Coronavirus Leaves 3M Scrambling To Cover A Face Mask Shortage

Coronavirus has hit countries around theworld, sparking public health emergencies in places as different from one another asIran, Italy, China and the United States.

Markets are in turmoil and companies of allsizes have been hit hard by the virus, especially those that do business inareas affected by the outbreak.

Respirator face masks has sparked aglobal race to fulfill those orders.

Ramp up manufacturing of so-calledN95 respirator face masks.

Supplies of face masks are running short allover the world, leading to evidence of price gouging, empty shelves in stores and fearsamong medical professionals that masks needed for surgery and treatment will run out.

The World Health Organization warned on March3rd that severe and mounting disruption to the global supply of personal protective equipmentcaused by rising demand, panic buying, hoarding and misuse is putting lives at riskfrom the new coronavirus and other infectious diseases.

The WHO estimated the industry neededto boost manufacturing capacity by 40% to meet demand for personalprotective equipment, including masks.

We've increased, almost doubled our output from19 million respirators to 35 million a month.

Especially noteworthy has been a typeof mask called the N95 respirator.

The N95 designation means that the mask iscapable of filtering out 95% of airborne particles, including bacteria.

That has placed leading respirator maker andAmerican industrial giant, 3M, right at the center of the crisis.

At a time when 3M is facing its own difficultiesand its stock has had its worst run in decades.

The spread of the coronavirusthreatens the company's operations around the world, and eyes everywhere are watching to seewhether 3M and other large makers of health and safety equipment can meet thesoaring demand spurred by the pandemic.

As of early 2020, the company was scramblingto ramp up respirator production as masks disappeared from stores and medicalprofessionals worried about accessing sufficient supply to handle the deluge of coronavirus patientson top of those suffering from other medical issues.

“Global demand for supplies used tohelp protect people and to prevent the spread of illness such as respirators iscurrently exceeding supply, ” 3M told CNBC on March 10th.

The company said it hasincreased its production at manufacturing facilities around the world, including theU.

S.

, Asia and Europe.

It also said it was closely monitoring andresponding to any potential impact on its broader supply chain.

3M was already supplying masks to other crisisaffected areas around the world at the time the coronavirus cases beganappearing in China.

When we first started hearing about thedifferent diseases in China, hearing there were some strange cases, we were working with Australiaalready to respond to the wildfires and there had just been avolcanic eruption in the Philippines.

So we were working with those countries to tryand get them respirators as they needed it.

As soon as we started hearing that there werea few cases in China, we realized that this could be a big event and we communicated withthe plants very quickly to start ramping up production.

In late March, 3M said it doubledglobal output of N95 respirators to more than $1 billion annually since the outbreak.

And it plans to double that againover 12 months to $2 billion.

The company said more than 90% of thosewere designated for healthcare workers, with the rest going to other critical industries, including energy, food and pharmaceutical companies.

Other mask manufacturers have also reportedsurges in demand in China, Europe and North America.

Honeywell said it has sold20 million masks in China since the virus first emerged in late February.

Vice President Mike Pence said the government hadcontracted with 3M to produce more face masks and would beworking with other manufacturers.

U.

s.

officials said in early March there wereonly about 35 million medical grade N95 facial masks available in the country.

That was 1% of the 3.

5 billion the countryneeds now that the outbreak has grown into a full blown pandemic.

The United States Department of Health and HumanServices said on March 4th it plans to purchase 500 million N95 respirators over thenext 18 months for the Strategic National Stockpile, which is a reservoir of pharmaceuticalsand medical supplies that can be used when local supplies run outduring a public health emergency.

Brick-and-mortar retailers are seeing shortages ofrespirators and all types of masks, including several varieties health officials sayare not especially effective against the virus.

The World Health Organization said on March3rd, the prices of surgical masks had seen a six-fold increase, while pricesof N95 respirators had tripled.

One Amazon listing for a 20-pack of 3MN95 masks climbed in price from less than $20 in December 2019 to nearly $200in early March, according to online price tracker KEEPA.

3M said itbegan running its U.

S.

respirator factories at full capacity as soon asit began hearing about the virus in China.

Meanwhile, many health officials warned thatmany masks are of dubious use to ordinary citizens who in many cases are buyingmasks that don't protect against viruses or are wearing the right kindof mask the wrong way.

