In June 2010, UPS published the executive summary of its third annual Pain in the (Supply) Chainsurvey, which explores healthcare companies’ biggest supply chain and logistics issues. The survey covered around 150 companies in pharma,biopharma, device and medical supplies, and I was interested in finding out how our sector is dealing with the twin logistics challenges of increasedprocurement/outsourcing and increased globalization of end-user markets. Nearly half of all respondents indicated that they plan to expand into new or emerging markets in the next 18 months.

To that end, I spoke with John Menna, director, Global Strategy, Healthcare Logistics, UPS, about the findings and implications of the survey, as well as to get more information about UPS’ role in smoothing out the wrinkles of global transportation for pharma and biopharma.

You can download the executive summary ofthe Pain in the (Supply) Chain survey by clicking here.

—GYR

Contract Pharma: What is UPS’ role in healthcare?

John Menna: UPS is a large transportation/logistics company, operating in more than 200 countries. In the past 5 to 10 years, we’ve put a significant focus on the healthcare industry, specifically in distribution and logistics. In a nutshell, what we do for pharma, biopharma and device companies is store their finished goods inventories in our cGMP-compliant warehouses.

These facilities are subject to FDA audits. We have DEA cages and vaults, as well as cold storage. Generally, they’re high-specification cGMP facilities. So we’ll house their finished goods inventory, and then we’ll receive orders, either directly from their clients (like distributors or wholesalers) or dispensers or patients in the supply chain. That would include retail pharmacy channels, hospitals, clinics, physicians offices, or patients themselves. Also, the manufacturer can pass orders on to us.

We pick, pack and ship the products. We also provide order-to-cash services for some clients, invoicing the buyer and collecting the funds and remitting payments to the manufacturer. It’s a full order-to-cash cycle.

So the transportation can be in different directions, inbound from the manufacturer’s facility and outbound to end clients.

CP: Are you involved earlier in the supply chain, handling ingredients, materials, bulk product?

JM: We are involved in those earlier stages, like moving APIs to manufacturing locations, but obviously we’re not involved in every step of the solution at that point. Once there’s a finished product and we can transport it from the manufacturer’s plant, we can provide an end-to-end, uninterrupted solution all the way to the buyer of the good.

So, yes, we’re involved in the earlier stages, but our focus is on this end-to-end process for finished goods distribution, where we can best leverage our strengths in logistics.

Border Crossing

CP: Tell me about this year’s edition of the Pain in the (Supply) Chain survey. What’s been the most surprising finding, the third time around?

JM: One of the biggest changes isn’t exactly a surprise. There’s a really significant shift in strategy and planning for global markets, particularly emerging regions of the world.

When you see some of the numbers, there’s a big change of geographic focus. Around 47% of our interviewees said that they’re looking to emerging markets more so now than ever. A lot of that comes from cost-management pressures they face in established markets. In order to grow the top line, they need to look to large, growing populations.

The other big finding is a continuing trend of how the regulatory burden impacts the supply chain. That’s perennially a large concern for businesses overall, but now when you add the layer of moving products into emerging markets, you really have to look at how you’re managing the disparate regulations of these countries. It’s a daunting proposition.

CP: How would you characterize some of those cross-borderproblems?

JM: Well, if you’re moving vaccines into Russia, many need to be quarantined by the government for 30 days before they can be released into the market. Meanwhile, all pharmaceutical products distributed in Turkey need to be serialized down to the unit/bottle level.

So from a logistics perspective, it’s very challenging to comply with all these regulatory schemes from country to country. The clear desire is to get harmonization for the bulk of these requirements.

CP: Besides the obvious, what regions are on the rise for either commercial or clinical distribution?

JM: Argentina is one. Saudi Arabia’s rise was a little surprising. Really, from UPS’ perspective, the China/Asia-Pac area is going to be significant for healthcare. They have huge populations, traditionally fairly impoverished and without a strong healthcare infrastructure. Many of the Asian governments want to provide basic healthcare services for close to 100% of their populations. That represents huge opportunities, but also huge logistics challenges.

Most of southeast Asia has little by way of good roadnetworks to move goods from one country to another. Sothings either have to be flown or shipped by ocean vessel. Depending on the perishable nature of the products, we need to make sure we have the infrastructure in place to get them to those markets.

CP: Does UPS have any involvement or input in helping these governments plan infrastructure build-out?

JM: Good question. The best place in southeast Asia to distribute products is southeast China. There are significant regulatory challenges, licensing requirements and other hurdles to do that. We’re actively working with the Chinese authorities to put those capabilities in place. We’re working with some manufacturers to do that, too.

Logistically speaking, Singapore is kind of a contrast to China. It has a very friendly business environment, with a good location to distribute products. So we’re looking at both of those areas as part of our strategy.

