5 min read
Executives Speculate About the Impact of COVID-19’s ‘Second Wave’
June 12, 2020
15+ min read
Meanwhile, on Thursday, executives from the world’s leading companies attended global healthcare conferences while the stock market tumbled due to public fears of a resurgence.
What may feel like whiplash is mostly a case of uncertainty–executives, attempting to prepare for the remainder of 2020, lack a consensus from public health officials, and feel trapped making predictions or providing guidance to investors. Despite all of this, one thing is clear: even if the second wave of COVID cases is imminent, executives do NOT anticipate another economic shutdown.
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Here are the highlights:
- Executives across sectors remain unsure if a second wave of the novel coronavirus will further impact their bottom line in the latter half of 2020.
- Companies are tracking the likelihood of a second wave by seasonality, stages of reopening by countries, and global economic recovery.
- Telekom and SAP, in conjunction with the German government, are building a COVID-warning app that will be rolled out as soon as next week.
- Executives from Morgan Stanley noted that the recent rebound in jobs numbers and the reopening of the economy are all positives and that there’s no evidence that the second wave of COVID is coming.
- Becton Dickinson & Co noted that the fall is when a potential second wave could be of greatest risk (the fall is also peak flu season.)
- Medtronic executives stated that if there is a second wave (which they do not predict) that “everybody, the hospitals, physicians, industry, patients are better equipped to deal with it.”
IHS Markit (Earnings Call Transcript – 6/23)
My personal view as we plan is that there will be some second and third waves like we’ve just seen in Beijing. But I believe communities, governments, hospitals, a whole bunch of therapeutics, and other things are starting to emerge, and the management of the waves will be more contained and the return to business and resumption to business will be faster.
So I do think the 5% floor is a solid floor and one that provides our shareholders with a peak at how we think in terms of a second wave. But really, our confidence is in the 7% to 9% and actually performing the businesses that we run, that we know how to run, and returning to a more normalized approach to running our business.
Kroger (Earnings Call Transcript – 6/18)
Question – Kenneth B. Goldman: I’ll just ask 1 because I know we’re late. You talked about some of the trends in states that reopened first. Maybe too early, but what are you seeing in states where there are headlines about a second wave or cases increasing? Have you seen any upticks there? Or again, is it just too early to say for sure?
Answer – William Rodney McMullen: I think it’s too early to tell for sure, and those were states where people were more comfortable going out, anyway, even during lockdowns. So it’s really early to — but we’re really not seeing massive shift changes. Centene Corp (Analyst Transcript – 6/12)
We’ve already seen significant growth in the use of telehealth to make up the difference for some provider types. And I also — you’re starting to see now not only those organizations that were hit by this expand office hours and do other things to make up for that lost utilization. I think the wildcard in this is what happens if there is a second wave in the fall, as Mark described, and what does that do to utilization.
Align Technology (Goldman Sachs Global Healthcare Conference (Virtual) – 6/11)
Question – Nathan Allen Rich: No, makes a lot of sense. Maybe the last one on this topic of COVID. I know we spent a lot of time on it. I did want to get just some big picture questions. How are you guys thinking about the potential for a second wave? And how might that look similar or different to kind of the initial outbreak of what we’ve just been through.
Answer – John F. Morici: Look, Nate, it’s tough to tell and how to forecast this. And I think that’s why many companies — most companies have suspended 2020 guidance because it’s difficult to know, as the crisis has happened. And then as the recovery happens, it’s difficult to know how that recovery is going to play out. I would say this. I think we, as a country and maybe the globe is a little bit more understanding about the virus than we were 3 months ago in terms of how it’s spread, the different dynamics about do you need to shut down everything? Or maybe you can shut down certain parts of the economy to prevent the spread, protect — you’re vulnerable in a way to make sure that they are not impacted, whereas other places can with protection and with social distancing, they can operate more on a more normal basis.
So I think we’re smarter about what’s happened and maybe what we go forward with. I think what you’ll find is certain regions will — you might have an impact where there’s an outbreak or some spread that will be impacted. But I don’t think you’re going to get the countrywide impact that we saw maybe in the past. And I think that it helps with understanding, it helps with testing, and some of the other variables that we were lacking in the past. But again, we’re going to work with our doctors, with our customers to find ways to help them through this. And really, the more that we can provide them with tools to be able to help them navigate in this new world. We think that’s a real positive for the industry.
