The Market Is Allergic to Failure of Diamyd Diabetes Vaccine

May.10.11 | About: Mertiva AB (DMYDF)

The search for a non-insulin approach to treating type 1 diabetes goes on. Diamyd Medical’s (OTC:DMYDF) eponymous vaccine for the autoimmune form of the metabolic illness has failed in a European phase III trial, wiping out four-fifths of the Swedish group’s market capitalization, more than $450m, in one morning.

While the company is still awaiting results of a US trial due in 2012 this setback, following recent disappointments with antibody approaches, dashes most late-stage hopes for novel ways to treat early onset diabetes (Otelixizumab another disappointment in type 1 diabetes, March 14, 2011). For Diamyd, it casts doubt on receiving any milestones or royalties from partner Johnson & Johnson (NYSE:JNJ), leaving the Swedish group shouldering half of all development costs.

Fighting autoimmunity

Type 1 diabetes is characterized by autoimmune destruction of insulin-producing pancreatic beta cells, which wipe out the body’s ability to moderate blood sugar. Because the body’s insulin-producing capacity is gradually destroyed, insulin-stimulating drugs such as sulphonylureas are ineffective. Patients become dependent on insulin; nearly all the products indicated for type 1 diabetics are human and recombinant insulin.

Much of the innovation of insulin products in the type 1 space so far has occurred with either longer acting products - as with Sanofi’s Lantus, the biggest selling product with sales last year of $854m, according to EvaluatePharma – or in faster acting forms, like Novo Nordisk's NovoRapid, the second-biggest type 1 treatment.

Diamyd’s treatment strategy focused on the presence of the protein glutamic acid decarboxylase (GAD) in insulin-producing pancreatic beta cells. Its hypothesis was the immune system in type 1 diabetics was overly sensitised to the protein, and the Diamyd vaccine, an isoform of recombinant glutamic acid decarboxylase, aimed to induce tolerance. The hope was to preserve beta function for longer and delay eventual insulin dependence, as had been demonstrated in phase II trials.

Two trials

The phase III trial in 320 newly diagnosed patients aged 10 to 20 had three arms - patients either received four injections of 20 micrograms of Diamyd vaccine, two jabs of Diamyd and two shots of placebo, or four placebo injections. The primary endpoint was improvement in beta cell function, using meal-stimulated C-peptide as a biomarker, which correlates to insulin secretion and thus beta-cell function (Event - High hopes for Diamyd's diabetes vaccine, March 4, 2011).

After 15 months, investigators found no significant difference in beta-cell function between placebo and Diamyd arms. The company plans to follow patients in the European trial for another 15 months and will report full data of this initial failure at the American Diabetes Association (ADA) meeting in June.

The US trial is a similar size and design and completed enrolment in December 2010, about a year after the European study. The company expects to report data from the US study in summer 2012. Given rather clear read-through from this trial – the company reported a “small positive effect” – there cannot be much hope for the US trial. Fuller data at the ADA meeting will likely shed more light, however.

Upheaval

Investors punished Diamyd for the setback, sending shares to an eight-year low of SKr18.70 in mid-afternoon trading. The news followed by two weeks the departure of chief executive Elisabeth Lindner, replaced on an acting basis by executive vice president Peter Zerhouni, because of a “disagreement with the board concerning certain important matters.” That shuffle had already caused a 7% share-price drop on April 26, down from near-record levels on high expectations for the vaccine.

Diamyd's partnership with J&J offered the possibility of the New Jersey giant assuming Diamyd’s half of development costs after reporting the European trial (Diamyd continues winning streak with J&J deal, June 23, 2010). While much of the hard work in the US trial is done, Diamyd’s executive team and investors must feel chagrined to know that half the remaining costs of that trial and any continuing development activity is likely to be on the Swedish company’s tab.

The group reported SKr473.6m ($75.9m) in cash as of February 28. The company spent SKr81m on R&D last year and SKr45m in first six months of the fiscal year to February 28, indicating Diamyd has a fair cash runway, even without milestones that would likely have been paid out on positive European results.

With enrollment already complete in the remaining diabetes trial it is likely to run to completion; if positive trends were detected in Europe, investigators may still retain some hope that the resources already committed will yield statistically significant results in US diabetics.

However, investors are probably right to write off the Diamyd vaccine – positive US trial results would now be a major surprise. With its next-most advanced products in the tricky Parkinson’s disease and pain spaces, Diamyd Medical is reverting to a higher-risk, mid-stage development company, and one with significantly less value.