She is mentally ill and is talking with a hallucination she has of a 3 foot tall scarred thing that apparently somewhat resembles a child whose mother took the drug Thalidomide while she was pregnant with them. The drug caused a lot of birth defects in the 1950's.

She's pretty set on killing herself, speaking to the hallucination like an old friend that she has tolerated over the years and become more or less annoyed by, but still tolerates. They go back and forth, he's rambling on about a bunch of bullshit. I would say in part trying to get a rise out of her/get her mind off the doom and gloom she's set on.

I think The Thalidomide Kid recognizes Alicia's genius intellect and wants to protect it and contends with a will of his own it seems even though as a hallucination what he really is in reality is a piece of her broken psyche.