Interest Rate Cuts Could Further Weaken European Competitiveness
On Tuesday, the Federal Reserve cut the benchmark interest rate by 50 basis points (0.5%), hoping to ease the spreading impact of the recent credit crunch. One of the consequences of this move is likely to be the further decline in strength of the US dollar (USD) relative to the Euro and the British pound (GBP), accelerating the long-term devaluation of the USD. The lower interest rates mean lower returns to foreigners lending to US borrowers, thus making foreign lenders less interested in making loans to US borrowers. This leads to less demand for USD from foreigners, which will drop the price for USD (the exchange rate).
The weaker USD will mean even more pain for European CMOs and CROs trying to sell their services to US pharmaceutical companies. Prices quoted in Euros are already 40% higher in US dollar terms, and prices quoted in pounds are twice as high in dollar terms. Those multiples are likely to increase as the interest rate cut impacts exchange rates. European CROs and CMOs have some protection from the erosion of their price competitiveness: bio/pharmaceutical companies seeking regulatory approvals in Europe won't have much choice but to source clinical research services from European CROs, and European GMP and clinical trial regulations create some bias in favor of sourcing manufacturing services from European vendors. But European companies looking to compete to deliver services that need not be delivered in Europe may find themselves squeezed by customer demands for price protection, e.g., by mandating prices quoted in dollars or some other sharing of exchange rate risk.
Another byproduct of a weaker USD is that it could make acquisition of US facilities and companies by European and Canadian investors even more attractive because the Euro- or GBP-denominated price of US assets will drop. Acquisition of US assets would be a viable defensive strategy for European service providers dealing with the declining competitiveness of their European operations. US acquisition is also a sound offensive strategy for European service providers, since so much of the new product pipeline is in the hands of small and mid-size US pharma companies.
The weaker USD will mean even more pain for European CMOs and CROs trying to sell their services to US pharmaceutical companies. Prices quoted in Euros are already 40% higher in US dollar terms, and prices quoted in pounds are twice as high in dollar terms. Those multiples are likely to increase as the interest rate cut impacts exchange rates. European CROs and CMOs have some protection from the erosion of their price competitiveness: bio/pharmaceutical companies seeking regulatory approvals in Europe won't have much choice but to source clinical research services from European CROs, and European GMP and clinical trial regulations create some bias in favor of sourcing manufacturing services from European vendors. But European companies looking to compete to deliver services that need not be delivered in Europe may find themselves squeezed by customer demands for price protection, e.g., by mandating prices quoted in dollars or some other sharing of exchange rate risk.
Another byproduct of a weaker USD is that it could make acquisition of US facilities and companies by European and Canadian investors even more attractive because the Euro- or GBP-denominated price of US assets will drop. Acquisition of US assets would be a viable defensive strategy for European service providers dealing with the declining competitiveness of their European operations. US acquisition is also a sound offensive strategy for European service providers, since so much of the new product pipeline is in the hands of small and mid-size US pharma companies.
