Aerie: A Brilliant Future, Derisking In Progress, And The Making Of A Major Ophthalmic Pharmaceutical

| About: Aerie Pharmaceuticals, (AERI)
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Summary

Aerie is a biotech with two very promising glaucoma medications in its pipeline: Rhopressa and Roclatan.

Aerie is a development stage biotech with no approved products, thus it is essentially a binary investment: zero or offering significant upside.

If Rhopressa Phase 3 results match the previous Phase 2 results, Aerie will have the 2nd most effective drug class for reducing intraocular pressures (IOP).

If Roclatan Phase 3 results match the Phase 2 results, this will mean that Roclatan will be the most potent medication available for reducing IOP.

In addition to Roclatan (Rhopressa + Latanoprost), we further expect Aerie's new ROCK/NET class of medications will allow Aerie to launch other best-in-class glaucoma combo medications.

For a company with as promising a future as Aerie Pharmaceuticals ("Aerie (NASDAQ:AERI)") we are surprised at the lack of hype surrounding Aerie. We want to add to the body of knowledge as to why Aerie has the potential to introduce new drugs that are likely to be both best in class and the standard of care in the glaucoma eye drop medication market to reduce intraocular pressure (IOP).

To obtain a balanced investment perspective, we recommend reading the recent Sirius Capital article that essentially presents the negative/short point of view. The Bioassociate Consulting article from mid-summer is also a good positive article on Aerie. We will try to avoid being redundant and will build on their articles and only give a brief refresher. Basically, high intraocular pressures (IOP) damage the optic nerve that can result in loss of vision and blindness. Therefore lower IOP = better.

Let's begin with outlining why we believe Aerie is an outstanding investment:

  1. Roclatan (combo drug of Rhopressa + Latanoprost) has the potential to be the drug with the highest IOP reducing ability, better than any other drug currently on the market.

  2. Rhopressa has the potential to be the standard of care in treating glaucoma.

  3. Rhopressa introduces a new ROCK/NET inhibitor class of glaucoma medications. We believe that this class of medication is ideally suited to creating combination medications, which is demonstrated by Roclatan's (Rhopressa + Latanoprost) outstanding Phase 2 results.

  4. Aerie has the potential to introduce the top 6 IOP lowering medications covering all the major classes of glaucoma medications. We expect this can all be achieved with low risk and low R&D expenses as all Rhopressa combo drugs could be combined with existing medications that are available as generics.

Roclatan's clear superiority

Even though Roclatan is Aerie's second glaucoma drug in its pipeline, we will begin with discussing Roclatan as this drug alone shreds the short point of view. Roclatan is a combination drug of Rhopressa + Latanoprost. From the Roclatan Phase 2b, there is no question about its statistically significant (p<0.001) IOP reducing ability that is superior to any of its constituent drugs (Latanoprost and Rhopressa). Roclatan mean diurnal IOP reductions were approximately 2 mmHg better than Latanoprost ("standard of care").

Roclatan, Phase 2b

(Source: Aerie Pharmaceuticals, Investor day presentation, Sept. 10, 2014)

Based on the impressive superior results of Roclatan Phase 2, Roclatan is the horse to bet on. If Roclatan Phase 3 results support Phase 2 results, this means that Aerie will have the single drug with greatest IOP reducing ability on the market.

Let us reinforce what Aerie has stated in its presentations in case you missed it, there has not been a single trial that has demonstrated such promising IOP reducing results as the Roclatan Phase 2. This is where the short thesis ends, but there are more positives, so we shall continue to build on the bull thesis with what we believe is a comprehensive primer on why Aerie is an outstanding investment opportunity.

Misconception of Rhopressa's lack of superiority

A superficial examination of Rhopressa Phase 2b results would lead one to incorrectly conclude that Rhopressa is a mediocre medication when compared to Latanoprost, the "standard of care." Results show that Rhopressa is approximately 1 mmHg worse than Latanoprost at reducing IOP. Thus the headline is that Rhopressa fails when compared to Latanoprost. However, this headline result of looking at one number to judge efficacy is awfully simplistic and demonstrates a fundamental misunderstanding of the glaucoma market.

