Description

Oramed is a very small NASDAQ-listed Israeli drug delivery company focused on developing the first oral insulin to get to market.  This has been a tough area historically and Oramed itself has been the subject of scrutiny in the past.  The company is fully funded to reach two Phase II milestones in the next six to nine months that could materially improve its valuation from a paltry $60 million today, perhaps partially in advance of the milestones.  Meanwhile, it also has a Chinese partner who has paid real $ to Oramed who could help tap that very large opportunity. 

Business Description (see 10-K/Q and investor presentation on company website)

Obviously diabetes is a large and unfortunately growing market.  (Any company with a compound that even has a flash of efficacy can be rewarded in the market based on the option value alone.) Equally obvious is that a pill is more convenient than a needle.  Oramed is focused on bolus / shorter acting insulin around meals with a goal of introducing a product that ultimately could be prescribed during the development of insulin resistance but before basal / long-acting insulin is required.  Its pill helps insulin survive the harsh stomach environment before being released in the intestines.  This is what many microencapsulation pills do so this is not unprecedented.  Oramed contents that is insulin can go directly from the GI tract to the portal vein which leads to the bloodsteam and allows it act more like the body’s insulin. 

Alternative methods besides injection of delivering insulin to diabetics like inhalable (Mannkind which got to market but has had execution issues and a previous iteration of Nektar that did not make it) have not proven wildly successful.  Oral has had a tough go as well (many failures) but recently, another oral therapy for diabetes (GLP-1) has filed based on strong Phase III data (for example see: http://ir.emisphere.com/news-releases/news-release-details/emisphere-development-update-5 ).  This comes from diabetes powerhouse Novo using a delivery tech of a gone-dark company Emisphere. Emisphere has experienced several data missteps outside of diabetes that left it with an Oramed-esque valuation 18 months ago.  Now, based on a guess because its dark, it has at least an approx. $500m market cap.   

Even the successes have been painful along the way.  The injectable GLP-1, mentioned above in the context of Novo/Emisphere’s oral, developed by Amylin Pharma (Byetta/exanatide) was the third attempt by the company which finally led to its acquisition by BMY in July 2012 for $5.3 billon. It is now a part of AstraZeneca. 

Oramed’s latest data comes from a Phase IIb study that read-out in mid-2017 on 180 patients that showed glucose reduction.  The company has a number of trials going on:

Trial 1 (most important by far): A 90-day IIb trial on 285 patients that initiated in April 2018 (designed after feedback on 2017 data). It is fully enrolled and is expected to read out in the fourth quarter of 2019.  There is also a second arm at a lower dose that will read out in 1Q20. 

Trial 2: A small Type 1 trial (n=6) to determine the content in a Phase 3 in that area that will likely readout before the 90-day IIb above. 

Trial 3: Oral GLP-1 (a different compound that the one used in the two trials above) is in Phase I with the potential for a Phase II next year.  This is in 16 healthy subjects.  It would be a late entrant to the market eventually.  There is data on 4 patients that looks good but isn’t worth much. 

Trial 4: The lead compound is also being studied in NASH (another huge metabolic disease that is related to diabetes) in a 30 patient Israeli study that will have an interim readout on the first 10 patients before year-end.  Full enrollment will be next year with a readout to follow. 

Trial 5: Oral leptin (different that insulin or GLP-1) is also being studied in a 10 patient Israeli study for Type 1.  Readout before year-end but small. 

The company’s China partner is Hefei Tianhui which has supplied Novo in China and owns a large insulin facility along with Sinopharm.  It will be conducting its own clinical trial of Oramed’s lead compound beginning in Q2 at its own cost.  There are 114m diabetics in China and 388m pre-diabetics.  If successful, there could be a commercial product by 2022 on which Oramed will receive 10% royalties at no further cost to the company. 

With 17.4m shares outstanding, the company sports a $64 million market cap and a technology value of $27 million net of $37 million of cash + marketable securities as of 5/31/19. Almost all of the options and all of its warrants are out of the money per the below at today’s $3.66 price.  I have used the treasury method to account for the in the money options but the effect is de minimus. 

