Winners and Losers of the Greek Financial Crisis

May 12, 2010 — -- A Greek financial tragedy was barely averted this past Sunday, when the European Union and the International Monetary Fund promised the equivalent of up to $1 trillion to guarantee the Greek national debt and the debts of other financially shaky countries like Spain and Portugal.

The end of this act was much like the predetermined outcome of an ancient Greek drama. After months of back-and-forth negotiations, an agreement to save Greece and the European Union was inked hours before nervous Asian markets could open on Monday morning. But this move may only stem the tide of default in Europe. Other countries are likely to seek bailouts and, in a worst-case scenario, it could lead to Greece being evicted from Club Euro.

Whatever happens, there will be winners and there will be losers, both in the near-term and over time. What we are likely to see in the near-term is a devaluation of the euro as a currency. This will happen either through European Union action, or through bankers saying the euro just isn't worth what it used to be.

As a research firm, dedicated to the analysis of businesses in the health care sector, we believe U.S. drug and medical device companies could be among the big losers as the euro is devalued. The euro's strength against the dollar has given U.S. pharmaceutical companies an edge in selling goods on the continent. In the first quarter 2010, companies like Merck & Co., Johnson & Johnson and Pfizer, Inc. reported favorable financial benefit from growing sales of U.S. products in Europe and they showed significant profits from managing fluctuations in a relatively strong euro.

Johnson & Johnson reported that domestic sales decreased by 9.6 percent while international sales increased by 11.1 percent, of which there was a positive currency impact of 9.7 percent. Merck announced that international sales of drugs and vaccines grew by 10 percent, including favorable impact of foreign exchange. Pfizer said that international revenues were $9.4 billion, an increase of 60 percent compared with the prior-year quarter, which reflected 48 percent operational growth and a 12 percent favorable impact of foreign exchange.

But what foreign exchange giveth, foreign exchange taketh away. The decline of the value of the euro would, over time, make U.S. pharmaceutical and medical device products more expensive for European consumers. Existing contracts with government insurance plans, written in euros will stay the same. However, since the euro will be worth less on international currency markets, U.S. companies will experience lower profits. Over time, as new contracts are written, U.S. companies will try to increase their prices, but will be at a disadvantage when competing against Europe-based firms.