One, which I mention several times elsewhere, is the need for patience if big profits are to be made from investment. Put another way, it is often easier to tell what will happen to the price of a stock than how much time will elapse before it happens. The other is the inherently deceptive nature of the stock market. Doing what everybody else is doing at the moment, and therefore what you have an almost irresistible urge to do, is often the wrong thing to do at all. - Phillip Fisher
In my years of investment research, I noticed that certain investment themes usually generate outsized returns. Particularly, I'm attracted to the investment thesis regarding leaders in their respective field. For food allergy, I strongly believe that the crowned champion is Aimmune Therapeutics (AIMT). In my view, Aimmune has the best long-term solution for food allergy. Better yet, the company is trading at a deep bargain to its intrinsic value. As the lead molecule, AR101 demonstrated stellar Phase 3 data, thus subjecting the drug to approval for peanut allergy in 1Q2020. As the revenues start to roll in, I expect the shares to trade at a much higher valuation. Interestingly, Aimmune is conducting research for AR101's label expansion. Concurrently, Aimmune intends to commence research for egg allergy in a matter of months. Amid the strong fundamental developments, it's possible that there's an unexpected acquisition in the making. In this article, I'll present a fundamental analysis of Aimmune and provide my expectation of this intriguing innovator.
Figure 1: Aimmune chart (Source: StockCharts)
About The Company
To get new investors oriented, I'll present a brief corporate overview. If you are already familiar with the firm, I recommend that you skip to the subsequent section. Headquartered in Brisbane, Calif., Aimmune is focused on the innovation and commercialization of medicines to service the food allergy market. Powering the pipeline is the lead molecule, AR101, which is an oral biologic designed as a preventative treatment (i.e. prophylactic) for peanut allergy. AR101 is designed by the characterized oral desensitization immunotherapy (i.e. CODIT) platform. Aside from AR101, Aimmune is brewing other drugs for other food allergies, including egg and walnut.
Figure 2: Therapeutic pipeline (Source: Aimmune)
It's important for investors to realize that Aimmune innovates its medicine via the proprietary platform technology CODIT which has more growth potential than isolated medicinal development. Specifically, if one drug proves successful chances are that other molecules will succeed. Of note, CODIT essentially works via oral immunotherapy ("OIT"). Interestingly, the allergic effects of an allergen - a substance that triggers an immune response - is dampened over time by incrementally raising the exposure with small dosages. Due to precise incremental dose increase, there's excellent treatment control.
From the logistics viewpoint, a patient suffering from food allergies like egg, walnut, or peanut would initially visit a specialist doctor (an allergist) for the first dose. Thereafter, maintenance doses can be conveniently administered at home until another follow-up dose is given at the office. After desensitization is achieved, the patient still continues maintenance therapy and avoids allergen exposure. Concurrently, the patient carries an epinephrine auto-injector pen as the extra "safety step." Investors should realize that CODIT medicines are designed to substantially lower the chances of having a potentially fatal reaction (i.e. anaphylaxis). Yet in the rare case that anaphylaxis occurs, there's always the epinephrine pen for "rescued" therapy.
Figure 3: CODIT technology platform (Source: Aimmune)
Lead Molecule AR101
As an oral biologic having the peanut allergen, AR101 desensitizes and thus prevents severe peanut allergy. With repeated and gradual exposure, patients would become less allergic to peanuts as soon as six months. Similar to other CODIT drugs, the patient is placed on requisite maintenance therapy with AR101 to ensure sustained benefits. Despite its sound design, the underlying science is meaningless unless AR101 can demonstrate clinical trial prowess. Accordingly, the aforesaid drug cleared all Phase 3 PALISADE, RAMSES, and ARTEMIS trials with flying colors.
In PALISADE, 50.3% of AR101-treated patients are able to tolerate a single-highest dose of 1,000mg of peanut protein compared to the meager 2.4% for patients on the sugar pill (i.e. placebo). This means that roughly half of all patients taking AR101 would not suffer from anaphylaxis and thereby deters from needing the epinephrine pen. Instead, if they do not take AR101 and consumed peanut, it's dollars to doughnuts that all patients will suffer from anaphylaxis. For a detailed analysis of PALISADE, readers can refer to my prior article. That aside, the similar finding was observed in the ARTEMIS study that I'll later discuss. Due to the robust composite data, I believe that AR101 will most certainly gain approval in the U.S. and Europe. And, I anticipated a "focused launch" to commence promptly thereafter. In the 1Q2019 earnings conference call, the Chief Medical Officer (Dr. Dan Adelman) noted,
Based on strong clinical results for our PALISADE, RAMSES, and ARTEMIS clinical trials, which, by the way, are the only Phase 3 efficacy trials in peanut allergy to meet their primary endpoints, we believe AR101 has the potential to become the cornerstone of care for patients with peanut allergy.
