NASH And Diabetes Markets Could Soon Be Disrupted

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Includes: ICPT, LLY, MDGL, NVO, SNY, VKTX
by: Austrolib
Summary

Diabetes and NASH stocks are in danger from a procedure that treats the diseases at their root.

The first chain in the causal link of diabetes and NASH is insulin resistance.

A new ablation procedure of the mucosal layer of the duodenum reverses insulin resistance and enables diabetics to be insulin free for 6 months.

It also reduced liver fat by almost half within days.

If the procedure catches on, it's bad news for NASH and diabetes-focused stocks.

It may soon be time to short diabetes and NASH-focused stocks. Maybe not just yet, but turn on a Google Alert for "Revita", "duodenal mucosal resurfacing" and "Fractyl Laboratories" and track developments over the next few months. Here's why. The solution to type II diabetes and non-alcoholic fatty liver disease together could be as simple as a 60-minute minimally invasive, non-pharmacological, painless outpatient procedure. How so?

Judging by the clinical results from a new procedure pioneered by Fractyl Laboratories, the medical community may have been taking an entirely wrongheaded approach to diabetes and fatty liver disease for over a century. This sounds like hyperbole, but follow me here. Until now, it has been assumed that the main therapeutic target for diabetes is the pancreas, naturally, and for fatty liver disease, the liver. Diabetes is treated with insulin, and fatty liver with drugs targeting the liver. Seems straightforward. However, both diseases are caused by insulin resistance. Fractyl's procedure treats insulin resistance directly and is focused on the duodenum, the first part of the small intestine. It involves no drugs at all.

If the procedure catches traction, investors in diabetes-focused companies like Novo Nordisk (NVO), Eli Lilly (LLY), and Sanofi (SNY) should be on alert. The non-alcoholic steatohepatitis (NYSEARCA:NASH) biotech subsector could also be fundamentally affected, which includes companies like Intercept (ICPT), Madrigal (MDGL), and Viking Therapeutics (VKTX), which get most of their valuations from NASH therapeutic drug candidates. New data out last week at the American Diabetes Association's 79th annual Scientific Sessions suggests that Fractyl's procedure is highly effective. If so, the entire diabetes/NASH and pharmaceutical complex could soon be disrupted.

In a press release entitled "Fractyl's Revita DMR Same-Day Therapeutic Procedure Could End Daily Insulin Injections for Type 2 Diabetes Patients," Fractyl showcases its simple procedure for quite possibly eliminating the need for insulin injections in type II diabetics indefinitely. We don't know yet long term, but the potential for such a result is there.

The procedure is called duodenal mucosal resurfacing (DMR), brand name ReVita. It basically involves inserting a catheter orally down into the duodenum, and the ablation of the mucosal surface of the intestine with hot water. The idea for the procedure stems from positive results seen with diabetes patients who have undergone bariatric surgery where the duodenum has been completely bypassed, preventing food from contacting its surface. These patients showed a 50% increase in insulin sensitivity (see page 303 here) and a decrease in liver fat of 45% within days of the procedure.

Obviously, expensive surgery for the purpose of bypassing a large part of the digestive system is not feasible on a large scale, so Fractyl had a different idea. What if it just burned off the duodenal surface, sort of like a tanning salon for the intestine? Theoretically, the surface would be regenerated within days with new cells, and the dead layer would simply be flushed out.

This 7-minute video explains how the procedure is done from start to finish. After sizing the appropriate balloon for the patient, about 200mL of saline solution is injected into the intestinal surface, separating it from the rest of the intestinal tissue and adding a protective cushion between the surface to be ablated and the remaining layers of intestine. The screenshot below from the video linked above shows how it's done.

This prevents damage to the rest of the organ, isolating the target layer for ablation. Once the layers are separated, a balloon is filled with hot water at about 90C, and the isolated surface layer is essentially cooked, as seen below. The swollen tissue thinning the circumference of the intestine is due to the saline cushion.

Within days, the surface is flushed out, and a new mucosal layer begins to regenerate.

If successful, DMR won't completely eliminate the need for diabetes medications, as patients post ablation patients were still taking GLP-1 agonists like Novo's liraglutide and semaglutide in order to continue stimulating native insulin production in the pancreas. So no, this doesn't make the pancreas a completely irrelevant target for diabetes type II. It just relegates it, possibly, to secondary supplemental status. What could change drastically is the current model of progressively higher and higher insulin doses as the disease progresses and insulin resistance rises.

