Multibillion-dollar ‘crumbs’

Next-flight service providers are increasingly taking aim at life sciences shippers.
  
By Chris Dupin
  
   Keen interest in providing logistics services to life science companies, especially by firms specializing in rapid delivery, was highlighted earlier this year by two acquisitions.
   In February, Los Angeles-based MNX, an expedited transportation and logistics services company, said it would acquire the same-day express/next-flight business of Columbus, Ohio-based AirNet.
   Scott Cannon, MNX’s chief executive officer, said the acquisition will expand the firm’s capabilities in the life sciences industry and dilute MNX’s concentration in existing vertical markets “so we will be a much more well-rounded company in the types of customers that we serve.”
   He said he expected life sciences will go from being about 18 to 20 percent of MNX’s revenues to upwards of a third of its business.
   The MNX-AirNet deal was followed in March by the announcement that AmerisourceBergen Corp. of Valley Forge, Pa., was buying World Courier Group of Stamford, Conn., for $520 million in cash. It expects to close the deal in June. AmerisourceBergen is one of the three largest drug distribution companies in the country, along with McKesson and Cardinal.
   World Courier is a global specialty provider of transportation, storage and distribution services for multinational biopharmaceutical clinical trials, and expected to have annual revenues of $500 million in 2012. It also serves sectors such as the automotive, aviation, high-tech, and oil and gas industries.
   “The acquisition of World Courier adds a new premium specialty service to our existing portfolio of market-leading pharmaceutical manufacturer services,” said Steven H. Collis, CEO of AmerisourceBergen. 
   World Courier has over 137 offices, 13 compliant storage depots, and 2,500 employees in 52 countries.
   Press reports said World Courier had hired Citibank to find a buyer and that both FedEx and UPS have shown interest in the company as well as private equity firms.
   A World Courier competitor, U.K.-based Marken Ltd., was acquired by Apax Partners in December 2009 for about £975 million (or $1.6 billion).
   Cannon noted UPS, DHL, and FedEx are all major players in the healthcare sector, which he said is growing dramatically.
   “Same-day has always been the crumbs of the industry, but those crumbs amount to a multibillion industry,” said Cannon, who is also president of the Express Delivery and Logistics Association (XLA).
   Same-day delivery has “always been our core,” Cannon said. “We’re an industry leader in that space globally and have had a brand recognition going back 30 years.”
   About 80 percent of MNX’s business is same-day deliveries, and another 20 percent is for express air freight and supply chain services similar to those offered by 4PLs.
   He said MNX will continue to work closely with AirNet, which will become an important provider of the lift that MNX uses to move its customers’ shipments.
   MNX had about $76 million in revenue in 2011. Cannon said that because of the acquisition and organic growth, he expects the company will have sales of more than $100 million in 2012. 
   Going forward, he anticipates roughly a third of the company’s business will be in the life sciences — a broad category that could include everything from biopharmaceuticals and clinical trial specimens to blood, tissue and organs.
   MNX got its start working in the entertainment industry, and Cannon said it will remain about a third of its business going forward. He said the company handles logistics for three of the four largest movie studios through global contracts.
   “We are probably the best known provider of same-day services, definitely within the Los Angeles area,” he said, adding the company also serves entertainment hubs such as London, Sidney, and Hong Kong.
   It moves products such as posters and standing displays for theaters, and Cannon said MNX was fortunate in that it was not heavily dependent on the actual movement of movie prints as the industry moves toward digital projection.
   Seventy-pound boxes with film reels have been replaced by five-pound hard drives and, in five years, he said much of that business will be replaced by films being beamed via satellite to movie theaters.
   Another 20 percent of the company’s business is aviation-related, moving time-critical parts to keep planes in the air.
   The remainder of the company’s business comes from moving cargo for a wide variety of manufacturing and service companies. MNX moves packages for payroll companies, the apparel industry, and high-tech companies such as semiconductor makers — “really everything else that you could imagine that uses same-day services.”
   While about 80 percent of MNX’s business is same-day, next-flight services, MNX offers other sorts of express services, though Cannon says “it’s all interconnected.”
   For example, when MNX ships marketing materials, such as posters and “standees” for studios, they are often shipped at the last minute, but are larger than smaller packages handled by the traditional next-flight services that most airlines offer.
   MNX is privately owned and Cannon is one of five shareholders. A private equity firm called St. Cloud Capital also has a small stake.
   He said MNX has been growing at about 30 percent annually in an industry that has been fairly stagnant, especially domestically. 
   The company has benefited from a strong international focus, part of its heritage as it was founded by a British businessman.
   MNX once derived 90 to 95 percent of its revenues from international business. That will decline to about 60 percent, in part because of AirNet’s domestic focus.
   “We think there is an opportunity for us to acquire other companies that are U.S.-centric,” Cannon said. “Obviously the U.S. economy is not growing as rapidly as around the world, and as customers’ needs evolve, companies like us chase them around the planet and to wherever the work goes. 
   “Because we’ve been internationally focused and have a network second to none in our opinion, I think we are well-suited to pick up a lot of additional customers around the world as more and more of our customers push operations to other parts of the world.”
  
