How do you solve a problem like Maria?
In search of efficiency savings, Convatec has spent the past year or so moving the manufacturing of its advanced wound care and ostomy care products, which make up around 60% of its sales, from the US to the Dominican Republic. The strategy seems to have backfired, with delays in obtaining regulatory certification affecting supply and fulfilment of backorders.
And then the hurricanes came. The disruption of power supply and shipping lanes in the Caribbean caused by hurricanes Irma and Maria on top of the earlier problems has forced Convatec to issue a profit warning; its shares crashed 28% yesterday. And it is not the only company affected by the extreme weather.
Convatec cut its guidance for 2017 organic revenue growth from more than 4% to 1-2%, wiping out the expected benefits from the margin improvement programme that called for the relocation to the Dominican Republic in the first place. Working off the company’s 2016 turnover of $1.7bn, this means a likely reduction in 2017 sales of around $40m, though this could be mitigated by inorganic growth from Convatec’s purchase of Eurotec in January.
A particularly bad hurricane season – as well as the earthquake in Mexico and wildfires in California – has cut into many medtech and biotech companies’ expected sales.
Medtronic said its non-GAAP net earnings would be hit by up to $250m in 2018’s fiscal second quarter ending October 27, after four facilities in Puerto Rico were damaged by hurricane Maria. This equates to around 3.7% of expected quarterly sales, according to Morgan Stanley analysts. Effects beyond the second quarter were hard to predict, the company added.
Quest Diagnostics was affected to a lesser degree, saying it expected its third-quarter revenues to be down 1.5% owing to operations in Florida and Texas being hit by Irma and Harvey. The company also put part of the blame on the earthquake in Mexico. Quest expects full-year 2017 revenues of around $7.7bn.
The orthopaedics company Exactech also had to adjust its guidance for the third quarter as a result of hurricanes Harvey and Irma. It said that, though its facilities were undamaged, $1.2m would be wiped off its expected third-quarter sales across Florida, Texas, Georgia and the Carolinas as surgeons in the affected states postponed operations. Its worldwide third-quarter revenues will now come in at around $61.4m.
Puerto Rico is a major manufacturing site for pharmaceuticals, as well as medical devices. Prescription drugs were Puerto Rico’s largest export last year, comprising 72% of the island’s exports and worth $14.5bn.
Naturally several big pharma companies have facilities on the island, including Pfizer, Bristol-Myers Squibb and Lilly. But if these groups expect future earnings to be affected by Maria or any other natural disasters they are not saying.
Baxter said three sites in Puerto Rico had sustained minimal structural damage from hurricane Maria, and production had been interrupted for up to a week. Two of Pfizer’s three sites and one of Bristol-Myers’s three had been hit. But none of these companies was willing to put a figure on the possible impact of the storms on the top line.
Analysts were no more willing to make a concrete call. Leerink said yesterday that fluctuations in the demand for drugs could be substantial in hurricanes, particularly when densely populated areas suffered power cuts and damaged transport infrastructure. “This effect could certainly contribute to some softness in reported domestic sales for the quarter, which may result in somewhat soft results in the period,” the analysts wrote.
Companies with significant sales from non-US markets, however, ought to see favourable exchange rates that would be more than enough to offset the hurricane effects on domestic sales, they wrote.
It is not clear that medtech companies will be worse affected than pharma groups by the 2017 hurricane season. But they do seem to have been more open about the potential consequences.