Coronavirus a big pharma headache

The rapidly spreading coronavirus has caused big headaches for the pharmaceutical industry. Supplies of everyday drugs, including paracetamol, are under threat. China, especially Hubei province, the epicentre of the outbreak, is critical to the global pharmaceutical supply chain. Disruptions at Chinese and Indian drugmakers will lead to drug shortages worldwide.

Those are already starting to be felt. Since the outbreak costs of mainstream antibiotics have risen 50% for Indian drugmakers, the world’s biggest exporters of generic drugs. These companies rely on China for more than twothirds of their chemical inputs.

Markets have registered their concern. Share prices of drugmakers Sino Biopharmaceutical, Shanghai Pharmaceutical and China Pharma have plunged in the past few weeks, the latter down as much as 50%. Indian producers such as Cipla, Aurobindo Pharma and Sun Pharma are down more than a tenth. In terms of financial staying power, should supply problems persist, Sino, Cipla and Aurobindo have low net debt relative to cash earnings.

More pain could follow. Global pharma companies, which source materials from India, usually carry inventory buffers of up to two months. That leaves little time to resume normal operations. While parts of China are slowly getting back to work, Hubei remains shut. A shortage of drug ingredients could last for months. The previous stockpiling by European drug suppliers to protect against a disorderly Brexit may well come into use.

For drugmakers, finding alternative suppliers or shipping methods is not a cure-all. Most of the affected drugmakers have little pricing leeway with customers as they operate on fixed supplier contracts. Margins will suffer. Pharma and health-care sectors have long been considered defensive choices. That does not apply during an epidemic. /London, February 25

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