Air carriers double down on winning business from life sciences

Fig. 2. Bulk cold-chain pharma deliveries often use ‘ULDs’ (unit load devices) like those of CSafe. Credit: CSafe

At the start of the New Year, the air cargo companies and logistics providers are done with their holiday rush shipping, and can now look at non-seasonal trends in logistics. And one of the themes that resonates throughout the business—especially for global transport—is the rise of healthcare products as a category of business development. Air cargo has been the traditional way to ship time- and temperature-sensitive pharmaceuticals, especially finished products; and in a past era, when delivery costs could easily be eaten, was the preferred mode of shipping. Today, air cargo is under stress from rationalization in shipping practices (such as employing second-day air rather than express delivery, provided that the packaging ensures temperature maintenance throughout), and from an intensified effort by ocean carriers to pull more cargo from air lanes with dedicated healthcare-products services.

Seabury Group, a global air cargo consultancy (New York) presented data from its Global Trade Database at a meeting of the Cool Chain Assn. in Europe this fall. The company reports that in fact, ocean shipping has been the dominant mode of transportation for life sciences for years, at least when raw materials are factored into the mix. Their study shows that in 2012, 90% of pharma products by weight travel by ocean in global trade; however, by value, 72% travels by air.

Pharmaceutical Commerce’s own annual Cold Chain Sourcebook, which looks primarily at the movement of finished goods, projected a $56.9-billion spend in biopharma logistics for 2013. The cold-chain portion was projected to be $7.5 billion, and is rising at approximately twice the rate of overall biopharma logistics spend.

That growth is easy to account for: the impact of biologics (including vaccines) on the industry’s product mix. A study from the Tufts Center for Drug Development issued last fall noted that biotech products accounted for 7% of revenue generated by the top 10 products worldwide in 2001; in 2012, that figure was 71%. The number of biotech products in clinical trials has grown by 155% over that time frame; with Big Pharma engaged in about 40% of all biotech products in clinical development. “The notion that large pharmaceutical companies primarily develop small-molecule drugs no longer holds,” said Tufts CSDD director Kenneth Kaitin.

US to Europe is dominant air-trade lane for cold-chain pharmaceuticals

Fig. 1. Arrows are proportional representations of air-cargo trade in 2012. Source: Seabury Global Trade Database

Historically, healthcare products have been a tiny part of overall global logistics. For the 3PL (third-party logistics, which includes some companies with their own air fleets) sector, Armstrong & Associates (West Allis, WI), a consultancy, projected 2013 revenue at $13.6 billion, representing 5.1% of the $265.5-billion global 3PL market. But its growth rate has been tracking higher, by a couple percentage points, than most other categories, such as food, retail or automotive. That growth has been the spur to attracting all logistics providers—ground, air, sea and 3PLs—to this market sector. Over the past 12 months, there have been numerous investments by companies offering dedicated services, as well as a wave of acquisitions as companies seek preferential market positioning:

• FedEx, which organized a Healthcare Solutions group about a year ago, will build an 88,000-sq.ft cold-chain transfer facility in Memphis, its US hub, to be online in fall 2014. The company also announced a strategic relationship with Cardinal Health to provide cross-customer services.
• UPS Healthcare Logistics rolled out its 42nd dedicated healthcare logistics facility during the year and expanded existing North American locations. It also acquired CEMELOG, a Hungarian healthcare-logistics firm, in early 2013.
• DB Schenker opened a nearly 12,000-sq.m. healthcare facility in Tilburg, Netherlands to handle both export trade and pan-European trade; it includes both controlled room-temperature (CRT) and refrigerated storage.
• Panalpina opened a 37,000-sq.ft. facility in San Juan, PR. The facility links to the company’s “own controlled air-freight network” of leased aircraft for international shipping.
• CEVA Logistics (Milan) has opened a “City of Pharma” logistics facility, with 22,000-sq.m. capacity, in Stradella, Italy.
• MD Logistics (Plainfield, IN) has won designation as a free trade zone (FTZ) at its Indianapolis facility, which enables it to more speedily get life sciences products from carriers into its temperature-controlled warehousing there.
• LuxairCargo, the only air-freight carrier at the Luxembourg airport, opened a 3,000-sq.m. facility there.
• IAG Cargo, the merged air-freight operations of British Airways and Iberian Air, opened a modest temperature-controlled storage area at Heathrow Airport, with plans to build a much larger one in the next couple years. The company is handling an increasing amount of trans-Pacific pharma cargo, as well as deeper access in Latin America.

