While the primary is focus on the human risk, market is leery of reverberations
– Generic drug companies source many ingredients from China, raising the risk of supply chain disruptions
– US hospitals would benefit from spike in patient volumes, but margins would be squeezed
– Shortages of China-made components for medical devices could disrupt supply just as demand begins to spike
New York, February 12, 2020 — Spread of the coronavirus in China and beyond would have mixed credit implications for US healthcare companies, Moody’s Investors Service says in a new report. While the outbreak could negatively affect US-based medical device and pharmaceutical companies that manufacture or source products in China, it could also ultimately increase demand for hospital services, medical products and devices and certain drugs.
Risk of Contagion Affecting Economic Activity
“While the primary impact is on human health, the risk of contagion is affecting economic activity and financial markets,” said Moody’s associate managing director, Jessica Gladstone. “The immediate and most significant economic impact is in China but will reverberate globally, given the importance of China in global growth as well as in global company revenue.”
China is an important market for the innovative treatments of US makers of branded pharmaceuticals, though most don’t source ingredients in China. To the extent that the Chinese economy slows or healthcare resources are diverted to the coronavirus, growth in other pharmaceutical categories could decelerate. However, some makers of branded drugs are testing medications to treat the virus, which, if effective, could provide some upside.
Conversely, many US manufacturers of generic drugs do source ingredients in China, and supply could be significantly impaired if manufacturing facilities are affected. Although most facilities are far from the epicenter of the virus, given how quickly it is spreading, contagion to the pharmaceutical manufacturing hubs can’t be ruled out. And shortages of ingredients could cause the prices of certain drugs to rise rapidly as demand outstrips supply.
With respect to US hospitals, Moody’s says that if the coronavirus were to spread widely in the US, demand for services would increase, but so would costs. Hospitals would likely need to supplement staff with expensive contract labor and cancel more profitable procedures such as orthopedic surgeries.
Many US medical device makers, meanwhile, depend on China for components such as memory chips. If the outbreak isn’t quickly contained, shortages of such items could lead to supply chain disruptions just as demand begins to spike. At the same time, China is an important market for many device and life sciences companies due to its growing population and investments in healthcare and innovation. Focus on coronavirus is likely to temporarily curb demand for many other medical and research products, leading to slower growth for these companies.