fx risk advisory benchmarking series: currency ......2020/12/03 · fx risk advisory benchmarking...

Currency management insights for Life Sciences & Healthcare

FX Risk Advisory benchmarking series:

Ivan Oscar Asensio, Ph.D. | Head of FX Risk AdvisoryPeter Compton | Head of FX Life Sciences & Healthcare Practice

November 2020

FX RISK ADVISORY BENCHMARKING SERIES 2

Looking ahead, we expect FX to be a higher priority item for LSHC companies due to the prospects for a weaker US dollar (USD).

1. Participants responded anonymously to a 15-question survey which ran between July and September 20202. In contrast, ‘passive’ currency management is where currency is bought and sold only as needed; an operational versus strategic exercise

Executive summary

We surveyed 124 innovation-sector Life Science and Healthcare and (LSHC) companies in the SVB client portfolio, representing different stages in the corporate life cycle (see chart at right), to understand their general strategies and practices for managing currencies.1 We learned the following:

3 in 10 companies actively manage currencies (aka FX), implying that active currency management is a strategic decision.2Respondents are aware that currencies affect business results, but have much less understanding of the scale and materiality of the impact.

The top three items exposed to currency risk are overseas cash burn, income statement, and top-line revenues.

Most companies that are active in currency risk management deploy ‘organic’ or natural hedging strategies (i.e. not involving derivatives) including asset-liability matching and raising funds in foreign currencies.

33%

29%

10%

28%

2020 SVB LSHC survey respondents

Clinical trials (pre-commercialization) – seeking FDA approval

Pre-clinical trials – product development

Fully commercialized – history of revenues

Commercialization (going to market) – hiring salespeople

Source: 2020 SVB LSHC Survey, SVB FX Risk Advisory

FX RISK ADVISORY BENCHMARKING SERIES 33. For background on this concept: https://www.svb.com/blogs/ivan-asensio/fx-risk-advisory-why-passive-fx-management-falls-short4. For background on this concept: https://www.svb.com/blogs/ivan-asensio/fx-risk-advisory-is-fx-material-to-your-business

Passive versus active currency management

Active FX management by life cycle stage

31%25%

37%

Pre-clinical trials Clinical trials (pre-commercialization)

Going to market / fullycommercialized

Life cycle stage Source: 2020 SVB LSHC Survey, SVB FX Risk Advisory

Companies in the commercialization stage in the life cycle had the greatest proportion of active versus passive currency management (37% versus 30% for the full sample).

The reason is likely related to scale. As firms start commercializing, they reach a point where refining treasury operations related to foreign exchange, cash management, and investments starts to move the needle and the financial lift from such efforts justifies taking an active, as opposed to a passive, approach.

3 in 10 companies deploy an active approach tocurrency management3, implying that the institution has made a strategic decision to do so.

Active currency management involves identification, analysis and quantification of the potential impact of currency volatility on Financial Planning & Analysis (FP&A). After an institution understands the potential impact and has determined materiality, it can make an informed decision about whether to proceed with hedging.4

In contrast, passive currency management involves transacting currencies only as triggered by operational needs. The cost or windfall of an unexpected rate change is absorbed by the business.

identification quantificationanalysis


Awareness that currency affects business results is high … However, the materiality of the impact is less understood

Although only 3 in 10 companies take an ‘active’ approach to currency management, the level of awareness about the potential impact of currencies on business results is high (mean score of 3.7 out of a max of 5.0). However, measurement of the materiality of the impact is incomplete (mean score of 1.97 out of 5.0).

3.70

1.97

1.00

1.50

2.00

2.50

3.00

3.50

4.00

Awareness - Are you aware of issue? Materiality - How big is the issue?

Mean scores for all respondents on 1 to 5 scale

(1 lowest, 5 highest)


3 in 10


Awareness that currency impacts business results is high … However, the materiality of the impact is less known or understood

0%

10%

20%

30%

40%

50%

60%

Non-USD cashburn

Incomestatement

impact

Revenues Margins,EBITDA, or

EPS

Other

Metrics exposed to FX

EUR48%

GBP18%

CHF11%

CNH6%

CAD5%

AUD4%

JPY3%

MXN2%

Other3%

55% of firms indicated cash burn as an item that is affected by currency impacts; roughly 1 in 5 pointed to the income statement, and 1 in 7 cited corporate revenues. The impact on cash burn is especially important for LSHC companies

In the SVB LSHC client portfolio, there are nine net sellers of USD for every one net buyer of USD. For the 12 months ending October 2020, LSHC clients that trade with Silicon Valley Bank purchased close to $2.4 billion worth of foreign currencies. The top five currencies were the euro, the pound, the Swiss franc, the Chinese renminbi, and the Canadian dollar.

Source: 2020 SVB LSHC Survey, SVB FX, SVB FX Risk Advisory

which remain at the pre-commercialization stage much longer than technology companies do. The absence of revenues magnifies the importance of cash burn as a performance metric.


