This January, the U.S. Food and Drug Administration (FDA) approved the first biologic for the treatment of peanut allergies in children and adolescents. The drug is called Palforzia and is marketed by Aimmune Therapeutics (NASDAQ:AIMT).

Expectations for Palforzia are high, as many analysts are predicting the peanut allergy treatment market to grow to over $4 billion by 2024. In addition, multinational food and drink giant Nestle (OTC:NSRGY) believes in the company's potential and has invested over $473 million in the company to date, with the latest investment of $200 million made in February. 

Yet since then, Aimmune's stock has declined by nearly 50%. Perhaps more stunningly, nearly 40% of its current shares outstanding are sold short, representing a $468 million bet Aimmune will ultimately fail in its efforts to commercialize Palforzia. That's approximately the size of Nestle's entire stake in the company. Just what exactly could warrant traders to bet against a new therapy that addresses a common medical concern in children?

Woman giving "no" hand gesture to a box of peanuts.

Image source: Getty Images.

What's going on?

Palforzia is an oral immunotherapy composed of residual peanut protein administered to children in increasing doses. In other words, the biologic is designed to desensitize patients with peanut allergies and gradually increase their tolerance. In clinical studies, about two-thirds of children and teenagers (ages 4 to 17) were able to tolerate up to 600 mg of peanut protein after 12 months of treatment, beating patients taking the placebo by a huge margin. Palforzia is not a cure for peanut allergies, and its primary purpose is only to prevent a serious allergy should patients become accidentally exposed to peanuts.

The first problem with the biologic is that it requires its first dose to be administered in a healthcare setting so doctors and allergists can monitor for potential serious adverse events. Unfortunately, due to the ongoing pandemic, hospitals and clinics are overloaded with COVID-19 patients and can ill afford to devote time and effort for non-urgent treatments. As a result, Aimmune was forced to postpone Palforzia's commercialization efforts to summer at the earliest. 

To make matters worse, Aimmune's financial situation isn't getting any better while it waits for the pandemic to subside. Palforzia is Aimmune's first and only approved product, and the company has no other sources of revenue that are significant. In the past quarter alone, Aimmune burned over $85 million while it ramped up Palforzia's sales and marketing efforts. That's a lot of money for a company with $370 million in cash and investments to offset $128 million in long-term debt and expenses. In other words, if Palforzia doesn't launch soon, Aimmune's days are numbered. 

The second problem with Palforzia is its utility. While there is no doubt the biologic works, it comes with its fair share of flaws. To start, patients are required to take Palforzia daily; if they don't, the biologic's effects will wear off in time. Next, the level of compliance with its dosing regimen isn't optimal, as more than one in five patients in clinical studies withdrew due to both treatment and non-treatment related reasons. Moreover, about one in seven patients who took the biologic developed systemic allergic episodes, which defeats the purpose of the therapy. 

Finally, the impact of Palforzia on patients' quality of life is questionable. After all, not every patient with a peanut allergy will develop severe or life-threatening symptoms to warrant treatment with epinephrine such as via an EpiPen. In fact, studies have shown only between 2% to 3% of children fit the criteria of having severe allergic reactions to peanuts, and would arguably need Palforzia to mitigate this risk.

Meanwhile, Palforzia's efficacy in increasing peanut tolerance isn't substantial for the rest of the population. An increase in tolerance of 600 mg of peanuts does not even equate to one-quarter of a serving of peanut butter. It certainly wouldn't allow patients to consume dishes that contain peanuts.

So is the stock worth buying?

Although I am quite skeptical of the drug's utility, I think the stock is a solid buy for another reason. In its recent earnings report, the company disclosed 15 health insurers will be covering Palforzia on either a conditional or permanent basis. This means nearly 43 million parents will have affordable coverage of Palforzia should their children need it. 

This changes things entirely, because the biologic has a list price of approximately $10,000 per year. Without a 20% copay, it can be hard to justify charging that much for a drug with questionable utility, especially when it comes to helping children.

In the U.S., approximately 1.25 million children and adolescents have peanut allergies of some severity, and the number is growing every year. Even if Aimmune manages to sign up 10,000 patients on Palforzia, that translates to about $100 million each year in annual revenue. Currently, allergists' enthusiasm for the drug isn't waning, and they are excited to prescribe the drug once the COVID-19 crisis subsides. For biotech investors who are interested in innovative therapies, Aimmune is definitely a stock to consider. 

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.