COVID-19: A Material Disruptor

Regular PharmaBoardroom contributor David Crean looks at how the ongoing global coronavirus outbreak has impacted the global economy, how the biopharmaceutical industry is responding, and what the longer-term consequences of the crisis and responses to it will be.

The latest disruptor to global health and the economy is the ongoing outbreak of the respiratory disease called Coronavirus Disease 2019 (Covid-19) which is caused by a virus coined SARS-CoV2. The virus has demonstrated the capability to rapidly spread, leading to significant impact on health care systems and causing societal disruption. Viral infection can cause mild to severe respiratory illness, and symptoms can include fever, cough and shortness of breath. Covid-19 was recognized in December 2019 (Fauchi et al, 2020) and researchers provide a detailed clinical and epidemiologic description of the first 425 cases reported in the epicenter of the outbreak: the city of Wuhan in Hubei province, China (Li et al, 2020). Recently, the World Health Organization (WHO) said the global risk of the virus spreading is now very high. The outbreak has posed challenges for the public health, biopharmaceutical research, and medical communities.

WHO and the Centers for Disease Control and Prevention (CDC) continue to monitor and report the increasing number of confirmed cases of Covid-19 and deaths in China and elsewhere.  In the U.S., there are now 72 cases of coronavirus and a death toll of nine as of the date for this writing. Worldwide, the death toll is almost 3,000. The first death in the U.S. attributed to Covid-19 was disclosed on February 29, 2020. Within hours the U.S. federal government and the biopharmaceutical industry announced new responses to the outbreak.

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Impact on the Global Economy

The Covid-19 fears have reverberated across the global economy not just in the epicenter of China. The stock market in the U.S. took its biggest hit in the final week of February 2020 since the 2008 financial crisis. China, the U.S., and several other countries have instituted restrictions on travel to try and contain the spread of the disease within China and throughout the rest of the world. Several weeks ago, Wall Street had only tepid concerns about disruptions to global supply chains.  It has now blossomed into deeper worries about the possibility that millions of people around the world may have to cut back on critical spending such as shopping, travel and eatin gout at restaurants to avoid picking up the virus. Wall Street despises uncertainty and in such situations, it has made it difficult for experts to predict the damage to the economy at this point.

We see signs that American consumers, who drive the economy, are becoming increasingly uneasy and fearful. Such fears do not bode well for a modern economy and stock market that depend on optimism and a willingness to spend.

It was an awful period of time in the last week of February for markets around the globe. The Dow Jones plummeted 12%. The S&P 500 has its worst week since 2008 falling to about 11.5% decline. It was the worst weekly decline for stocks since the 2008 financial crisis. The sell-off was fueled mostly by worry that measures to contain the virus would hamper corporate profits and economic growth, and fears that the outbreak could get worse. The selling has in a matter of days dragged stock benchmarks around the world into a correction. In Europe, Britain’s FTSE 100 fell more than 3% and the Dax in Germany fell more than 4%. In Asia, the Nikkei 225 in Japan closed down 3.7%, the KOSPI in South Korea dropped 3.3%, and the Shanghai Composite in China dropped 3.7%.

In previous financial shocks, Federal Reserve Banks (“Fed”) have moved in to stem investor fears.  However, in this case, it is believed that any Fed moves may not stem the damage. Most economists believe that the Great Recession of 2008 and 2009 was largely a “demand shock,” as banks neared collapse, home prices plunged and trillions of dollars in household wealth were wiped out. People and businesses suddenly had less money to spend, tipping the economy into a deep recession. The virus threat of 2020 appears to be a “supply shock” — one that stems from a sudden slowdown in economic activity as China struggles to get back to work and as crucial industries come under strain against a backdrop of travel restrictions, not going out to social gatherings, and schools closing temporarily (e.g., Japan).

The Biopharmaceutical Response to Covid-19

Covid-19 is truly causing material disruption across the globe and is a stark reminder of the ongoing challenge of emerging and reemerging infectious pathogens and the need for constant surveillance, prompt diagnosis, and robust research to understand the basic biology of new organisms and our susceptibilities to them, as well as to develop effective countermeasures. The “pandemic” has incentivized the development of novel coronavirus vaccines across the biopharmaceutical industry and research organizations such as the National Institutes of Health (NIH). The first Covid-19 vaccine in China is expected to be ready for clinical trials by the end of April, according to Xu Nanping, China’s vice-minister of science and technology. The National Medical Products Administration of China has approved the use of Favilavir, an anti-viral drug, as a treatment for coronavirus.

As part of the U.S. Food and Drug Administration’s (FDA) ongoing and aggressive commitment to address the coronavirus outbreak, the FDA has also issued a new policy for certain laboratories seeking to develop diagnostic tests for coronavirus in order to achieve more rapid testing capacity in the United States. The guidance describes a policy enabling laboratories to immediately use tests they developed and validated in order to achieve more rapid testing capacity. To effectively respond to the Covid-19 outbreak, rapid detection of cases and contacts, appropriate clinical management and infection control, and implementation of community mitigation efforts are critical.

