Bayer, Novartis, Sanofi lose big on Venezuelan bonds
- Bayer, Sanofi, and Novartis have all recently recognized significant losses on the sale of dollar-denominated Venezuelan bonds, which they bought in order to circumvent the country's tight currency controls. The controls have made it hard for pharmaceutical companies to move their locally-earned revenue, denominated in bolivars, out of the country.
- Acquired from the state-owned oil company PDVSA, the bonds were resold for as little as a third of their face value, Reuters reports. All told, the three companies recognized $710 million in foreign exchange losses related to Venezuela (that figure includes the losses on the bonds).
- As oil prices have crashed, PDVSA has brought in significantly fewer US dollars. Currency controls and a recent official depreciation have meant a foreign exchange squeeze for pharma companies looking to repatriate their profits.
Venezuela has stringent currency controls which have helped exacerbate runaway inflation and widened the gap between official exchange rates and those on the black market.
For priority goods such as medicine, the country attempts to use an official exchange rate of 10 bolivars to the dollar. This is devalued from a month ago when the priority rate was 6.3 to the dollar. However, for most other goods the official rate is 206 bolivars to one dollar.
With the government unable to meet the priority exchange rate, pharma companies faced either retaining revenues in a quickly weakening currency or exchanging their revenues at the lower official rate.
Buying dollar denominated PDVSA bonds offered a workaround to this trap. While this gave Bayer, Novartis, and Sanofi a way to converting their revenues, it meant the companies had to face an initial foreign exchange loss buying the bonds and a second loss on the eventual sale of the unattractive bonds.
In its fourth quarter earnings report, Novartis noted an expense of $346 million, "related to Venezuela due to foreign exchange losses of $211 million, monetary losses from hyperinflation accounting of $8 million, and a loss of $127 million on the sale of PDVSA bonds received to settle a portion of intra-Group payables."
Other pharma companies are feeling the ill effects of the weak bolivar. According to Reuters, Pfizer predicts a negative impact of $800 million tied to Venezuela.
Follow Ned Pagliarulo on Twitter