More than two million people die each year from diseases that could otherwise be prevented through the use of vaccines targeted at those ailments. The challenge is not so much a shortage in the supply of those vaccines, but that they must be refrigerated from their point of manufacture to their point of distribution to end-users in remote locations that lack the reliable power required to keep those vaccines properly chilled.
The vaccine industry is only one of several sectors where maintaining the integrity of the “cold chain” is critical for preserving the safety and efficacy of high-value goods, notes Harvey Rubin, professor of medicine at the University of Pennsylvania’s Perelman School of Medicine. Although consumers in the industrialized world often take it for granted, sound management of the cold chain is critical in the manufacturing and distribution of pharmaceuticals, for food service products (for restaurants, hospitals and other institutions), and for high-value products such as frozen foods, meats, fruits and fish. Maintaining the integrity of the cold chain also plays a vital role in efforts to comply with stringent regulations for food and drug safety.
Recently, managing the cold chain has become so profitable that some private equity firms are expanding their ownership in some leading third-party cold-chain management providers. Could IPOs be around the corner for some of those firms?
The ‘Missing Link’
As Rubin notes,“The vaccine story is one small part of the cold chain, and the cold chain story is one small part of the supply chain,” which enables many companies to increase their profitability even as they serve customers in ever-more remote locations around the world. Rubin is a director of Energize the Chain, a Philadelphia-based non-profit whose stated goal is to “solve the missing link in the delivery of vaccines to the world’s poorest” by creating “an economically and technologically sustainable energy infrastructure of the effective transportation and storage of vaccines.” How so? By harnessing the energy potential of telecommunications towers that are found in many of the most remote locations where refrigeration is in short supply.
“There will always be a need for [a cold chain] — but it won’t be just vaccines.” –Harvey Rubin
So far, Energize the Chain [“EtC”] has 110 such sites up and running in Zimbabwe, with another 100 planned next year. In India, a similar project will be launched soon. “This [process] involves doing a lot of GIS (Geographic Information Systems) mapping of where the cell towers are compared with the health clinics, and then optimizing the placement of refrigeration systems” so they can feed off the unused power of those towers, Rubin notes. “We [also] have a foundation set up in South Africa, which will help us roll it out throughout the rest of Africa.”
Already, EtC has enabled about 250,000 children to be vaccinated in Zimbabwe, but that is only the start of something much larger, says Rubin, who is also director of Penn’s Institute for Strategic Threat Analysis and Response (ISTAR), which is dedicated to addressing scientific and technical issues that threaten international security. “There are about ten million kids out there who are vulnerable in very remote parts of the world. I would like, if things go well, to reach two-thirds to three-quarters of those kids. If we could do that, I would consider this a tremendous success.”
Vaccines are just one of many health care-related products that can benefit from Energize the Chain’s novel approach to creating cool-chain infrastructure in the most remote locations. As Rubin explains, “There are a number of other things you need to keep cold; for example, some medicines that stop post-partum hemorrhaging, which is a life-saving measure in many parts of the world. Even insulin needs to be kept cold and must be taken every day. Our solution is not going to be of much value in Nairobi, for example, or in Bangalore, [or other cities] where there is sufficient power. But it will be important in the more remote parts of the world” where sizable portions of the lower-income population –even in emerging economies like Brazil and China –lack access to reliable, secure refrigerated facilities.
There will also be more kinds of vaccines coming down the pike, Rubin predicts, perhaps including the HPV (human papillomavirus) vaccine, which may become more commonly used around the world. “Who knows? We may even have a malaria vaccine, or even an HIV vaccine. And then we have to be ready as the industry develops newer and more efficient vaccinations. People are talking about a cancer vaccine; there is a tremendous pipeline coming down…. There will always be a need for [a cold chain] — but it won’t be just vaccines; there will other medicines that will need to use part of the cold chain.”
Creating a reliable, secure supply chain in the developing world, and even in the middle-income countries, is a very large problem that will likely be addressed by non-profits and for-profit entities alike. “We are just in the beginning stages of putting together a project that will really look at what is needed [in terms of] the full supply chain in middle-income and low-income countries,” Rubin notes. “We know that the pharmaceutical industry would love to get their product out, but even in mid-income countries they have a difficult time.”
Rubin adds that the initiatives of EtC in Zimbabwe provide a “very nice example of a public-private NGO partnership” at a time when the United Nations has made public-private partnerships a major focus of efforts to reach its latest Millennium Development Goals, which range from halving extreme poverty rates to halting the spread of HIV/AIDS and providing universal primary education, all by the target date of 2015. “Countries generally recognize that the private sector may be helpful in solving some of these supply chain –especially cold chain – problems, and that the public sector is important, but that neither one of them alone is adequate to solve the problem.”
“The general public doesn’t have a good grasp on how the food they consume gets to their plate.” –Corey Rosenbusch
In the case of EtC, Rubin notes, “the private sector is the cell tower operators, and the public sector is the Ministry of Health. Before [our initiative], they didn’t have any reason to talk with each other, and now they do.” In Zimbabwe, the private sector partner is Econet Wireless, the global telecom service provider headed by Strive Masiyiwa, its Zimbabwe-born founder and chairman. “We are taking all of our lessons learned in Zimbabwe, and putting together tool kits. We will do a health impact study, and an optimization study — and roll out this solution throughout Africa. Every country will be slightly different.”
