CHICAGO—The pandemic will continue to boost the medical supply market as health systems expand their personal protective equipment stock, industry observers said.
Providers are inking long-term contracts with PPE manufacturers as they stockpile supplies. They are asking for more American-made materials, which could garner government subsidies. PPE-intensive non-urgent procedures are ticking up after a year's worth of deferrals and providers have doubled down on infection prevention.
That likely will lift the revenues and outlook for PPE suppliers, said Patrick Finnegan, senior director at Fitch Ratings.
"What started as potentially a one- or two-quarter surge has become a multi-year increase in demand," he said. "The challenges associated with controlling the coronavirus are going to be around for some time."
Owens & Minor, which is one of the leading suppliers of PPE, is projecting demand for PPE to increase for at least a year as health systems stockpile supplies and non-urgent procedures rebound.
"The opportunity we see in the back half (of the year) and continuing even beyond that is really around stockpiling," CEO Ed Pesicka said in the company's Feb. 24 earnings call. "There are a lot of states, whether it's the federal government, states, locals or even hospitals themselves setting criteria of what they want from a stockpiling or safety stock. We believe that's going to continue on for an extended period of time," Pesicka said on the call. Owens & Minor did not immediately respond for comment.
Demand for gloves is going to be a long-term issue, which is why Owens & Minor is expanding its output in both finished products and raw materials, Pesicka said. The company plans to produce more PPE in the U.S. rather than contract it out. Providers' renewed focus on infection prevention and the pent-up demand for elective procedures will also stoke demand, he added.
From February to November, Owens and Minor increased N95 respirator production more than 1,000 percent, surgical mask production nearly 100 percent and face shield production more than 600 percent, the company said. Part of that demand hike is due to companies like Encompass Health, one of the largest inpatient rehab providers, entering into year-long contracts with suppliers that expand allocations of surgical gowns, N95s and other PPE.
"Those (elective) procedures use a heck of a lot of that PPE also," Pesicka said on the call. "So that's why we think next year has the opportunity to come across some better comparables."
Owens & Minor's credit rating has effectively done a 180, Finnegan said, noting that it has increased four ratings notches to BB- over the past year.
"They did pay down debt and stabilize the ship, but that's usually not sufficient to take them up that many ratings notches. What is driving it is the demand for PPE and much more focus on client services," he said. "Clearly a company like Medline could also benefit."
Medline is exploring a sale that could value the company at as much as $30 billion, the Wall Street Journal reported. Medline declined to comment on the reported sale.
Medline, which makes masks, surgical gowns, drapes, gloves, diagnostics and other medical supplies and equipment for providers, reported $17.5 billion in sales in 2019, the family-owned company said on its website.
Medline opened eight distribution centers over the past three years to help health systems centralize their distribution network, with plans to add more than 10 million square feet in warehouse space over the next four years.
It is now manufacturing face masks out of its Georgia plant, in part, thanks to a $6 million contract with the U.S. Defense Department. Medline looks to produce 36 million face masks per month.
Overall, the company has invested $1.5 billion in domestic manufacturing and distribution from 2018 and 2020.
"Stockpiling, once this is over, I think will be valuable," Medline CEO Charlie Mills said in a recent podcast with SMI.
Providers also will be able to reserve production on certain product lines, which will remain idle until demand spikes, he added.
How much suppliers expand their operations likely will depend on government subsidies, tax breaks and other potential incentives. There are several bills, including the Make PPE in America Act, moving through the legislature that aim to incentivize domestic production.
While production capacity and delivery times will be important, price likely will be paramount, Finnegan said. Quality and durability as well as user experience will also be key.
When it comes to diagnostics, there will be a premium on remote monitoring technology, said Sky Milch, U.S. pharmaceuticals and life sciences deals leader at PricewaterhouseCoopers, who expects deal activity to increase.
"There has been a shift in the way people are treated, and the medical device and diagnostic companies will play a significant role," he said. "If companies are able to facilitate in-home or self-service care as part of virtual visits, those are the things that will make companies attractive."