Keuring Dr. Pepper (Deutsche Bank dbAccess Global Consumer Conference – 6/11)
We think the trends that I described that would describe March, April and May are moderating. People are coming back to the restaurant. People will come back to the office. So there’s that kind of real high-level thing that we could all guess that. But what happens if there’s a second wave? So that’s why we don’t get too locked in on any of these and think that this was a storm that blew through and it’s behind us. Now we’re recovering. We’re very wary of what else can happen in the future.
Zoetis Inc (William Blair Growth Stock Conference – 6/11)
Answer – Glenn C. David: Right. So obviously, when we gave guidance back in May, there were a number of unknowns at that point in time. And we highlighted that. We talked about the fact that we increased the range of our guidance. Obviously, our revenue range is negative 2% to positive 3% operational growth. And we said there were a number of factors that would drive that range. A speed of the recovery in terms of how quickly that visits would start to return to normal levels. Also how the livestock market adapted to some of the new scenarios that we were seeing: a, big shift from the restaurant and foodservice sector to the grocery sector and also some of the challenges that we’re seeing with plant closures in the U.S.
We also talked about some longer-term factors as well in terms of the second half of the year in terms of the impact of a recession as well as the uncertainty around the second wave of the disease.
Humana Inc (Goldman Sachs Global Healthcare Conference – 6/11)
Answer – Brian Andrew Kane: Well, it’s a fair question and it’s something that we think a lot about because you’re right. If utilization doesn’t bounce back as we are planning effectively for it to get back closer to normal by certainly later this summer, where we could even see in certain circumstances running a bit above normal utilization and then sort of settling back down to more normal utilization. If that doesn’t happen or there’s a second wave, for example, which we truly hope isn’t the case, but were that to happen, that could impact our utilization assumptions. And to answer your question, I would say, within a reasonable amount, I think we’d be able to manage it. Obviously, if there’s significant depression of utilization, then that would be more challenging. But we have — we’re clearly ready to release funds to the extent that more dollars are available within a reasonable range, is the way I would describe it.
Dollarama Inc (Management Discussion and Analysis – 6/11)
It remains impossible to reliably estimate the duration, severity, and extent of public health and economic impacts of the COVID-19 pandemic on the operations and financial results of the Corporation, both in the short term and in the long term. The second wave of COVID-19 infections could force governments to reverse reopening plans and impose stricter restrictions.
Hologic Inc (William Blair Growth Stock Conference – 6/11)
Just to go back on the capacity side, though, one of the things that I’m trying to understand better is, as the country does open up a bit, and it clearly is doing so for how long and if there’ll be a second wave, I don’t know. But clearly, there’s going to be an increase back in some of your core diagnostic testing and how does that compete for capacity in your manufacturing with COVID testing? How do you balance that?
Answer – Stephen P. MacMillan: Sure. In real simple terms, we’ve built our business certainly on our women’s health assays. We would never sacrifice the ability to continue to offer that. So the reason we’ve been making the investments is exactly that. As our core business comes back, we need more capacity to be able to really offer the [product], in the very short term, call it, May, as we were launching the TMA assay, our core business was much softer. So it gave us the capacity.
Fresenius SE & Co (Goldman Sachs Global Healthcare Conference – 6/11)
Question – Veronika Dubajova: Okay. And a question that someone’s just e-mailed to me. Just how are you thinking about preparation for a second wave? Obviously, this remains a concern and I think for hospitals in particular, what has the Helios business done to prepare for this? And kind of is this — if there is a second wave, do you think it’d be a more significant or less significant headwind to the business than the first?