In my view, it's important for investors to keep tabs of development centering your stocks. That way, you can forecast future events. As follows, I summarized pertinent events in the table below. In my view, the most important catalyst is the robust data posted for ARTEMIS that assessed AR101 in children age 4 to 17. Interestingly, AR101 easily met its primary study endpoint. In a blinded-exit challenge after nine months of therapy, the proportion of AR101-treated patients who tolerated a 1,000mg (i.e. 2,043mg cumulative) peanut protein dose was much higher than the placebo group.
The p-value (an indicator of statistical significance) was less than 0.00001 which is far below the 0.05 cut-off. This proved that the result was attributed to AR101 rather than random chance. When you assess the clinical trial results, be sure to check the p-value to ascertain that the findings are real rather than random occurrences. On the 95% confidence interval, the standard cut-off for the p-value is 0.05. Therefore, you want to observe a p-value that is either 0.05 or lower for statistical significance.
Additionally, AR101 clearly demonstrated its ability to desensitize peanut allergen over the treatment course. Notably, the median "tolerated dose" increased from 10mg to 1000mg at the "exit challenge" and thus signifies a 100-fold increase. The statistical significance was off the roof, as the 15% lower-bound of the 95% confidence interval was greatly exceeded. Regarding safety, AR101 is well tolerated with a similar side effect profile as previous trials. Remarkably, there was neither a single case of anaphylaxis nor eosinophilic esophagitis. On June 2, 2019, Aimmune intends to publish the complete data set at the European Academy of Allergy and Clinical Immunology (EAACI) Congress.
Though AR101 posted the strong data in ARTEMIS and other trials, I'm surprised that the author of the Lancet article claimed, "despite an increase in peanut-tolerated in the exit food challenge, this quote does not translate into less reactions outside of the clinic." There are countless authors who voiced their opinions on many drugs that are then published in medical journals. Those articles are "suggestive" in nature. For me, my view is in line with Dr. Adelman's analysis,
The Lancet article does not discriminate between the severity of the systemic allergic reactions into mild, moderate, or severe, nor does the analysis allow for the long-term effects of OIT. The reported observations are limited in both time and scope. Allergy immunotherapy for most indications requires a minimum of three to five years to fully effect the modulation of the immune response. As such, we disagree with the authors of The Lancet article.
Shifting gears from the clinical findings, Aimmune intends to file for a Marketing Authorization Application ("MAA") in Europe by mid year. As the firm already submitted a Biologic License Application ("BLA") with the FDA in March, I expect an approval to be announced in 1Q2020. I strongly believe that the composite data supports the "more than favorable" (i.e. 65%) chances of approval for AR101 in both the US and in the EU. My estimated timeline for the EU approval is in either late 2020 or early 2021. Commenting on the strong catalysts, President and CEO Jayson Dallas enthused,
We are well on track to introduce AR101 as potentially the first-ever approved treatment for peanut allergy, a significant milestone for our company, the allergist community, and the millions of people who live with the daily risk of serious reactions to accidental peanut exposure. The FDA’s acceptance of our BLA was a key step forward and now we continue to work with the FDA to facilitate an expeditious review. In parallel, in the U.S., we are continuing our medical education through our medical science liaison team and are fully ramping up our commercial efforts and scaling our organization to be launch-ready by Q4 this year. Recent market research has provided additional focus to this effort. For example, we have found that the approximately 30% of allergists who are most eager and ready to offer AR101 to their patients, if approved, today see approximately 70% of peanut allergic patients.”
AR101 for peanut allergy
The FDA accepted the BLA that was filed in March 2019. The agency will hold an Advisory Committee (ADCOM) meeting. Under a 12-months review period, the Prescription Drug User Fee Act (PDUFA) is set for January 2020.
Aimmune also reported excellent data for ARTEMIS that studied AR101 in the aforementioned age group. This results positioned Aimmune to file an MAA in Europe by mid-2019.
|Other AR101 developments|| |
In December 2018, Aimmune commenced the Phase 3 POSEIDON trial to investigate the therapeutic merits of AR101 in young children (age 1-3). The company also initiated a Phase 2 combination study of AR101 with Regeneron (REGN)'s dupilumab.
