2017: A Transformational Year For Aimmune Therapeutics

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About: Aimmune Therapeutics (AIMT), Includes: DBVT
by: Art of Capital
Summary

I see Aimmune Therapeutics rising to a $2 billion market capitalization, implying 80% upside from current levels, as the year draws closer to the company's Phase 3 results.

This article expounds the bull case by looking at the opportunity that lies ahead, the science, competitive landscape, leadership, financials, insider activity, and upcoming catalysts.

All small-cap biotech equities have a plethora of risks, but I examine some of the idiosyncratic risks.

Opportunity lies ahead for Aimmune Therapeutics

Aimmune Therapeutics (NASDAQ:AIMT) is looking to be the first FDA-approved treatment for peanut allergies. Furthermore, the ultimate goal of the company's platform is to treat all food allergies. I find this opportunity extremely compelling because the market is in dire need of an FDA-approved drug.

Food allergies are highly dangerous and fairly common. For example, the U.S. Centers for Disease Control states that every three minutes food allergies send someone to the emergency room. Furthermore, the CDC says that food allergies result in more than 300,000 ambulatory-care visits a year for individuals 18 and under. Also, it's estimated that 15 million Americans have food allergies, including 1 out of every 13 children, and the overall economic cost of food allergies is upwards of $25 billion a year.

Currently, the only option people have for food allergies is to merely treat the symptoms. Antihistamines are the go-to medications in order to treat the symptoms associated with allergic reactions. Patients may also utilize an EpiPen to stave off more severe reactions. Thus, drugs that seek to eliminate food allergies altogether - not merely treat the symptoms of allergic reactions - represent a massive opportunity.

Science

Aimmune Therapeutics is looking to capitalize on this opportunity with its Phase 3 pivotal study entitled PALISADE (Peanut ALlergy Oral Immunotherapy Study of AR101 for DEsensitization in Children and Adults). The company's therapeutic AR101, which received both breakthrough designation and FDA fast track designation, is the first of many from the company's CODIT ("characterized oral desensitized immunotherapy") platform. This approach is being utilized because of strong evidence from leading researchers, which suggests oral immunotherapy is effective in treating food-related allergies.

Essentially, Aimmune Therapeutics' approach is to orally administer a gradually increasing amount of the allergen until individuals become desensitized to their food allergies. The PALISADE Phase 3 trial is designed to determine the efficacy of its lead candidate AR101 in the elimination of peanut allergies. According to the company website, the PALISADE trial design is an:

International, randomized 3:1, double-blind, placebo-controlled Phase 3 trial of the efficacy and safety of AR101 in a characterized desensitization (CODIT™) approach in patients with peanut allergy; approximately 500 peanut-allergic patients 4-55 years of age; and 60 clinical sites in the United States, Canada, and nine countries in the European Union.

A multi-center, randomized, double-blind placebo-controlled design is very similar to its Phase 2 study, which proved to be statistical significance in meeting both its primary and secondary endpoints. The Phase 2 results are truly impressive with:

23 out of 23 patients who completed the active treatment regimen met the primary endpoint of tolerating a cumulative amount of peanut protein of at least 443 mg, compared to 5 of 26 patients receiving placebo (p≤0.0001).

The extremely strong p value score, the trial design of the Phase 3 study, and the general probability of Phase 3 trials succeeding give me confidence in PALISADE being able to deliver statistically significant results.

Competitive Landscape

There may not be an approved treatment yet, but that doesn't mean that Aimmune Therapeutics is not facing serious competition. DBV Technologies (NASDAQ:DBVT) and Aimmune Therapeutics are currently in a foot race to be the first to market. However, I believe that Aimmune Therapeutics has the upper hand in nearly every dimension possible when it comes down to the science behind the two companies.

Firstly, Aimmune demonstrated stronger Phase 2 results with 100% efficacy, which compares favorably to DBV Technologies' Phase 2, which demonstrated only 50% efficacy.

Secondly, the time it takes to achieve the desired treatment outcome is only 22 weeks for Aimmune Therapeutics, whereas DBV Technologies' treatment takes 12 months.

Thirdly, the age range for Aimmune's Phase 3 trial is 4 to 55, whereas DBV Technologies is only testing on individuals aged 6 to 11.

