UPS (UPS) is poised to cash in on the expanding pharmaceutical logistics market as expiring patents on popular drugs like Lipitor push up demand for generic exports from Asia.

The transportation firm already provides freight services for German drug maker Merck (MRK), and in the past year has invested in five new pharmaceutical processing facilities, with further deals expected. That leaves UPS well positioned for traffic for the pharmaceutical logistics market, which is forecast to grow by 7.6% per year in the near-term.

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Pharmaceuticals growth easily outpaces electronics

The hugely popular cholesterol drug Lipitor, produced by Pfizer, is widely credited as being the world's top-selling pharmaceutical brand, having notched up 2008 sales of $12.4 billion. Following the expiry of its patent protection last month, however, generic versions produced in Asia are fast making their way to U.S. drugstores, which in turn fuels demand for new and highly specialized logistics channels.

A recent study by research firm Transport Intelligence predicted that pharmaceutical air freight will grow by 12% over the coming five years, compared to just 4% for electronics cargo. With emerging markets in India and China driving much of this growth, UPS has reacted by opening five dedicated pharmaceutical processing facilities around the globe in 2011. According to Bloomberg, the firm is on the cusp of announcing further Asian logistics deals within a month.

The chart below shows how we expect total shipments of UPS freight to continue their up-trend throughout the Trefis forecast period, rising from 10.9 million Less than Truckload (LTL) shipments this year to 13.7 million by 2018. Less than Truckload shipments weigh between 100 and 15,000 pounds. Given UPS' expanding logistics network, we believe that pharmaceutical air freight could be a significant contributor to this rapid growth.

High-value cargo boosts yields

One of the main appeals of the sector is the high value of pharmaceutical goods relative to weight, with individual containers frequently containing more than $30 million worth of drugs. Focus on transporting higher value goods contributes to our forecast that LTL yields will continue rising over the coming years -- up from 21 cents per unit this year to 26 cents in 2018.

The combined effect of burgeoning demand and high yields is sure to attract competition in the sector, with competitors such as Lufthansa Cargo and FedEx (FDX) also investing heavily in logistics. However, transporting healthcare products requires bespoke capabilities such as temperature-sensitiv​e handling, regulatory compliance and advanced security. These barriers to entry will make established logistics firms all the more attractive to Asian suppliers, and should allow UPS to expand its freight division well beyond the less than 1% it currently contributes to the stock price.

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