There are no specific therapeutics approved by the FDA to treat people with Covid-19. A robust research effort is currently under way to develop a vaccine against Covid-19.  Critical to moving the field forward, even in the context of an outbreak, is ensuring that investigational products are evaluated in scientifically and ethically sound studies. Below is a list of the various coronavirus drugs and approaches that biopharmaceutical companies across the world are developing that have the potential to become major coronavirus vaccines or antivirals for treating the contagious coronavirus infection.

The FDA is continuing ongoing efforts on a multi-pronged approach to this public health emergency, including focusing on actively facilitating efforts to diagnose, treat and prevent the disease; surveilling the medical product supply chain for potential shortages or disruptions and helping to mitigate such impacts, and leveraging the full breadth of public health tools, including enforcement tools to stop fraudulent activity as we oversee the safety and quality of FDA-regulated products for American patients and consumers.

There is a risk and potential for disruption in the pharmaceutical and life sciences supply chain. The vast majority of the critical ingredients needed to manufacture drugs on which many consumers and manufacturing companies rely are produced in China.  China is the largest exporter of vitamins and antibiotic raw materials in today’s economy. The U.S. pharmaceutical supply chain depends upon Chinese manufacturers. At this point, there is no information available to the public about the proportion of critical medications which originate in China and the specific locations of the manufacturing facilities.

Another matter of concern is the ability of the FDA to oversee the $13 billion-worth of prescription drugs, medical devices and food products that are exported from China.

Fears have been raised about the FDA’s ability to monitor and help ensure compliance with good manufacturing standards.  There are also concerns regarding supply and demand needs in the United States, especially when the increased demand of China is included. From a medical device standpoint, there are 11,529 class II and class III medical device manufacturers in China, primarily in four geographic areas.  Each has experienced incidents of the coronavirus outbreak.  Life science industry experts anticipate that most of the 11,000+ manufacturing companies are or will be affected as employees will effectively be placed on leave due to quarantines, preventing any production of medical devices.

Forward-Looking Impact

The situation worldwide is still evolving, it’s too early to make even a rough estimate of the exact overall cost to the global economy due to viral exposure.  Even assuming that the outbreak eases soon and these negative demand and supply shocks fade, the near-term damage to China and spillovers to the rest of the world will likely be significant. Companies have already started to slash their growth projection for 1Q20. Like SARS, the pandemic will affect the demand side by changing consumption patterns. Fear and uncertainty may lead people to rush to purchase daily necessities and other goods, which is facilitated by e-commerce, now a major driver of China’s retail industry. Unlike SARS, a coronavirus pandemic is also going to cause shocks on the supply side due to higher level of absenteeism and much greater reliance of manufacturers around the world on Chinese-made supply chain components. Normal business operations would be significantly affected as a large percentage of workers get sick, become scared to go to work, or cannot return to work because of government containment measures.

Final Thoughts

There remains huge uncertainty about how widely the virus will spread and how much damage it will do. Financial markets accustomed to optimism may be all the more vulnerable if the virus becomes a global pandemic that causes meaningful pullback of commerce across major economies. Even after the sell-off during the final week in February, financial markets remain richly valued by historical standards. No doubt that Covid-19 is hurting service industries as well. If administrations in major world economies start shutting down facilities where large numbers of their people congregate, the damage could prove painful.

From a priority standpoint, what we need is safe and effective treatments to combat the viral infection.  Limiting further infection will undoubtedly help collective efforts by all.  Infected people need treatment. Let’s do our part in supporting the efforts of the biopharmaceutical industry to find effective treatments.  Moves offered up by the Fed won’t make a sick person well or give public health authorities confidence that businesses can reopen. All they can do is lower borrowing costs and help encourage businesses and consumers to spend and push financial market prices higher. Economists don’t make good epidemiologists or medical health professionals. In this case, the science of epidemics and the policy choices that countries make to try to address challenges the Covid-19 virus has presented, will shape the economy for the near future.

Disclosure

David H. Crean, Ph.D., is a Managing Director for Objective Capital Partners, a leading investment banking advisory firm whose Principals have collectively engaged in more than 500 successful transactions serving the transaction needs of growth stage and mid-size companies. Services include M&A sale transactions, partnering/ licensing, equity and debt capital raises, valuation and comprehensive advisory services. Additional information on Objective Capital Partners is available at www.objectivecp.com.

This article is provided for informational purposes only and does not constitute an offer, invitation or recommendation to buy, sell, subscribe for or issue any securities. Securities and investment banking services are offered through BA Securities, LLC Member FINRA, SIPC. David H. Crean is a Registered Representative for BA Securities. Objective Capital Partners and BA Securities are separate and unaffiliated entities. While the information provided herein is believed to be accurate and reliable, Objective Capital Partners and BA Securities, LLC makes no representations or warranties, expressed or implied, as to the accuracy or completeness of such information. All information contained herein is preliminary, limited and subject to completion, correction or amendment. It should not be construed as investment, legal, or tax advice and may not be reproduced or distributed to any person.