Lastly, not only does Aimmune Therapeutics likely have the most effective and quickest solution, but it's also the easiest. Aimmune's treatment is simply a pill administered daily, whereas DBV Technologies uses a patch which must be replaced daily. People all around the world have been conditioned to take pills, but patches, on the other hand, are more burdensome, and you have to worry about them coming off or being tampered with. I personally think that the average individual will be more comfortable with taking pills; opposed to DBV's solution that looks something like a nicotine patch.

Leadership

A top flight management team is essential to a good investment; unless you invest in a company, as Warren Buffett suggests in doing, which even an unenlightened individual can run. I firmly believe that strong management and proven scientists are essential components in a true long-term investment in the biotech industry.

Stephen Dilly is the chief executive officer of Aimmune Therapeutics. Dilly's educational background can be defined as elite; he received a Ph.D. in Cardiac Physiology and an MBBS from the University of London. Furthermore, he has a wealth of experience in what it's like to work on drug development and commercialization within the confines of large institutions like SmithKline Beecham (NYSE:GSK) and Genentech (OTCQX:RHHBY). Lastly, he has played key roles in getting numerous drugs approved such as Activase, Lucentis, and Raptiva.

The executive team includes nine members in total and appears to be very talented, but I'm most excited about the Scientific Advisory Board that was appointed in December of 2016. The company picked up five leading food allergy researchers and clinicians. The SAB will provide critical peer reviews of Aimmune's trials, help with selecting future therapeutic targets, and will assist in the formulation of new trial designs. A poor Scientific Advisory Board can add to cost, complicate the vision of the company, and slow the progress, but I'm confident that this SAB will be able to add to the marketplace of ideas and increase efficiency within the company.

Financials

The company is extremely well capitalized with the latest infusion of cash coming from Nestle Health Science (OTCPK:NSRGY), which was announced on November 4, 2016. Nestle received a 15% stake in the company in exchange for $145 million, and Aimmune Therapeutics retained full rights to AR101. I view this as a highly favorable development that adds to the conviction I have for this company.

The company has entered into 2017 with nearly $300 million in cash. The company has already begun its Phase 3, only has $13 million in long-term liabilities, and will most likely spend between $60 million and $100 million in operational expenses for 2017. Furthermore, the outstanding share count after the Nestle deal is only at 49.9 million in outstanding shares.

This company is cash rich and its capital structure is light, so I'm very comfortable in this company's ability to both pay its bills and to raise additional money.

Insider Activity

Interest in Aimmune Therapeutics is really starting to pick up. I already mentioned Nestle taking a large position ahead of the company's pivotal trial results, acquiring 15% of the company, but it is not alone. For example, Aimmune's senior vice president of Corporate Development and Strategy acquired 129 shares in the beginning of December, 2016. Furthermore, a sequential analysis of 13F forms shows an uptick in net purchases of 4.06%.

Also, there are 74 funds that currently hold positions in this stock, and five of those funds have Aimmune as one of their top 10 holdings. Lastly, nine funds created new positions, 36 funds added to their existing positions, eight funds closed out their positions and 12 funds reduced their positions.

Catalyst

Aimmune's main catalyst is the results from its Phase 3 trial which should come out in November of 2017. However, another possible catalyst can come in the form of DBV Technologies failing its Phase 3 trial, which is expected around July 17, 2017.

Idiosyncratic Risks

The main risk for investors is if PALISADE fails in its efforts to prove that AR101 is able to deliver statistically significant results. AR101 for peanut allergies is the only therapeutic candidate that the company currently has, so failure will likely result in a 50% to 70% haircut given the current valuation of around $1.14 billion. Also, another main risk is if DBV Technologies delivers on its Phase 3 trial. Ultimately, Aimmune Therapeutics appears to have far superior science, so I'm not concerned by the possibility of these two companies battling for market share.

Last Word

I am currently long Aimmune Therapeutics, and it represents one of my largest biotech holdings. My investment style could be best described as a hybrid between Benjamin Graham and Philip Fisher. However, I prefer to be much more nimble in the world of small biotechnology companies, given the probabilities and risk/reward profiles.

Disclosure: I am/we are long AIMT. 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.