The Phase 2 trial to study AR201 in egg allergy is projected to start by mid-2019.
|Outlook||I expect approval and launch of AR101 in the U.S. in 1Q2020.|
Table 1: Catalyst summary (Source: Integrated BioSci Investing)
Since I believe that approval is nearly certain, I'll assess AR101's commercialization progress. With the strong approval expectation, Aimmune is preparing for an upcoming U.S. launch. An important variable that accounts for commercialization success is if the drug has a meaningful "market." No matter how efficacious and safe the medicine is, it cannot generate substantial sales in the absence of a sizable market. That being said, the food allergy market is gargantuan because the condition is affecting 15M people in the U.S. and Europe. In the U.S., there are 1.7M kids suffering from peanut allergy alone. Altogether, research estimated that the food allergy market is as big as $24B.
Currently, there's no long-lasting prophylactic available for patients with severe peanut allergies. The only available medicine is the rescue therapy with epinephrine injection. That aside, mild cases can be treated with an antihistamine like Benadryl. Amid the potential fatality without an answer, the demands for AR101 is extremely robust. Therefore, it's quite likely that AR101 will trump the limitations of commercialization without a large partner. Perhaps, AR101 will procure blockbuster results yet I'm reserved from forecasting a peak revenues beyond $1B. After all, Aimmune is still "going at it alone" and the hurdles are nearly insurmountable, in my opinion. Contrary to my belief, the intelligence research firm Reportbuyer assessed that the peak AR101 sales will be much higher. Per Reportbuyer,
Aimmune's AR101, is expected to be the market leader among the four peanut immunotherapy products released during the forecast, period, capturing over 67% of the peanut allergy market in 2027, worth an estimated $3.0B. Second in sales is DBV Technologies' (DBVT) Viaskin Peanut, which is projected to capture 32% of the peanut allergy market in 2027, totaling nearly $1.4B in sales. Finally, sales for Prota Therapeutics' and Camallergy's products, PPOIT and CA-002, together are only expected to total 1%. This estimate is based on GlobalData's assumption that within the forecast period these therapies will each only be released in one geography - Australia and the 5EU respectively.
Figure 4: Food allergy market (source: Aimmune)
On top of the robust demand for AR101, I'm highly encouraged by the fact that Aimmune already conducted the pre-launched intelligence to ensure success. Instead of using a "hit and miss" approach, Aimmune will initially tap top allergists who are covering 70% of all diagnosed patients. As a result, this saves tremendous commercialization expenses. Commenting on the launch initiative, Chief Commercial Officer Andrew Oxtoby enthused,
This research highlights that a large percentage of diagnosed patients are seen by a relatively concentrated number of allergists, while over time we will work with a broader population of 5K allergists across the U.S., these data allow us to be very focused at launch on working with the 1.3K allergists who see 70% of the already diagnosed patients. We also now know that these 1.3K allergists hosted into approximately 800 individual allergy clinics, which allows us to have even more focused efforts. To support these allergy clinics, we are well on track to hire our first wave of commercial field-based employees by this fall. This first wave will consist of 40 high-quality individuals who have multiple prior experiences beyond traditional pharmaceutical sales, including payer account management, marketing, and long-term care.
Label Expansion And Regeneron Partnership
Moreover, Aimmune is unlocking AR101's value through other initiatives. For instance, POSEIDON is assessing the said drug for peanut allergy in patients from 1-3 years old. I strongly believe that POSEIDON will generate positive results. My rationale is that a young patient's immune system is not "hardwire" so it's far more adaptable than the adult's immune system. As a result, it's amenable to desensitization therapy with AR101. Of note, PALISADE results confirm my assertion because AR101 demonstrated efficacy in kids (age 4 to 17) vs. non-efficacy in adults.
