Oramed's Scilex Play: A Value Investor's Look at Capital Allocation and Intrinsic Value

Oramed's investment in Scilex Holdings is a classic case of a high-yield portfolio play. The financial mechanics are straightforward: Oramed made an initial outlay of $99.5 million and has now collected $118 million in cash returns through a recent $18 million payment in January 2026. This generates a substantial current yield, providing a significant cash return that funds Oramed's dividend and other operations.

Yet the risk profile is equally clear. Oramed retains a $39 million outstanding debt position with Scilex, including a $27 million note maturing in quarterly installments through October 2026. This is not a clean exit; it's a contingent claim on a distressed company. The financials of Scilex itself underscore the peril. The company reported a net loss of $72.8 million for 2024 and carries an accumulated deficit of $563.1 million. Its strategy relies on raising more capital through equity and debt to stay afloat.

Viewed through a value lens, this is a bet on a turnaround that is not yet in sight. The high current yield is a reward for bearing the risk that Scilex cannot service its remaining obligations. For now, the cash flow Oramed has extracted provides a cushion, but the underlying asset remains a speculative claim on a company with deep financial holes.

Capital Allocation and the Dividend Decision

The board's recent approval of a $0.25 per share cash dividend is a clear signal of Oramed's capital allocation philosophy. The company has framed this move as a return of surplus capital, with the dividend funded from the strong cash flows generated by its investment portfolio. This aligns with the stated strategy of using portfolio returns to support the core business. As the company noted in its October letter, it has built a diversified portfolio of opportunities to generate returns while advancing its oral insulin program independently.

On one level, the dividend is a rational use of excess capital. It rewards shareholders for the successful execution of the Scilex investment, which has already returned $118 million on a $99.5 million outlay. The board's decision to pay approximately $10.5 million from this surplus provides a tangible return without touching the funds needed for clinical development. From a value perspective, it's a disciplined move-distributing capital that is not required for growth. Yet the dividend also introduces a dual interpretation. It may signal confidence in near-term cash flows, demonstrating that the company can fund its operations and shareholder returns from its portfolio. But it could also be seen as a distraction from long-term value creation. A regular dividend commits capital to a fixed payout, potentially limiting the flexibility to reinvest in high-return internal projects or new opportunities. For a clinical-stage company, the priority should be funding the pipeline that will eventually generate the intrinsic value. The dividend, while modest in size, shifts the capital use away from that pure compounding engine.

The bottom line is that Oramed is walking a tightrope. It is leveraging its investment portfolio to fund its core mission, which is a sound strategy for a company with limited operating cash flow. The dividend, however, adds a layer of shareholder expectation that must be balanced against the need for patient capital in the pipeline. The company's ability to manage this tension-using portfolio returns to cover costs while still aggressively advancing its oral insulin program-will determine whether this capital allocation is a strength or a compromise.

The Core Business: Assessing the Oral Insulin Moat

The long-term value of Oramed hinges on its ability to commercialize an oral insulin formulation. The market opportunity is substantial, with the global oral insulin market projected to grow at a CAGR of 15.39% between 2026 and 2033, reaching approximately $17.04 billion by the end of that period. This expansion is fueled by the rising global burden of diabetes and a clear, unmet patient need.

The core of the potential competitive advantage lies in patient compliance. For decades, insulin therapy has been delivered via injection, a method that often leads to poor adherence due to discomfort, inconvenience, and the risk of infection. An oral formulation directly addresses this critical issue, promising to enhance patient adherence and improve long-term glycemic control. This is not merely a product improvement; it represents a potential paradigm shift in diabetes management. A durable competitive moat could form around a drug that makes treatment easier and more reliable, especially for the large population of patients who struggle with daily injections.

Yet the path from promise to profit is long and expensive. Oramed is advancing its oral insulin program independently, having terminated a joint venture earlier this year. The company has initiated a new, targeted U.S. trial designed to be cost-effective and focused on validating its formulation in high-responder subgroups. This disciplined, data-driven approach is prudent. However, the critical question for intrinsic value is whether Oramed can fund this pipeline to its conclusion. The company has stated it is building a diversified portfolio of opportunities to generate returns, with the Scilex investment being a major source of cash.

The bottom line is a tension between a high-potential asset and a capital-dependent path. The oral insulin market offers a decades-long compounding opportunity. The patient compliance advantage could create a wide moat. But Oramed's reliance on investment returns to finance its core clinical development introduces a layer of uncertainty. The company must successfully navigate this capital allocation challenge-using portfolio cash flows to fund the pipeline without sacrificing the long-term value creation that oral insulin represents. For the value investor, the intrinsic worth of the enterprise is now a function of both the market's growth and the company's ability to execute its independent development plan with the capital it can generate.

Valuation and Catalysts: The Path to Realizing Intrinsic Value

The investment thesis for Oramed now hinges on a sequence of discrete catalysts, each with its own timeline and outcome. The path to realizing intrinsic value is not a single event but a multi-year journey, with near-term cash flows from the Scilex investment providing the runway for the longer-term, higher-stakes clinical bet.

The next major cash inflow is a scheduled event. Oramed retains a $27 million note with Scilex, which will be repaid in quarterly installments through October 2026. This predictable repayment provides a clear, near-term cash return that will further bolster the company's portfolio. It is a tangible step toward the ultimate goal of a clean exit, but it is not the final chapter. The more significant, and uncertain, catalyst lies in the company's ability to convert its remaining $12 million convertible note. This note is convertible at Oramed's option into Scilex equity at a fixed price of $36 per share. The value of this conversion is entirely dependent on Scilex's future stock performance. If Scilex's shares trade above $36, Oramed can choose to convert, potentially capturing substantial upside. If they trade below, the note will simply be repaid in cash. This creates a binary outcome tied to a distressed company's turnaround, adding a layer of volatility to the portfolio's final returns.

Beyond these portfolio events, the ultimate value driver remains the independent clinical development of Oramed's oral insulin program. The company has initiated a 60-patient, US-based trial designed to be cost-effective and focused on validating its formulation in high-responder subgroups. This is a critical, early-stage step. Success here would provide the data needed to refine the patient selection for future regulatory submissions. However, this is just one phase in a long and expensive process. The timeline for commercialization is multi-year, fraught with uncertainty, and dependent on continued funding. The company's strategy of using investment returns to finance this pipeline is a pragmatic use of capital, but it also means the intrinsic value of the enterprise is now a function of two parallel tracks: the successful execution of a high-risk, high-reward investment and the successful, capital-intensive development of a novel drug.

For the value investor, the catalysts are clear but sequential. First, the quarterly repayments through October 2026 will provide a steady cash return. Second, the convertible note conversion will act as a leveraged bet on Scilex's survival and recovery. Finally, and most importantly, the oral insulin program must advance through clinical trials to generate the long-term compounding value that justifies the current enterprise. The timeline for realizing intrinsic value is therefore stretched out, with near-term cash flows providing a cushion while the company waits for the clinical and commercial payoff that could redefine its worth.