Face Value
Though the weakened U.S. dollar spells bad news for most Canadian companies, some stand to benefit
by Christopher Gulka
Even though consumers are enjoying the lofty Canadian dollar, all is not as good as it seems. Those who invested in United States equities may have thought their portfolios were performing well, until they convert the share prices back to Canadian dollars. The investment, in some cases, could actually be in a loss position even if the share prices did go up.
Canadian exporters that sell the bulk of their products or services stateside in U.S. dollars especially feel the hit, since they now receive less money for their goods. Their gross margins and profits are reduced significantly, affecting future stock prices. Even if these exporters are able to sell in Canadian dollars, they will not likely benefit because their prices are less competitive.
The oil and gas industry has also been negatively affected by the strong Canadian dollar. Since crude oil prices are denominated in U.S. currency, the increase in oil prices from $30 US per barrel in 2002 to $80 US in 2007 is much more modest when denominated in Canadian dollars; over the same period the U.S. dollar has depreciated approximately 50% against the loonie. Canadian mining producers are hurt in the same way, as commodity prices are also denominated in U.S. currency but their costs are mostly in Canadian dollars. The result is that profit margins are significantly eroded, and in a few cases, some mining projects have become uneconomical.
The question then arises, what companies or industry sectors can benefit from the rise in the Canadian dollar? Basically, companies that have significant expenditures in the U.S. will benefit since the costs they incur will now be relatively low. Oil and mining companies that explore in the U.S. will save money. Technology and biotech companies that complete research and development in the U.S. can look forward to improved balance sheets. In short, any company fortunate enough to have costs in American dollars and revenues in Canadian dollars will benefit. The following are a few Alberta based companies that could benefit from the increase in the Canadian dollar.
BIOMS MEDICAL CORP. (MS:TSX $2.45) is a biotech company engaged in the development and commercialization of novel therapeutic technologies with emphasis on the treatment of multiple sclerosis (MS). BioMS is currently conducting three late-stage clinical trials for the treatment of multiple sclerosis. The pivotal Phase III clinical trial in the U.S. will be evaluating one of its key products, MBP8298, for the treatment of secondary progressive multiple sclerosis. Phase III clinical trials typically cost millions of dollars, thus with the depressed U.S. dollar, the cost savings to BioMS are significant.
ISOTECHNIKA INC. (ISA:TSX $0.75) is an international biopharmaceutical company dedicated to the discovery, development and commercialization of immunosuppressive therapeutics for the treatment of autoimmune diseases and for use in the prevention of organ rejection in transplantation. Recently Isotechnika announced that it had received permission from the U.S. Food and Drug Administration (FDA) for the long-term use of ISA247 in patients currently participating in its Phase 2b kidney transplant trial. Forty-two centres across North America have been contracted to perform the trial, including 38 in the U.S. and four in Canada. The weaker U.S. dollar could produce cost savings for the company, yet the stock trades at its 52-week low of 75 cents.
ONCOLYTICS BIOTECH INC. (ONC:TSX $2.25) focuses on the discovery and development of pharmaceutical products for the treatment of a wide variety of human cancers. Oncolytics has completed six clinical trials with its lead product, Reolysin, in Canada, the United Kingdom and the U.S., and is currently conducting seven Phase I or Phase II Reolysin trials in the U.K. and the U.S. Patient enrolment has commenced in Oncolytics’ U.S. Phase II trial to evaluate the intravenous administration of Reolysin in patients with various sarcomas that have metastasized to the lung. Significant cost savings will be incurred for these U.S. trials on a Canadian-dollar basis, which should result in less dilution for shareholders.
Christopher Gulka, CA, CFA is the Prairie Trader. He is an avid investor, sometime day trader, and owner of Working Capital Corporation.
Prairie Trader is an independent overview and assessment of Alberta-based companies in the public markets that have investment potential. The author declares that he has no investment or business interest in any of the recommended companies described herein. Alberta Venture assumes no responsibility for the accuracy of any stock recommendations. You can reach Gulka atfeedback@albertaventure.com.
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