Investors would have been happy to see the back of the first calendar quarter of 2020. The broad US stock market S&P 500 index fell by 20%, while the NYSE Arca Pharmaceutical index and NASDAQ Biotech Index both demonstrated some defensive characteristics with only 14% drops. Stock prices are leading indicators of investors’ future expectations and if there is visibility on those expectations early enough, companies may have to pre-announce their results ahead of their scheduled first-quarter earnings dates.
While investors will have looked back on the first quarter of 2020 with disappointment, the financial results of biopharmaceutical companies are not expected to start until Johnson & Johnson’s (J&J’s) scheduled report on 14 April. But towards the end of the first week of the second quarter 2020, product managers, country managers, CFOs and CEOs will already be scrutinizing their revenue lines by product, region and company. At the very least, the full-year financial guidance that was issued at the start of the year is likely to be withdrawn by most pharmaceutical companies.
The initial concern on the effect of the coronavirus outbreak for the pharmaceutical sector was on the supply of active pharmaceutical ingredients (APIs) from China and therefore drug shortages. These issues were highlighted by Mylan NV because China represents a proportion of its global supply chain. The pharmaceutical sector is constantly assessing its supply chain and, on the downside, the number of manufacturing sites have declined over the years as a result of big pharmaceutical mergers. This will have reduced capacity and responsiveness. In the short- to medium-term, however, second source manufacture for APIs are available, even if unvalidated, and more to the point, there is usually API inventory in the supply chain and finished product in the wholesaler channel.
With India banning firstly the export of APIs like acetaminophen (paracetamol) and more recently chloroquine, and then chloroquine’s appearance on the FDA’s drug shortage list, drug supply issues are likely to remain top of mind as long as the coronavirus pandemic lasts. However, with large parts of China in moving into lockdown mid-way through the quarter, end-market demand has become the greatest concern.
No company had included any impact from coronavirus in their full-year 2020 earnings guidance back in February. Now, their assessment will not be whether there will be an impact, but how big the impact will be.
More than 20% of AstraZeneca PLC’s 2019 revenues were generated in China and with much of Hubei province going into lockdown from 23 January, this could have resulted in a significant drop in demand. However, on the positive side, pharmacies remained open in all countries with lockdowns and the manufacture and supply of pharmaceuticals are designated as essential work. The official number of coronavirus-related infections and deaths in China would tend to discount a material effect to AstraZeneca’s first-quarter 2020 financial results.
AstraZeneca’s revenue exposure to China is the largest of all the big pharmaceutical companies that segment revenues from China separately. Among other big pharmaceutical companies that disclose their sales in China, Pfizer Inc. generated 9% of its 2019 revenues there, and Merck & Co. Inc. and Sanofi each generated 7%. Less visibly, 19% of J&J’s 2019 revenues were classified as coming from Asia-Pacific and Africa, which may include a large component from China. So, unless J&J or AstraZeneca pre-announce their first-quarter 2020 revenues because of a material shortfall in Chinese demand, the sector may have largely escaped unscathed the effect of coronavirus on revenues in the first quarter.
However, since early March, coronavirus has been a global pandemic and by extension, the focus of the first-quarter 2020 earnings season may not be on the demand from China, but those pharmaceutical markets on lockdown. In what investors might have seen as a positive attribute earlier on in the year, AbbVie Inc. generated all of its revenues 2019 revenues from the US and Europe – two continents that are now largely under lockdown. Of those companies that include Europe in their geographic segmentation of revenues (rather than including it in either International, or Rest of World), Bristol-Myers Squibb Co., Novartis AG and Eli Lilly & Co. generated 83%, 72% and 71%, respectively, of their 2019 revenues from Europe and the US combined.
The biggest driver of uncertainty for the 2020 earnings of pharmaceutical companies may be the percentage of revenues generated by the US. In single payer markets like Italy, Spain, Germany and the UK, the cost of the coronavirus pandemic, and, down the line, the cost of preventive vaccination, is born by public nationalized healthcare systems. This is not the case in the US where AbbVie, BMS and J&J have the largest exposures to an economy that over the last two weeks of the quarter reported a 7 million person increase in unemployment. The logistics of 7 million or more people moving from private healthcare (which disappears quickly on unemployment) to the US Medicaid system (for the disabled and unemployed) is unprecedented and seem likely to delay demand. The costs for US health insurance companies for those remaining employed, but with a coronavirus infection, are likely to be passed on in higher future premiums. In addition, being a largely private healthcare market, US hospitals have been reported on social media to have cut physicians’ salaries because the they are not billing for elective or routine procedures that comprise most of their profit.
Medical device company Smith & Nephew PLC recently withdrew its month-old full-year 2020 financial guidance as a result of the drop-off in elective surgical procedures as hospitals reassess their workflows during the coronavirus pandemic. Similar guidance withdrawals are likely to punctuate the first-quarter 2020 earnings season for pharmaceutical companies. Reductions in elective surgical procedures for solid tumor removal and then oncology drug prescriptions are likely to follow this trend and the ramifications for the health of global populations are likely to be affected for some time.
Andy Smith gives an analyst and former investor's view on life science companies. He joined the independent research house Equity Development in October 2019 having previously been an analyst at Edison group and a Senior Principal in ICON PLC’s Commercialization, Pricing and Market Access consulting practice. Smith has been the lead fund manager for four life science–specific funds, including 3i Bioscience, International Biotechnology and the AXA Framlington Biotech Fund. He was awarded the techMark Technology Fund Manager of the year for 2007 and was a global product manager at SmithKline Beecham Pharmaceuticals until 2000.