Pharma giants entering the testing fray

But elective surgeries have been postponed – spelling trouble for Smith & Nephew

April 8, 2020

“We did not start this crisis with a large diagnostics industry. But that doesn’t mean that we can’t build one.” These were the words of health secretary Matt Hancock on 2 April, as he outlined a five-point plan to help the UK reach 100,000 coronavirus tests per day by the end of the month. Britain’s pharmaceutical giants such as GlaxoSmithKline (GSK) and AstraZeneca (AZN) “have no great history” in this area, Mr Hancock conceded. However, these companies are now working with the country’s smaller diagnostics entities to build a new sector “at scale”.

By the sound of things, GSK and Astra have a busy few weeks ahead of them – albeit other projects and research programmes may well have been put on the backburner anyway, with social distancing measures in place and more pressing scientific matters on the agenda.

In any case, GSK is not only stepping in to help on the testing front. The group has also entered into a research partnership with China-based Clover Biopharmaceuticals to work on the latter’s coronavirus vaccine candidate – whereby GSK is giving Clover access to its pandemic adjuvant system, which enhances the body’s immune response to an antigen.

Guidance not updated in recent weeks

GSK last updated the market on earnings in early February – stating within its full-year results that it expected adjusted EPS for 2020 to decline by 1 to 4 per cent. Notably, the group added that this guidance excluded any material divestments beyond those previously announced, and any potential impact on its business from the coronavirus outbreak. Similarly, while Astra’s numbers – released on Valentine’s Day – assumed an unfavourable impact from China lasting up to a few months, they did not capture the escalation of events that has taken place since then.

It follows that we cannot rule out revisions to either group’s guidance. But both arguably look well placed as things stand – at the forefront of fighting the raging pandemic.

Elective surgeries postponed

It is a different story for Smith & Nephew (SN.), which specialises in advanced wound management, orthopaedics and trauma, and sports medicine. A large proportion of what the group does is elective procedures – and in the countries most affected by coronavirus, all but the most urgent surgeries have been cancelled. In its guidance on 20 February, Smith had assumed a normalisation of the ovid-19 outbreak early in the second quarter. But it has since withdrawn this expectation, because of the rapid expansion of the virus beyond China.

Even in China, where elective procedures have restarted, these are still well below pre-outbreak levels. It follows that Smith & Nephew will not update its 2020 guidance until the effects of the virus become clearer. Like so many companies across multiple industries, it simply cannot say for certain how long the situation will last, and what the timing of the catch up will be in the aftermath.

The group has taken steps to save costs such as travel, advertising and promotions, has frozen all but crucial hires and is slowing some capital expenditure. Offering some reassurance, it also highlighted its access to significant liquidity – with $1.9bn (£1.6bn) in net debt (excluding lease liabilities) but committed facilities of $2.9bn and a further $0.55bn in senior notes.

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