A wave of vaping-related illnesses has resulted in hundreds of visits to hospitals and at least seven deaths in the United States. Investigators have yet to determine exactly what about vaping is causing these life-threatening symptoms, but there's a good chance that industry changes, including regulation, are coming. In this episode of The Motley Fool's Industry Focus: Healthcare, analyst Shannon Jones and contributor Todd Campbell discuss what changes could mean to cannabis companies' future sales.

Also, Aimmune Therapeutics (NASDAQ:AIMT) recently won key support for approval of its medicine for peanut allergies, Palforzia. A standardized approach that could help reduce reactions to accidental exposure to peanuts in kids and teens, Palforzia aims to desensitize patients to peanuts through controlled exposure to peanut proteins that cause allergic reactions. Can this medicine reshape treatment or will safety concerns limit its risk?

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This video was recorded on Sept. 18, 2019.

Shannon Jones: Welcome to Industry Focus, the show that dives into a different sector of the stock market every single day. Today is Wednesday, September the 18th, and we're talking Healthcare. I'm your host, Shannon Jones, and I am joined by healthcare guru Todd Campbell. Todd, how's it going over there?

Todd Campbell: It's going good! I don't know what time we're going to air the show, but it's Fed Day today. I'm killing the whole morning eagerly waiting everybody's predictions on Twitter about what the Fed may do and what the impact may be for stocks.

Jones: A lot happening last night. A lot of predictions today. Hear there may be some things happening tonight, too. A lot to uncover! We won't unpack that on today's show, though, because we've got more to unpack. We're going to be diving into the peanut allergy wars with an update from a company that just had an FDA panel last Friday. And, we're wading into the murky waters of vaping. That's right, we're going to be talking about what's going on with vaping, what are some of the headlines that are out there, and what that could mean for a lot of these cannabis-based businesses right now. 

Todd, let's kick things off with something we briefly queued up in last week's show. That was Aimmune Therapeutics, ticker AIMT. Last Friday, September the 13th, the company had a chance to plead its case for regulatory approval for its drug AR101, or Palforzia, a treatment hoping to make it across the finish line to approval for adolescents with peanut allergies. Todd, this was important because AR101 is an immunotherapy, but it's not necessarily new. It's really about the delivery of this immunotherapy that is new. I think, before we dive into what happened with the panel, though, can you explain for our listeners out there who may not be familiar, what exactly is AR101, and why is this such a huge opportunity for this company right now?

Campbell: Over the past seven years or so, allergists are starting to treat patients increasingly with desensitization. Essentially, in the case of peanut allergy, they would take peanut flour in micro doses, small doses. And then, in their office, they would give them increasingly more, just to see whether or not they could desensitize that patient to any exposure they may have to peanuts. There have been some studies that have backed up that this is a good idea, that it can be successful. What Aimmune is doing is, they are standardizing this approach. No longer will be each allergist ferreting out how much to give in each dose. There'll be doses that patients will give their kids, or their kids will take every day, of basically the proteins that cause the allergic reaction that are found in peanuts. It standardizes this whole desensitization process through an oral daily dose. 

I do want to say right up front, this is not a cure. You have to always be very, very careful when it comes to exposures. The idea here is not to eliminate the risk, but to reduce the risk so that if you or your child accidentally are exposed to peanuts, they're not going into anaphylactic shock and having a violent reaction.

Jones: Such a great point! This is a treatment option, one of several that they have, to try to build up their tolerance. It's basically a pill that's packed with peanut protein. You mentioned, you can do the allergy shots. For some patients and for their parents, they've also been trying to do this at home, in a homebrew style, where they've been trying to actually desensitize their child to the peanut allergy on their own. I think, for a lot of patients, especially the ones that are more susceptible to accidental exposure, that's very dangerous, because there's no medically validated process that they're following. They're really just trying to do something, anything that they can.

When you look at peanut allergy treatments, this company has one, it's an oral pill. There's another company called DBV Technologies that's got a peanut allergy patch that's attempting to do the same thing. At the end of the day, I think these are really parents who are looking for some sort of option to reduce the risk related to accidental exposure. That's the key. It's not a cure, it's about making sure that as a parent, I know that my child can go to school, and I don't have to worry as much about them being exposed to any sort of peanut protein powder that could be in the air or in the food that they're eating.

