chinese buyers.

This year the U.S. dollar has risen about 12% versus the euro and 10% compared to the Japanese yen.

But the recent gains come after a sharp downturn in the U.S. dollar in the past two years. The dollar fell some 50% from 2002 through 2004 as the trade deficit widened and foreign debt piled up.

The so-called “FX U-turn” was the subject of a report by Joanne Wuensch, a medical device analyst with New York investment bank Harris Nesbitt & Co., earlier this summer.

“While foreign exchange has benefited many (medical technology companies) over the last several years, it is poised to do a U-turn, dampening revenue growth and, depending on the company’s hedging program,potentially dulling earnings per share growth,” Wuensch said.

The dollar’s 2005 rise led Wuensch to reduce quarterly revenue estimates for several device companies she covers, including Bausch & Lomb, a rival to Santa Ana-based Advanced Medical Optics Inc. and Lake Forest-based Cooper Cos.; Biomet Inc., which purchased Interpore Cross International, a bone device maker that was based in Irvine; and Boston Scientific Corp., which has invested in several OC-based startups.

Wuensch didn’t change her revenue or earnings estimates for either Advanced Medical or Cooper. That’s because both companies earlier lowered their earnings guidance based on the strengthening dollar.

The currency issue is becoming timely because of the dollar’s recent strength against the euro, said Randy Meier, Advanced Medical’s chief financial officer.

Advanced Medical, a maker of eye surgery devices and contact lens care products, does about 70% of its business overseas.

“With the recent softness in the euro, there is a concern that all of the benefit that corporate America has been receiving in terms of revenue growth and increased demand because buying U.S. products (is) a little cheaper, that could create somewhat slowing revenue growth,” Meier said.

Meier noted that the dollar has fallen versus the euro on a yearly basis because of the sharp decline in the past few years.

In early June, Advanced Medical said it expects to post 2005 sales of $920 million to $930 million, down from an earlier forecast of $955 million.

That guidance “did incorporate some of our thinking about where currencies were going. But we also said that we did not expect that currencies would have a major impact in the second half of this year,” Meier said.

Meier said Advanced Medical has benefited from several acquisitions that gave it manufacturing operations in foreign countries. The benefit: so-called “natural hedging” versus a dollar gain.

In the past few years, Advanced Medical has bought a cataract surgery device unit of Pfizer Inc., laser device maker Visx Inc. and a plant in Spain. The buys allow the company to make devices in Europe for sale there or export to other countries.

“A global company with operations and expenses that are in that local currency, whether it’s the euro or the yen, are somewhat naturally hedged against the fluctuations of currency,” Meier said.

Companies also use currency hedging to offset risk. They can buy contracts to convert a certain amount of foreign currency at a set U.S. dollar rate in the future. The downside is that the contracts cost money to buy. The upside is that the effects of currency moves are limited.

Advanced Medical hedges its pretax income so that a certain amount of its cash flow is converted to U.S. dollars, depending on currency trends, according to Meier.

Edwards Lifesciences Corp., the Irvine-based cardiovascular device maker, counts a majority of its sales from overseas buyers.

Edwards reported U.S. sales of $119 million and international sales of $139 million in the second quarter. About 47% of its international sales came from Europe with 34% from Japan.

Edwards said it took foreign currency issues into account when it issued its 2005 sales and earnings forecasts, said Corinne Lyle, its chief financial officer, in published reports.

Lyle said the heart device maker’s sales are two-thirds hedged with foreign currency contracts, and that it’s also protected against foreign exchange issues because it makes products outside the U.S. in local currencies.

In fact, Edwards said its second-quarter revenue of $258 million was aided by a $5 million boost because of foreign exchange rates. Hedging helped shield the company from a stronger U.S. dollar. But Edwards also benefited because the dollar’s rise hasn’t been strong enough to offset the heavy declines of the past few years.

Cooper, meanwhile, counts about 52% of its revenue from outside the U.S. More than half of its products, including contact lenses, are made outside the country, primarily at its British plants, said Steve Neal, Cooper’s chief financial officer.

“Basically, being a multinational company with greater than 50% of our revenues from outside the U.S.,whatever strength or weakness the dollar has will impact our reported results,” he said.

In June, Cooper lowered its 2005 guidance to $828 million to $837 million from a previous forecast of $840 million to $850 million. Cooper cited changes in foreign exchange rates as a reason for the revision.

Meanwhile, Medtronic Inc., which employs about 500 people at a heart valve plant in Santa Ana, said it had active hedging strategies in place and didn’t believe its earnings would be affected by the dollar’s rise.