Spread of the coronavirus in China and beyond would have mixed credit implications for U.S. healthcare companies, Moody's Investors Service said in a new report.
While the outbreak could negatively affect U.S.-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 as well as certain drugs.
"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."
WHAT'S THE IMPACT
China is an important market for the innovative treatments of U.S. 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. But some makers of branded drugs are testing medications to treat the virus, which, if effective, could provide some upside.
Conversely, many U.S. 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 U.S. hospitals, Moody's says that if the coronavirus were to spread widely in the U.S., 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 U.S. 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 the coronavirus is likely to temporarily curb demand for many other medical and research products, leading to slower growth for these companies.
THE LARGER TREND
To date, the number of deaths linked to the coronavirus has risen to about 1,100, with 45,000 people infected worldwide, the majority of those in mainland China, according to CNN. To prevent spread of the disease in the U.S., the Department of Health and Human Services and the Centers for Medicare and Medicaid Services has issued requirements and safety standards to U.S. healthcare providers and state survey agencies that inspect provider facilities.
CMS wants to ensure compliance with current standards so that healthcare facilities and clinical laboratories are prepared to respond to the threat. Every Medicare-participating facility in the nation's healthcare system must adhere to standards for infection prevention and control, CMS said.