Rhopressa Phase 2b

(Source: Aerie Pharmaceuticals, Investor day presentation, Sept. 10, 2014)

The brief explanation is that managing glaucoma is very complicated. There is no magic bullet. Treating glaucoma is almost a trial and error affair. Multiple classes of drugs exist to treat the various classes of non-responders. You really don't know what class of drugs the patient will respond to. Even if you do find the right class/drug, it may stop being effective or perhaps the patient may build tolerance to the drug. Then you might need to switch to another drug or add another drug to the one already being taken.

Glaucoma is like managing blood sugar levels in diabetes, IOP can quickly rebound and missing a dose is bad for keeping IOP levels under control. With multiple meds on different dosing schedules, patients make mistakes or miss doses.

This is also the reason so many combo drugs exist.

As we embark on demystifying the glaucoma market, we want you to keep one thought in mind, that Timolol is at least 1 mmHg worse than Latanoprost. Yet Timolol and other similar beta blockers capture 29% of the glaucoma market either as monotherapies or combination therapies.

Similarly, Rhopressa is 1mmHg worse than Latanoprost. Rhopressa is in a class of one (ROCK/NET inhibitor), yet Aerie only projects that Rhopressa captures 18% of the glaucoma market.

Glaucoma market 2013

(Source: Aerie Pharmaceuticals, Investor day presentation, Sept. 10, 2014)

Latanoprost and Timolol

(Source: Aerie Pharmaceuticals, Investor day presentation, Sept. 10, 2014)

So let's correct the view that IOP lowering ability as a singular number determines the efficacy of a glaucoma medication. If one has trouble grasping this concept, consider that glaucoma is similar to diabetes. It is not enough to say one drug is best at lowering blood sugar levels. There are different classes of diabetic medications, from fast-acting insulins, to long acting, to mixes of insulins with a mix of response properties. Of course, now there is also the inhaled insulin class of medications in addition to the traditional injectable insulins. There are also different classes of oral antidiabetics that act in different manners: e.g. Biguanides (metformin), Sulfonylureas (glyburide), etc. Like the diabetic market, glaucoma patients may be on several different classes of medications at the same time.

Glaucoma is a complicated disease that is difficult to manage and this results in many different treatments. An individual's response to different therapies varies (range of responders to non-responders) and it also varies over time. It may not even be that unusual that to manage IOP levels a patient may be on three different classes of medications.

In the glaucoma eye drop market, there are the following classes of drugs: prostaglandin analogues (PGA), beta blocker (NYSE:BB), carbonic anhydrase inhibitors (NYSE:CAI), and alpha agonist (AA). None of these may be effective at reducing IOP, thus there may also be the need to resort to oral medications (e.g. BBs & CAIs which have wide ranging systemic side effects) as well as surgical procedures: Laser trabeculoplasty, laser iridotomy, cycloablation, trabeculectomy, and insertion of drainage shunts. As one might expect, most patients will prefer to exhaust their eye drop options before they resort to a surgical intervention. Let's keep in mind that a patient may even need multiple surgical interventions. At the end of all this, the IOP levels may still be poorly managed, resulting in loss of vision.

The beauty of Aerie's two new drugs is that they rely on a new novel mechanism of action the ROCK/NET inhibitor. By now, it should be obvious that due to lack of a truly effective glaucoma cure/treatment, there is plenty of opportunity for a new, novel, and effective class of medications. This new class of medications can either be used as monotherapy or added to complement other therapies. If Rhopressa were just another PGA class of drug, then we agree with the fact that it would not make sense to bet on this horse. But this is not the case.

As previously demonstrated, both Timolol and Latanoprost are most effective at high IOP. As IOP declines, they lose effectiveness. In contrast, Rhopressa Phase 2b has demonstrated that its response profile is essentially similar at either high or low pressures.

