UPS Updates: Expansion in Pharma Logistics Shows Promise

The stock of the leading logistics company, UPS (NYSE:UPS) traded in a tight range during the first half of December while trending slightly lower as broader market exhibited some weakness. Among the noticeable developments at UPS this month, the company announced an agreement to purchase Italy-based pharmaceutical logistics provider, Pieffe Group. While terms of the deal stand undisclosed at the moment, we expect the acquisition to support UPS’s ongoing global healthcare strategy by adding value to its European healthcare network.

The deal brings two major healthcare distribution facilities to UPS’s existing global network, one in Milan and the other in Rome. With the healthcare logistics spending expected to cross $100 billion over the next decade, healthcare distribution represents a lucrative opportunity for UPS. The pharmaceuticals sector spend comprised 85.1% of overall healthcare logistics spending in Italy, last year. The agreement offers UPS, a combined space of nearly 753,500 square feet including 12 cold storage areas, with options for further expansion. This adds to UPS’s global healthcare distribution footprint of more than 4 million square feet and positions it well to capitalize on the healthcare logistics opportunity.

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Just last month, UPS announced the expansion of healthcare capabilities to Asia with the launch of two cold chain offerings. With increasing global research and development as well as public healthcare investments in Asia, the region is estimated to grow to almost 40 percent of global revenues in the healthcare industry by 2015, from the current revenues of just 27 percent. (See UPS Press Release, Nov 23)

We expect the combined effect of burgeoning demand and high yields to attract competition in the sector with competitors such as Lufthansa Cargo and FedEx (NYSE:FDX) also investing heavily in healthcare logistics. However, transporting healthcare products requires bespoke capabilities such as temperature-sensitive handling, regulatory compliance and advanced security. These barriers to entry will make established logistics firms all the more attractive to Asian suppliers and should allow UPS to expand its freight division well beyond the less than 1% it currently contributes to the stock price. We discussed the drivers of the pharma logistics boom at length in a recent article. (See UPS, Fedex Ready for Generic Drugs as Next Boom in Shipping)

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