In all four clinical trials listed for the procedure on Clinicaltrials.gov, the native ability to secrete insulin is a requirement for all patients, so we are dealing with those that aren't yet in the late stages of the disease. If the ability to secrete insulin natively is completely gone, then how effective DMR is becomes questionable. Further, some patients did show regression 6 months post procedure, but many of these had reduced their background medications as time progressed. The most common side effects were short-term abdominal pain, and patients who undergo the procedure are restricted to ingesting only liquids for the first few days after the procedure until the mucosal layer is regenerated.

Why it Works

A better understanding of diabetes progression and its connection to fatty liver disease and by extension NASH can make the potential of this procedure and its impact on diabetes companies clearer. Type II diabetes does not begin with a sudden dying out of beta cells in the pancreas. It begins with insulin resistance which accompanies a lower acute insulin response, measured as the increase in insulin concentrations in the blood 2-8 minutes after fasting glucose levels are established. The higher the insulin resistance, the lower the acute insulin response, because insulin resistance leads to more insulin in the bloodstream. The higher this level, the more tired pancreatic beta cells become from constantly producing it in an attempt to lower blood sugar levels.

The higher constant insulin levels stimulate the growth of fat cells, which maintain their insulin receptors and sensitivity while muscle cells lose them. This results in a feedback loop where resistance leads to weight gain, leading to worse resistance which leads to diabetes. The first link in the chain then is insulin resistance.

According to a 2009 study on the progression of diabetes comparing those in the progression stage to diabetes with nonprogressors (meaning healthy people), the acute insulin response decreased by 27% during the transition from normal to impaired glucose tolerance and by 51% during the transition from impaired glucose tolerance to diabetes. In nonprogressors, acute insulin response increased by 30%.

The process of insulin resistance leading to higher serum insulin levels over time is conceptually similar to high thyroid-stimulating hormone (TSH) levels in patients with Hashimoto's thyroid disease, where the thyroid cells die and stop producing thyroxin, so we see very high levels of TSH in the blood as the body tries to get the thyroid to produce the hormone but can't. In insulin resistance, the pancreas keeps trying to get the body to absorb glucose by producing more and more insulin, but it doesn't work well, and the extra insulin keeps stimulating fat cells to proliferate instead.

This is where fatty liver disease comes in. Fat cells, in general, are stimulated by high insulin levels in the blood, which includes fat cells in the liver. So, insulin resistance leads inexorably to NASH. The thing is, nobody is entirely sure what exactly triggers insulin resistance in the first place, but Fractyl believes the mucosal layer of the duodenum is involved. A 45% decrease in liver fat within days of the procedure and a 51% increase in insulin response is certainly a step in the right direction. Patients with type II diabetes who underwent the procedure went insulin-free for 6 months.

From a conceptual standpoint, the procedure catches the causal chain of diabetes/fatty liver at the beginning stages, rather than resorting to expensive drugs that try to reverse the process once it has already progressed. By nipping the problem in the bud, type II diabetes could be prevented, or if not entirely prevented, then significantly delayed, drastically reducing the demand for insulin and releasing a huge burden on the US healthcare system.

Keep in mind that Fractyl's trials were conducted on patients with diabetes already on GLP-1 receptor agonist drugs. But there is no reason why the procedure can't be done at the first signs of insulin resistance before problems start to require the use of these drugs in the first place. This is not gastric bypass. It's a simple outpatient procedure.

The Danger for NASH Stocks

For companies like Madrigal, DMR could become a serious problem and really deflate the stock, and not in the distant future either. Approval for the procedure does not require years of clinical data in three phases.

Madrigal's valuation is almost entirely based on future demand for MGL-3196, which targets NASH. Nip NASH in the bud by treating insulin resistance when it starts before it causes fat cells in the liver to proliferate, and MGL-3196 becomes unnecessary.

Madrigal's peer Intercept would still have value for its main product OCALIVA® (obeticholic acid), as it treats an autoimmune liver disorder not connected to insulin signaling, but the stock would be damaged. As for Viking, most of its value is based on NASH and diabetes type II, though it does have a few other assets. The value of the stock would still plummet significantly if DMR catches on and works.

DMR already has a CE mark in Europe, allowing the procedure to be employed throughout the European Union, so the effects of the procedure on the diabetes and fatty liver disease markets could begin being felt within the next year or two, with FDA approval not far behind. We still need more data on the procedure as it matures, so these stocks won't start plummeting tomorrow (at least not because of DMR), but my suggestion to keep a Google alert active on Fractyl and its progress would be wise for investors in these stocks. If we start seeing repeats of these results, it could be time to start shorting.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.