The Takeaway: A Q&A With Burke Smith on Time-Critical Logistics

Pharma and healthcare logistics has emerged as an intensely active sector within the overall transportation and logistics market. Why is that happening now?

Across the logistics landscape, coming out of the COVID-19 boom, many companies have been in a post-binge recovery mode. Logistics service providers aggressively expanded their capabilities during COVID-19 to solve pervasive supply chain dislocations for customers and consequently harvested unnaturally high profits. In most segments, the height of the peak has been more than matched by the depth and length of the recovery. We remain in the longest-dated general freight recession in recent history, by far the longest.

Healthcare logistics, and particularly pharmaceutical logistics, has traced a different pattern. Many specialized pharma logistics providers have sustained performance across the last several years, leveraging a demonstrable value-add for shipper customers and favorable end-market dynamics. COVID-19 drove massive nonrecurring demand for vaccine distribution and other key logistical needs. However, even as that one-time demand waned, broader developments in biologics, radiopharma, cell gene therapy, and other emerging areas, each with specialized distribution needs, have carried beyond COVID-19. Large, well-capitalized integrated logistics providers like UPS, DHL, and FedEx, as well as Japanese competitors like Nippon Express and Yusen Logistics, have targeted the segment as a key growth vector and have poured billions of dollars into an acquisition-led arms race.

Just in the last few months, UPS announced the $1.6 billion acquisition of Andlauer Healthcare Group, DHL acquired CRYOPDP from CryoPort for $195 million, Nippon Express acquired Simon Hegele, and Yusen Logistics announced an agreement to acquire the healthcare business of Walden Group for approximately $1.5 billion.

What are some key differentiating capabilities that players need to develop to be successful in the sector?

At its core, pharma logistics—like other areas of time-critical logistics—is driven by a need for on-time delivery. However, pharma logistics has other elements such as regulatory compliance, lot control tracing and documentation, unique temperature demands, and other characteristics that create complex and sometimes high-stakes operating demands. So, operational excellence is table stakes.

Technology turns out to be a big piece of that. Having the right technology and underlying system can be a major differentiator, whether that’s a combination of a third-party forwarding platform that’s been customized or a completely proprietary system that’s been developed specifically for the end use. Remarkably, even some of the largest players in the U.S. and global healthcare supply chain lack the integrated systems to manage and provide real-time shipment visibility. Shippers ascribe real value to these capabilities.

Beyond technology, a key intangible element is developing a comprehensive and uncompromising culture around on-time delivery and client success/service levels. While this factor can be difficult to assess from the outside in, culture ultimately drives success across a broad spectrum of logistics categories.

With large strategic players aggressively focused on the sector, is it too late for financial sponsors to enter healthcare logistics and build value?

No, it’s not too late. There are platforms being built in real time. Yes, the strategics are in an escalating arms race. Any sponsor wanting to play within the sector will need to compete against the strategics for most scaled assets. However, this is a large and broad market with pockets of significant remaining fragmentation in areas where the large strategics are not focused as well as emerging service categories. For example, last-mile B2B drug delivery in the United States is a fairly fragmented sector. The three large drug distributors generally have outsourced this function and expressed a desire to work with fewer larger and more sophisticated service providers. They favor consolidation in the outsourced service provider networks. The evolution of B2C direct-to-home drug delivery is another emerging area of focus given well-publicized moves in that direction by Amazon and others. Finally, rapid growth in drug categories with more specialized handling requirements, particularly around product temperature, creates opportunities for new service models. Significant investments are being made into purpose-built pharmaceutical warehousing networks overlaid with customized transport solutions.

Outside of pharma and healthcare, what other areas of time-critical logistics are interesting right now?

Time-critical spare parts logistics is another area with similar characteristics. One of the main distinguishing features is an underlying high cost of failure. So, for example, with marine spare parts, the cost of downtime for a vessel typically far outweighs the incremental cost of keeping a vessel in port longer. And the classic time-definite or time-critical category would be the aircraft on ground (AOG) space where there’s an aircraft that needs a part that’s not at that airport, so someone needs to transport it from A to B to get that plane moving. Beyond those examples, there are other categories that might be slightly less time critical but have similar cost-of-failure dynamics, like high-value goods such as art, expensive wine, trade show items, and all the gear and props supporting complex traveling live events. Time-critical logistics is a diverse space, with some players trying to be very specific in what they do—for example, keeping to a narrow focus on marine spare parts. And then others are developing a portfolio of different end-market silos within a broader time-critical platform, network, and set of capabilities.

So what’s The Takeaway?

The global logistics and transport market is massive and diverse. While parts of the market are challenged currently, long-term fundamentals remain intact, and one shouldn’t paint the entire ecosystem with a broad brush. Even in the face of tariff uncertainty, logistics players with a nimble partnership approach can help shippers manage supply chain complexity and differentiate themselves. Pockets of the market are quite healthy, with favorable end-market dynamics, differentiated service models supporting stronger profit margins, and robust deal activity. Time-critical logistics—including healthcare but also parts logistics and other high-cost-of-failure logistics categories—is a fertile category populated with differentiated value-added players ready to be scaled.