Covid Leaves Its Mark on Three Health Giants

(Bloomberg Opinion) — Health-care earnings season is firmly here, with reports now in from three pillars of the sector: pharmacy giant Walgreen Boots Alliance Inc., health insurer UnitedHealth Group Inc. and drug-and-device conglomerate Johnson & Johnson. Against the backdrop of a global pandemic, each had a singular quarter. And while experiences varied given the different niches each of the companies occupy, taken together they present a comprehensive picture of the outbreak’s impact on the industry and the risks it still poses.

Walgreens, the first to report on July 9, was the hardest hit in many respects because its pharmacy counters are surrounded by retail offerings that were affected by economy-slowing efforts to contain the virus. The results also point to big trans-Atlantic differences in dealing with the Covid-19 pandemic. A stringent U.K. lockdown led to enormous sales declines at the company’s stores there. Varied and often shorter U.S. shutdowns kept North American sales comparatively high. Margins fell on both sides of the pond as people spent more on essentials and less on makeup and skincare products.

Though the drug side of the business was more resilient, pharmacy volume fell worldwide alongside doctor visits and hospital admissions. The sales impact in the U.S. was muted by price increases and sustained sales of costly specialty medicines, but the quarter was a notable disruption to years of volume growth. The patchwork U.S. response may have been a temporary boon on the retail side, but the resulting resurgence in cases makes the next few months uncertain.

Even if short-term disruptions abate, long-term concerns remain. Some of the company’s business shifted online, but it couldn’t begin to make up for the decline in foot traffic. That’s not entirely a pandemic specific-issue; it was an existing trend that’s been accelerated by the disease. Walgreens is fighting back by investing in digital offerings and in-store clinics, but those efforts will take time to bear fruit.

While unfortunate for pharmacies, slowing health-care consumption boosted the bottom line of health insurers as UnitedHealth demonstrated Wednesday. The company’s medical-benefit ratio — the portion of premium dollars spent on health care — declined steeply as a result of delays in elective surgeries and other care. Much of that money flowed into a historic insurance profit, some of which will be rebated to consumers under Obamacare provisions. It’s a good sign for others in the same business but is quite concerning for providers.

UnitedHealth doesn’t expect this boost to last. People will eventually go back to the doctor, in some cases incurring extra costs if conditions have worsened. The company is already seeing signs of a rebound in visits, though renewed Covid case growth could still derail this shift. 

There haven’t been enormous drops in employer-based insurance yet, but there are early signs of declining coverage from the rounds of layoffs caused by the Covid recession . More will lose their insurance going forward, especially if the U.S. can’t control the virus. Some will shift to Medicaid or the individual market offered under Obamacare, but those are less reliable and profitable businesses.

Johnson & Johnson, a company that makes the drugs and consumer products sold by Walgreens and devices used in many of those surgeries that have been delayed, felt the slowdown differently and its results Thursday showed it. Drug sales increased, though gains were muted by Covid-19 related downturns in diagnosis and treatment. Strong sales of over-the-counter products such as Tylenol and Listerine couldn’t overcome a decline in skin health and beauty products on the consumer side. And revenue from devices plunged.

Despite the big hit to several businesses, the company boosted its sales and earnings guidance for 2020. The update was based entirely on a positive shift in the company’s expectations for its devices. J&J believes that the worst is past for that business and the pandemic. Procedures are coming back, executives said on its Thursday earnings call, and they think that any second wave is unlikely to be as bad because of better preparation and knowledge. The company acknowledged a still-high level of uncertainty and some concern about U.S. case growth. If unemployment rises and insurance coverage falls, its business could suffer. But it’s holding on to optimism for now.

If J&J is wrong about the the trajectory of the pandemic, it will be able to adjust. Other product-focused companies with finances that aren’t as robust and have more U.S. exposure, or less product diversity — and that’s many of them — won’t have it as easy. 

Health-care businesses are both more exposed to and sheltered from the pandemic. Even these three giants won’t come out unscathed or unchanged.  

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Max Nisen is a Bloomberg Opinion columnist covering biotech, pharma and health care. He previously wrote about management and corporate strategy for Quartz and Business Insider.

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