Strong Q1 Earnings Belie the True Financial Devastation of COVID-19

The bad news is that COVID-19 is very, very bad for business; the good news—sort  of—is that the pandemic had just the last few weeks of March to wreak havoc on 2020 Q1 earnings reports. And even that flimsiest of silver linings doesn’t apply to diagnostics firms that do heavy business in China and other East Asian markets where the virus first hit in January.

Gainers

Many companies were able to get the fiscal year off to a strong start and build up enough of a cushion in January and February to finish Q1 with positive growth. Thus, of the 39 companies that had published earnings results for the quarter as of the time we went to press, all but 10 had higher 2020 Q1 revenues, as compared to the same period in 2019. Gainers included not only emerging genetic and molecular testing firms with relatively low revenues but also mature giants like Abbott, Danaher, LabCorp, Roche and Thermo Fisher. Alas, Quest posted a 4% year over year decline but did top its Wall Street targets on both the top and bottom lines.

Among companies with reported Wall Street earnings estimates, 28 hit their targets and only eight came up short. But three companies in the latter group—Fluidigm, Pacific Biosciences and Waters—actually reported higher than expected earnings per share.

The Pandemic Effect

Once the pandemic hit, all hell broke loose. Labs stood hopelessly by as doctors, clinics and other key customers temporarily shut down or severely curtailed their operations. As just about all forms of non-urgent testing came to a screeching halt, being in the COVID-19 space became pretty much the only way for labs to make money. However, most lab companies weren’t positioned to provide COVID-19 testing, which must be performed by Level 2 labs on platforms costing anywhere from $250,000 to $1 million, to say nothing of scarce supplies like cotton swabs, reagents, PPE and, of course, trained testing personnel.

In addition, while the demand for COVID-19 testing is unprecedented, the reimbursement is rather modest. Thus, even the companies with the wherewithal and resources to offer COVID-19 testing, including big companies like Abbott, LabCorp and Quest, couldn’t make enough to offset the massive overall volume losses in other areas.

The Pandemic Positives

On the bright side, there were a few firms that were able to take maximum advantage of the unprecedented demand for COVID-19 tests, instruments, platforms, reagents and other related products and services, including BioMérieux whose BioFire FilmArray products grew 67% year over year thanks to “exceptionally high” use of its respiratory and pneumonia panels. Sales for DNA/RNA extraction instruments and reagents were also off the charts.

The severe flu season and subsequent COVID-19 was also good for business at Danaher, where diagnostics revenues increased 6% to $1.63 billion driven by 40% growth in revenues for Cepheid point-of-care respiratory testing.

Another company that made hay on COVID-19 was Meridian Bioscience. After five quarters of decline in a row, Meridian’s diagnostics division turned things around by posting positive growth of 4%. And while most companies were withdrawing their 2020 financial guidance due to COVID-19 uncertainty, Meridien not only stuck with but increased its guidance based on expectations of greater demand for its molecular and serology SARS-CoV-2 reagents.

Other companies that posted a strong Q1 either because of or despite the pandemic:

• Qiagen, one of the few companies where coronavirus revenues offset the losses in other businesses and which is dramatically ramping up production of its COVID-19 reagents and RNA extraction kits;
• Natera, whose diagnostics division been enjoying its biggest sequential quarter-on-quarter segment growth in company history before the pandemic, and which was able to minimize COVID-19 disruption by making fast and effective improvements to its remote ordering capabilities; and
• GenMark Diagnostics, where revenues increased 80% and which raised its guidance after the FDA gave Emergency Use Authorization for its ePlex SARS-CoV-2 Test run on the firm’s ePlex system.

Takeaway

According to several reports, the COVID-19 revenue losses that began in March continued into April and the first two weeks of May. As reopening progresses and elective surgeries and non-urgent health care services resume, the rebound will likely continue, albeit at a modest rate through June and July. Thus, the true extent of the economic horrors will become clear not in Q1 but the earnings reports for Q2. No wonder so many firms have withdrawn their financial guidance.

Diagnostics Earning Reports for Q1 (period ended March 31, 2020)
 (At least $10 million in sales)

Bold face: Companies that met or exceeded average or consensus Q1 Wall Street revenue estimates
Italics: Companies that missed average or consensus Q1 Wall Street revenue estimates
* Companies that raised their revenue or EPS guidance during Q1