Vaccine Supply Chains Bend But Don't Break

It’s been one terrible year, but it’s worth taking a moment to appreciate how corporate America has risen to the challenges of the moment — especially when it comes to manufacturing and transporting essentials like vaccines. Supply chains have been tested in ways they never have been before and, yes, there have been pileups, shortages and other snafus. By and large, though, companies have figured it out and kept moving, at times under impossible circumstances. 

Shares of Pfizer Inc. fell on Thursday after the Wall Street Journal reported the company would deliver only 50 million doses of its vaccine this year, half as many as initially targeted, because of supply-chain logjams. It took longer than expected to source the necessary raw materials in large quantities, Pfizer said, while also noting that its clinical trial of the vaccine concluded later than first planned. The company has been indicating for weeks that the initial rollout would be scaled back, based on November news releases, but given current anxiety levels and the consequences of each passing day of the pandemic, this headline understandably put people on edge. I actually found it encouraging in a way. 

Obviously, we would all like to see a vaccine distributed in as many doses as possible, as quickly as possible. But considering pharmaceutical companies typically wait to set up supply chains and factory lines until after a vaccine is approved, the fact that Pfizer was able to cobble together the infrastructure to deliver any vaccines at all this year is an incredible feat. Not to mention, neither Pfizer nor any other drugmaker has ever developed a vaccine on this scale using messenger RNA technology that instructs the body’s cells to create virus proteins. On Friday, BioNTech SE, Pfizer’s partner on the vaccine, said the companies had already made most of the 50 million doses, a testament to the manufacturing prowess of its supply chain. The companies expect to make up this year’s shortfall — relative to initial targets — as production of the vaccine ramps up, and are on track to distribute at least 1.3 billion doses in 2021. 

The government is aiming for Pfizer to begin shipping the vaccine within 24 hours of receiving U.S. Food and Drug Administration approval, Vice President Mike Pence and Health Secretary Alex Azar said at a press conference this week. Pfizer will do so directly with FedEx Corp. as part of the Operation Warp Speed program to accelerate distribution of vaccines. FedEx rival United Parcel Service Inc., which historically has operated a bigger pharmaceutical shipping business, will also play a key role in the rollout. The news this week that UPS is limiting pickups at certain retailers to ease congestion should be viewed in that context.

Vaccine Supply Chains Bend But Don't Break
Logistics data-analytics company ShipMatrix estimates a surplus of 7 million packages per day this peak season relative to the actual capacity of the parcel-delivery industry. That’s before factoring in vaccine shipments, which will inevitably displace some e-commerce orders. UPS’s efforts to meter the flow of boxes into its network therefore isn't a flaw in the system; it’s a feature and a reflection of the company’s billions of dollars of investments in automation and software to help it more profitably handle the deluge of e-commerce shipments. Even with all of the demands on their networks right now from the pandemic-fueled surge in e-commerce orders, UPS and FedEx are handling this peak season amazingly well so far. For the third week of November, FedEx delivered 96.6% of its packages on time, while UPS delivered 96.9%, according to Satish Jindel, president and founder of ShipMatrix. That should instill some confidence in their ability to get vaccines from point A to point B. 

UPS and FedEx are only one part of the logistics equation, though. Much of the final legwork will fall to pharmacies, whose trained medical professionals will be responsible for poking millions of arms with the vaccine, including the first wave of recipients at long-term care facilities. Thankfully, this is something they have experience with. So far this year, CVS Health Corp. has held flu-shot clinics at more than 8,000 long-term care facilities across the country, Chris Cox, a senior vice president at the company and its liaison to Warp Speed, said in an interview. There are unique features to the coronavirus vaccines under development, but CVS is drawing on this know-how.

The company will ultimately administer shots at more than 30,000 elder-care facilities as part of a program coordinated by the U.S. government. CVS has selected about 1,000 of its existing pharmacies (which were chosen based on their geographical proximity to long-term care facilities) to serve as hubs for vaccine warehousing, Cox said. CVS’s past experience with administering vaccinations means it already has certain cold-storage infrastructure in place, a must for the leading coronavirus candidates. CVS will transport the shots from the hubs using specially-made cooling containers manufactured by AeroSafe Global.

