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Coronavirus Spreads Rapidly Worldwide: Medtech Stocks in Focus

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The new strain of coronavirus is spreading rapidly across the world and has recently picked up pace outside China. Per the latest announcement made by World Health Organization (WHO) chief Tedros Adhanom Ghebreyesus, almost eight times as many cases have been reported outside China in the previous 24 hours.

This has dealt a blow to U.S. Medtech stocks, as the country relies heavily on imports from China. Evidently, the Dow Jones U.S. Medical Equipment Index has declined 7.5% since the beginning of this year when China alerted the World Health Organization (WHO) about this virus’ growth.

Coronavirus Impact on Medtech Stocks

Per a report by Business Insider, the United States currently makes up more than 30% of China's medical device and diagnostics imports. This surely reflects the dependence of the United States on China in the Medical sector and the potential of the health emergency to disrupt the global supply chain.

Meanwhile, the death toll has risen to nine in the United States and at least 120 cases of coronavirus have been recorded in more than a dozen states. This has raised the possibility of a coronavirus outbreak in the United States, thereby increasing the probability of an economic downturn. The potential disruption in global supply chain and probable economic crisis must have made investors skeptical about Medtech stocks’ growth, which got reflected in the year-to-date decline in the Medical Equipment Index.

Evidently, shares of some of the largest companies in the medical device sector — Medtronic, Boston Scientific, Becton, Dickinson and Abbott Laboratories — have declined between 9% and 13% on a year-to-date-basis.

Stocks in Focus

Boston Scientific BSX stated on its fourth-quarter earnings call that it expects to face adverse procedure volumes in China and supply chain problems related to the coronavirus. This in turn is projected to impact the company’s first-quarter sales in the range of $10 million to $40 million.

Becton Dickinson BDX mentioned on its first-quarter fiscal 2020 earnings call that it expects to witness a headwind of $20 million to $30 million in fiscal 2020. From a supply chain perspective, the company currently has sufficient inventory of the products that it exports from China to meet current demand. However, considering the rapid spread of the virus, we remain skeptical about the time till it which it can sustain on its current inventory.

Medtronic MDT has multiple manufacturing and research facilities across China, which contribute nearly 7% of its total revenues. This has led the company to estimate that its fiscal fourth-quarter results will be hit by the supply chain disruption and production halt in China.  As the Chinese healthcare system is focused on containing the spread of the virus, hospitals in the country are experiencing a slowdown in medical device procedure rates. Medtronic is witnessing procedure delays.

Much of Abbott LaboratoriesABT manufacturing in China is centered on its nutritional products. China is a significant market for Abbott’s infant formula business, said Debbie Wang, a senior equity analyst at Morningstar. She said Abbott’s overall sales in the first quarter could be soft as a result of the virus. It’s also possible that Abbott, which sells generic drugs outside the United States, could, like other companies selling pharmaceuticals, have a tough time making these drugs as a number of active ingredients for medications come from China, Wang said.

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