Shares of Aerie Pharmaceuticals (NASDAQ:AERI) were trading at their lowest level since 2016 earlier this month, ahead of its third-quarter 2019 earnings update. Afterward, they redefined the meaning of "lowest."

The pharmaceutical company, which specializes in drugs for glaucoma and is developing candidate treatments for other eye diseases, has struggled with the launches of Rhopressa and Rocklatan. Originally projected to combine for $1 billion in peak annual sales, the two drugs claimed a combined 1.5% of the glaucoma market at the end of September. The pharma stock sat below $20 per share.

To be fair, it's still early. Rhopressa has only been on the market for 18 months, while Rocklatan launched just six months ago. But their slow starts, combined with multiple reductions in 2019 revenue guidance, have put investors on edge. Management expresses confidence that the new duo can eventually capture a more than 40% market share. But how confident should investors be that the products and the company are on the right track?

A person applying an eye drop.

Image source: Getty Images.

Revenue guidance was slashed (again)

Aerie Pharmaceuticals reduced its 2019 revenue guidance when it reported third-quarter results on Nov. 6. -- the second consecutive quarter it reduced expectations. After originally forecasting $110 million to $120 million in product revenue for the year, management walked its outlook back first to a range of $70 million to $80 million, then even further to $61 million to $66 million. 

The updated guidance reflects the tepid starts for Rhopressa and Rocklatan. The drugs utilize the Rho kinase (ROCK) inhibitor netarsudil to reduce intraocular pressure, which is the cause of glaucoma. Rhopressa relies solely on netarsudil, while Rocklatan is a combination of netarsudil and latanoprost that's intended for patients with severe cases. Interestingly enough, latanoprost is the current leading glaucoma medication with an estimated 41% market share -- and is the current target of Aerie Pharmaceuticals' ambitions.

Its achievements to date don't quite match those ambitions, but management laid out what it has learned so far, and the strategy it intends to follow to improve those results. While Aerie Pharmaceuticals ended September with a healthy $346 million on the books, there's a sense of urgency to demonstrate progress, considering how quickly the company is burning through its cash. 

Metric

First 9 Months of 2019

First 9 Months of 2018

YOY Change

Revenue

$45.2 million

$9.7 million

365%

Total costs and operating expenses

$182.8 million

$167.5 million

9%

Operating income

($137.5 million)

($157.8 million)

N/A

Operating cash flow

($123.3 million)

($121.0 million)

N/A

Data source: Press release. YOY=Year over year.

Investors who pore over the details will notice another reason to be disappointed in the latest revenue guidance. Aerie reported product revenue of $18.5 million in the third quarter, and $45.2 million for the first nine months of the year. But its updated guidance suggests fourth-quarter revenue could be as low as $16 million.

Why is growth so erratic and difficult to come by?

A patient and doctor sitting at a table.

Image source: Getty Images.

Sluggish coverage decisions hurting the franchise

On the third-quarter earnings conference call, management explained two reasons for the low fourth-quarter expectations. First, it anticipates there will be lost sales days due to the holidays. While that affects all pharmaceutical companies, it may have a more significant impact on a company in the midst of a market launch and ramp-up for two drugs.

Second, Rhopressa and Rocklatan are still experiencing a high rate of churn with doctors. Part of the reason is that the two drugs treat similar patients, so doctors are still figuring out how each fits into their practice. A larger effect comes from insurance coverage differences between the two products.

Rhopressa is accessible to the majority of people covered through commercial insurance programs and Medicare Part D. Rocklatan is accessible to an estimated 80% of individuals with private insurance but just 36% of those covered by Medicare Part D. 

CEO Vicente Anido explained that many insurance programs have been slow to add Rocklatan to the lists of drugs they cover because they already cover Rhopressa, which they believe (rightly or wrongly) is sufficient. That has caused some doctors to prescribe Rhopressa (containing netarsudil) and write a separate prescription for a generic version of latanoprost, since Rocklatan (a combination of netarsudil and latanoprost) isn't covered for all patients. That could explain some of the erratic week-to-week changes in bottles sold and churn witnessed at doctors' offices. 

Aerie Pharmaceuticals is making progress in getting Medicare Part D plans to cover Rocklatan -- it's just happening more slowly than it expected. Anido expects the churn problem to subside when Rocklatan reaches 70% to 75% coverage in Medicare Part D plans and 80% to 90% in commercial plans, which would put its coverage rates on par with those of Rhopressa. But he estimates that won't happen until the middle of 2020.

This is getting complicated

There's no doubt that Rocklatan sales are being held back due to the relatively slow uptake in insurance coverage, but investors are clearly concerned that the drug has other hurdles to overcome. 

Will doctors continue to prescribe Rhopressa and a generic latanoprost even if Rocklatan becomes more accessible? It presumably would be more convenient for individuals to use one eye drop instead of two, but cost is another factor to consider -- and Aerie just raised prices 9%.

Can Aerie Pharmaceuticals reduce churn by doing a better job educating doctors about its products? The glaucoma market is a little crowded, but if Rhopressa and Rocklatan are superior and more convenient, then that should provide an advantage, right? There did seem to be good penetration among top practices, but the company will need to replicate that effort across the board for sustainable success.

Simply put, Aerie Pharmaceuticals' glaucoma portfolio still appears to hold considerable potential, but few envisioned it would be this difficult to get those drugs into the hands of patients. Investors will need to remain patient and keep an eye on product revenue growth in the first half of 2020. If obstacles continue to thwart growth, then it may be time to move on.