Pandemic’s effect expected to vary by sub-sector
New York, NY (May 13, 2020) – The outbreak of COVID-19 is both benefiting and challenging the U.S. healthcare industry in ways that will continue to evolve in the coming quarters, according to the Global Healthcare team at Mitsubishi UFJ Financial Group (MUFG).
The team issued its perspective on the heels of a wave of first-quarter earnings reports published by major U.S. pharmaceutical companies.
The industry’s position as a defensive sector
“From a macroeconomic perspective, healthcare is considered a defensive sector because it is comparatively non-cyclical: It offers products and services that consumers need and continue to consume in most economic environments,” says Andreas Dirnagl, MUFG’s Global Head of Healthcare Research at MUFG.
Amid the public health crisis triggered by COVID-19, Mr. Dirnagl notes the main reasons why healthcare has come back into favor among investors. “Naturally, there’s intense interest in healthcare as a source of treatment and of potential cure for the disease,” he says. “Healthcare as a whole is also viewed as a bastion of financial resilience relative to other industries that are suffering because of social distancing—and that will likely continue to suffer in a recessionary environment. These industries include tourism and hospitality, airlines, capital goods, and other industries fueled by discretionary spending and susceptible to economic downturns.”
However, when examined more granularly, “the healthcare industry itself is diverse and will be affected in uneven ways by the pandemic,” Mr. Dirnagl notes.
The financial effect of the pandemic by sub-sector
Mr. Dirnagl specifies the anticipated financial consequences of the pandemic for the healthcare industry’s main sub-sectors:
The effect on the pharmaceutical supply chain
Mr. Dirnagl expects the pandemic to have a lasting effect on the supply chain of pharmaceutical companies.
“This pandemic has exposed how dependent the United States is on countries like China for the material sourcing and manufacturing of active pharmaceutical ingredients, or APIs, which are the building blocks of drugs,” he says. “It should prompt a reassessment of supply-chain vulnerabilities and lead companies to establish workarounds to reduce their reliance on offshore outsourcing and minimize risks.”
The effect on M&A
Mr. Dirnagl expects most merger and acquisition (M&A) activity to be put on hold until companies are able to reassess their financial prospects once the pandemic subsides. “At the onset of COVID-19, healthcare companies emphasized the preservation of liquidity,” he says. “I believe that emphasis will continue so long as uncertainty remains about the economy and consumer behavior. Once the immediate impact of the pandemic subsides, we expect strategic, opportunistic and ‘tuck-in’ acquisitions to be the core of M&A activity in 2020. Healthcare companies are taking a hard look at their portfolios and will be seeking to trim or add to them.”
The effect on pharmaceutical public relations
Mr. Dirnagl notes the negative reputation that pharmaceutical companies have had to contend with in recent years until the pandemic hit.
“The perceived steady increase in drug prices and the images of CEOs being summoned to testify in front of congressional committees about it fueled a negative perception of those companies as greedy at the expense of public health,” he said, “but COVID-19 has allowed for image rehabilitation. The public now looks to pharma as the solution. This favorable change in attitude was only amplified when manufacturers decided to donate hydroxychloroquine as an experimental cure for the disease, forfeit some profits, and demonstrate that they were being socially responsible.”
Mr. Dirnagl adds that pharmaceutical companies without consumer-product divisions or blockbuster drugs had been relatively obscure until the pandemic brought them to light and enhanced their public relations. “For example, Gilead Sciences was likely not a household name until everyone started talking about its drug remdesivir as a possible treatment for COVID-19,” he says.
The prospect of a vaccine
As the search for a vaccine to inoculate the world’s population continues, Mr. Dirnagl emphasizes the risk/reward endeavor it entails for pharmaceutical companies.
“It’s a business of dichotomous outcomes in that the result is binary: Either you manage to synthesize an effective, commercializable drug following a tremendous financial undertaking of research and development—or you don’t,” he says. “It’s the kind of risk/reward profile that pharma companies and their investors must assume and be comfortable with in the process.”
Mr. Dirnagl adds that a successful vaccine would face monumental global demand in the form of hundreds of millions—and perhaps billions—of doses. “Given its odds of success, the pursuit of a COVID-19 vaccine can’t be a foundational, long-term business strategy of a company,” he says, “but if the opportunity presents itself for an established company to try, the financial benefit could be enormous.”
MUFG is the world’s largest publicly traded financial institution and fifth-largest by assets, with approximately $2.9 trillion. Its U.S. Healthcare Banking team is based in New York and comprises 12 bankers serving more than 100 large and middle-market corporate clients throughout the country.
About MUFG Americas Holdings Corporation
The U.S. operations of Mitsubishi UFJ Financial Group, Inc. (MUFG), one of the world’s leading financial groups, has total assets of $341.4 billion at December 31, 2019. As part of that total, MUFG Americas Holdings Corporation (MUAH), a financial holding company, bank holding company and intermediate holding company, has total assets of $170.8 billion at December 31, 2019. MUAH’s main subsidiaries are MUFG Union Bank, N.A. and MUFG Securities Americas Inc. MUFG Union Bank, N.A. provides a wide range of financial services to consumers, small businesses, middle-market companies, and major corporations. As of December 31, 2019, MUFG Union Bank, N.A. operated 349 branches, consisting primarily of retail banking branches in the West Coast states, along with commercial branches in Texas, Illinois, New York and Georgia. MUFG Securities Americas Inc. is a registered securities broker-dealer which engages in capital markets origination transactions, domestic and foreign debt and equities securities transactions, private placements, collateralized financings, and securities borrowing and lending transactions. MUAH is owned by MUFG Bank, Ltd. and Mitsubishi UFJ Financial Group, Inc. MUFG Bank, Ltd., a wholly owned subsidiary of Mitsubishi UFJ Financial Group, Inc., has offices in Argentina, Brazil, Chile, Colombia, Peru, Mexico, and Canada.
Mitsubishi UFJ Financial Group, Inc. (MUFG) is one of the world’s leading financial groups. Headquartered in Tokyo and with more than 360 years of history, MUFG has a global network with over 2,700 locations in more than 50 countries. The Group has over 180,000 employees and offers services including commercial banking, trust banking, securities, credit cards, consumer finance, asset management, and leasing. The Group aims to “be the world’s most trusted financial group” through close collaboration among our operating companies and flexibly respond to all of the financial needs of our customers, serving society, and fostering shared and sustainable growth for a better world. MUFG’s shares trade on the Tokyo, Nagoya, and New York stock exchanges. For more information, visit https://www.mufg.jp/english.