Public-private partnerships can solve some very difficult problems, Rubin adds, “but we have to be very creative about how we incentivize the private sector — and also about how we assure the public sector that this will be a solution in the long haul.” The danger, he says, is that a project may be viewed as a one-off solution, “where some do-gooder retires” after the project is completed and the entire solution dissolves. Rubin notes that firms in Africa, India and elsewhere increasingly recognize the value of enhancing their corporate social responsibility image by associating themselves with cold chain initiatives. In Zimbabwe, Econet uses billboards to advertise its association with the EtC initiative.
On the Dining Table
Until recently, even in the developed world, ignorance of the importance of the cold chain has been widespread. Corey Rosenbusch, president and CEO of the Global Cold Chain Alliance, argues that “for a long time, many consumers didn’t understand where their food came from.” Rosenbusch’s association brings together the International Association of Refrigerated Warehouses (IARW), the World Food Logistics Organization (WFLO), the International Refrigerated Transportation Association (IRTA) and the International Association for Cold Storage Construction (IACSC). Even today, “the general public doesn’t have a good grasp on how the food they consume gets to their plate. I think that’s evolving very rapidly, which is good –but is also bad, because there is a lot of bad information out there.”
To illustrate that point, Rosenbusch cites advertisements urging consumers to eat only things that are “fresh.”“Eating frozen is bad for you or not as healthy — you see it in commercials; you see Wendy’s talking about their fresh, never frozen, hamburger meat. You also see people focused on consuming local by [purchasing] farmer’s market vegetable,” Rosenbusch notes. “The reality is that the frozen product is, in many cases, a healthier and more nutritious option for [consumers], because the major vegetable processors are harvesting a vegetable and are immediately flash-freezing it and locking in the nutritional content. When it gets to your house, you are getting a just-picked vegetable with the highest possible [nutritional value] as opposed to something that might be harvested locally and then takes a couple of days to get to market. As the vegetable continues to live and breathe, it is losing that nutritional value.”
The cold chain isn’t just about keeping things cold; it’s also about keeping them at their optimal temperature. “In winter time, many refrigerated trailers are being heated to their optimal temperature so that bananas and fresh lettuce can last longer after they arrive on the shelves,” explains John Haggerty, vice president of Burris Logistics, which operates one of the largest controlled-temperature food distribution networks in the U.S. The cold chain also enables some leading grocery chains to develop their own high-end, high-margin food products. In Rochester, N.Y., Wegmans Food Markets has constructed a multimillion-dollar state-of-the art “affinage” — or cheese ripening — facility that is reportedly the first of its kind for a U.S.-based chain. This operation comprises seven highly controlled cheese-aging “caves” spread across a 12,300-square foot complex, where several white-walled, concrete-floored aging rooms are filled with racks of test-batch cheese to be dispatched to 83 Wegmans stores throughout the Northeast. The goal is to produce house-aged washed-rind and soft-ripened cheese at the highest level of freshness.
In the last three to five years, there has been “an explosion of entry of private equity into our industry.” –Corey Rosenbusch
Private Equity Knocks
For decades, even as the cold chain grew in significance, it escaped widespread attention from corporate investors, remaining largely in the hands of the families who founded and built the companies that provide third-party cold-chain management services such as refrigerated warehousing and transportation. As Rosenbusch explains, “The barriers to entry in this business are incredibly high because the asset is very high-value: large buildings [warehouses] and large fleets that are often concentrated in very expensive land because you are trying to distribute food to population centers and consumers.”
Over the past few years, however, outsiders have begun to pay more attention. “There has been a tremendous growth in our industry,” notes Rosenbusch. After the most recent recession, “we found a lot of food manufacturers and processors were very conscious of their balance sheets and how they used their capital. Their core competency is to manufacture food, and they want to make sure that they are taking all their capital and reinvesting it into understanding the consumer, proliferating SKUs [stock keeping units] and enhancing product and packaging. What they don’t want to do is to take that capital and pump into a very capital-intensive activity — namely, cold chain [warehousing and distribution], which is not going to be a revenue generator but is often a cost center.” For an increasing number of food companies, “the wisest financial move is to outsource to third party companies that manage their cold chain for them so that they can achieve the economies of scale of multiple manufacturing [facilities]” that wind up in a limited number of distribution centers.
In the last three to five years, there has been “an explosion of entry of private equity into our industry,” adds Rosenbusch. “We are very attractive; we have assets; we have the real estate play; and we have excellent cash flow so a private equity firm can hold an asset for a while and see appreciation of the asset over time.” Three of the five largest firms in the Global Cold Chain Alliance are now held by private equity firms, he states.
Rosenbusch says that further arrival of private equity firms will be “forcing a lot of consolidation” in the cold chain, as family-owned, single-location operations are bought out, and older-generation owners cash out their ownership. “Most likely, the end result will be an IPO or, in some cases, the sale to another private equity firm.”