Furthermore, Aimmune secured a partnership with the highly reputable company Regeneron Pharmaceuticals back in October 2017. Under the terms, Regeneron will sponsor a Phase 2 combination trial of AR101 with its blockbuster drug, dupilumab. A year after the partnership is signed, the companies commenced the said trial. I believe the Regeneron partnership is favorable for Aimmune because Aimmune is essentially getting a "free ride." In other words, Regeneron pays for all study expenses while Aimmune simply supplies AR101 and food challenge materials. As the human monoclonal antibody, dupilumab inhibits interleukins 4 and 13 (i.e. IL-4 and IL-13) which are important cytokines driving the Type 2 inflammation associated with allergy. The partners believe that the combination treatment will accelerate the desensitization process and potentially lead to remission. The President and Chief Scientific Officer George Yancopoulos M.D., Ph.D., of Regeneron stated,
The incidence of food allergy continues to rise and with it the risk of life-threatening allergic reactions. Dupilumab targets the IL-4/IL-13 signaling pathway, which is a critical driver of allergic inflammation and which we believe regulates the balance between allergic antibodies and the protective antibodies generated during desensitization. After receiving its first FDA approval, dupilumab is being explored in a wide range of diseases that we believe share a common pathway, such as asthma, nasal polyps and various allergies. Working with Aimmune is an important part of this comprehensive program and an important step to evaluate if dupilumab can help desensitization approaches designed to protect people with peanut allergies.
Whether the aforementioned Phase 2 study will generate positive outcomes remains to be seen. Yet I ascribed it the slightly favorable odds of success (i.e. 60%). My gut feeling is that IL4/3 suppression won't contribute much to the "memory desensitization" needed to dampen food allergy in the long term. Instead, dupilumab provides a "temporary" immune suppression which is efficacious for the "acute" treatment rather than prevention of allergic anaphylaxis like AR101. Be that as it may, there are still 40% possibility of treatment synergy between AR101 and dupilumab. If so, Regeneron will likely to acquire Aimmune for AR101 and CODIT to enhance the value of its autoimmune disease franchise. In my opinion, Regeneron already sparked an interest in Aimmune yet the company is taking the prudent "wait and capture" approach. Prior to acquisition, it's wise to have concrete data regarding AR101's ability to synergize with its blockbuster dupilumab that procured $374M in 1Q2019.
I believe that it's important for investors to check the earnings report of your stocks because it can reveal important development. Therefore, I'll assess the 1Q2019 earnings report for the period that concluded on March 31. Aimmune registered $54.4M ($0.87 per share) net loss compared to $49.5M ($0.92 per share) decline for the same period a year prior. On a per share basis, this represents an 8.0% earnings improvement. This is good news for Aimmune because an earnings improvement usually signals improved operating efficiency.
That aside, the research and development (R&D) expenses registered at $31.3M and thereby signifies a 6.2% decrease from $33.4M for the same year-over-year (YOY) comparison. The lower R&D is due to expenses associated with AR101 trial advancement as well as contract manufacturing. Additionally, the general and administrative expenses increased from $16.7M to $23.7M in support of the upcoming AR101 U.S. launch.
Regarding the balance sheet, there was $296.3M in cash and equivalent, thus signifying a 2.5% decrease from $303.9M last year. Based on the $55.0M quarterly OpEx, there should be adequate capital to fund operations for approximately three additional years.
Figure 5: Key financial metrics (Source: Aimmune)
Of note, an early-stage bioscience company usually raises its cash by conducting additional offerings. Hence, I'm not worried about dilution unless the rate is excessive. I believe that anything less than 30% YOY is reasonable. For Aimmune, I noticed that the shares outstanding increased from 53.5M to 62.0M, thereby signifying a 15.9% YOY increase. This is modest dilution and thus implies efficient business operations.
I usually like to mention Warren Buffett's wisdom in my valuation analysis. After all, Buffett is one of the best, if not the best, asset allocator in this field. The Oracle of Omaha, Buffett stated that two analysts can come up with completely different price target ("PT") for the same stock. As such, valuation has a lot of built-in "subjectivity." To remove my potential bias, I employed the most applicable assumptions that leverage comparative market analysis and sum-of-the-parts valuation. In my view, the most important asset of Aimmune is AR101. Therefore, it contributes to the most value in this valuation.
Since AR202 also uses CODIT, I believe that it should post excellent results like AR101. Moreover, both conditions (egg and peanut allergies) shared a common disease pathway which should benefit from analogous CODIT drugs. As a result, I ascribed AR202 with the more than favorable (i.e. 65%) chances of success.
Estimated market and peak sales
Discounted peak sales
|Peanut allergy||75%||$1B peak sales (my estimate is much lower than other research which ascribed $3B for AR101 alone).||$750M|
|AR202||Egg allergy|| |
|$2.3B total estimated market (I estimated a $1B peak sales at best without a marketing partner).||$650M|
Table 2: Valuation of the sum-of-the-parts (Source: Dr. Tran BioSci)
To arrive at my price point, I assumed the 25% profits margin from the $1.4B calculated above to get $350M future net earnings. In dividing $350M by 62.0M shares outstanding, I obtained the $5.64 earnings per share. Applying the 10 price-to-earnings (P/E) ratio to my calculations, the arithmetic yields $56.45 per share. And by placing a 15% discount, I received the $47.98 PT. Keep in my that my valuation is based on the assumption that the shares count stays constant.
