From Illumina to Twist Bioscience, a Strong Dollar Is Bad News

Wall Street hasn’t fully digested what currency devaluation really means for biotech stocks.

If the preliminary second-quarter 2022 earnings from 10x Genomics  (TXG) – Get 10x Genomics Inc. Report are any guide, then investors are in for a decent amount of pain this earnings season. 

And a strong U.S. dollar is likely to be one of the primary culprits.

The lab-hardware developer generated 53% of its revenue from the U.S. in 2021, but even that wasn’t enough to protect investors. 10x Genomics expects to report a 1% decline in Q2 revenue compared with the year-earlier period. An 11% drop in revenue from Europe and 15% decrease in revenue from Asia-Pacific slammed the brakes on sales growth.

That hints at potential trouble for a number of companies with significant international presences, including Illumina  (ILMN) – Get Illumina Inc. Report, Twist Bioscience  (TWST) – Get Twist Bioscience Corporation Report, and others.

A Strong Dollar Is a Headwind for These Businesses

Many companies report their geographic revenue mix in Securities and Exchange Commission filings. It may be a good time for investors to become familiar with that distribution.

Investors may have heard that the euro reached parity with the U.S. dollar for the first time since 2002. Similarly, the Japanese yen hasn’t been so devalued since the 1990s.

The U.S. Dollar index, which compares the greenback with numerous international currencies, hit a 20-year high in July. It shows no signs of slowing.

Why does this matter? A strong U.S. dollar means international currencies are less valuable. Selling goods that originate from the U.S. – whether liquefied natural gas or DNA-sequencing machines – into international markets becomes more difficult, as they become more expensive in local currencies. 

The flip side is also true: Exporting goods to the U.S. becomes more attractive. But that won’t help U.S.-based companies that have a significant international presence. These businesses must convert revenue and earnings into U.S. dollars, which can hurt results and make a company less likely to meet 2022 guidance.

10x Genomics may have been the canary in the coal mine for biotech investors. It generated a relatively healthy 53% of revenue from customers in the U.S. for 2021, but it still expects to get whacked from a strong greenback. How do other businesses compare?

Biosimulation leader Certara  (CERT) – Get Certara Inc. Report generated 72% of revenue from the Americas in 2021.Physics-based modeling software leader Schrodinger  (SDGR) – Get Schrodinger Inc. Report generated 66% of revenue from the U.S. in 2021.DNA synthesis leader Twist Bioscience generated 58% of revenue from the Americas in the fiscal first half of 2022.Clinical trial management leader Veeva Systems  (VEEV) – Get Veeva Systems Inc. Class A Report generated 57% of revenue from North America in 2021.DNA sequencing leader Illumina generated 52% of revenue from the Americas in 2021.Bioprocess equipment supplier Repligen  (RGEN) – Get Repligen Corporation Report generated 41% of revenue from North America in 2021.

Prepare for the Worst, Hope for the Best

Shares of 10x Genomics fell 17% on Friday as Wall Street analysts digested the company’s preliminary Q2 results. (At last check the stock was 2% higher from Monday’s close.)

The growth shock was surprising considering the relative strength of the business, which was nearing profitability and growing at a healthy clip. In the coming weeks it may not be the only company to see a share-price drop.

While many stocks have trended lower since late 2021, the declines have been driven primarily by contractions in valuation metrics. 

That still assumes growth is humming along as expected – the growth is just worth less in the eyes of Mr. Market. 

The lower valuations across the stock market have not yet taken into account the potential for or reality of weaker operations. If revenue or earnings growth slows or contracts, then investors could see valuations tumble by double-digit percentages from current levels. Buckle up.

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