After tumbling by double digits in March, major stock markets have rallied in early April on seemingly any and every indication that the coronavirus pandemic might be plateauing. That cautious optimism might be wishful thinking on the part of Wall Street, however: It's possible second waves of infection will emerge after local, state, and national lockdowns are lifted. It's also possible that the economic damage already done is worse than currently known. Wishful thinking or not, individual investors should continue to maintain a long-term mindset.
However, investors also need to be realistic about the unusual nature of the current situation. For example, Repligen (NASDAQ:RGEN) and Albemarle (NYSE:ALB) have distributed risk across diverse customer bases and ridden megatrends to impressive growth in recent years. But both growth stocks might be more exposed to unfolding economic risks now.
Delayed clinical trials could stall this growth stock
The coronavirus pandemic has upended many parts of modern life, including the ability to conduct clinical trials. The individuals enrolled in clinical trials might be at greater risk of a severe case of COVID-19, especially in studies of experimental cancer treatments or diseases where patient populations are slanted toward older individuals. Similarly, many sites where clinical trials are conducted -- hospitals and other medical centers -- have focused nearly all of their attention on preparing for current or possible surges of coronavirus cases.
Many companies across the pharmaceutical and biopharmaceutical industries have announced plans to delay the start of new trials or the enrollment of new cohorts in ongoing trials. From development-stage companies such as Fate Therapeutics to established drug companies such as Eli Lilly and Bristol Myers Squibb, seemingly every business has been or will be affected.
That suggests it will be a difficult year for Repligen. The bioprocess leader supplies equipment and materials used in the manufacture of biological drugs, including monoclonal antibodies, cellular medicines, and gene therapies. It helps customers produce drugs for both clinical trials and commercial sales.
While diversifying revenue across the biopharmaceutical sector has lowered Repligen's risk profile in recent years, the nature of the coronavirus pandemic flips that calculus. The business might be more exposed to risk if delays to clinical trials linger across the industry.
In 2019, Repligen generated 65% of total revenue from customers engaged in clinical trials. Consumables and single-use products accounted for 77% of total revenue last year, whereas equipment accounted for only 23%. It's not clear Wall Street is taking the risk of delayed clinical studies into account, especially considering the stock has clawed back most of its losses from March.
The bioprocess leader hasn't publicly addressed the coronavirus pandemic, but it might need to withdraw full-year 2020 guidance. The silver lining is that Repligen started the year with $528 million in cash, which means it's well-positioned to weather a prolonged rut. It just might lead to a sharply reduced share price for the growth stock.
A high-margin business exposed to commodity markets
The coronavirus pandemic is going to make 2020 a painful year for Albemarle, too. The well-run business operates three segments -- lithium, catalysts, and bromine chemicals -- that delivered a combined gross margin of 35% in 2019. So what's the issue? Well, each segment is tied to commodity markets, which are driven by consumption, which is something the world isn't doing much of right now.
For example, Albemarle is the world's largest producer of lithium. The coronavirus pandemic is likely to stunt near-term demand for the metal, especially for electric vehicles, which are now the leading end market for lithium materials. Investors shouldn't be surprised if major producers announce significant production cuts in light of the current situation.
Albemarle's catalyst segment is exposed to even greater headwinds. The company's catalysts are primarily used by refiners, which convert varying grades of crude oil into everyday products such as transportation fuels. Global crude oil demand has fallen by at least 15 million barrels per day (bpd), or by roughly 15% of pre-pandemic consumption levels.
Luckily, the business has been pretty transparent with shareholders in recent years. Albemarle provided an update on March 23, although there were so few details known at the time about the new coronavirus or national lockdowns that it wasn't very useful. Investors can expect management to provide another update in April -- and brace for sour projections for the year ahead.