Healthcare is in the spotlight south of the border as the presidential campaign gets in full swing. If the Democrats gain control of the House, Senate, Oval Office, or any combination thereof, change is in the wind.
The U.S. healthcare debate has simmered for years, but it has come to the boil because of the growing sense that the cost of drugs, hospital visits, and treatments by doctors is spiraling out of control.
Those people without insurance face huge odds in getting care, while those with insurance are paying more and more for what they have.
A recent article in the Globe & Mail highlighted how acute the problem has become – mothers of children with Type 1 diabetes who live in Minnesota crossing into Fort Frances, Ontario in minivans to buy insulin at a fraction of the cost they would pay at home.
The U.S. healthcare dilemma is putting pressure on all aspects of the system to cut costs. One area that is at the heart of healthcare delivery – though mostly out of sight – is healthcare logistics.
This refers to the distribution of supplies and consumables to hospitals, doctors, and pharmacies, as well as the just-in-time delivery of temperature-sensitive drugs, biologics, and organs and tissues used in transplants.
Getting this right means connecting medical products to the point of care. By one estimate, the global market is huge and growing by 4% a year, with a value of US$81 billion in 2019. A report to the Ontario Government in 2017 valued the province’s medical supply spending that year at C$12 billion.
This sector is a place where new technologies play a big part. Artificial intelligence software (AI), which learns as it goes, is helping plan deliveries. The Internet of Things (IoT) is connecting the software to handheld devices. Blockchain technology is creating shared platforms so hospitals, doctors, suppliers, and shippers can see where the supplies are in the chain.
Among the biggest players in this field are, naturally enough, multinational shipping giants. They include the two largest American companies, United Parcel Service (NYSE: UPS) and FedEx Corp. (NYSE: FDX), as well as Deutsche Post DHL, which is headquartered in Frankfurt, Germany.
DHL, UPS, and FedEx have been building the expertise and infrastructure to handle heavily regulated, high-value, and sensitive products like cancer drugs and vaccines. That gives them an edge over would-be rivals like Amazon.com, which is trying to muscle in on this business.
UPS looks to Blockchain
UPS is the world’s largest package delivery company, with a market capitalization of US$87.6 billion. It operates in 220 countries and territories and employs 481,000 people. Its operations include a cargo airline, freight-based trucking, and 5,000 franchised UPS stores. In 2018, it had net income of US$4.79 billion and revenues of US$71.8 billion.
The company has increased its dividend every year since 2010. At the current share price of US$101.16, the $3.84 annual payout yields 3.84% on a trailing 12-month basis. Its trailing 12-month p/e ratio is 14.38.
UPS is combining its traditional competency with new technologies to give it an edge. For example, the company hopes it will one day be able to accept crypto currencies. It recently filed a patent for a blockchain tracking system for healthcare and other shipments. The patent helps route packages through an international supply chain that may include multiple carriers.
Once a package has been scanned, the software will choose a route based on the fastest delivery, using its network of shippers. As the package travels to its destination, information about the shipment will be recorded in a shared ledger.
The use of unmanned drones is spreading as a way to deliver medical supplies to remote places. Through the UPS Foundation, UPS has combined blockchain, AI, and IoT with drones to deliver drugs in remote parts of Ghana. The Foundation is expanding a medical drone network in partnership with Zipline, a privately-held California-based automated logistics company. The start-up is backed by the likes of Google Ventures, Microsoft co-founder Paul Allen, and Yahoo co-founder Jerry Yang.
Working with the Ghanaian government, Zipline will operate 30 drones to make on-demand deliveries of such high priority products as emergency and routine vaccines, blood products, and medications.
The service will operate 24 hours a day, seven days a week, from four distribution centres, each equipped with 30 drones. It will deliver to over 2,000 health facilities serving 12 million people across the country.
UPS supported a similar initiative in Rwanda using drones for just-in-time delivery of blood products at hard-to-reach clinics.
