A conversation with Brian Shotto, Owens & Minor

Owens & Minor, Inc. is a leading US-based distributor of healthcare products, a supply chain solutions provider, and now a leading provider of healthcare logistics services in Europe and the U.S. Founded in 1882, the company has 48 distribution centers located strategically across the United States to serve its 4,000 healthcare-provider customers, and its 1,400 supplier partners. In 2010, Owens & Minor launched a domestic contract logistics business, establishing two logistics centers—one in Redlands, CA and a second facility in Louisville, KY. OM Healthcare Logistics (OM HCL) provides activity-based warehousing, transportation, order-to-cash, and value-added services for pharmaceutical and medical-device manufacturers. During the summer of 2012, Owens & Minor acquired the Movianto Group from Celesio AG for approximately €130 million. Movianto services correlated perfectly to those provided by OM HCL, creating an integrated service offering throughout the US and EU.

Pharmaceutical Commerce sat down with Brian Shotto, senior vice president, specialty services, Owens & Minor, to find out how this acquisition changes the company, and what it means to the international healthcare community.

1. Let’s start with this latest acquisition, Movianto. What made the acquisition attractive to O&M, and where do you hope to go with it in the next few years?

The EU represents a new market for Owens & Minor and a promising opportunity. With approximately 74% of the global healthcare spend centered in North America and Europe, healthcare manufacturers can now leverage our synchronized network of logistics centers and validated technology to provide a seamless and integrated logistics experience with greater global visibility. Manufacturers can go to sleep at night assured their products are being managed within a single integrated network in a highly compliant manner. We believe this will improve the integrity of the global healthcare supply chain.

As an acquisition, Movianto represents a ready-made network with the industry and in-country expertise needed to serve manufacturers of healthcare products with a holistic suite of services. Movianto maintains 23 logistics centers in 11 countries across Europe, and provides local, regional and global reach for its customers. Movianto has an experienced team of 1,800 logistics professionals currently serving more than 600 healthcare manufacturers.

Prior to the divestiture of Movianto, the parent company had invested heavily in building specialized distribution capacity throughout the network. This network supports a range of storage conditions such as controlled room temperature (20—25°C), 2–8°C, -20°C and -40°C cold rooms. We also have experience in multiple classes of products, including controlled substance handling, API material, and clinical trials. Additionally, we can provide customized services such as re-labeling, kitting with inventory postponement, and packaging. The distribution network is complemented by a private fleet of validated cold-chain delivery trucks to ensure efficacy and auditability of temperature-sensitive products throughout the in-transit experience.

Movianto’s suite of services aligns perfectly with those provided by OM HCL in the US. The service synergies of the two entities, combined with the available capacity in the EU, made this a very attractive acquisition for Owens & Minor, as we are immediately prepared to provide an integrated, US-European logistics model. We believe that had we chosen to “green-field” this pan-European network, it would have taken years to accomplish, and the cost to build the network, secure contracts and gain in-country experience would have been cost prohibitive.

Also, there is a significant trend occurring in the EU today, where healthcare manufacturers are consolidating supply chain partners, and we are seeing a similar trend globally. This was evident early in our relationship with Movianto, whereby we found immediate opportunities to cross-sell Movianto’s services to legacy O&M manufacturers in Europe, as well as the opportunity to expand our European relationships to the US. It just makes sense for a manufacturer to partner with a global provider who can provide efficient and effective service from a single validated IT platform.

The purchase of Movianto truly puts Owens & Minor on the map as one of the few healthcare-only, activity-based providers that offers an integrated solution.

2. Everyone knows that participation in the EU allows cross-border movement relatively freely, but is there more to be said than that when it comes to healthcare products?

There is more to be said on this topic. The nature of cross-border commerce across Europe is a fairly complex one, despite the presence of the European Union. Let me begin by stating the obvious, which is, regardless of any particular global market, manufacturers are generally trying to find the perfect balance between the following:

• Transportation costs
• Warehousing costs
• Inventory carrying costs
• Customer service requirements
• Quality and compliance
• Tax burden

However, the devil is always in the details in how best to realize this balance. In the EU in particular, a case can be made for any manufacturer to create a product, category or business-unit-specific supply chain based on one or any of the following: product type (medical device, biotech, etc.), product handling (controlled substance, temperature sensitive), volume of product, tax implications, channel configuration, customer service commitments and/or country-specific regulatory compliance issues.

For example, there are still certain countries that require manufacturers to have local distribution centers in order to distribute within that country. Another challenge for manufacturers is cross-border movement of controlled substances. This process can add days to the order cycle time for these products; therefore, many manufacturers opt to store controlled substances locally.

