The problem with being at the top of one of the largest healthcare market niches in the world is extremely heightened expectations. The World Health Organization (WHO) estimates that the annual cost of diabetes to the world is $827 billion. That’s nearly one trillion dollars, every year, year in year out. To be on the receiving end of some of that cost is obviously rewarding, and being the market leader even more so. But Novo Nordisk A/S (ADR) (NYSE:NVO), a – if not the – current market leader in diabetes, managed to disappoint investors despite beating on earnings, just because forward guidance wasn’t as stellar as the most bullish forecasts had hoped.
The stock has collapsed 16% since Thursday, quite a huge move for a megacap, especially one with an earnings beat.
But besides the Danish giant’s lackluster earnings headlines, there is something much more consequential bubbling under the surface than slightly lower forward guidance. Novo’s biggest bestseller is by far its injectible insulin product NovoLog. Combining all permutations of the drug including NovoRapid and NovoMix, sales amounted to almost DKK 32 billion, or $4.75 billion. As long as diabetes incidence continues to rise, and it has been as global sugar intake rises the world over, sales of injectible insulin will keep rising basically until national taxpayer-funded insurance schemes go broke. That is, unless a new and better formulation is finally developed. If an oral formulation is brought to market and is good enough to at least supplement subcutaneous insulin if not replace it, there could be some major shakeups.
This hasn’t happened, ever, for nearly 100 years since the advent of injectible insulin. No company has yet succeeded in formulating an oral insulin that can be readily absorbed through the small intestine. Currently though, there are 6 clinical trials ongoing on oral insulin formulations, and three of them have seen some success through Phase II. It isn’t surprising to find out that Novo itself is behind 3 of these 6 trials, though like many of its sister companies in the past, the diabetes behemoth has discontinued trials on two of three of its own candidates for reasons unknown.
Getting reliable information as to how these oral insulin formulations work is also quite the daunting task. Oral insulin is considered the “Holy Grail” of the diabetes market and no one has found it in nearly a century. The good news though is that Novo may finally be on to something as it has reported “generally encouraging” results for its oral insulin formulation so far. There isn’t much more information than that out there, and Novo insists that more data will be available during the second half of this year.
The entire effort, however, raises some serious questions. The most obvious being, assuming that Novo Nordisk succeeds in its oral insulin formulation, wouldn’t that doom its own injectible bestsellers, or at least make a big dent in its own sales? Could this be at least partly why two previous Novo oral insulin trials were suspended? At the very best, sales would be cannibalized, and at the very worst, if successful, eventually generic or biosimilar versions would become available even if that’s 10 years from now, and Novo’s entire business model based on injectible insulin would have to shift. That is a much more serious impact than slightly lower forward guidance that has already smashed the stock 16% in a few days.
From the conservative and probably more realistic perspective, oral insulin will probably not replace injectible immediately, if ever in the foreseeable future. If successful, it will probably be mostly a supplemental therapy, but even so could still bring down global injectible sales significantly.
The other major question is how does oral insulin supposedly work? If it hasn’t succeeded in nearly 100 years, what has suddenly changed? What has Novo finally figured out that has taken so very, very long? This is the most frustrating part for investors, because nobody wants to answer that question. The companies behind these formulations are extremely tight-lipped possibly because they know they are on to something. Our research into this arena though has shed a tiny bit of light onto the subject.
As it stands, there are two companies out in front in this race. The first is Novo, and the second is Israel-based Oramed Pharmaceuticals Inc. (NASDAQ:ORMP). A third company, private firm Diabetology, also reported positive results on a Phase II back in 2008, but has not advanced on those results since, so we can assume that product is dead in the water for now, for whatever reason.
Novo has been the most transparent about the mechanism of action behind its oral insulin formulation, which is to say, not very transparent at all. The only thing we could uncover confidently is that besides enteric coating that protects the insulin from the digestive juices of the stomach, the drug, branded GIPET, contains caprate-based absorption enhancers to get the insulin through the lining of the small intestine.
More precisely, the absorption enhancer is called sodium caprate, or C10, a harmless food additive that has GRAS status at the FDA, which means it is Generally Recognized As Safe. Capric acid is copious in dairy products, present at about 1-3% in cow milk, 8% in goat milk, and 20% in rabbit milk. It is at its most concentrated natural form in elm seed oil at 50%.
Capric acid temporarily expands the tight junctions, or TJs, in the lining of the small intestine to allow larger molecules to pass through. This would include insulin molecules which are normally too big to pass through the digestive tract into the blood. Besides that, they normally get digested by proteases before they even have a chance to make contact with the intestinal wall. Though this is speculation, capric acid and its effects on intestinal permeability may have something to do with some people’s sensitivity to dairy and its effects on digestion. Though sodium caprate is generally considered safe, it may still cause some indigestion in people sensitive to it, but once again this is speculative.
Oramed is even more tight-lipped than Novo about the mechanism of action for its own oral insulin formulation, which has also shown positive Phase II results. All it says publicly is that it combines protease inhibitors with absorption enhancers and enteric coating. Protease inhibitors and enteric coating are fairly straightforward. Absorption enhancers and their proportion to the insulin in the pill and method of release are the main attraction here. Chances are, a company like Oramed, development stage with limited capital and heavily reliant on its flagship candidate, would pick something with GRAS status like sodium caprate or something similar just for the increased chances of getting it through the FDA. The fact that Novo is itself testing capric acid provides some evidence that Oramed may be using something similar, or at least something known to increase intestinal permeability without much side effects.
But here’s the interesting part. Novo Nordisk has a vested interest in keeping its injectible insulin therapies on the market and selling well. That means it probably does not want its oral insulin pill to be so successful as to render it all obsolete. It does not want oral insulin to completely replace injectible therapies, but only supplement them. Could these be partly why two previous phase II program were suspended? Hard to tell.
Oramed, on the other hand, has a vested interest in making its own oral insulin as effective and powerful as possible. It does not claim to be targeting the complete replacement of injectible insulin. In fact, it only claims to be seeking supplemental status, though this may just be caution talking. It would theoretically still be in Oramed’s interest to develop an oral therapy as powerful as injectible therapy is today, and that is not the case for Novo Nordisk which needs to keep as many of its products as relevant as possible.
This creates a fascinating situation going forward. As the year progresses, we will find out more about Novo’s oral insulin and its data. We now know very little, but when more information is published, Oramed will need to be watched with a microscope from the other side. We already know that Oramed is actively pursuing a Phase III trial after its successful Phase II. Novo, on the other hand, isn’t so clear yet.
The bottom line is that if and when Oramed sets up its own Phase III trial and is only one clinical trial away from oral insulin, then Novo may decide to take action and take control before the cat comes out of the bag. After all, it has much more at stake than Oramed. Two oral insulin programs have already been suspended by Novo for “portfolio considerations” whatever that means. It could mean the drug did not work. It could also mean that results were initially positive, but there was no plan in place to contain it.
It is impossible to know what is going on exactly at this point. One thing we do know is that any successful oral insulin pill will immediately threaten the largest diabetes companies in a fundamental way, in any way from improving disease outcomes and necessitating patients take less injectible insulin, to possibly even replacing injections entirely at some point.
Bottom line, if the upcoming results for Novo Nordisk’s Phase II oral insulin therapy are negative and Oramed proceeds to Phase III, there may be a bidding war over Oramed in a mad dash to keep the current diabetes business model alive. That means the final results of this Novo Nordisk Phase II trial for oral insulin could have profound effects on Oramed shares and its shareholders, even more than a first-hand Oramed data readout.
