Infrastructure Matters

Infrastructure Matters

This morning we read about Novo Nordisk spending over $100 to expand their manufacturing facilities in Denmark. This comes after Novo bought an existing facility in North Carolina to expand capacity here in the US. Lilly has also been on a spending spree as has Abbott and Dexcom. While this isn’t big news it does point to an often-overlooked hurdle faced by every company seeking to enter the crowded diabetes market. The ability to manufacture products on a massive scale.

Unlike other consumer products diabetes products whether they are drugs or devices are regulated by the FDA. It’s not like just any company can just get their drug or device approved by the FDA, they must also demonstrate the ability to make this drug or device. The FDA does not just look at safety and efficacy they also look at manufacturing processes and can withhold approval if they believe a company has not demonstrated the ability to manufacture a quality product.

Making matters worse for any wannabe is even if they can demonstrate this ability there is huge cost in terms of capital and time to get a facility running. Yes, a company can outsource manufacturing, and many do but even when outsourced this is not a simple process. At one time Insulet outsourced their pod production but has since expanding their internal capacity.

We mention this as lately people have been overly focused on the whiz bang way cool and seem to have forgotten about the mundane yet very important aspect of the ability to actually run a business. Quite frankly it’s easy to come up with way cool whiz bang it’s a whole another story having the ability to actually run a commercially viable company. While some may have forgotten these are not charitable institutions these are for profit endeavors which have a responsibility to their stakeholders to make money.

Contrary to what some believe capitalism is still alive and doing very well. Capitalism may not be perfect until one considers the alternative sucks.

Like it or not diabetes has become a business of huge scale, this is what happens when the patient population is growing at epidemic rates. While huge scale does bring with it manufacturing efficiencies it also creates somewhat of a nightmare until these efficiencies can be realized. Abbott and Dexcom are spending hundreds of millions not just to meet increased demand but to create greater efficiencies which will only make it tougher on all the CGM wannabes. The same can said for Novo and Lilly this is not just about meeting increased demand but improving margins.

It’s also the reason we continue to believe that Sanofi should take the final step and sell off their diabetes franchise which just so happens includes lots of manufacturing facilities. Facilities which are up and running. Combine that with Sanofi’s existing payor relationships and there is value here. Rather than milk the franchise until the well runs dry Sanofi should capture this value today and use whatever capital they receive to bolster their other units.

Sanofi should avoid the mistake made by JNJ who ended up giving away Animas to Medtronic and sold LifeScan for a fraction of its real value to Platinum. To this day we shall consider this move by JNJ as one of the all-time classic blunders. The question is will Sanofi top this blunder? Given their history in our wacky world we’d say the odds are better than even money they will.