Campbell: Right. 1.6 million U.S. kids and teens are estimated to suffer from peanut allergies. About 1.25 million have been diagnosed with it. The annual occurrence or incidence rate of accidental exposure ranges between 12% and 15%, depending on what study you're looking at. There is a real risk, obviously, for children to get exposed to it. They do say that as you get older, peanut allergies get easier for people to deal with those kinds of accidental exposures. But when you're young, much more difficult. It's not a tremendous amount of people who pass away because of this, but sadly, it's about 100 deaths per year caused by food allergies. That's enough to make any parent a little bit anxious, and, obviously, wanting to seek out what will hopefully be a better solution. And that, of course, was what the FDA convened their advisory panel to help them ferret out. Is this new option better than, say, your typical in-office visit with an allergist who's helping you get desensitized to it?

Jones: Exactly. For our listeners who may not be familiar, the FDA Advisory Committee, it's basically a panel of experts plus patient advocates that come together when there are questions about a drug's safety or efficacy. It's really designed as a chance to go through the scientific data, to really mesh out those questions. Is this a drug that we would recommend approval to the FDA for? One that we think the risk to safety benefit profile is favorable for that particular drug? The FDA is by no means bound to whatever these panels ultimately recommend. Typically, the FDA will tend to go in line, but that's not always the case.

Let's talk about some of the data that they were reviewing. They had actually a couple of phase 3 trials. In the PALISADE trial, they tested the treatment AR101 against placebo in 555 patients aged 4 to 55. Of course, the target demographic here is really the children and adolescents. That's where the company is trying to gain approval. These were kids who couldn't tolerate 100 milligrams or less of peanut protein. For context, a single peanut actually contains about 300 milligrams. These patients were given a higher dose of the treatment every two weeks until they reached a maintenance dose of 300 milligrams. After a year, about two-thirds of the patients -- about 67% of the original intent to treat group -- could tolerate 600 milligrams of peanut protein -- that's huge; that's about two peanuts -- compared to 4% of patients who received placebo. So we saw the data support what the company was hoping to see -- that this was not only having a benefit on the scientific level, but there was a clinical outcome that was associated with us that was favorable. 

That's not to say, though, it wasn't without its own risk, and some safety concerns too.

Campbell: Not to bury the lede any further, the FDA Ad Com did come out voting in favor of recommending approval of this new drug by a 7 to 2 vote. The two that went against it, maybe they were the ones who had some concerns over some of the safety issues that are associated with this therapy. We need to understand that there's two sides to some of these coins. Yes, in the trial, the average patient was able to be exposed to more protein than they would have otherwise been OK to deal with. However, you had a very high dropout rate in the trial. I think 21% of people discontinued the therapy, which suggests that they weren't able to tolerate it. It didn't work on a secondary measure with adults -- granted, it was just secondary measure. You did see the benefit in kids. But, you also had a higher incidence rate when it comes to safety. You had a higher incident rate of adverse effects in the group that was taking this drug vs. the people who were not taking this drug. That's something that parents and allergists are going to have to figure out. 9.4% of the subjects who took the drug had a systematic allergic reaction during the initial dose escalation and during updosing. That was a lot bigger than the 3.8% of people who had a reaction in the placebo group. There was a lot of debate in wondering ahead of this Ad Com, how are they going to view this safety issue vs. the efficacy, and the potential to reduce the need for drastic interventions like hospitalization? 

I think the solution there they are going to come up with -- they did vote on a safety vote 8 to 1 in favor of instituting a risk management program. We've talked about this in the past on the show. The abbreviation is REMS. Risk evaluation mitigation strategy. What it's going to do is, it's going to require that everybody says, "Yeah, we're going to have epinephrine available. We're going to have that available at all times." And, you're going to have to have these initial doses and the escalating doses handled within specific locations that can deal with a severe allergic reaction. As a result, this drug will launch with a black box warning. A black box warning, for people who are new to healthcare, typically not what you want to necessarily have on a drug. It does raise the stakes, if you will, in wondering whether or not this is going to be the right option for you or your child.

Jones: Exactly. I think that's really the question right now for a lot of investors who've been following this company. What is the commercial viability, given the REMS overhang? I do think that the REMS strategy makes sense. Again, it's really about being in a medically validated process, and someone who is comfortable and well educated on the risk and knows how to identify a lot of those allergic reaction symptoms. So I think it's smart. But it does create an extra hurdle that a lot of these parents will have to go through for their children.