In late February, the surgeon general of theUnited States scolded consumers for buying up several types of masks, which he said didnot protect against the virus and threatened to deplete supplies needed byhealth care professionals.

3m faces the effects of the coronavirus at atime when it is facing challenges on several fronts.

Shares of the company are on theirworst streak since the Asian financial crisis of the late 1990s.

As of March 26, 2020 shares of 3M hadfallen more than 35% in the past 12 months.

Sales grew modestly in the last quarter of 2019after falling in each of the previous five year-over-year.

In a research note in lateFebruary, Melius Research said 3M is arguably the most out-of-favor ofthe multi-industrial names.

Just 10% of analysts with a buyrating versus 44% for our average name.

The company is facing several challenges.

First, it is dealing with lawsuits and otherfallout from its use of PFAS or polyfluoralkyl substances, which it and otherchemical and materials companies have at times used in some of their products.

3M has used PFAS to make firefightingfoam and its well-known Scotchgard product.

The Centers for Disease Control and Preventionsaid PFAS may interfere with the body's natural hormones, increase cholesterol levels, affectthe immune system and increase the risk of some cancers.

3M told CNBC research has only establishedthat such substances are associated with certain health effects, it has not determinedthat these substances actually cause adverse health consequences.

3M has phased out the manufacturer of somePFAS substances, but continues to use others in some of its products.

Gordon Haskett analyst John Inch estimates 3Mfaces liability costs of about $14.

5 billion associated with PFAS.

Other challenges loom.

Some Wall Street analysts say a recent downturnin the Chinese economy stands to hurt 3M considerably, especially through its businesses inthe automotive and electronics sectors.

China represented about 10% of 3M's salesand earnings in 2019, according to William Blair.

China's already slowing economy has beenexacerbated by the spread of the virus.

The odd thing is that while coronavirus standsto harm 3M's businesses in China and elsewhere in the world, the company will alsoreceive a boost from the sales of its respirator masks, which are in highdemand in China and the U.

S.

Both 3M and Honeywell are leading producers ofthe masks in China, according to William Blair.

On March 24th, U.

S.

automaker Ford said it would work with 3Mand GE healthcare to produce masks, ventilators and other equipment.

We are focused a lot on respirators inour company, but it's more than that.

We're working on ramping up additionalcapacity for hand sanitizers, for disinfecting capabilities.

We're working inpartnership with many companies.

It's amazing how many companies have come to thetable with great ideas on how we can work together.

The company does not say exactly howbig its business and respirator masks is, but face masks fall within 3M's personal safetysegment, which in turn falls within the company's safety and industrial segment, thelargest portion of 3M's business.

Safety and industrial accounts for about one-thirdof the company's sales and personal safety accounts for about one-third of that.

Gordon Haskett analyst John Inch estimated 3M'sface mask business to be about $100-$150 million before the virus.

William Blair analyst Nicholas Heymann estimated saleswere as high as $325 million in 2019 and could roughly doubleto $600 million in 2020.

3M's total sales in 2019 were $32 billion.

However, some analysts see in coronavirus an echoof an earlier viral outbreak from nearly two decades ago, severe acuterespiratory syndrome, or SARS.

The division that contained 3M's face mask businessat the time was called Safety, Security and Protective Services.

That business grew for several quarters around thetime of the SARS outbreak, with a peak of 12% growth in the second quarter of 2003.

Incremental margins were also50% higher year-over-year.

Incremental margins are the percentage profitthe company makes for selling each additional unit above the minimum neededto cover the company's fixed costs.

How much of a difference face mask sales canmake for 3M is a question dividing Wall Street.

Melius Research upgraded 3M to abuy on February 26, saying that while potential economic dangers of coronavirusare impossible to fully predict or understand, this is a problem that affects theentire S&P 500 rather than just industrial companies such as 3M.

The company is also undergoing a large scalerestructuring that could yield a recovery in 2021.

The simple reality is that 3M is one ofonly a handful of S&P 500 names that sells a necessary product in virus containment.

The report said this isbeing ignored by the market.

However, some investors figure any benefit face masksales may bring to 3M's top or bottom lines are likely to be outweighedby declines elsewhere in the business.

Even if coronavirus added $300 million to incrementalsales of face masks, that would only add to 10 cents or maybe a bit more ofearnings per share, which would be dwarfed by the lost business across 3M's other segments, saidJohn Inch, an analyst for Gordon Haskett.

But many around the world will likely begrateful to get their hands on those masks.

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