Once the vaccine is more widely available, CVS will link its vaccine inventory management system with its software that tracks patient appointments to ensure that each individual gets two doses of the same vaccine, he said. You wouldn’t want to get one dose of the Pfizer vaccine and a second of Moderna Inc.’s, for example. CVS will use the same messaging system it deploys for prescription pick-up reminders to prompt customers to come back for their second shot. These are the kinds of things the average person isn’t thinking about right now, but these little logistical details matter a great deal. 

This is not to say the back-end preparation for a vaccine rollout has been an easy process. Raw-material suppliers, logistics companies and pharmacies have had to come up with comprehensive plans despite a myriad of uncertainties, including but not limited to: knowing which, if any, of the vaccines under consideration might ultimately be approved; adjusting to shifting perspectives on who should receive inoculations first; managing through a patchwork of different plans, budgets and launch dates by the 50 individual states; and ensuring their own workers are protected during this process. There may yet be hiccups and snags, but I for one am comforted by the degree to which the private sector is on top of this process. These companies have a plan and in many ways are playing to their strengths and existing infrastructure.

Stuck on the Runway

One group that's eagerly cheering on the vaccine news is the aerospace sector. Ryanair Holdings Plc is so optimistic that mass inoculations will drive a travel rebound that it was willing to order 75 more of Boeing Co.’s embattled 737 Max jets. It’s the largest firm order for the Max since December of 2018, according to Bloomberg News. Earlier that year, the Max suffered the first of two fatal crashes that would eventually prompt a 20-month grounding. While Ryanair CEO Michael O’Leary has a reputation as a hard bargainer and likely got the Max at a significant discount given its woes, he chose to characterize the price reduction as “modest” and focused on the fuel-efficiency benefits. If nothing else, it was a major PR victory for Boeing, which has been dogged with questions about the future profitability of the Max program.

However confident aerospace executives are about the post-vaccine future, they still have to deal with the worsening pandemic now. Boeing itself offered a stark reminder of that this week, with Chief Financial Officer Greg Smith telling a Credit Suisse Group AG conference on Friday that the company is planning to further trim output of its 787 Dreamliner and is considering an equity sale to help mitigate the heavy debt load it took on during the crisis. While Boeing would love the Ryanair order to be the first of many, even the strongest U.S. airlines are facing fresh turmoil. Delta Air Lines Inc. this week warned it could burn more cash than previously expected this quarter (as much as $14 million per day) and said demand had taken a hit amid the rising coronavirus case count across the U.S. Southwest Airlines Co. sharply expanded the number of employees that may be affected by its first-ever forced furlough. In total, more than 7,000 jobs are at risk if the carrier and labor unions can’t agree on a plan to cut $500 million of costs. On the bright side, a bipartisan stimulus bill that includes fresh aid for the airline sector appears to be gaining traction

Deals, Activists and Corporate Governance

FedEx Corp. agreed to buy ShopRunner, a member-based e-commerce service that provides free shipping and returns for more than 100 brands including Neiman Marcus and American Eagle. The deal will help further embed FedEx into the e-commerce process and is a particularly notable tie-up in the wake of the company’s falling-out with Inc. FedEx has tried to position itself as an anti-Amazon ally for other e-commerce retailers, including Walmart Inc. Terms weren’t released, but FedEx says the purchase should close by the end of the year, pending regulatory approval. Elsewhere in e-commerce deals, private equity firms continue to gobble up warehouse real estate. Blackstone Group Inc., a big player in this corner of the market, acquired 13 properties located mainly in California, northern New Jersey and Pennsylvania’s Lehigh Valley from Iron Mountain Inc. The price tag was $358 million. KKR & Co., meanwhile, is reportedly nearing an $800 million purchase of a portfolio of warehouses in markets including Atlanta, Chicago, Dallas and Baltimore. 