Of note, my valuation is 64% premium to the $30.27 share price that Nestle Health Science (OTCPK:NSRGY) paid to Aimmune in the $98M investment made in November 2018. Either my valuation or Nestle signified that Aimmune is substantially undervalued. Our valuations correspondingly represent 139% and 45% upsides from Aimmune's current market price of $20.08 per share. Most importantly, investors should keep in mind that whether the stock will reach these valuations depends on the upcoming AR101 launch progress and other risk factors.
Given that investment research is an imperfect science, there always are risks associated with your stocks regardless of its strong fundamentals. Hence, it's important for you to assess Aimmune's pertinent risks. At this point in its growth cycle, the biggest concern is if AR101 can gain FDA approval in 1Q2020. Despite the prudent launch preparation for a high-demand drug, I believe that there are significant chances that it could fail in commercialization. My rationale is that I rarely see a small company successfully launched its drug into blockbuster status alone. A robust marketing partner is requisite to success. Nonetheless, Aimmune is highly strategic in its launch strategy. With preparation, the commercialization success is improved for AR101. Moreover, the heightened demand for a long-term prophylaxis for peanut allergy strongly encourages sales.
In all, I maintain my buy recommendation on Aimmune with the four out of five stars rating. And, I ascribed the $47.98 price target to be reached within two to three years. Harnessing the power of CODIT, Aimmune has the capability to innovate stellar medicines that are "silver bullets" for various food allergies. The demands for a long-term solution to food allergy is extremely robust because there is no available molecule that can serve this purpose. Notwithstanding, the first CODIT drug, AR101 demonstrated excellent Phase 3 trial results and thereby positioned it for 1Q2020 approval as a treatment of peanut allergy. There is definitely a sizable market with strong demand for AR101. As commercialization rolls in significant revenues, I expect the market sentiment will shift and induced a robust rally. And, your long waited patience will be rewarded. Interestingly, first AR101 approval also opens the door for label expansion. Additionally, the upcoming approval milestone further validates CODIT's success which enables Aimmune to potentially secure a commercialization partner for other developments.
Though I view the upcoming AR101 launch and the combo trial of AR101/dupilumab with "reserved optimism," both catalysts can still achieve success. And if a partner is secured, I strongly believe that they will unlock the tremendous value of Aimmune's assets. Furthermore, if the data for the combination study with Regeneron's drug turns out positive, Aimmune is likely to be acquired. On the subject of acquisition, it's highly likely that Nestle is interested in Aimmune. Perhaps, the giant is waiting for AR101 approval to move in for the bidding. Regeneron also is employing the wait and capture approach. Taken altogether, Aimmune is definitely an ultra-long-term holding with much upside. On a parting note, I'd like to bid farewell with a quote by Warren Buffett in which he urged against the impulsive decision.
I insist on a lot of time being spent, almost every day, to just sit and think. That is very uncommon in American business. I read and think. So I do more reading and thinking, and make less impulse decisions than most people in business.
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Dr. Tran's analyses are the best in the biotech sphere, well worth the price of subscription.
Very professional, extremely knowledgeable, and very honest … I would highly recommend this service and his stock picks have been very profitable.
Simply put, this is worth every penny. Just earlier today, one of the companies recommended by Dr. Tran got acquired for a nice 50% premium.
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.
Additional disclosure: As a medical doctor/market expert, I'm not a registered investment advisor. Despite that I strive to provide the most accurate information, I neither guarantee the accuracy nor timeliness. Past performance does NOT guarantee future results. I reserve the right to make any investment decision for myself and my affiliates pertaining to any security without notification except where it is required by law. I'm also NOT responsible for the action of my affiliates. The thesis that I presented may change anytime due to the changing nature of information itself. Investing in stocks and options can result in a loss of capital. The information presented should NOT be construed as recommendations to buy or sell any form of security. My articles are best utilized as educational and informational materials to assist investors in your own due diligence process. That said, you are expected to perform your own due diligence and take responsibility for your action. You should also consult with your own financial advisor for specific guidance, as financial circumstance are individualized.