The other question that came up during the panel was, what about long-term safety data? We don't have that for this process. The company does have a long-term safety study. I think about 90% of the patients that were enrolled in the Phase III trial have enrolled into this follow-up study. That will be a longer-term study that we'll certainly circle back on, keep everyone up to date.

But, with the REMS overhang, you've also got competition. I have seen some estimates for where sales could be for this company slashed in half. I've seen anywhere from $650 million to $1.2 billion. There's a wide range, a lot of question marks. We'll just have to wait and see how this plays out on the commercial level.

Campbell: Right. It could cost thousands of dollars per year. I think I saw some estimates that said that if you're just having an allergist do this on their own with protein power, maybe your out of pocket costs are exceeding $5,000 a year. So, maybe that you could say that, yes, there's a value opportunity here. Maybe this would justify a price tag that's meaningful. And then, obviously, if you can get X% of allergists and patients onto this medication, then you have a nice, recurring stream of revenue. I know that we don't have the long-term data for this particular drug, but they have done some follow-up studies in just desensitization overall. What they've discovered is, yeah, you lose that ability. So, it looks like this is going to be something that someone would have to take well throughout their adolescence and beyond. It's probably not something you could just take for two years, then expect that's going to take you from 10 years old to 18 years old. 

I'm staying on the sidelines on this one right now, Shannon. I'll wait and see how this other trial plays out. I'll wait and see what allergists really say, what the prescription trends look like, and what the payers say about covering it.

Jones: Exactly. I'm going to be on the sidelines for this one, too. I know DBV Technologies has had its own issues. They voluntarily withdrew their application to the FDA due to some manufacturing and quality issues. But when I think about it from a parent's perspective, would I rather go the route of an allergy injection, a pill, or a patch? I'm going to go for what's most convenient and what I think is going to be the safest for my child. So I think I want to watch some of the competitive dynamics play out. A lot to watch here, but we'll certainly keep all of our listeners up to date.

Alright, our next story isn't necessarily about any one company, but rather the headlines and the stories that could impact many companies within the cannabis space. That's all about vaping. Todd, there's been a lot of alarming headlines over the last several weeks. Some related to e-cigarettes, which we'll get into; others related to vaping cannabis products. So alarming, in fact, health officials -- even the Trump administration now -- calling for more investigations, potentially even a ban on certain types. At the end of the day, the goal is to figure out what's happening and also to make sure it does not happen moving forward. 

Todd, a lot to unpack with a lot of these vaping stories. Before we get into what we're seeing, for the kids at home -- really probably more the adults at home; I think kids already know what vaping is -- for the adults out there, what exactly is vaping?

Campbell: Not encouraging, Shannon, that they haven't quite nailed down what it is that's causing these headlines to happen, these deaths and these illnesses. I think it's important for every parent, listener, whatever -- I have a teenage son, he's 16, and sure enough, we're wrestling with some of these problems here in our household as well. To give you a little background, what we're talking about is inhaling and exhaling of vapor that gets produced by an e-cigarette, an electronic-type device, that usually features a mouthpiece, it has a battery, and then it has a cartridge that would contain an e-liquid or e-juice or concentrate or something. And that gets heated by the battery, so you create the vapor, which you then inhale and exhale. These products, these vaporizers, have been around for a while. Probably 2007, 2008. But it's really exploded in use in the last five or whatever years, as one company in particular, Juul, launched a USB-looking device that has really made it very simple, easy to use, with a lot of product behind it, that was attractive to people. Rather than going in and getting a cigarette that you would smoke to get your nicotine, or to buy marijuana and either legally or illegally and smoke it that way, these devices provide an opportunity to do it in, call it more of a controlled fashion -- less mess, less smoke, less smell. It's just a more effective delivery device.

Originally, when vaporizers came on the scene, the idea, the goal here, was that it would be a smoking alternative. If you smoke cigarettes, you'd say, "OK, I want to quit, but I don't want to give up nicotine right away." Well, this would be another option. Smoking cigarettes has its own set of much more substantial risks, theoretically, because there's so many different chemicals and stuff that go into the making of these cigarettes, and obviously, this long-term data that shows us just how unhealthy and bad for you smoking cigarettes is.

