What happened

After Aerie Pharmaceuticals (NASDAQ:AERI) reported disappointing sales of its glaucoma drugs Rhopressa and Rocklatan in the third quarter, its shares tumbled 22.4% on Thursday.

So what

Over $3 billion is spent annually treating glaucoma, an eye disorder that can cause vision loss that primarily affects seniors. The size of the existing market and potential for market expansion due to aging baby boomers creates a big opportunity for Aerie Pharmaceuticals, which has won Food and Drug Administration (FDA) approval for two glaucoma medications in the past two years.

A person holds his head in his hands in front of a chart showing a declining share price.

IMAGE SOURCE: GETTY IMAGES.

Unfortunately, slower-than-expected insurance coverage has resulted in a sluggish launch for both drugs, causing revenue to fall shy of industry watchers' and management's forecasts. Disappointing sales in the second quarter led management to reduce its full-year revenue forecast to over $70 million from prior guidance for over $110 million, and a tepid third-quarter earnings report yesterday led to an additional cut in guidance to over $61 million.

Management says that lumpy weekly prescription volume growth is partially to blame. In Q3, the company's sales increased sequentially by 17%, to $18.5 million. That was far shy of what's necessary to cover its operating costs. Aerie Pharmaceuticals spent $59.8 million in the quarter, resulting in a net loss of $49.4 million in the period. 

Now what

It's not uncommon for young drug companies to experience growing pains following the launch of new drugs. That's one reason why many companies decide against going it alone, choosing to partner with larger peers to leverage their experience and existing sales force. Since Aerie Pharmaceuticals has (so far) shunned bringing in a partner, it's shouldering the burden of those expenses, and that's a headwind that's likely to continue for a while.

The good news is that insurance coverage is improving, which should help knock down barriers to access for glaucoma patients. Rhopressa offers similar efficacy with fewer doses than beta blockers like timolol, a drug commonly prescribed alongside prostaglandin analogues (PGA), including latanoprost. And Rocklaton, which combines latanoprost with Rhopressa, offers better efficacy than latanoprost alone. Since latanoprost historically accounts for over one-third of all U.S. glaucoma prescriptions, there's plenty of opportunity for sales to increase over time.

Given the large and growing addressable glaucoma treatment market, an argument could be made for owning shares as long as the company's balance sheet is healthy. So far, cash hasn't been a problem. Aerie Pharmaceuticals finished September with $345.8 million in cash and cash equivalents, despite burning through $131 million in the first nine months of 2019.

Nevertheless, this is a high-risk company, suitable only for patient investors who can withstand the possibility that sales will continue to grow more slowly than hoped over the coming quarters.