Reasons the materiality of currency impacts is less known or understood

Not much time spent on FXFX not part of FP&A process

8 of 10 companies do not use FX budget rates5, implying global FP&A projections are made in US dollars and the impact of currency swings is not measured or analyzed.

Nearly 9 of 10 companies spend less than a day per quarter analyzing, managing, and/or explaining FX impacts.


Board level visibility of FX is low

Only 1 in 6 companies reported that FX is ever a topic at board meetings.

20%

80%

88% 11%

1%

73%

16% 0% 10%

Never At some Boardmeetings

At most Boardmeetings

Don't know

Use FX budget rates? Time spent on FX per quarter How often is FX discussed at board meetings?Yes Less than 1 dayNo 1-5 days 5-10 days

5. For background on this concept: https://www.svb.com/blogs/ivan-asensio/use-fx-budget-rates-to-improve-global-fpa

65%

22%

16%

5%


If the currency risk is material enough to be hedged, the strategy deployed may or may not involve derivatives

Hedging strategies deployed by active currency managersBest practice typically is to exhaust all natural organic strategies — such as buying currency in advance of needing it, asset-liability matching, and raising/borrowing in foreign currencies — before deploying a derivatives hedging program.

Buy and hold foreign currency

Asset/liability matching

Use derivatives

Almost 2 in 3 active currency managers buy and hold currency in advance of needing it. Generally speaking, a minimum of six months is required for this strategy to provide value. This approach is becoming increasingly difficult to justify as a result of negative interest rates across Europe and Switzerland.

of active managers use derivatives.

Nearly one in four active currency managers taps into non-USD markets for capital or funding, a testament to the increased globalization of venture activity.

Only

5%

Raise VC money or borrow in foreign currency

Source: 2020 SVB HCLS Survey, SVB FX Risk Advisory


Looking ahead, we expect FX to be a higher priority item for LSHC companies due to the prospects for a weaker USD

Annual % change in US dollar versus trade-weighted currency basket

Source: Federal Reserve (Bloomberg ticker: USTWBROA), SVB FX Risk Advisory

Not paying much attention to FX has paid off, even if by accident.We expect this to change.

USD strength in recent years has benefited companies that are net sellers of the currency, as USD's purchasing power to fund foreign operations improved.

The USD may be headed for a bear cycle, anchored by gridlocked government and US interest rates at the zero lower bound. A dollar bear cycle may represent a new pain point for the LSHC sector.

-15%

-10%

-5%

0%

5%

10%

15%

2002 2005 2008 2011 2014 2017 2020

Good and bad years for the USD generally

cluster together


Summary

Our 2020 benchmark survey has revealed that: Let us help you:

• SVB stands ready to help assist clients better understand, and if appropriate manage, their currency exposure and identified risk.

• SVB has a dedicated team and a robust suite of global payments and foreign exchange solutions to help LSHC clients better deal with their unique challenges.

• Your success is our goal. Contact your SVB FX Advisor or the authors of this report to discuss your situation and how we may be able to help.

Ivan Oscar Asensio, Ph.D.Head of FX Risk Advisory at [email protected]

Peter ComptonHead of FX Life Sciences & Healthcare Practice at [email protected]

SVB’s LSHC clients recognize that they are affected by their foreign currency exposures.

The USD may already have embarked on a multi-year bear cycle, representing a potential new pain point for the LSHC sector.

Some are measuring the impact and materiality of this exposure, and some are implementing programs to manage the exposure — many are not.

mailto:[email protected]:[email protected]

©2020 SVB Financial Group. All rights reserved. Silicon Valley Bank is a member of the FDIC and the Federal Reserve System. Silicon Valley Bank is the California bank subsidiary of SVB Financial Group (Nasdaq: SIVB). SVB, SVB FINANCIAL GROUP, SILICON VALLEY BANK, MAKE NEXT HAPPEN NOW and the chevron device are trademarks of SVB Financial Group, used under license.

This material, including without limitation to the statistical information herein, is provided for informational purposes only. The views expressed in this material are solely those of the authors and do not necessarily reflect the views of SVB Financial Group, Silicon Valley Bank, or any of its affiliates.

The material is based in part on information from third-party sources that we believe to be reliable but which has not been independently verified by us, and, as such, we do not represent the information is accurate or complete. The information should not be viewed as tax, investment, legal or other advice, nor is it to be relied on in making an investment or other decision. You should obtain relevant and specific professional advice before making any investment decision.

Nothing relating to the material should be construed as a solicitation, offer or recommendation to acquire or dispose of any investment, or to engage in any other transaction.

Foreign exchange transactions can be highly risky, and losses may occur in short periods of time if there is an adverse movement of exchange rates. Exchange rates can be highly volatile and are impacted by numerous economic, political and social factors as well as supply and demand and governmental intervention, control and adjustments. Investments in financial instruments carry significant risk, including the possible loss of the principal amount invested. Before entering any foreignexchange transaction, you should obtain advice from your own tax, financial, legal and other advisors and only make investment decisions on the basis of your own objectives, experience and resources. CompID 596246000


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fx risk advisory benchmarking series: currency ......2020/12/03 · fx risk advisory benchmarking...

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