General Motors Co. announced this week that it was downgrading its lofty partnership agreement with electrical-vehicle startup Nikola Corp. to what is essentially a glorified supplier contract. GM will supply the Hydrotec fuel-cell system to Nikola’s commercial semi-trucks at “cost plus” — meaning the startup will reimburse it for costs incurred as well as a specified profit. Gone is the production agreement for Nikola’s Badger pickup truck, a program that now appears to be defunct. Also gone is GM’s willingness to be compensated for its services in Nikola stock. After a rough few months for Nikola that included accusations of deception by a short-seller (denied by the company) and the departure of founder Trevor Milton as executive chairman, GM would prefer cold hard cash. The obvious question is, if GM doesn’t want Nikola stock, why would anyone else? The shares fell more than 30% this week. My colleague Tim O’Brien calls for more explanation from GM on how the company could so misjudge Nikola’s prospects. Personally, I continue to believe that GM didn’t misjudge Nikola, but rather the stock market. Investors are much less willing to award companies that lack revenue or proven technology with premium valuations than they were just a few short months ago. And hey, GM still got out while the getting was good. Elsewhere in bad news for electrical-vehicle startups, shares of Workhorse Group Inc. also plummeted this week after reports that the U.S. Postal Service further delayed a key contract for new mail trucks. 

Vaccine Supply Chains Bend But Don't Break

XPO Logistics Inc. is moving ahead with a breakup. The $11 billion company will spin off its contract logistics businesses, leaving behind a provider of services for shippers who don't need a full truck to carry their freight. This completes the strategic review process XPO announced in January; an attempted sale of its European supply-chain business reportedly stalled after Blackstone dropped out of the bidding over valuation disagreements. XPO says the split will help each business hone its customer and technology focus, attract better talent and operate with lower debt profiles. If there was a generic “breakup logic” you could buy right off the shelf, that would be it. The split marks a turning point for a company that was built via consolidation of a fragmented industry. That being said, the market is happy: XPO shares climbed on the news to a fresh record. “It is hard to argue that thesis creep has not occurred, but one thing has not changed and that is the company’s commitment to maximize shareholder value,” Cowen analyst Jason Seidl wrote in a note. He also questions whether this breakup might offer an eventual exit strategy for XPO CEO Brad Jacobs, a serial entrepreneur. Elsewhere in logistics, Transfix, a startup that operates a freight marketplace, is reportedly in talks to go public through a merger with a blank-check firm, Tuscan Holdings Corp. II. 

Eaton Corp. has lured away W.W. Grainger Inc. CFO Thomas Okray, who will join the electrical equipment company in the same role starting in April. Current Eaton CFO Rick Fearon will leave big shoes to fill upon his retirement, and this job will bring unique challenges to Okray, RBC analyst Deane Dray wrote in a report. He points out that Eaton’s Irish domicile gives it a different tax profile than what Okray is used to at Grainger, while the company’s more global business and appetite for M&A will also be a change. That being said, Dray thinks Okray is up for the job. 

Grab Bag. It appears dealmakers and regulators were busy over the holiday weekend. GardaWorld increased its hostile offer for British security provider G4S Plc to 235 pence-a-share ($4.9 billion) and lowered the investor acceptance threshold to 50% plus one share. Garda says this is its final offer, unless G4S gets a bid from someone else, which feels like a possibility as G4S said Thursday that it continues to hold talks with Allied Universal. My colleague Chris Hughes writes that Garda squandered an opportunity by not raising its bid more significantly earlier. CSX Corp. inked an agreement to buy New England carrier Pan Am Railways. Bloomberg Intelligence analyst Lee Klaskow says CSX should be able to lower Pan Am’s operating ratio to around 60% from an estimated 80% to 85% currently (a lower number here is good). And lastly, Alstom SA said it had finally received all regulatory approvals to acquire Bombardier Inc.’s rail business. This is somewhat ironic because Bombardier also this week named Bart Demosky its new CFO and Demosky has had a long career in … the rail industry. 

Bonus Reading
Rusty Pilots Making Flying Errors Is Next Aviation Headache
Exxon Is Now the Thing It Wasn't Supposed to Be: Liam Denning
Covid-19 Vaccines Start a Frenzy for Dry Ice; 'It's Like a Herd of Mustangs'
Hydrogen Is a Trillion Dollar Bet on the Future: David Fickling
Women Take the Lead in Covid Vaccine Development: Tyler Cowen
As Stimulus Debate Rages, Senators Agree on Tax Cuts for Beer

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Brooke Sutherland is a Bloomberg Opinion columnist covering deals and industrial companies. She previously wrote an M&A column for Bloomberg News.

©2020 Bloomberg L.P.

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