This article examines the channels for testing, holding and moving drugs that have to be stored at cold temperatures and in ways that are safe. Get used to a new term: the "cold chain". It is one that investors, including those at wealth managers, should note, so the author here argues.
As the world enters the second year of the fight against COVID-19, focus is moving from vaccine discovery and regulatory approval to mass production and distribution. The global cold supply chain, which until recently remained unchanged for decades, is now innovating at an extraordinary pace. This is to meet both the challenges of COVID and also more sophisticated drug creation through biologics, which have better patient outcomes than previous generations of drugs but require more sophisticated handling through the transportation process. In a sector where pre-COVID growth was a minimum of 20 per cent per annum, this combination of innovation and increasing demand is seeing a rise in interest from investors, from the sale of Envirotainer at a valuation of over $1.5 billion in 2018 to Cyroport Inc’s market capitalisation now exceeding $3 billion.
The article is written by Richard Ettl, chief executive and co-founder of SkyCell, a pharmaceutical logistics technology company based in Zurich.
The last 18 months have seen innovation accelerate across countless industries - the supercharged development, testing, and regulatory approval of vaccines against COVID-19 being the prime example. In an industry typically laden with patient process, the unprecedentedly rapid creation of vaccines has shown that when crisis strikes, ingenuity thrives. However, the discovery of vaccines, while critical, represents just one link in the chain required to defeat this disease.
As the focus has moved away from drug development, invention has been required elsewhere, and will continue to be for some time as governments, charities, and NGOs around the world settle in for the long haul of the global rollout programme. One such area is the global cold supply chain, a system that has remained unchanged for decades but is now flourishing in order to meet the unprecedented demand for vaccines worldwide. This process of change is supporting not just efforts to control the coronavirus pandemic, but also the rollout of biologics – a new, more sophisticated, generation of drugs coming onto the market to treat a range of illnesses. With this sophistication comes complexity and sensitivity: transporting biologics – products created from live organisms – is challenging. As these medicines are effectively “alive,” transporting them requires delicately orchestrated conditions in order to prevent spoilage.
With this rise in biologics, the global cold supply chain has required some deft innovation in recent years – innovation that investors are waking up to. The combination of increasing demand and innovators challenging the industry incumbents has created a fertile environment for investment. The global cold chain market was valued at $211 billion in 2020, and this momentum is showing no signs of abating, with the market expected to grow at a compound annual growth rate of 14.8 per cent from 2021 to 2028. Recent major deals further exemplify this growth potential – Envirotainer was recently purchased by Cinven at a valuation of over $1.5 billion, and Cryoport Inc’s market cap has now exceeded $2.5 billion.
The market is dominated by a small number of companies, with DHL remaining the largest pharma freight forwarder by revenue, followed by Kuehne+Nagel. The big players are aware of the need to evolve, and have spotted opportunities to secure competitive advantage by acquiring disruptors – in the services space, Amerisource Bergen bought World Courier, and UPS acquired Marken. The deficit in the global cold supply chain that the pandemic exposed was primarily a technology one, though, and innovative tech firms in the space have yet to be snapped up by incumbents, leaving opportunities for investors – from venture capital to private equity – to capitalise on untapped potential.
Breaking into this industry is not without its challenges – as the variety of pharmaceutical products continues to expand, companies planning to disrupt the space need to account for reducing spoilage (the cold supply chain has typically accepted spoilage rates between 2.1 per cent in Western countries and as much as 12 per cent in emerging markets), environmental challenges, and growing regulatory demands. In addition, transportation of biologics is complex – those operating in the cold supply chain need to be able to account for different conditions, such as air and sea freight, fluctuating temperatures, shock and vibration, and the intricacies of last-mile delivery. The stakes, particularly for pharmaceutical boards and investors, have risen dramatically – and not just because of the pandemic.
High-value products mean increased financial risk in transportation, but also significant opportunity for growth. The key lies in automated, secure supply chains that utilise the latest in software and hardware innovation.
Historically, one of the cold chain’s great challenges has been the environmental impact due to the methods of transportation and the energy required for refrigeration – a fact pharmaceutical investors are all too conscious of. The Carbon Disclosure Project (CDP), which rates companies on their environmental performance to guide investors, found that only three pharma companies made the list of 120 with the best climate change policies. However, this is changing: technological advances have meant that the impact can be significantly reduced while also ensuring that spoilage can be reduced to almost zero, critical when moving life-saving medicines and vaccines around the world.
The last 18 months have transformed the way in which pharmaceutical companies, investors, and governments view the global cold supply chain. The pandemic has supplied the jumpstart that the industry needed – the industry was stagnant and complacent for years, accepting such a high degree of spoilage, but the gravity of the pandemic has brought home how unacceptable such a high rate really is and driven pharmaceutical companies to accelerate adoption of more secure and efficient alternatives. Not just a question of protecting profit, it is imperative to saving lives and managing environmental impact in a post-pandemic society. As a result, investors are realising that “what’s cold is gold” in today’s economy.
As countries begin to emerge from the COVID-induced crisis mode in the coming years, this global cold supply chain will remain “hot” and those that back the innovators of supply chain 4.0 will find themselves in possession of cold hard cash.