The U.S. experiment
These experiments are being leveraged in the U.S. with Matternet, a Swiss drone start up. It will test medical supply delivery in North Carolina.
Matternet is a leader in unmanned aerial delivery in urban environments. In 2017, the Swiss government licensed it as the first company to be allowed to perform drone deliveries over densely populated areas in the country. In 2018, it was selected by the Federal Aviation Administration (FAA) to carry out drone logistics operations for US hospitals.
In March, UPS announced a collaboration with Matternet in the Raleigh, N.C., metropolitan area, serving several hospitals. It includes close co-operation with the FAA and North Carolina Department of Transportation.
A medical professional will load a secure container with a blood or tissue sample onto a Matternet drone which can carry medical payloads up to five pounds over distances of up to 12.5 miles. The drone will fly along a predetermined flight path to a landing pad at a hospital lab. The program will help UPS develop services at other hospitals and medical facilities across the U.S.
FedEx and the Dutch connection
FedEx and UPS go head to head in most areas and that includes healthcare logistics. FedEx has a market capitalization of US$41.48 billion. It also operates in 220 countries and employs 440,000 people. It has 39 ground hubs and 600 operating facilities and handles 15 million packages a day.
In the 12 months to May 31, it earned $540 million on revenues of $69.7 billion.
Revenue for the 2019 fourth quarter, ended May 31, rose 2.8%, to US$17.8 billion. This was partly due to an expansion of its ground delivery service in the U.S. to six days, from five. That has meant added costs and earnings in the quarter fell 17.7%, to $1.32 billion.
The company is another dividend aristocrat with its $2.60 annual payout. At the recent price of $159.19, it yields 1.63%. Its trailing 12-month p/e ratio is 10.36.
FedEx sees applications for drones in its healthcare unit, noting in a background paper on its website that the sector has been a first adopter of drone deliveries. As drones evolve, they will allow for easier transportation of refrigerated products. FedEx sees drone delivery aiding hospitals, labs, and being useful on battlefields, natural disaster zones, and other places where weak infrastructure makes conventional transport ineffective. Other applications include situations where small quantities are delivered quickly over relatively short distances.
In 2016, FedEx completed a $4.9 billion acquisition of TNT Express NV, which is based in the Netherlands. The acquisition makes FedEx the second-largest European delivery firm, after United Parcel Service.
TNT Express NV operates road and air transportation networks in Brazil, Chile, Argentina, Australia, and New Zealand, as well as Europe, Asia, the Middle East, and Africa. It was particularly attractive because it has operated in healthcare logistics for 30 years.
It offers next-day delivery to 96% of the hospitals in Europe – a better coverage than any other competitor. This includes just-in-time delivery of such medical devices as hip and knee replacements so hospitals don’t need to keep as many of these expensive devices on hand. In 60 countries where it operates, it had dedicated healthcare teams working with clients to ensure proper handling and delivery of sensitive goods.
Starting next year, the company will expand U.S. ground delivery service from six days to seven days a week. This demand is coming from the rise in online shopping.
Trade war tensions and worries about rising tariffs have weighed heavily on FedEx and UPS in the past year. If the global economy slows, customers may opt for ground delivery, which is slower but cheaper.
At the same time, the companies are spending money to upgrade hubs and their fleets of trucks and airplanes.
Their share prices and p/e ratios reflect that. FedEx’ stock was down 1.33% year-to-date as of July 10 and 32.2% in the past 12 months. UPS is up 4.3% year to date and down 6.3 % in the past 52 weeks. Both dividends would seem safe.
These companies are making investments in their future to remain dominant. Both are geographically diversified, with expanding revenue, and offer a way to participate safely in the development of new technologies including drones, blockchain software, AI, and Internet of Things. Growth in online shopping and healthcare logistics offer a way to buffer other pressures.
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A version of this article appeared in the Internet Wealth Builder investment advisory on July 15, 2019.
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