Tough to Swallow: Paper Trail Behind ‘Breakthrough’ Leads to Penny-stock Profiteers

For what, insulin?

Nadav Kidron, the C.E.O. of Oramed, with an insulin pill. (Photo via Baz Ratner/Reuters)

Nadav Kidron, the C.E.O. of Oramed, with an insulin pill. (Photo via Baz Ratner/Reuters)

Let me get one thing straight: I was predisposed to cheer for Oramed Pharmaceuticals, a tiny Jerusalem-based drug developer that has been working on an orally ingested insulin pill for more than a decade. That’s one of the holy grails of disease management, with a potential market of nearly $20 billion per year.

Oramed stock, which traded below $10 for most of 2013, took off like a rocket in December and flirted with $30 in January as both Oramed executives and a chorus of supporters whipped investors into a frenzy over some supposedly great clinical trial results they were due to release at the Tel Aviv Stock Exchange at the end of the month. The company even raised $16 million in December on the heels of that strong stock price movement.

Well, the results weren’t all that, and the stock has since given back most of that gain, to its current level of $16. Is this a buying opportunity? Oramed CEO Nadav Kidron is certainly bullish. He has taken any opportunity he can to tout his company’s prospects on the likes of Bloomberg TV and Fox Business. And Oramed’s current market capitalization of $150 million is minuscule compared to the opportunity, and in January, the company filed to raise as much as $100 million. Should you be buying? Short answer: No.

There are a few major challenges when it comes to oral insulin. The first is that digestive enzymes that break down proteins in the processing of food can also break down the amino acid-based proteins in insulin, rendering it useless to the diabetic. And even if it survives that process, the insulin then needs to pass through the wall of the intestine and make its way into the bloodstream, at which point there’s another challenge, which is that insulin proteins need to be absorbed in precise quantities and stay in the bloodstream for the right amount of time, or a diabetic runs the risk of, well, dying. 

Novo Nordisk, the world’s largest producer of insulin, has been working on its own insulin pill for years, and in October, the Danish company announced plans to spend up to $3.65 billion through 2020 developing six diabetes pills it has under development. But with just two oral insulin pills in Phase I clinical trials, even Novo isn’t yet close enough to confidently say that it’s ever going to come up with an effective pill. And the road to oral insulin is marked with other casualties. Pfizer, for example, abandoned an inhaled insulin product in 2007. “I’m not going to hold my breath on this one,” Dr. Robert Ratner, the chief science and medical officer for the American Diabetes Association, told Reuters late last year.

So let’s get back to Oramed. It’s true that the company is ahead of the competition in clinical trials of its flagship product, ORMD 0801, which is based on research from Jerusalem’s Hadassah Medical Center. And the Phase IIa trial results in January did appear to show that the pill was safe—none of the 30 patients who participated in the one-week trial showed adverse reactions to its use. That’s important. What’s more important, though, is whether or not the damn thing works—whether this pill will help the sick man lookin’ for the doctor’s cure. 

I asked Oramed CEO Nadav Kidron about the pill’s efficacy this week, and he pointed me to data in the company presentation that did show lowered glucose levels in those participating in the trial. But he also admitted that the data referred to just eight people. In other words, it wasn’t statistically significant. If you think eight is a small number, I have another one for you: 12. Look at the R&D that has gone into ORMD 0801; you might think you’re looking at a typo. The company has spent a total of just $12 million in cumulative R&D since 2002. Novo Nordisk spent $635 million on R&D in the fourth quarter of 2013 alone.

Let’s give Oramed the benefit of the doubt and assume that the money was very well spent. And why wouldn’t we? The chief scientific officer and director is 73-year-old Miriam Kidron, Ph.D. She’s a pharmacologist and biochemist. So far, so good. Dr. Ehud Arbit, M.D., the former chief neurosurgeon at New York’s Memorial Sloan-Kettering Cancer Center, is the company’s director of R&D. Also impressive, yes? Maybe not. Dr. Arbit was twice accused of operating on the wrong side of patients’ brains, and he was dismissed from his Sloan-Kettering post in 1995. The company does have some luminaries on its scientific advisory board, including the former head of diabetes research at Merck. But an advisory board isn’t a management team.

And the CEO Nadav Kidron? That’s Miriam’s 39-year-old son. Asked recently about his gig, Mr. Kidron said, “[My mother is] the chief scientist. I just went for the ride to do the business side.” (And in a company car, apparently: Recent filings show that Oramed spends upward of $10,000 per year on automobile-related expenses for each Kidron, as well as other executives—this for a company that has incurred aggregate losses of more than $20 million since inception with no actual revenues in sight.)

So what has this group come up with for that $12 million? Oramed says ORMD 0801 contains a protease inhibitor and other “technologies” that promise to solve the absorption problem. It even has a patent! A close reading of the patent leads one to this list of ingredients in the pill: 1) a gelatin or enteric coated capsule, 2) a chelating agent called EDTA, 3) omega-3 fatty acid, a.k.a. fish oil, 4) a protease inhibitor called Soybean Trypsin, a.k.a. soy powder, 5) a chemical called SNAD and 6) insulin. 

So why don’t we make some ORMD-801 in our own kitchen? Here’s my best guess at what it would cost to do so. Gelatin capsules from the Vitamin Shoppe, $6.29; a bottle of EDTA, $7.49; some omega-3 fish oil, $15.99. And for the soy powder, Oramed says it has its own special formula, so we won’t skimp on ours—the fancy stuff costs $58. As for SNAD, that’s an oral drug delivery agent developed by Emisphere Technology, sold under the brand name Eligen. Clinical trials using Eligen for drug delivery programs for calcitonin, parathyroid hormone and growth hormone have all failed, and oral insulin and vitamin B12 are that company’s only horses left running, although the B12 stuff was recently taken off the market. Anyway, you used to be able to get it for $21 per bottle. Finally, the insulin: You can purchase 100iu of it from Walgreens for $92. Total cost of materials: $200.