Answer – Stephan Sturm: Personally, I have my doubts whether we’re going to see a second wave just because the population as a whole, as well as the administration, is better — even better prepared than the first time around. I think in Germany as well as in Spain with largely decentralized decision-making, we have done the right preparations for that. We will continue to see local areas of infection. But I would also expect that those can be fairly rapidly contained. I literally come out of a video conference with Ms. Merkel and various ministers of where Telekom and SAP have informed us about the COVID-warning app that’s going to be rolled out as from next week. They have solicited the support of all the very large German employers. And I think that is also going to be an effective tool to contain infections. As far as Helios is concerned, number one, we entered the first infection wave, which wasn’t really a wave in Germany, with pretty good inventory levels as far as PPE is concerned. We have replenished those, sometimes even done a bit more…
Answer – Stephan Sturm: I will spare you numbers, but we are not there yet. We’re still in recovery mode even though the speed, the magnitude of the recovery have been at least in line with our earlier expectations. Whether it’s already in Q3 or only later in the year when we see a recovery to previously normal levels remains to be seen. But my expectation would be that over the course of the second half, we’re going to go back — get back to normal, obviously, with the caveat of the absence of the second wave.
Raymond James Financial (Morgan Stanley Virtual US Financials Conference – 6/10)
Question – Manan Gosalia: So I do want to get into what you’re doing on the technology side, but maybe before that, what longer-term changes do you see coming out of this environment?
Answer – Paul Christopher Reilly: Yes. I think it’s kind of early to tell. I think that we’ve learned that if 95% of people can work from home and productivity doesn’t fall. Certainly, we don’t need 99% of the people in the office. So I think the office and the meetings from a cultural standpoint, a bonding standpoint, and really deep strategic discussions are certainly helpful for any organization. But we had — there is no reason why people can’t work more often from home or that some number, I don’t know what it will be, 30% plus of the sales force will be working from home and other people can work mobile as they travel, so I think that we will see longer-term more people working from. And ironically, just a week before we kind of really shut the offices. We had hired someone who had the mobility efforts of PwC, and I told him he had 5 years to get us to what we are working, 30% of our people working from home, and then everyone having the mobile capability. So after he’s here a month, I said, I really meant 5 weeks, not 5 months because we virtually were there. So I think that’s going to be a change. We’ve learned that we can have effective meetings like this conference without flying. We’ve learned that even with client engagement, the clients have learned these technologies where they were afraid of them before. We have 80-year old clients on Zoom and doing e-signature, which didn’t happen before the pandemic very often. So I think it is going to change how we work, but we’re going to have to learn. And I think part of that depends on the course of the virus as we get into a heavy second wave. I think it’s going to be — people are going to be leerier about getting into the offices or crowded spaces. If it’s something we get a vaccine, and it kind of goes away, we’ll see what that new normal is. And I think — I don’t think it’s going to be 80% working from home, but I don’t think it’s going to be 80% or 90% wanting to come to the office every day.
Johnson & Johnson (Goldman Sachs Global Healthcare Conference – 6/10)
Answer – Terence C. Flynn: Great. Well, that’s great to hear. I guess the last one’s just how are you guys thinking about the potential for a second wave of infections in the fall? I know that’s the other thing we’re all monitoring here as we watch the reopen. So how are you guys thinking about that? And any perspective you can share?
Answer – Jennifer L. Taubert: Yes. No one knows for sure whether the virus is going to return or not. But our thinking is that if it does return, it’s not going to have the same level of global impact that’s been experienced over the last few months. This assumption is based on opinions that have been shared with us by numerous experts that we’ve spoken to as well as in a number of different forums. And I think they believe, as we do as well, that if the virus does return later in the year, the world should be much better prepared, right? Testing should be more readily available. There will be an adequate supply of PPE and other necessary medical equipment. Things — isolation and other preventative measures should be able to be implemented with more precision. And there may also be good therapeutic options that are available for treatment. And so at a minimum, we should be in a much better place if it returns than where we were when the virus first started beginning of the year. So I think more to come on that later in the year. But if it does return, we don’t think it will have the same impact that it did this time around.
S&P Global Inc (William Blair Growth Stock Conference – 6/10)
In terms of making sure that the businesses continue to operate and deliver financial results during the year, we immediately went into a mode of scenario-based planning. Because it was so hard to talk about how long this situation would last, what kind of recovery patterns we would see, we have all seen all the latter shapes kind of forms, even if there would be a second wave, and it would come back at a certain point in time. And we wanted to make sure that we think about all those different scenarios and take appropriate management actions to deal with those scenarios.