Mergers among leading US firms

American Airlines and USAirways, Southwest Air and AirTran, and the earlier United/Continental combination, are leading to rationalization of air routes and modernization of air fleets. Nearly all of these carriers, as well as DHL (the global healthcare 3PL leader, according to Seabury) are investing in training and infrastructure improvements to “accredit” healthcare stations throughout their networks. The general guidance in this process is the newly formalized Good Distribution Practices (GDPs; the latest version is Directive 2013/C 343/01) of the European Union (and adopted, in various versions, by many other countries). The guidance specifies extensive quality management systems and documentation of procedures for handling and transporting medical products. While these GDPs are widely recommended—and documentation of shipments are reviewed by health authorities of many nations—the onus is still on the shipper to ensure safe delivery of products. So, in practice, shippers or their 3PL providers do their own reviews of carriers’ resources and policies.

An entirely new set of regulations will soon take effect among 3PLs that handle FDA-regulated products: the national licensure and shipment-tracking requirements of the Drug Quality and Security Act (DQSA). DQSA is the “track and trace” law, long under debate in the US Congress, to set standards to track shipments and prevent counterfeit or diverted product deliveries. FDA is in the process of writing regulations for the law, which was passed just before Thanksgiving. It will be the first time that 3PL activities come directly under FDA oversight. And while the intent of the law is anti-counterfeit measures and diversion protection, a technical interpretation of “adulterated” products includes temperature-controlled ones that were not properly stored; eventually cold-chain practices will factor into the tracking and licensure policies.

Notwithstanding the expanded regulatory environment, there’s a steady tension in biopharma companies between the quality groups and the logistics/transportation groups. “Quality is looking for higher reliability and risk reduction, while logistics is rewarded for driving costs out of the system,” says Richard Smith, head of the FedEx Healthcare business unit. “The emphasis swings back and forth between the two, and while today’s main driver is lowered logistics costs, it only takes one or two instances of improper shipping practices to swing the pendulum in the other direction.”

Cost rationalization measures that FedEx is currently emphasizing include providing more cross-docking capabilities to enable air shipments to be broken down readily to less-than-truckload deliveries (which may or may not include FedEx Custom Critical, FedEx’s premium service for refrigerated and other special delivery), and the recently announced thermal-blanketing service, by which shipments requiring controlled-room-temperature (CRT) maintenance can be protected, avoiding the need for insulated packaging in some cases.

At the same time, the tightening regulatory frameworks are pushing FedEx and others to invest in more types of services. Smith says that the company’s SenseAware program, which involves telecom-enabled dataloggers to accompany shipments, are proving popular; when a shipment arrives at its destination, the shipper can have available all the tracking information on shipping conditions in near real-time. Similar services are available from a variety of vendors who work with several airlines, including Sensitech (which acquired a cargo-security company, FreightWatch International, in the past year), OnAsset Intelligence and LoJack Supply Chain Integrity, among others. Southwest Air provides a Cargo Companion service, enabled by technology from OnAsset Intelligence; DHL is rolling out a service called Thermonet, in conjunction with its LifeConEx subsidiary, for dedicated ambient and cold-chain monitoring.

Services like these are dependent, as well, on state-of-the-art communications and IT systems, and IT is a service differentiator for UPS Healthcare Logistics, says Bill Hook, VP of global strategy. “We’re being called on to handle front-end order management, real-time visibility for shipments, and both executing and reporting on last-mile deliveries, including the ability to bring a delivery directly into alternative-distribution destinations like the hospital pharmacy or even the patient’s home,” he says.

Alternative (some would say “direct”) distribution is of growing importance in the specialty pharmaceutical segment, where shipments (often of temperature-sensitive biologics) are being delivered to a growing array of specialty pharmacies, infusion centers or other specialized clinics (see related analysis of this activity).

The biopharma industry is asking air cargo companies to go both broader (in terms of global coverage) and deeper (in specialized services), all while seeking lower cost and looking more intensively at ocean-freight options. It’s a partnership—but a demanding one for the air carriers.