The pharmaceutical and medical device sectors slipped along with global markets Feb. 28 as concerns about the coronavirus outbreak dragged down stocks.
Several of the largest pharmaceutical and biotech companies in the world have lost ground since the beginning of the year. Shares of Merck & Co. Inc. and Pfizer Inc. have fallen more than 8% since Jan. 1, Eli Lilly and Co. and Alexion Pharmaceuticals Inc. stocks have dipped more than 7% and Johnson & Johnson's more than 6%.
During the same period — from Jan. 1 to close of business Feb. 27 — the S&P 500 index fell 7.7%.
The medical device sector dropped even more than biopharma with shares of the largest companies — including Medtronic PLC, Becton Dickinson and Co., Boston Scientific Corp. and Abbott Laboratories — slipping between 9% and 13%.
WedBush analyst Liana Moussatos broadly attributed the downturn to the outbreak of the coronavirus in an email to S&P Global Market Intelligence. The market panic is likely to subside when the outbreak goes through the initial pandemic process and becomes part of the background of viral diseases like influenza, Moussatos said.
"Right now, we don't know how widespread and destructive it will eventually be. Once the cycle looks like it's coming to an end, the markets are likely to calm down," Moussatos added.
More than 83,300 people have been infected by the virus, which causes a respiratory disease known as COVID-19, and nearly 2,900 have died, according to a tracker from Johns Hopkins University's Center for Systems Science and Engineering.
Executives from Medtronic, Becton Dickinson and Boston Scientific said during fourth-quarter earnings calls that the epidemic would likely cost them in the long run.
SVB Leerink analyst Richard Newitter said in an interview Feb. 28 that medical device companies doing business in China should expect impacts "well beyond elective procedures."
"The regions in China that have been affected have essentially been on lockdown, and that influences and effects any and all traffic into hospitals and into other sites of service," Newitter said. "This is going to be a pretty wide-reaching impact to all medical device companies that sell any kind of product into hospitals or, for that matter, elective procedure type settings."
Medical device companies operating in China could see supply chain disruptions, but the predominant impact will come from the demand for products, Newitter said, noting that the drop in stock prices over the past week is happening across the entire market and is not specific to med-tech.
Mizuho analyst Vamil Divan agreed in an interview that the volatility seen among biopharma companies Feb. 28 is mostly related to the broader market reaction to COVID-19.
"To some extent, it's just business as usual," Divan said. "There's not much that the companies can do until this clears whenever that might be."
'Fundamentals are going to prevail'
Generic-drug maker Mylan NV also pointed to the potential for a broad impact from the virus outbreak.
Cowen analyst Steve Scala said in a Feb. 28 note, however, that many pharmaceutical companies likely would not feel the full effects of the virus's impact on sales because of their limited exposure to Chinese markets.
"All appear prepared from the raw material and finished product standpoint to sustain disruption for at least several months," Scala said.
Instinet biotech analyst Christopher Marai said the impacts have not yet been felt and that, for smaller biotechs, policies to help correct the market could be a positive.
"The ramifications of, for instance, disruptions to the supply chains in China have not yet materialized in everybody's models," Marai said. "With respect to biotech short term, it probably does follow that same trajectory through the broader markets, but one might expect if there's any monetary policy that's supportive of markets, like rate cuts, that tends to be very supportive of the biotech space because these companies require substantial capital to support operations."
Les Funtleyder, E-Squared healthcare portfolio manager, said his firm has an optimistic view of the market despite a lack of quantifiable data to create epidemiological models. Although the market is going down, it is still doing so in a more or less predictable way, he said.
"Basically, the market is acting rationally," Funtleyder said. "I'm looking to see, is it orderly? Yes, it's going down, but it's downward ticking. When it becomes disorderly and you don't know what price you're going to get at a given time, that's when you have a problem."
Funtleyder said the conditions in the pharmaceutical and biotech sectors are still favorable under the surface.
"Ultimately, the fundamentals are going to prevail," Funtleyder said. "There are some good things happening in the sector — we're still more likely to be buyers than sellers, and we're just quantifying the macro risks."