CVS Health Corp (Goldman Sachs Global Healthcare Conference – 6/10)
it’s difficult to predict the last half of the year. Obviously, we’re watching these utilization numbers. They’re — depending on the markets, they’re varying. And I think what you have to — what we’re considering as we’re thinking about the latter half of the year is what do we think about elective procedures, how quickly will people go back into the offices to get procedures. And quite frankly, we’re encouraging them to get those services so that we don’t see adverse effects on their health for not getting those services.
And then, obviously, we’re considering the possibility of a second wave and what that could potentially do. So it’s really hard to pinpoint what the trend will be in the second half because there are so many variables. And as you would imagine, we’re running a number of scenarios as we’re thinking about the last half of the year.
Edward Lifesciences Corp (Goldman Sachs Global Healthcare Conference – 6/10)
Answer – Scott B. Ullem: Yes. It’s really about the top-line recovery. So our expense numbers have been impacted, I guess, positively just naturally as a result of COVID because there’s less travel. There are fewer society meetings. There are just some natural expense savings that have come from this interruption.
Those will recover as the overall environment recovers. But when revenues pick up and we get back onto that top-line growth curve that we originally projected for 2020, we think we’re going to be able to grow back into our margin profile pretty quickly.
Longer-term, we still believe that mix and efficiencies are going to benefit our gross margin. And we anticipate that that’s going to trickle down and have an incremental minor impact as our operating margins expand over time. So headwinds, obviously, if there’s a resurgence in COVID cases, if there’s a second wave, that will be a meaningful headwind to margins. Absent that, we are on a — we’ll be on a glide path to a return to our margin profile that’s more like what we originally guided to for 2020.
Zimmer Biomet Holdings (Goldman Sachs Global Healthcare Conference – 6/9)
Question – Amit Hazan: So Bryan, one of the things we’ve been asking folks today is just to consider — obviously, everybody is considering a lot of scenarios that could unfold just given the uncertainties. And just to consider the downside case, whatever it is that you’re looking at yourself or whether that’s high rates of infections in the fall and second wave or what have you. And maybe just talk through your preparation for that in that scenario, what incremental actions you would need to take as a management team to work through that.
Answer – Bryan C. Hanson: I actually think — I kind of think about that idea of the second wave in a couple of different ways. But before I even get to that, just the preparation and the organizational structure that we have right now in dealing with this wave absolutely sets us up to be able to deal with anything that would be coming in the future. We got right out ahead of this and made sure that we have the right work streams in place to manage this extremely effectively across a number of different factors. And that, obviously, infrastructure is still in place. And so we feel more confident now than we ever could have to be able to deal with any second wave that might come.
In the way we’re thinking about a second wave, it’s really 1 or 2 things, right? I mean the first one would be that as social distancing starts to loosen up, you get an immediate recurrence, and we’re keeping an eye on that. Probably our best proxy on that right now is China because they’ve been through the other end of this thing longer than anybody else, and we haven’t seen that. But certainly, we’re looking at it by stage and by country, in those states or countries that are further along in moving towards more of an opening of their economies to see what happens. But so far, so good. We haven’t seen a recurrence in that way.
The other one would be around seasonality. Obviously, a lot of people potentially predicting that there would be, as a result of seasonality, a recurrence at some point in the future. And again, I think just given where we are as an organization and the industry is as a whole, when I talk to hospitals and hospital CEOs where their comfort level with being able to respond to a second wave, pretty much, everybody says that if there is a second wave, the materiality of it is not going to be anything like what we’ve experienced in wave 1. That’s mainly because now you know. Whenever you don’t know something, you’re automatically more conservative because you’re not sure what’s going to happen. Now we’ve got a pretty good sense of what’s going to happen, so you’re going to have more of a less conservative approach based on that. We also now have a high level of comfort with PPE, testing capabilities. So a lot of those things that put us in a situation where it was as dramatic as it was in the first wave just aren’t going to be present, from my perspective and certainly our customer’s perspective, if there is a wave 2.
Becton Dickinson & Co (Goldman Sachs Global Healthcare Conference – 6/9)
Today, we’re producing — we’re a little under 1 million tests a month. We’ve ramped that up but are at that steady-state now. I mentioned at the start of our discussion that we’re adding capacity, another line. It’s an automated line. I had shared historically that, that line, we expected to go live at the very end of calendar 2020 into potentially early 2021. Our team has been executing really well there, and we expect to have that line fully go live within mid-Q1 now of our fiscal year. So in time for the fall and in time for really the ramp-up of the flu season, which is, in our assumption, is when a potential second wave could be of greatest risk, COVID second wave.