Outsourcing

CP: In the survey, there are indications of increased outsourcing activity. Does this cover logistics or other parts of the pharma companies’ processes?

JM: Well, we’re focused on the outsourcing of warehousing and distribution. In past surveys, we broke out particular categories of outsourcing, but we didn’t do that in this edition. Since the survey respondents are supply-chain decision-makers, it’s understood that their outsourcing refers primarily to supply-chain activities.

CP: There’s a chart in the survey summary showing that at least half of the respondents indicated that in the next 18 months, there’ll be at least 10% less usage going through wholesalers and distributors to reach hospitals, pharmacies, etc. What do you make of the shift away from those channels?

JM: It’s not exactly a shift away from those channels. 92% of pharma manufacturers are currently using wholesalers and distributors. We asked them if they planned to increase or decrease their use. Half said they would increase, and 45%said they would decrease, and about 5% said they’d keep itthe same.

But it’s certainly interesting. About 95% of the parties are evaluating changes to their channel strategies.

CP: What accounts for that?

JM: First, we need to ask why half are planning to increase their usage. When a manufacturer is trying to sell products in new markets where they don’t necessarily have a sales force and infrastructure, they’re more likely to use an established wholesaler.

In the more established markets, where they’ve developed experience and have strong logistics infrastructures, companies are finding they want to get closer to the end-customer who’s actually using the products. There, it may make sense to establish a more direct relationship with the end user. It’s been a topic of conversation in the industry.

CP: What role does a logistics company like UPS play in driving that conversation? Have advances in your own technologies created options that may not have existed in recent years? Not to say that you’d advocate one distribution model versus another, but what impact does your very presence in the supply chain have?

JM: UPS’ position is that we will execute whatever distribution strategy the manufacturer wants. They’re ultimately making the decision, based on what the product is, who uses it, where it’s being used, etc. Is the product being used in a physician setting or a pharmacy? The manufacturer decides how it’s going to reach that market, and we help them execute that strategy.

Is technology helping manufacturers go more directly to their end-customer? That’s a tough question. In some of these cases, they want the data, the insight, the visibility of the customer. To some degree, advances in technology have helped make that a reality.

Changes in Attitudes

CP: How has large pharma’s attitude toward 3PL providers changed over the years?

JM: Traditionally, pharma and biopharma companies took an in-house approach to logistics. That attitude has changed tremendously, for two main reasons.

1.Capabilities of companies like ours have grownenormously in the past 10 years, and

2.their cost pressures are driving them to look for moreefficient processes.

They seem to have a bigger appetite to outsource logistics.

CP: Is that also leading to full-scale partnerships?

JM: A few years ago, Merck announced that they were outsourcing to UPS, pretty much its entire U.S. warehousing and distribution for vaccines and other finished products. That relationship has expanded and others have grown as well.

CP: Do you do significant business with smaller pharma and biotech, beyond “normal” shipping?

JM: Many emerging pharma and biopharma companies have commercialization agreements with larger pharma companies, so we usually work with larger companies to coordinate marketing activities.

CP: How significant is your business in clinical trial logistics?

JM: Small, but growing. The increase is partly due to the growth of that industry overall, and partly because we’ve been investing in our capabilities. There are a lot more clinical trials being conducted in emerging markets, and there are fairly tight transportation requirements around clinical trials. UPS has been building up temperature-sensitive transportation capabilities. It’s still small compared to our finished-product warehousing and distribution business, but it’s on the rise.

The Big Question Mark

CP: Extra-credit question! Healthcare reform: How will it impact your clients and UPS, operationally?

JM: We don’t know exactly how the reforms are going to be written into regulations. We are working and will continue to work with HHS and the FDA to review the implementation of these changes and how we’ll maintain compliance for ourselves and our customers.

So, in compliance terms, the short answer is that it’s too early to tell.

In broader terms, there are two areas of impact. With increased access to healthcare products, there should be more units of pharmaceutical products and medical devices moving through the supply chain. Capacity will need to be built to handle the increase: warehouses and transportation networks will need to be bigger.

Along with being bigger, we think they also need to be more flexible. We don’t know how quickly demand will ramp up, nor how quickly regulations will be enacted. You don’t want to be caught with having excess capacity and its attendant costs to carry. At the same time, you don’t want to end up short.

With the increased emphasis in driving down the costs of healthcare, companies will need to find ways to build more efficient supply chains. It’s one of the ways that they’re going to need to drive down costs. We think we’re going to be in a position to help companies become more efficient and more flexible in their supply chains.

Gil Y. Roth has been the editor of Contract Pharma since its debut in 1999. He can be reached at [email protected]