Merck's North American logistics head says industry supply chains struggling with new business environment

The head of pharmaceutical giant Merck & Co.'s North American logistics operations said today that the drug industry is struggling to realign its supply chains in the face of shrinking revenue growth, compressed profit margins, patent expirations, and increased product complexity.

Christopher LaGullo said the industry, in general, needs to do a better job of benchmarking processes and performance, noting that the fat profit margins of past years did not impose a sense of urgency on the industry's supply chains. Drugmakers are experiencing a "level of pressure the industry hasn't seen, and we are grappling with it," LaGullo told a panel session at the annual Georgia Logistics Summit in Atlanta.

Merck's multibillion-dollar investment in research and development is yielding significant product innovation, LaGullo said. But with that innovation comes increased complexity, which puts pressure on its supply chain partners to manage quality processes that differ from product to product. Additionally LaGullo said the industry can no longer treat all inventory the same given the unique nature of its products.

Merck, based in Whitehouse Station, N.J., reported $44.7 billion in sales in 2013, down 7 percent from 2012 levels. About 3 percent of the decline was due to the impact of foreign currency translations, LaGullo said.

The company's overall results were also affected by plummeting sales of Merck's former number 1 product, the asthma and allergy treatment Singulair, which lost patent protection in 2012. LaGullo said sales of Singulair, which had generated about $4 billion in annual sales for Merck, would drop to about $400 million within a year.

About three-quarters of Merck's revenue comes from traditional pharmaceuticals, which are handled through the large medical distribution companies. The remaining one-quarter comes from vaccines that move in small parcels exclusively handled by UPS Inc.

Merck turned the vaccine delivery business over to UPS as part of a strategy to outsource its distribution. "We've transitioned to a completely outsourced business," he said.