Rhopressa response profile

(Source: Aerie Pharmaceuticals, Investor day presentation, Sept. 10, 2014)

When IOP is less than 26 mmHg (80% of glaucoma market), Rhopressa reduces IOP 5.8 mmHg while Latanoprost reduces IOP 5.9 mmHg. Keep in mind that a 0.1 mmHg difference is not statistically significant and we are completely missing the big picture, which is that Latanoprost does not completely dominate the glaucoma market due to the non-responder issue.

Even though Latanoprost is the "standard of care," not all patients respond to Latanoprost, and this essentially is the reason that other "less effective" drug classes exist and also the reason there are multiple drugs in each class.

So what we want to reinforce is that Latanoprost does not meet the needs of everyone and therefore there is plenty of room for other competing products. We also need to keep in mind that although patients may start on Latanoprost, it may become ineffective at maintaining low IOP and the patient may need to be switched to another medication or another medication may be added. Introducing a new drug class does not imply an OR proposition, it may also be an AND proposition.

We highlight again that Timolol/BBs are at least 1 mmHg worse than Latanoprost across all IOP levels and still capture 29% of the glaucoma market (monotherapy and/or in combination). Similarly, Rhopressa is also approximately 1 mmHg worse than Latanoprost across all IOP levels. However, Timolol also loses effectiveness at lower IOP levels and we know that at 26 mmHg or less Rhopressa is equivalent to Latanoprost. Therefore, for 80% of the glaucoma market that exists at the 26 mmHg level or lower, we can conclude that Rhopressa is at least 1 mmgHg better than Timolol. Thus, we believe Aerie's projections that Rhopressa can capture 18% market share is reasonable.

Questionable safety profile and risks

Those with a negative view on Rhopressa and Roclatan raise the issue of a questionable safety profile and risks. This is a valid concern since we only know of Aerie's drugs' efficacy and safety profile up to 30 days. Phase 3 studies will measure effectiveness of reducing IOP at 3 months and safety up to 1 year. Should Phase 3 studies not support Phase 2 efficacy and safety results there would be a significant decline in share price. We assume shareholders would receive a value of zero in this scenario.

As far as known adverse side effects go, Phase 2 studies demonstrated that Rhopressa had 24% of patients experiencing hyperemia (redness of the eye) and Roclatan had 40%. We do not believe that these are indicative of any serious safety problems as the eye redness generally was mild and self limiting. Hyperemia is not an unusual side effect of glaucoma medications; in Latanoprost, this figure is 16%, Travoprost = 27% and Bimatoprost = 35%.

We also need to keep things in context, i.e. the severity of the side effect versus the consequences of the disease. We believe that mild red eye is acceptable versus loss of vision. We also know that other approved drug classes (BBs) have potentially dangerous respiratory and cardiac systemic side effects (e.g. bronchoconstriction, thus Timolol could be dangerous for those with respiratory conditions such as asthma. Cardiac side effects: bradycardia, hypotension, arrhythmias, cardiac arrest...).

Future Projections, i.e. why we are so bullish

We are optimistic that Rhopressa Phase 3 results will show similar results to Phase 2 results, which will demonstrate superior efficacy versus Timolol. The reason for this optimism is that Aerie has already successfully executed three Phase 2 studies with Rhopressa:

  1. Rhopressa Phase 2a

  2. Rhopressa Phase 2b

  3. Roclatan Phase 2 (Rhopressa arm)

Considering that Timolol captures 29% of the market as singly administered or as a combination medication, we will demonstrate why we view Aerie's projection of Rhopressa capturing 18% market share as conservative.

(Source: Aerie Pharmaceuticals, Investor day presentation, Sept. 10, 2014)

As one would expect, at this early stage, Aerie is still tinkering to determine the optimal dose (concentration) and dosing schedule (frequency). Phase 2a was used to determine effectiveness at different concentrations of Rhopressa (0.01%, 0.02%, 0.04%) vs. placebo (note dose was QD morning). The Phase 2b of Rhopressa was also used to confirm effectiveness of two concentrations (0.01% and 0.02%) with a Latanoprost comparator (all QD night).