Also, each country has its own set of challenges related to factors such as cultural differences, language, product preferences and labeling requirements. Movianto’s local, regional and pan-European expertise is already equipped to handle these preferences. This expertise is simply part of the requirement of doing business in Europe.

However, there are also areas where manufacturers can achieve pan-European efficiencies. Consolidating service providers on a pan-European basis, and/or regionalizing distribution points, can improve inventory turns and standardize processes that ultimately correlate to an improved patient experience. Regardless of the supply chain design for any product or manufacturer, Movianto has the breadth of services and the network to “operationalize” the perfectly balanced solution. In the past, supply chain decision-making was made at the country level. Today, we see this more localized decision-making migrating to being “pan-European.” We are also seeing manufacturers moving to global distribution partners. As this trend increases, we are positioning ourselves as the provider of choice for our manufacturer partners.

On the regulatory side: The proposal for a revision of the European Good Distribution Practice Guidelines (GDPs) suggests some major changes to the current standards in place. The new guidelines, expected in the near future, could significantly increase the cost of distribution in Europe, especially for wholesalers. We believe this presents an opportunity for Movianto.

While austerity measures and the sluggish economic conditions might affect the volume of products in the global healthcare pipeline, we see this as a potential opportunity for manufacturers to strongly consider their outsourcing options and “lean out” their supply chains. And, as economic conditions improve, we expect to see increased consumption of healthcare and related products that will have a positive impact on Movianto’s network utilization and transactional volume.

Among the other factors that made Movianto attractive to Owens & Minor: The two companies share a similar culture of hard-working, customer-focused teams. Our pedigrees are rooted in the healthcare environment rather than the traditional transportation or warehousing-based 3PL environments. We believe this cultural alignment is a differentiator.

Now, the task at hand for Owens & Minor is to build our US-European client base by offering lean integrated solutions by leveraging the capacity in the Movianto network and offering the healthcare community new and more streamlined solutions. We view this as a tremendous opportunity for the collective Owens & Minor organization, and our success will be instrumental in continuing our 130-year legacy of creating value for the healthcare industry.

3. What will be the impact, if any, on import/export of healthcare products between EU and the US?

We know that 74% of global healthcare spend occurs in North America and Europe, and while this growth is estimated be in the range of 2—4% over the next few years, the logistics spend for manufacturers in these geographies will always remain material.

To your specific question, if you’re a multinational manufacturer, you understand the challenges and expect continued changes in governmental influences on pricing and reimbursements, and you should expect enhanced regulatory requirements—particularly around compliance for temperature sensitive products. If you are only selling products in the US or Europe today, you have a different set of challenges. European manufacturers expanding to the US will find manageable regulatory hurdles and numerous distribution options. US manufacturers attempting to expand to Europe and/or ROW will encounter many more intra-EU product registration, labeling, and tax-related issues, all of which require in-country support.

With the acquisition of Movianto, we can now assist manufacturers seeking expertise in the movement of product between the US and Europe as well as those needing assistance with local, regional, pan-European, US or global expertise.

4. Historically, while pharma and med device manufacturing has always been multinational, most of the time manufacturers would see to it that the products moved to other nations and regions, and then leave it in the hands of local distributors and retailers. Now, there seems to be the beginnings of a movement for providing global distribution services from a growing number of international distribution companies. Where is the international healthcare products distribution business heading?

Having spent my career in healthcare logistics, I have seen unprecedented change in the last five years, and believe it will only accelerate in the coming years. Therefore, the broad answer to the question is that it depends how far into the future you wish to look, and through which lens you are looking.

If you agree that there are only two constants in the supply chain—manufacturers and patients—and you identify the macro trends affecting these constants on a global basis, clues might reveal where the market is heading. Some of these trends are particularly true in established markets like the US and Europe:

• Margin compression on manufacturers and points-of-care
• Outcomes-based compensation
• Regulatory compliance complexities
• Commoditization of products
• Reduced access to caregivers
• Industry consolidation
• Globalization and regionalization

These trends have had an impact on channel strategies in the recent past and will continue to have impacts well into the future. Products, product channels, and where patients receive care can and will change in the future. Combined with the trends I have mentioned, it becomes evident that the future channel landscape will change and there will be winners and losers.

Everyone involved is trying to figure out how to win in the healthcare space of the future. Global supply chain organizations that adapt to bring value to both manufacturers and patients through true activity based pricing, regulatory compliance, information transparency, and operational excellence will be the winners.