Teva Pharmaceutical Industries Ltd., the world’s largest generic-drug maker, is seeking to transform a compound once rejected by Sanofi into the first treatment to succeed insulin for Type 1 diabetes.

The therapy, DiaPep277, is made from a human protein that stops the immune system from destroying the pancreatic beta cells that secrete insulin, a hormone needed to convert sugar, starches and other food into energy. The drug also helps control sugar levels in the blood, a late-stage study showed last month.

Type 1 diabetes develops early in life and robs people of their ability to make insulin, according to the World Health Organization. Teva, based in Petach Tikva, Israel, and its partners are aiming to find a drug that preserves the ability to make insulin after companies including Eli Lilly & Co. and Johnson & Johnson have failed. If the product is approved, peak sales may be between $500 million and $1 billion, Ronny Gal, an analyst at Sanford C. Bernstein, wrote in a Dec. 2 note.

“Type 1 has a huge unmet need, with no other treatment other than insulin,” Aharon Schwartz, vice president of innovative ventures at Teva, said in an interview. “We believed the risk-benefit ratio was worthwhile.”

Diabetes is a chronic illness in which the body either doesn’t produce enough insulin or fails to use insulin effectively. About 346 million people worldwide have diabetes, of which 90 percent have the Type 2 form of the disease, often the result of excess body weight and lack of physical activity, according to the Geneva-based WHO.

Beta Cells

While the exact cause of Type 1 is unknown, scientists believe it occurs when the immune system attacks the pancreatic beta cells that produce insulin. By the time most patients are diagnosed with Type 1, 80 percent of their beta cells have been destroyed, Shlomo Dagan, chief executive officer of Teva’s partner, Andromeda Biotech Ltd., said in an interview.

“Right now the only treatment for Type 1 diabetes are insulin injections,” Dagan said. “This is not a therapy; it’s a replacement.”

Lilly and partner MacroGenics Inc. last year said their experimental Type 1 diabetes drug teplizumab wasn’t effective in slowing the progression of the disease in a pivotal trial. Diamyd Medical AB terminated an agreement with a Johnson & Johnson unit to develop a Type 1 diabetes treatment in June after the medicine failed to preserve beta cell function after 15 months, the primary goal in a late-stage trial.

No Competition

“When we started we thought, even if the results are positive, we would have competition,” Schwartz said. “Now we are the only game in town.”

DiaPep277, which modulates the immune system to prevent the destruction of insulin-secreting cells, was invented by Irun Cohen of the Weizmann Institute of Science in Rehovot, Israel. Since then it has been under development by Peptor Ltd. and its successor companies: DeveloGen AG, which merged with Peptor in 2003, and Evotec AG, which bought DeveloGen last year. Aventis SA, which later became Sanofi, licensed the drug from Peptor in 2002 and returned the rights two years later.

DeveloGen sold the drug to Andromeda Biotech in June 2007. Teva licensed worldwide rights to DiaPep277 from Andromeda Biotech in June 2009, and invested $170 million in the company last year to fund a clinical trial to confirm earlier results for DiaPep277.

Teva’s Stake

Bernstein’s Gal estimates the market for the medicine to be about 50,000 patients a year at a price point of between $5,000 and $10,000 annually. The product is a “nice asset” for Teva, which will probably get 20 percent of sales as a royalty rate, Gal said.

“It sounds like a drug that could provide value to patients who don’t have a lot of options,” he said in an interview. “The question is, does it stop the deterioration of the pancreas or just slow it down?” If patients lose the ability to produce any insulin, then DiaPep277 wouldn’t help, he said.

The drug met both the main and secondary goals of a study in the last of three stages of human testing generally needed for regulatory approval, Andromeda Biotech, a unit of Ramat Gan, Israel-based Clal Biotechnology Industries Ltd., said on Nov. 22. Patients taking the medicine had stable C-peptide levels, which meant pancreatic cells secreted insulin on their own, while there was a decline in those levels among patients taking the placebo.

Glucose Control

Patients taking DiaPep277 also maintained “good diabetic control” compared with those taking the placebo. That means patients need fewer daily insulin doses, delaying or reducing complications from diabetes, which include heart disease and stroke, according to Andromeda Biotech.

The trial included 457 Type 1 diabetes patients between the ages of 16 and 45 in Europe, Israel and South Africa. Patients were newly diagnosed and received one subcutaneous injection every three months, on top of their regular insulin injections, Dagan said.

Enrollment in the second late-stage trial, which includes 450 patients in the U.S., Canada, Europe, Israel and Argentina, will probably be completed during the first half of 2012. Data from the two-year study is due out in 2014, and the company will use it to apply for approval in the U.S. and Europe, Dagan said.

“Type 1 diabetes has been notoriously difficult to treat,” Cord Dohrmann, the chief scientific officer of Evotec who oversaw early trials of the drug as CEO of DeveloGen, said in an interview. “A number of other applications have failed in late-stage development. There’s a lot of hope riding on DiaPep277.”

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