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Last month, the FDA approved Aimmune's (NASDAQ:AIMT) oral immunotherapy Palforzia indicated for the treatment of peanut allergy in children. At first glance, the drug appears to demonstrate robust efficacy for the indication. In a pivotal clinical trial, over 67% of patients were able to tolerate 600 mg of peanuts after 12 months of treatment with p<0.001.
Once analyzed in context, however, the study may be deficient as to warrant the commercialization efforts of the drug to be futile. Since ARO101 is the company's only candidate to every surpass Phase 3, its billion dollar valuation may be materially affected once prescription data rolls in and investors are disappointed at its results. Let's take a look at why this scenario can very much become reality.
First off, studies have shown only 1 out of 8 patients with peanut allergies experience episodes of accidental exposure each year. Out of this group, only 1 in 5 (or 1 out of 40 of the entire peanut allergic population) develop symptoms severe enough to warrant treatment with epinephrine. Therefore, the vast majority of patients who wish to try Palforzia will want to do so to improve their quality of life, that is, to be able to consume peanut dishes after 12 months of oral immunotherapy.
Unfortunately, this when deficiencies in the drug's clinical trial begins to arise, as QoL was never evaluated as a secondary endpoint in the trial's design. While 67.3% of pediatric patients passed the 600 mg peanut challenge at the end of therapy, it is important to note just one kernel of peanut contains an average of 200 mg peanut protein. In other words, patients treated with Palforzia could at best consume 3-5 peanut kernels a day before severe allergic reactions set in. Perhaps more concerning is how AIMT never bothered to disclose how many serious adverse events occurred when patients took the 600 mg exit food challenge, and whether or not 33.7% of patients who failed did because the drug was unsafe.
Therefore, for patients who want to try the drug in hopes of being able to eat a peanut snack or a peanut butter sandwich after treatment, they will be severely disappointed. Moreover, the drug comes at a staggering cost of $890/mo. Not only is unaffordable for low income families or families without health insurance, it is extremely unlikely how parents would show enthusiasm for paying $178/mo. for a drug which does not enable their children to consume peanut dishes after treatment.
Even for patients who may take the drug to reduce the risk of accidental exposure to peanuts, the risk-reward profile is abysmal. For starters, patients must take the drug on a daily regimen and carry epinephrine at all times. Since pediatric patients with severe or life-threatening allergies to peanuts are already carrying epinephrine at all times, it is unclear why their parents would pay $178-$890/mo for this therapy when the extra cash can be used to stock up on more Epipen. Furthermore, if the daily maintenance dose is abandoned, then the risk of accidental exposure return and entire cost of maintaining the previous treatment will be nullified. In addition, the drug's clinical effects did not demonstrate statistical significance at all for adults, indicating the treatment would not be effective for patients aged 16-17 after a couple of years, resulting in guaranteed withdrawals from therapy.
To make matters worse, safety issues in Palforzia's clinical trial was several times worse than that of placebo. 34.7% of the participants had events with a highest severity of mild, and 59.7% had events with a highest severity of moderate, as compared with 50.0% and 44.4%, respectively, in the placebo group. Out of these groups, 5.6% of patients in the Palforzia group reported serious adverse events compared to 1.6% of patients in the placebo group. Most strikingly, 14.2% of patients in the Palforzia group experienced serious allergic events compared to 3.2% of patients in the placebo group. Considering the objective of the study was to reduce allergic events of patients after peanut exposure, the fact a high proportion of children developed an allergic response to the experimental drug cast a long shadow over its risk-reward profile.
Inexplicably, 21% of patients in the Palforzia arm dropped out of the study compared to 8.0% of patients in the placebo arm. The most plausible explanation for the abnormal drop out rate is the trial's futility when it comes to improving quality of life. Once commercialized, the drop out rates will likely be far worse than expected since patients received Palforzia for free during the clinical trial. As soon as parents realize they are paying $178-$890 for negligible improvements in their children's ability to consume peanut dishes, they will want to cancel the therapy as soon as possible.
I am shocked the analysts are predicting $830 million in sales for Palforzia by 2023, and that investors are apparently taking investment bank surveys about the drug at face value. Whenever new therapies are approved, physicians will always be open to prescribe them to patients as to evaluate their benefits. What the surveys do not, and cannot take account of, is the estimated enormous drop out rate for patients once the drug is commercialized. Based on the drop out percentages observed in the clinical trial and the cost patients will be paying for such a marginal benefit, I estimate up to 60-95% of patients will never take Palforzia again after an initial short term treatment. After all, why take Palforzia when peanut-escalation therapy is directly available from physicians with up to 80% of patients being able to eat 12 peanuts after therapy.
AIMT is trading at an enterprise value of $1.46B with Palforzia as its only product in commercialization. I estimate the price of the stock will be cut in half after the first quarter of prescription data are available on the Bloomberg Terminal via Symphony Health Solutions. Investors were justly awarded when the drug was approved by the FDA, but now is the time to sell as serious, irreconcilable issues arise as we enter the commercialization phase.
Meanwhile, the company has very little on its balance sheet to justify its valuation. With a total asset value of $204M and total liabilities of $100M, there exist very little margin of safety in the likely event Palforzia fails to impress doctors and patients.
What is more striking, however, is the pace at AIMT is burning through investors' capital. In the past year, AIMT spent over $126M in SG&A expenses while bringing in $0 in revenues, leading to a net loss of over $200M (or roughly 10% of the company's market cap) after accounting for R&D. Unfortunately, I anticipate this metric will increase even more as the company begins expanding its sales force. In a couple of years, investors will likely find AIMT's revenues missing analyst targets and their holdings being diluted as more stock is issued to market what I consider to be a futile drug.
Summary
In all, the company will likely never enroll a sizable portion of the 1.6M children and teenagers in the U.S. with peanut allergies with Palforzia. This because only 1 out of 40 patients with peanut allergies suffer severe allergic events given they were accidentally exposed to peanuts. Even for patients who want to enroll to reduce exposure risk, the prohibitive cost, requirements to carry epinephrine at all times, and several magnitudes of SAEs after taking Palforzia vs. placebo will significantly inhibit the drug's risk reward profile. The vast majority of patients who want to try Palforzia will do in the false hopes the drug can help with improve their quality of life and give them the ability to consume peanut dishes. Unfortunately, parents will be more than disappointed when they have spent $2100 to $11000 on Palforzia to discover the most peanut-intensive dish their children can have after treatment is a Pad Thai.