Next Flight. Cannon says many people don’t even know that next-flight services exist or how they work.
   “If you needed to ship something from Newark, N.J. to Miami and it had to get there this afternoon, the way it would work is this: You would call us, we would take the order and we would dispatch a service partner, a local courier who would come to your facility and pick up whatever you need to ship.
   “He would then go to the commercial airline, and he would tender it on our airline account, and we would dispatch a courier in Miami to recover it from the airline and go deliver it on your behalf. We manage the entire process,” he said.
   Most airlines, he explained, sell a next-flight package service, and MNX uses the lift of 170 to 180 commercial airlines worldwide.
   One of the suppliers of lift to MNX will be AirNet. However, with AirNet focusing on air cargo, Cannon expects “service levels at Air Net are going to be much higher than you would expect from a commercial airline.”
   He said couriers can usually pick up and drop off cargo for next-flight services at cargo locations, though in some cases it will travel with baggage.
   The materials that MNX moves in the life sciences market generally weigh less than 25 pounds and are perhaps a foot square, but the company’s business runs the full gamut of dimensions — for example, it may charter a plane to move an aircraft engine.
   Why does a company like MNX get hired to move parts for big airlines?
   “As you can imagine, there are 100,000-plus parts on an airplane. If you look at all the places they fly to, it would be impossible for an airline to provision every single part they might need for every aircraft at every location,” Cannon said.
   Through an organization called the International Airlines Technical Pool, more than 100 member airlines share parts so planes can be repaired quickly and put back into service.
   “Buying inventory is very cost prohibitive and eats away at capital, so it’s cheaper to use a service like us and spend a little more on transportation then it is to provision every kind of part you could for an aircraft.”
   MNX is a small, “asset-light” business with about 250 employees after the acquisition of the AirNet business.
  
Life Science Lift. But the largest express companies, namely UPS, FedEx, and DHL, have also expanded aggressively into the pharmaceutical business.
   “It’s an area they want to grow,” said Kevin Sterling, a senior vice president and transportation industry analyst at BB&T Capital Markets. “If you look at air freight, it is one of the larger sectors.”
   Michael Eckstut, a principal at the Hackett Group consultancy, said because more pharmaceuticals are biological products, temperature control has become much more important.
   Like other businesses, there is a drive to reduce costs, but he said this is complicated in the drug industry because of the high cost of products and the need for specialized handling to ensure safety and patient health.
   It may be cheaper to move a product on next-flight or next-day services that result in better handling, Eckstut said. In addition to products that have to be kept within strict temperature parameters, there may be liquids prone to spillage or radioactive medicines.
   Take a seemingly simple decision like how to distribute product samples to salespeople. The logistics department may want to send that product using conventional overnight services, but if delivery can’t be guaranteed within a narrow time window, it may be worth paying more for special handling because the salesperson’s time is better spent with customers rather than waiting at home or in an office for hours to sign a delivery receipt for a drug.
   John Menna, director of UPS healthcare strategies, said his company handles everything from raw materials to manufacturers to delivery of final products to wholesalers, drug stores, hospitals, clinics or consumer’s homes.
   UPS has also developed a network of more than 30 dedicated healthcare distribution centers around the world, including over 20 in North America.
   While built specifically for healthcare products, the facilities have multiple companies as tenants, which Menna said reduces costs and makes it easier for companies to adjust up or down the amount of space they need as markets change.
   UPS moves life science products across all transport modes, including ocean, road, and air, and it also offers next-flight or next-day deliveries through its Express Critical business unit.
   This service is useful in several different ways, he explained. For example, he said a company may have an urgent need to move a rare product or help a hospital to quickly ship a sample.
   UPS also sells a proactive response, intercept service. If the normal small package or freight channel handling for a company’s shipment is hit with some disruption, such as bad weather, UPS will jump in and take special steps to protect the cargo. For example, it may need to put the product on dry ice or in a refrigerator, or ship it using a next-flight service.
   UPS has a secure air service mostly used by healthcare companies for very expensive or highly sensitive drugs. A bonded courier and armed guard will pick up a delivery at a manufacturer, bring it directly to the airport, place it on the plane and only leave when the plane is ready to be sealed for flight.
   A similar team of couriers and guards will wait at the other end and remove the cargo so it does not move through the normal freight stream, and deliver it to the consignee.
   What kind of cargo may get this kind of white-glove treatment? Narcotics, extremely rare samples, or exotic oncology drugs are a few of the examples Menna gave.
   Matt Daniels, vice president and general manager for DHL Same Day, said life sciences is a “growing market and requires a transit time often faster than what the traditional express carriers can offer. Life science customers expect a 24/7 service with visibility and are willing to pay more for the right service.”
   He said in the clinical trial area, pharmaceutical companies “are expanding the number of trials done on each project so this is also driving more volume. Our existing customers use us due to our reliability and the access to information we provide. We are working on a hybrid model which will leverage our existing express network with the expertise of our same-day service offering. This will provide a more cost-effective solution than what our competitors can offer.”
   UPS’s Menna said clinical trials involve both the movement of investigative medicines to patients and samples back to centralized laboratories for analysis.
   He said more of those trials are taking place overseas in places such as Africa and China. He explained the cost of trials in some of these areas may be cheaper and drug companies want to test products on patients who are not already taking other drugs, and because it may be important to test drugs in persons with varied genetics.
   Daniels said DHL’s strong international network is one of the reasons the express carrier is involved and expanding in the clinical trial business.