Asia’s Generic Drugs Boom Swells Cargo Sales for Lufthansa, UPS: Freight

When the patent on Pfizer Inc. (PFE)’s Lipitor expired last week, Ranbaxy Laboratories Ltd.’s generic version was the first to hit U.S. drugstores, some 7,000 miles away from the northern Indian factory where the production process started.

Providing transport for Asia’s burgeoning generic-drug industry is an investment priority for Deutsche Lufthansa AG and United Parcel Service Inc. (UPS) The pharmaceutical logistics segment will grow 12 percent this year to 47 billion euros ($63 billion) as more drugs are made in Asia and other developing markets, according to research firm Transport Intelligence Ltd.

“Just about every airline is looking at this space with interest right now,” Dan Gagnon, UPS’s European health-care logistics director, said in an interview. “As more competition gets into this space, you need to come up with solutions that are more economical but provide the same level of service.”

UPS, which provides freight service for German drugmaker Merck KGaA, has invested in five new pharmaceuticals facilities in the past year and last week purchased drugs logistics company Pieffe Group in Italy. Lufthansa opened a cold cargo facility in Frankfurt today to add to a pharmaceutical hub in Hyderabad, India, which started operations in May.

Pharmaceutical logistics growth will average 7.6 percent in the coming years, reaching 63 billion euros by 2015, according to a report last week by Transport Intelligence analyst Cathy Roberson. Biotech and pharmaceutical products represent the highest value per airlifted pound for any cargo, she said.

Topping Electronics

The 12 percent growth predicted for pharmaceutical air freight over the next five years outstrips the 4 percent anticipated in electronics cargo, which has traditionally been the strongest sector for air freight demand, Roberson said.

“The growth will be driven by emerging markets,” in particular India, China and Brazil, Roberson said in the report. “Continued outsourcing to these locations, along with changes in government legislation, will drive increases in logistics spending.”

Lufthansa’s cargo unit, whose customers include Ranbaxy, is planning to dedicate six McDonnell Douglas MD-11s by 2015 to handle pharmaceuticals as the five Boeing Co. 777s the airline will start receiving at the end of 2013 free up capacity. “Far more” than 12 percent of Lufthansa’s annual growth in India is coming from drug transports, said Karl Ulrich Garnadt, who heads the cargo unit.

High-Value Cargo

“It has been our most successful product in the past few years,” Andreas Otto, Lufthansa Cargo’s head of sales and marketing, told journalists in Frankfurt today, adding that the cool segment now accounts for a little less than 10 percent of the unit’s revenue. “The value carried in one container can easily reach more than $30 million.”

UPS, aiming to exceed the market forecasts for pharmaceutical air cargo growth of up to 12 percent, is currently tying up deals to improve its Asian facilities, Gagnon said. He expects an announcement in “about a month.”

“Infrastructure for us in India has been quite limited,” Gagnon said. “For our strategic initiatives, that is an area in which we will be investing.” UPS already has a cold cargo facility in Singapore.

India’s pharmaceutical exports are expected to grow 23 percent annually to 2015 as the quantity of generic drugs produced in the country increases, according to a joint study by the Organization of Pharmaceutical Producers of India and Deutsche Post AG released in September.

FDA in India

With more than 100 plants, India is home to more U.S. Food and Drug Administration-approved pharmaceutical manufacturing facilities than anywhere else outside the U.S. The FDA has had offices in New Delhi since 2008 and Mumbai since 2009 to enable better regulation of drugs produced in India.

While not all drugs require a controlled temperature environment to maintain their efficacy, vaccines, some medical devices, diagnostic kits and so-called biological medicines -- which are made from a living organism as opposed to chemical processes -- often do.

Seventy percent of drugs expected to dominate the market over the next four years fall into this biological bracket, and will therefore require more stringent temperature control measures in their transport, said Savvas Neophytou, a London- based Panmure Gordon health care analyst.

CSafe LLC, based in Dayton, Ohio, leases its 200 temperature-controlled containers to UPS, Deutsche Post’s DHL unit and FedEx Corp. (FDX) The company plans to build another 100 containers in 2012, according to its president.

Temperature Control

“Our product is really designed for that strict two to eight degrees centigrade,” Brian Kohr, CSafe’s chief, said in a telephone interview. “It could be going from a really hot ambient to a very cold ambient or vice versa and it has to maintain the temperature.”

Also contributing to growth are drug companies’ efforts to consolidate their number of production sites, said Jack Scannell, a Sanford Bernstein analyst.

“The upshot of that is that you end up shipping as you have less local production,” Scannell, who is based in London, said by telephone. “There has been a long gradual process over the past ten years to try to rationalize pharmaceutical manufacturing.”

‘Vast Untapped Market’

Health-care companies’ predilection for carrying out many of their logistics needs in-house also presents a “vast untapped market” for external carriers, Transport Intelligence analyst Joel Ray said by telephone.

“For us the biggest opportunity and competition is in- sourced supply chains,” UPS’s Gagnon added. “Health care is behind when it comes to outsourcing, and if we break down the market, that’s where most of our opportunities come from.”

An added perk is that pharmaceutical demand is unlikely to be harmed by an economic slump, Joerg Bodenroeder, who manages Lufthansa’s new cool center in Frankfurt, told journalists today.

“We saw in 2009 that the need for medical products and pharmaceuticals is also stable in crises,” he said.

To contact the reporter on this story: Alex Webb in Frankfurt awebb25@bloomberg.net.

To contact the editor responsible for this story: Chad Thomas at cthomas16@bloomberg.net.

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