Morgan Stanley (Morgan Stanley Virtual US Financials Conference – 6/9)
I’m anxious to see what the numbers show us. I think the recent rebound in jobs numbers and clearly the reopening of the economy, and there’s no evidence there’s a second wave yet of COVID, are all positives. I think the fiscal work and the monetary stimulus from the Fed have been positives. So I’m curious to see where it comes out. But I feel really good about Morgan Stanley’s capital position. But until we see what the models do and how they hit different parts of our business, it’s hard to tell.
Varian Medical Systems Inc (Goldman Sachs Global Healthcare Conference – 6/9)
Question – Amit Hazan: Okay. And then let me take — before we get into some of the more recovery-type updates, I want to just ask about the fall, and talk through a downside case. I imagine you’re preparing for a whole bunch of scenarios, just given the uncertainty as and maybe talk through your preparation of whether we — if we get a second wave of infections in the fall, what it is that you’ll be — what you’ll be putting in place to kind of defense against that?
Answer – Dow R. Wilson: Yes. I mean, I think, first and foremost, we’ve got a number of activities in place right now. So we still have pretty much all of our engineering and management teams, jobs that can be done from home are being done from home. The manufacturing and service side of our operations are still — are viewed as essential services. And we don’t see that changing in a second wave.
We’re seeing customers be a little more adaptive to doing business over the phone, so doing what we’re doing here. So I don’t — if there is a second wave, I mean, it’s, obviously, going to be a function of how deep? How broad is it? But, a, I think our supply chain is in pretty good shape; b, our service team is in very good shape. This has given us a chance to really kind of make sure that they are where we need them to be. We’ve got sufficient PPE for our service team.
PNC Financial Services Group (Morgan Stanley Virtual US Financials Conference – 6/9)
Answer – Betsy Lynn Graseck: So when I’m thinking about the reserve ratio that you’ve got, we’re looking at, say, your 2019 stress test and your current reserve is about 40% of projected losses there, I mean could this scenario be as tough as what you had been stressing for last year in the stress test that like 100% of those? Is that — or is that like wildly, that’s a crazy statement?
Answer – William S. Demchak: It’s not one that we would run as our baseline, but it’s one that — it’s a different scenario, but the losses aren’t wildly different that we run as kind of a downside case in COVID. I mean so everything we think about — everything we’re talking about right now kind of assumes that, in fact, the economy can reopen without a second wave and a second shutdown, right? That’s what’s in fact in our base case numbers.
So to the extent, you put whatever probability you want on to it, that we end up with kind of second-wave and second set of issues here, then it gets worse.
Baxter International (Goldman Sachs Global Healthcare Conference – 6/9)
Question – Amit Hazan: Okay. So one of the other things that struck us on the call is you guys always sound extremely thoughtful in how you’re thinking about probabilities for how outcomes might turn out. And so I thought I’d ask you a downside case scenario because it seems like you’ve got at least 6 scenarios, as you guys had mentioned that I know other companies probably do the same.
But maybe just talk through your preparation for a downside case where we get something like a second wave of infections in the fall? And then just what incremental actions you as a management team would plan to take in that scenario?
Answer – James K. Saccaro: Sure. There are really just a few different buckets of preparedness. First, you’re right in saying we have looked at a lot of different scenarios. And frankly, given our approach, most of them are kind of downside scenarios, we’ve done that because, for us, we want to make sure that the operation continues to move forward in the right manner with no disruption under all different scenarios that we can imagine.
So it’s not like we spent a lot of time kind of modeling this whole thing goes away very swiftly, which we certainly hope it would. But as it relates to these downside scenarios, there are basically 3 areas of focus. One is the — do we have adequate liquidity? Two is, do we have adequate inventory? And three is, have we thought carefully about the cost structure?