What if the trial readout indicates failure? The stock will go lower but that is why I am recommending this idea at a $64 million valuation and not a $500 million valuation.  There may be uncertainty around whether a failure was caused by something particular to insulin or if it was a faulty delivery method that would affect all compounds the same.  In the first scenario (if this can be discerned), there could be some residual value in the Phase I GLP-1 (same area as Novo/Emisphere) as well as the  Leptin & NASH programs as well.  

In addition there are $17 million of expected payments from the Chinese partner over the next two years but those may not happen if there is poor US data. 

Beyond the platform, there is some potential value on an eventual 3% royalty (actually 92% of the that 3%) from Entera who is commercializing a separate oral technology in inflammatory disease that came out of Oramed.  Amgen has partnered with Entera for up to $270m in payments but the compound is still pre-clinical. Oramed retains the rights for diabetes and influenza so is getting a free-ride on all development through Phase I (safety) so that it can begin efficacy trials on an Amgen-blessed drug if it makes it that far.    (Oramed also owns less than $1m of Entera shares which is too small to matter).

As of 12/31/19 here is also a pre-tax US $12m NOL (may be subject to annual limitation) and a pre-tax $35m / after-tax undiscounted $9 million Israeli NOL that does not expire and I do not believe it has an annual limitation on a change of control.  The Israeli NOL would seem to be an asset even if the oral delivery platform was torched although its size is nothing to get too excited about.  (It will probably be slightly larger by the time there is data)

On the positive side, there are at least several multiples of the current valuation upon early success on option value alone which is why this is interesting at these levels despite the risk.  Quantifying this further is academic.  Time will tell but I suspect that the valuation will improve into the end of this year and it may be possible to sell/trim ahead of the data with a positive return. 

Investment Positives

Funded through data.

Very low expectations.

Strong China partner has paid Oramed $20.5 million and invested $12 million.  The option on this market does not seem to be factored into the valuation.

Has not yet benefitted from Emisphere-effect.

Recent data shows that Oramed’s potency is much better than previous Novo insulin compound that was abandoned (not to be confused with the Emisphere/Novo GLP-1) so it will have better economics.

Focused on both Type 1 and Type 2 Diabetes.

Trying to create a new market for pre-meds insulin (based on today’s standards) that would increase the overall market and where it could be a leader.

Two patents have been allowed this year in the US. 27 patents allowed worldwide in 2017/18

If both are successful, Oramed could also offer a combo insulin/ GLP-1 product that could be competitive with Novo product.

Other applications to vaccines (flu & other) as well as interferon if the platform is validated – these would all be large markets.

Investment Concerns

Oral insulin seemed to be a dead-end until recently.

Perception that delivery method is not very innovative.  The recent success of AMRN’s Vascepa, which is basically a prescription fish oil, suggest that even seemingly non-innovative compounds can achieve commercially relevant competitive positions. 

Concern that prior data wasn’t very good despite meeting endpoints.  Trial data showed reduction effect on mean nighttime glucose in 30 patients and showed reduction in a statistically significant difference in the “HbA1c” marker (what experts are focused on) over 30 days but the next study will measure “HbA1c” over a longer time period (90 days) and will be more convincing if it is successful. 

The Novo/Emisphere upcoming launch is a GLP-1 which is different than insulin and is arguably superior than insulin (although it will not capture all of such a huge potential market even with a long head start) If interested see: https://www.ncbi.nlm.nih.gov/pubmed/30270567  .

Novo would have been a logical partner in diabetes but they may be focused on Emisphere.

Some of the IP is method not composition which is perceived as weaker but can be defended.

CEO is son of inventor which attracts red flags but he has done a good job raising capital.  His $500k salary + bonus is high for a microcap but more in-line for a Phase 2 company.  He also received a $430k one-time relocation payment to move from Israel to NYC which probably would not have happened if I were on the comp committee but would need to know the details.

Past association with stock promoters.   

Novo is working with MIT on a pill that actually injects in the stomach but it is not even in human trials yet. 

Disclosure 

We make no claims, promises or guarantees about the accuracy, completeness or adequacy of the contents of this document and expressly disclaim liability for errors and omissions in the document.  We have no obligation to update this document.  We may change our position at any time without posting an update.  The views expressed here are merely the opinion of the author.  Readers should do their own research.

Catalyst

Excitement around Phase 2 data and/or a willingness by the market to accept the notion that an oral product for diabetes can success based on Novo/Emisphere.