Merck Outsources Distribution to UPS

An article published on January
7, 2009 in Wall Street Journal reported that United Parcel Service Inc. said it
agreed to manage U.S. distribution for most of Merck & Co.'s drugs and
vaccines, and to provide package-transportation services for the company.

Merck, based in Whitehouse Station, N.J., had previously handled
distribution in-house, but decided to outsource much of the function to UPS as
part of an effort to save costs and better focus on core tasks such as drug
research, a Merck spokeswoman said. Financial terms weren't disclosed.

The deal illustrates how major drug makers are increasingly turning to
outside partners for assistance with a range of functions, from drug testing to
sales and marketing. Merck also has been striving to reduce costs, and
announced in October that it would cut an additional 7,200 positions by the end
of 2011.

For Atlanta-based UPS, the deal underscores its expansion into health-care
services, though that isn't seen as a serious competitive threat to the
wholesale-drug distribution industry. From its 2000 acquisition of Livingston
Healthcare Services, UPS has built up a network of health-care distribution
centers.

The deal comes at a tough time for shipping companies. Although high fuel
prices have receded, trucking and shipping companies face declines in orders
and sales across a range of industries. In December, UPS's investment ratings
were cut by several firms. J.P. Morgan said UPS had relatively outperformed
other transporters since the beginning of November, but it no longer expects
that outperformance to continue.

Through its unit UPS Supply Chain Solutions, UPS has taken control of two
Merck distribution centers comprising more than 200,000 square feet of space,
which provide the drug maker with temperature-controlled storage, packaging and
transportation services. Most of Merck's U.S. vaccines and pharmaceuticals go
through the two centers, located in suburban Atlanta and Reno, Nev.

UPS also plans to open two new health-care distribution centers, in Puerto
Rico and the Netherlands.

"UPS has been pushing into the health-care market pretty
aggressively as an outsourcing logistics provider over the last several
years," said Adam Fein, president of Pembroke Consulting, a pharmaceutical
supply-chain consulting firm in Philadelphia. But it isn't seen as a serious threat to the wholesale-drug distribution
industry, which is dominated by AmerisourceBergen Corp., McKesson Corp. and
Cardinal Health Inc.

Source: Loftus, Peter and Brin, Dinah Wisenberg,  “UPS Gets Merck Contract” Wall Street Journal, January 7, 2009.