Of course, if you’re going to make this magic pill, you will need some equipment. Start with a capsule machine for $15.69. Maybe even splurge on a “gorgeous” mortar and pestle, for $16.95, and a scale, for $10.53. Total equipment cost: $43.

The only component of ORMD-801 that requires a prescription is the insulin. As far as I can tell, everything else can be bought over the counter. And it’s hard to see what’s proprietary beyond its unique soy power formulation. It doesn’t seem to have invented a whole lot. Suddenly, the $12 million doesn’t seem like too little investment but too much. I spent less than $250 to make the same pill. Well-known biotech journalist Adam Feuerstein of TheStreet.com blasted Oramed earlier this month, concluding that the hyped-up data—and thus the pill—was “completely worthless.” But that’s being a little harsh. Let’s call it $250, shall we?

The Emisphere connection is an interesting one. Both Drs. Arbit and Kidron used to work there. Emisphere also has a partnership with Novo Nordisk, which it entered into in 2008, and Novo re-upped in 2013 with a $10 million payment. If the SNAD stuff does work—and we don’t know that it does—Novo has already licensed it. It doesn’t need Oramed, which could be one reason it hasn’t already bought the upstart. Sure, the people at the company believe in themselves. The only problem is that no one else seems to, other than some cheerleaders of, shall we say, questionable objectivity.

Say, for example, Sharon Di Stefano, who has churned out a number of ridiculous posts about Oramed on stock chat site Seeking Alpha that the company links to on its own website as if the posts were “news.” Last June, Ms. Di Stefano wrote, “Oramed’s Unparalleled Insulin Technology Pipeline Comes at a Time When Acquirers Need It Most.” And then in July, “Oramed: An Early-Stage Biotech Company With Huge Potential.” And November: “Oramed’s Success in Type I Diabetes Could Solve Novo Nordisk’s Problems.” Stick with Oramed, she says, because Novo Nordisk could “make a play” for it. Really? When? Why? Dr. Kidron says the company is “in discussions” with potential partners and will partner “at the right time.” But it has had a decade to do so, and with Oramed spending pretty much zero on R&D, the pill surely hasn’t changed much during that time.

Let’s talk about Ms. Di Stefano’s résumé for a minute. Until January, she worked for Meyers Associates in New York. Granted, she was only there for three months, but this is a firm run by Bruce Meyers, a former broker at the defunct and fraudulent D.H. Blair who went on to co-found Janssen/Meyers, which also got up to no good in the penny stock realm. Ms. Di Stefano has worked for no less than 12 brokerage firms since the late 1980s, including Ross Mandell’s Sky Capital, H.J. Meyers & Co. and Josephthal & Co.—all three infamous players in the shady underworld of penny stock fraud. She’s like the Where’s Waldo of crappy brokerages.

Another supporter: Ray Dirks of CPreports.com, an “analyst” of such notoriety that there are Internet chat room threads dedicated to reminding investors to steer clear of anything he recommends. And then there’s the fact that parent company CorporateProfile.com describes itself as the place where “fashion meets finance … the intersection where tomorrow’s hottest stock ideas are being discovered by today’s top entertainment talents.” Huh? We’re also told that the company’s CEO, Laurel Moody, has “a wherewithal unmatched in the industry”—one she apparently honed as investor relations officer for … boiler room Sky Capital. Do all of these people come from the same shady corporate family tree?

Mr. Dirks told investors to buy Oramed in July 2012 at $0.30 per share. They would have profited handsomely following that advice. Of the reasons he cited for buying it, however, included ORMD 0801’s “ease of use” (i.e., it’s a pill), “more efficient manufacturing once approved to fatten profits quicker” (it hasn’t been approved, nor is “more efficient manufacturing” guaranteed), “greater acceptance by physicians” (uh, what?), “less side effects meaning a decreased burden on our health care system” (buy Oramed, and you’re buying America) and “appeal to patients” (yes, if it works, but it hasn’t been shown to do so). It’s all empty bullshit, basically. 

But let’s get back the question of whether or not it works. And the answer is that we just don’t know. Despite all the pretense of “news” every few months, Oramed has merely announced the results of successive Phase II safety trials over and over again— in August 2008, July 2009, May 2010, April 2013 and just last month—with the same results, namely that the pill is safe. That’s better than saying it’s unsafe, but it’s not the same as saying it works. In fact, the reason it might be safe could be that the digestive system has simply destroyed the contents of the pills, rendering them not just “safe” but also useless. It has applied with the FDA to run a Phase IIb trial to show efficacy next. All eyes will be on those results.

In an October interview with Bloomberg Television, Mr. Kidron suggested that $8 million in balance sheet cash wasn’t what it was—a decidedly paltry amount for a firm vying for one of biotech’s biggest prizes—and that, “as an Israeli company, though we are [listed on] Nasdaq, we are able to get a lot done on a much smaller and tight budget.” It has raised another $16 million since then, but that’s still not a lot of money in the world of drug development. And the cost of scientific discovery doesn’t recognize geographical boundaries. And if you ask me, it doesn’t really seem to have gotten “a lot done” at all. So its pill won’t kill you. Neither will not buying its stock.

For lack of verifiable and significant scientific progress, Oramed’s executives and cheerleaders have been content to remind us that an effective insulin pill would make a lot of money. Great. But we already knew that.