Aerie Pharmaceuticals (AERI) thinks it has something special in its two commercialized drug products, which utilize a novel mechanism of action to relieve the underlying cause of glaucoma. Now if only its investors could find relief.
Shares of the eye-care specialist peaked at over $72 in July 2018, but the pharmaceutical stock has plunged nearly 70% since then following a slower-than-expected market launch for its first drug, Rhopressa. Management even had to walk back its original full-year 2019 revenue guidance to account for sluggish prescription growth.
But there are signs Wall Street may have overreacted just a bit. Recently published numbers suggest pharmacies are building inventory of the company's second drug, Rocklatan, which launched in May 2019 and uses two active pharmaceutical ingredients, including the one that Rhopressa contains. Considering the two drugs have combined peak annual sales potential of over $1 billion, is Aerie Pharmaceuticals a buy?
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A promising approach
Glaucoma, or high intraocular pressure (IOP), occurs when too much fluid accumulates in certain layers of the eye. If left untreated, the condition can damage the nerve connecting the eye to the signal-processing center of the brain and cause vision loss.
Therefore, the goal of most glaucoma treatments is to drive the largest decrease in IOP, with the least amount of irritation and most convenient dosing schedule. Aerie Pharmaceuticals offers two compelling treatment options thanks to a novel mechanism of action.
Netarsudil, the active pharmaceutical ingredient in Rhopressa, belongs to a class of drugs called Rho kinase (ROCK) inhibitors. The drug compound blocks the activity of enzymes (the aforementioned Rho kinases) that regulate, in this case, how cells in the eye jettison excess fluid. The result is better fluid drainage and a significant reduction in IOP from a once-daily eye drop.
Rhopressa is the first ROCK inhibitor approved for glaucoma by the U.S. Food and Drug Administration. It was followed shortly thereafter by Rocklatan, which combines netarsudil and latanoprost for an even more significant decrease in IOP. The drugs launched in the second quarter of 2018 and 2019, respectively.
Considering the glaucoma market in the United States harbors over 35 million prescriptions and is valued at more than $3 billion annually, investors have high hopes for the one-two punch. But it's been a rough start.
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A sluggish start
Aerie Pharmaceuticals reported first-half 2019 revenue of less than $27 million and an operating loss of $94 million. The sales total was far below what investors, analysts, and management anticipated. As a result, management had to reduce full-year 2019 revenue guidance from the previously expected range of $110 million to $120 million to a new range of just $70 million to $80 million.
Sharply lower revenue will also result in significantly higher cash burn, now expected at about $165 million in 2019. The business exited June with $109 million in cash, although it raised $316 million in gross proceeds from a debt offering in mid-September. The well-subscribed offering suggests institutional investors are buying into the long-term opportunity -- and perhaps implies an innocent explanation for the sluggish start for Rhopressa.
Aerie Pharmaceuticals appears to have suffered from low coverage initiation of Rhopressa, with just 75% of individuals relying on Medicare D covered at the beginning of October. Wall Street expected that level to be achieved almost six months earlier. Rocklatan began October with just 36% of Medicare D individuals covered. It's worth noting that scoring a contract with Medicare contractors is not the same as receiving formulary coverage, which can further delay prescriptions as doctors balance cost with care for patients.
The silver lining is that the sluggish start encountered so far comes down to paperwork, which can be remedied in time. Aerie Pharmaceuticals hasn't been deterred. It recently published data demonstrating a huge surge in the number of bottles of Rhopressa and Rocklatan sold to pharmacies, which often precedes a complementary response in prescriptions.
The company also expects to receive a decision from European regulators for Rhopressa (called Rhokiinsa on the continent) by the end of 2019, while an application for Rocklatan (called Roclanda) will be submitted in early 2020. The European market for glaucoma treatments is estimated at $1 billion per year.
This pharma stock is down, but not out
Aerie Pharmaceuticals serves as a reminder to investors that reporting positive results in a phase 3 clinical trial, or even earning regulatory approval, means relatively little if commercialization efforts run into obstacles. The sluggish launch of Rhopressa and slow coverage adoption for Rocklatan have combined to push the company's market cap below $1 billion for the first time since 2016.
It may take time to smooth out the paperwork of Medicare D expansion and formulary coverage, but investors shouldn't write off this pharma stock just yet. Flush with cash and positioned to end 2019 on a high note -- assuming bottles sold to pharmacies translates into an increase in prescriptions -- Aerie Pharmaceuticals could find a spot in your portfolio at current levels.
