Dollar rally doesn't help makers of medical devices.

This year's rally in the dollar is having an adverse impact on locally based medical device makers because they are becoming more expensive for overseas buyers.

The recent gains come after a sharp downturn in the dollar over the past two years. The dollar fell 50 percent from 2002 through 2004 as the trade deficit widened and foreign debt piled up. But with the U.S. dollar strengthening against other foreign currencies, products made here and sold elsewhere become less appealing to those foreign buyers.

"While foreign exchange has benefited many (medical technology companies) over the last several years, it is poised to do a U-turn, dampening revenue growth and--depending on the company's hedging program--potentially dulling earnings per share growth," said Joanne Wuensch, a medical device analyst with New York investment bank Harris Nesbitt & Co.

The dollar's 2005 rise led Wuensch to reduce quarterly revenue estimates for several device companies she covers, including Bausch & Lomb, a rival to Santa Ana-based Advanced Medical Optics Inc. and Lake Forest-based Cooper Cos.; Biomet Inc., which purchased Interpore Cross International, a bone device maker that was based in Irvine; and Boston Scientific Corp., which has invested in several Southern California startups.

Wuensch didn't change her revenue or earnings estimates for either Advanced Medical or Cooper. That's because both companies earlier lowered their earnings guidance based on the strengthening dollar.

The dollar fluctuations are becoming an important issue for companies like Advanced Medical, a maker of eye surgery devices.

"With the recent softness in the euro, there is a concern that all of the benefit that corporate America has been receiving in terms of revenue growth and increased demand could create somewhat slowing revenue growth," said Randy Meier, chief financial officer of Advanced Medical, which does about 70 percent of its business overseas.

In early June, Advanced Medical said it expects to post 2005 sales of $920 million to $930 million, down from an earlier forecast of $955 million.

That guidance "did incorporate some of our thinking about where currencies were going. But we also said that we did not expect that currencies would have a major impact in the second half of this year," Meier said.

Hedging factor

Meier said Advanced Medical has benefited from several acquisitions that gave it manufacturing operations in foreign countries. The benefit: so-called "natural hedging" versus a dollar gain.

In the past few years, Advanced Medical has bought a cataract surgery device unit of Pfizer Inc., laser device maker Visx Inc. and a plant in Spain. The buys allow the company to make devices in Europe for sale there or export to other countries.

"A global company with operations and expenses that are in that local currency, whether it's the euro or the yen, are somewhat naturally hedged against the fluctuations of currency," Meier said.

Companies also use currency hedging to offset risk. They can buy contracts to convert a certain amount of foreign currency at a set U.S. dollar rate in the future. The downside is that the contracts can be expensive. The upside is that the effects of currency moves are limited.

Since Advanced Medical hedges its pretax income, a certain amount of its cash flow is converted to U.S. dollars, depending on currency trends.

Edwards Lifesciences Corp., the Irvine-based cardiovascular device maker, counts a majority of its sales from overseas buyers.

Edwards reported U.S. sales of $119 million and international sales of $139 million in the second quarter. About 47 percent of its international sales came from Europe with 34 percent from Japan.

Edwards took foreign currency issues into account when it issued its 2005 sales and earnings forecasts, said Corinne Lyle, its chief financial officer.

Lyle said the heart device maker's sales are two-thirds hedged with foreign currency contracts, and that it's also protected against foreign exchange issues because it makes products outside the U.S. in local currencies.

Edwards said its second-quarter revenue of $258 million was aided by a $5 million boost because of foreign exchange rates. Hedging helped shield the company from a stronger U.S. dollar. But Edwards also benefited because the dollar's rise hasn't been strong enough to offset the heavy declines of the past few years.

Cooper, meanwhile, counts about 52 percent of its revenue from outside the U.S. More than half of its products, including contact lenses, are made outside the country, primarily at its British plants, said Steve Neal, Cooper's chief financial officer.