Keryx Pharmaceuticals' (NASDAQ:KERX) Auryxia just won the Food and Drug Administration (FDA) green light for boosting iron levels in non-dialysis chronic kidney disease patients, but shares dropped following third-quarter financial results that failed to impress. Can Keryx Pharmaceuticals' new approval kick-start revenue and investor optimism?

What went wrong? Payer mix

Inking contracts with big Medicare Part D payers allow drugmakers like Keryx to target millions of new patients, but Part D coverage can be a double-edged sword.

Bundled $100 bills inside a giant drug capsule.

IMAGE SOURCE: GETTY IMAGES.

Part D payers typically pay less for medicine than commercial payers do. As a result, revenue can miss the mark if Part D prescription volume grows more quickly than does commercial insurance prescription volume. This phenomenon shows up in drugmakers' gross-to-net sales, which reflects gross product revenue minus rebates paid back to payers based on each payer's contracted cost. In the third quarter, the sword cut both ways for Keryx Pharmaceuticals as prescriptions increased, but net revenue per patient fell.

Initially, Keryx Pharmaceuticals' Auryxia was approved in 2014 for use in chronic kidney disease patients on dialysis. However, sales didn't begin to take off until late last year and this year, when manufacturing hiccups were resolved and the company secured reimbursement of Auryxia from more insurers.

In 2015, Keryx Pharmaceuticals' revenue was only $5.8 million, but it grew to $32 million in 2016. Revenue of $11.8 million in the first quarter and $15.1 million in the second quarter put the company on pace to nearly double 2016's revenue. Instead of revenue growing quarter over quarter in Q3, however, revenue stagnated, clocking in at only $15 million in the quarter -- $3 million less than industry watchers were expecting.

A drop in demand wasn't behind the flatlining sequential revenue. Instead, it was a bigger-than-expected shift in patient mix to Part D plans. Keryx Pharmaceuticals' inked contracts with UnitedHealth Group and Humana earlier this year, and because they are two of the biggest Medicare insurers, those contracts resulted in rapid prescription growth and a larger-than-expected proportion of Medicare patients taking Auryxia in the quarter. Since Medicare patients pay less than commercially insured patients for Auryxia, price headwinds more than offset tailwinds associated with an 18% sequential increase in patients taking Auryxia.

What could happen next

More patients having access to Auryxia is a good thing, but since Auryxia's patient count is relatively small, quarter-to-quarter shifts in payer mix could make for uneven revenue growth for a while.

The impact of mix, however, could lessen now that Auryxia's approved for use in non-dialysis patients, because the non-dialysis market is significantly bigger than the dialysis market. There are only 450,000 chronic kidney disease patients on dialysis, but there are 650,000 chronic kidney disease patients who aren't on dialysis, and who are currently being treated for iron deficiency.

Up until now, non-dialysis patients are treated with oral iron supplements or intravenous iron supplementation by infusion. These approaches can work, but Auryxia may offer advantages that help it win market share away from them. For example, oral dosing allows for outpatient care rather than in-facility infusions, and oral supplements can cause gastrointestinal problems in some patients. In trials, 52% of patients who were intolerant, or didn't respond to oral iron, saw an improvement on Auryxia.

Tapping into this new addressable market might not be all that hard, either. Non-dialysis patients are treated by the same doctors who treat dialysis patients, and given rising prescription volume for dialysis patients, Keryx Pharmaceuticals is already winning traction with them. If doctors prescribe Auryxia in non-dialysis patients at a similar pace to what we've seen in dialysis patients, it could help smooth out the impact of payer mix, because non-dialysis patients are more often covered by more profit-friendly commercial insurers.

Investor's takeaway

Keryx Pharmaceuticals is still spending more money than it's bringing in, and uncertainty associated with the patient-mix problem probably won't go away until the prescription volume reaches flight altitude. The opportunity here for upside, because of the increasing addressable market, is big, but this remains a high-risk and volatile stock, and that isn't going to change for awhile. Therefore, Keryx Pharmaceuticals may be best suited to aggressive investors only.

Todd Campbell has no position in any of the stocks mentioned. His clients may have positions in the companies mentioned. The Motley Fool recommends UnitedHealth Group. The Motley Fool has a disclosure policy.