Unfortunately, now, as you said, widespread use, and now we're starting to see some health issues cropping up. And yeah, that's a problem. That's a problem, obviously, for Juul, and the makers of these different vaporizers and vaping components. KushCo comes to mind, ticker KSHB. And, the cannabis companies themselves. A lot of people are using these vapes to smoke cannabis-based products. In Canada, later on this year, for the first time, a lot of these products are going to become available. So, all eyes are basically on what's going on for multiple reasons. Not just from the healthcare perspective, but also from an investment perspective.

Jones: Exactly. There's so many opinions right now as to what could be causing this. I've read some reports that it could be vitamin E, specifically a vitamin E oil, that, when you are vaping it, it gets into your lungs, and causes almost a chemical pneumonia. So, there's that potential. It could be the device. It could be the contaminants. There was a study done in California where they found metals in certain products. I think it's a function of, we don't know what's actually causing this, and now you have more people using it, so we're starting to hear more reports about it.

There's also, too, the illegal market on the cannabis side. Because this is an unregulated space, there are consumers who can go into dispensaries, stores, pick up some of these vape cartridges, think they're getting something legit, but they could actually be getting counterfeits. There is out on the street something called K2 or spice, which is basically synthetic marijuana, which is extremely dangerous. The problem is, a lot of these consumers have no idea. A lot of these counterfeiters can actually print off labeling and packaging, and it looks just like the legit, licensed product that people are used to seeing. In that regard, because you don't have enough regulation, now you see problems with that. Now it's this murky area, where people can just literally, in their backyard, create these products, and people don't know what it is that they're getting.

For me, as I look at this space, both as a parent, as a consumer, and as someone who follows the cannabis space, I think this is really an opportunity for companies that have high quality standards, that have high consistency standards, that have independent third-party labs tests that can be verified, I think it creates an advantage for those companies. You mentioned KushCo. KushCo just signed a deal recently to try to basically stamp out some of the counterfeit players. So, I think it creates some opportunity.

But by and large, Todd, it's still a massive overhang. I had a chance to interview a CEO just yesterday in the cannabis space who said he's very concerned.

Campbell: Rightfully so, I think. If people start worrying about the safety of vaping -- and you have to remember, a lot of people, when it comes to these legal states, vaping represents a fairly large proportion, second largest way of consuming marijuana products behind the dried flower. So this is a significant part of the market, representing billions and billions of dollars of additional sales. Right now in Canada, for example, you've got a $6 billion [$CAD] illegal-plus-legal market. Of that, you're at 20% or so roughly that's legal. Once they roll out edibles and basically derivative products, people are estimating that's going to cause that market to explode to $11 billion, which, on a percentage basis, is huge. So, there's a huge amount of money that's at stake. Vaping, having represented such a large proportion of what we've seen in Colorado and places like California, any kind of pushback that reduces the attractiveness of using those devices could pose a headwind to everybody's future sales forecasts. I think it's a great move on KushCo's part to go out there and ink this deal. Authentication is huge. You're right -- there's probably people working in the black market, bringing in containers full of fraudulent, fake packaging that looks, like you said, like the real thing. I think they just made an arrest in Wisconsin not that long ago -- they walked in there, and the stuff in the closet looked almost like it came right from my regular dispensary. I think the takeaway there is, if you're in a legal state, or you have access to buying in a legal state, it seems like those products haven't cropped up as much in this conversation because there already are some quality standards, you're already going through some steps to make sure that the products on those shelves are safe. Maybe, ultimately, the way to solve the problem would be federal legalization so that everybody is working under that same guise. I don't know the last time I went out and actually made moonshine, right? I go to the liquor store. It's a more convenient way of buying something that I know is going to be safer. Maybe that's the direction we're heading.

Jones: Yeah. So, a lot to watch in this space. We'll have to see if the regulators get on the same page with this, and ultimately what that means for a lot of these companies. As always, we'll be sure to keep all of our listeners up to date.

That'll do it for this week's Industry Focus: Healthcare show! We want to thank you for tuning in! As always, people on the program may own companies discussed on the show, and The Motley Fool may have formal recommendations for or against some of the stocks mentioned, so don't buy or sell anything based solely on what you hear. Thanks to Dan Boyd for his work behind the glass! For Todd Campbell, I'm Shannon Jones. Thanks for listening and Fool on!