As it relates to liquidity, look, we have ample liquidity and the balance sheet is very, very solid. I think — but one of the things that we did in the first quarter was we did a bond issuance of $1.25 billion, just to shore up, really like an insurance policy, against a downside case. And this would be an extreme downside case where it would be necessary to access some of the funding that we raised. But we just felt it was prudent to be prepared for those kinds of scenarios. Now it’s expensive insurance in the sense that the rates were a little bit higher than and what we would have done had we raised money a year ago. But like I said, we thought it was really the smart thing to do. A lot of companies are issuing equity at this time, I think, for very similar reasons. We chose not to do that. Equity felt more expensive than raising some 5- and 10-year debt.
The second piece relates to the supply chain. And so for us, there are critical products where, in a wave 2 pandemic or, by the way, in a hurricane season, we will want to ensure that we have an adequate supply of in our warehouses and often time — many of those warehouses are in the U.S…
And then third is the cost structure. And I think as we think about rolling into the second half of the year, we’ll be very cautious with discretionary spending. We’ll be very cautious with travel and consulting and all of these different categories of spending to ensure that we have enough support and an efficient enough cost structure that supports us as we move forward, recognizing that in some of the scenarios, you obviously can’t fully offset the negative cost impact that will materialize. You want to be thoughtful about being as efficient as you can be.
McKesson Corp (Goldman Sachs Global Healthcare Conference – 6/9)
In terms of some of the important factors that we considered in our guidance, and we talked about it on our earnings call, I would just remind you that first of all, we’re not assuming that the second wave of a virus returns at the same peak levels as it originally came at us.
Transunion (William Blair Growth Stock Conference – 6/8)
Question – Andrew Owen Nicholas: Great. That’s helpful. And you answered a few of my follow-ups within that. So I appreciate that. Maybe one more on the current environment. Just — and you alluded to it a little bit in your response earlier, but just given the experience you have managing through the past couple of months, I’m curious how you’re thinking about the potential risk of the second wave. Obviously, there are a bunch of different variables to consider. But I’m just wondering if you think the impact on consumer credit could be less severe, the second time through. Just given the experience consumers and businesses have in dealing with a more unique pandemic-driven shelter-in-place type environment? And just kind of how you’re thinking about that risk in the second half of the year?
Answer – Christopher A. Cartwright: Yes. That’s a good question. I mean obviously, I hope we don’t have a second wave of any sort. We had obviously a lot of suffering already. But I do think we’ve had in this first wave, great preparation for how we would deal with subsequent flare-ups in COVID. And as you see from the statistics, COVID continues to march across the U.S. and the rest of the world, although those cities, states, countries, et cetera that went aggressively shelter-in-place policies are — have bent the curve and have reduced infections to more manageable levels. And now I’m hopeful that the combination of populations getting comfortable with working from home and sheltering in place, also wearing masks to mitigate the disease transition. And the increased availability in diagnostics can help prevent or mitigate a likely second wave. If it comes around, I think it’s just more of what we’ve experienced in the latter half of the second quarter, right? I don’t think we’ll have the shock of that initial transition to working from home, working virtually that we experienced. So I think we’re prepared. However, and again, look, I read the same things that you read. I thought it was very encouraging yesterday when the WHO came out and said that they believe now that asymptomatic transition — transmission rather, doesn’t happen very often. It’s actually quite rare. And transmission between children and their adults is also quite rare. Now I just saw this yesterday, obviously, there’s a lot more to read and to understand, but if that’s the case, I think that’s going to people to reengage societally and economically with more confidence, which just further fuels recovery.
Medtronic PLC (Goldman Sachs Global Healthcare Conference – 6/9)
Answer – Geoffrey Straub Martha: Well, I mean, first, we learned a lot from the first go-around here and so has the health care system. So if there is a “second wave,” like I said earlier, I don’t — I think everybody, the hospitals, physicians, industry, patients are better equipped to deal with it. And I don’t anticipate a shutdown again.
And our approach would be largely the same. I mean besides the lessons learned, which I think will make it more efficient, we want to continue — we have — look, we have a pretty healthy product cadence coming, hitting the market now. And we’ve been working on this for a number of years, and the team is focused on making it count, making it count, and driving incremental share for us. And so I want to keep our team focused on that, keep — all the way from operations in terms of making sure that the manufacturing plants are opened up and running smoothly to our distribution centers, through our sales team, that they can focus on the customer.
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