The Phase 3 Rhopressa (i.e. AR-13324 Ophthalmic Solution, 0.02%) trial is actually 3 trials with Timolol BID as the comparator, which consists of:

  1. Rocket 1 (Clinical Trial NCT02207491): 90-day efficacy trial + 90-day safety, Rhopressa QD. (~400 enrollment)

  2. Rocket 2 (Clinical Trial NCT02207621): 90-day interim efficacy readout, 1-year safety. (~690 enrollment)

    1. Rhopressa QD arm

    2. Rhopressa BID arm

  3. Rocket 3 (Clinical Trial NCT02246764): 1-year safety. (~240 enrollment)

    1. Rhopressa QD arm

    2. Rhopressa BID arm

Our base case scenario is that we expect Rhopressa Phase 3 trials to show results similar to the previous three Phase 2 results, namely that Rhopressa (QD night) is at least 1 mmHg better than Timolol BID and equivalent to Latanoprost (QD night) for IOPs < 26 mmHg.

Many studies demonstrate that IOP quickly rebounds, therefore more frequent medication dosing schedules maintain a more even therapeutic dose of the medication, and this results in lower IOP levels. Most glaucoma medications are more effective at more frequent BID/TID dosing. The main exception being PGAs. The odds are in favor of Aerie's Rhopressa Phase 3 - Rocket 2 and Rocket 3 demonstrating that Rhopressa BID dosing is more effective at reducing IOP than the already impressive Phase 2 QD dosing results.

  • As an example, Timolol is significantly more effective at reducing IOP when dosed BID as compared to QD. In this study, Timolol BID dosing was 2.1 mmHg more effective than QD dosing at reducing IOP levels.

  • Our base case scenario is that given that non-PGA drugs benefit from more frequent dosing, minimally we would expect Rhopressa BID to exhibit diminishing returns and not be any worse than QD dosing. We will keep this feature in mind for more analysis later.

  • In our optimistic scenario, we expect Rhopressa BID dosing to be superior to QD dosing. If BID dosing of Rhopressa were to result in just a 1 mmHg improvement over QD dosing, we expect this will mean that Rhopressa will move up from being a very good 2nd choice to become the unquestionable new standard of care.

Latanoprost and other PGAs are the exception where QD dosing is best. In an anomaly for PGA medications more frequent dosing actually significantly worsens IOP lowering ability as compared to QD dosing:

This anomaly would be like taking insulin twice daily and the twice daily insulin resulted in worse (i.e. higher blood sugar levels) than if you took insulin once a day. For the "standard of care" class of medications, this is actually a significant drawback for constructing combination drugs. We doubt that the Phase 3 Rhopressa trials with both BID and QD dosing arms will demonstrate anything like this.

Aerie likes to promote the once-daily dosing advantage over non-PGA drugs (Aerie product portfolio). All the information we have access to already demonstrate that at QD dosing Rhopressa and Roclatan are already outstanding drugs. So if Aerie is promoting QD dosing, then we have to question why it has designed the Phase 3 trials the way it did (i.e. with BID dosing arms). It makes no sense if you want to promote once-daily dosing. If it was just doing basic research, it should have run the BID/QD comparison in Rocket 1, the shortest and easiest trial to enroll. This way it could rule out BID dosing and make the 1-year Rocket 2 and Rocket 3 smaller and simpler. Therefore, we suspect that Aerie is thinking along the same lines as we suspect, namely that BID dosing will be superior to QD dosing.

Now switching our attention back to Roclatan, the Roclatan Phase 2 trial already demonstrated phenomenal IOP lowering ability. There were statistically significant results of Roclatan being able to produce superior IOP reduction compared to either of its respective components (Latanoprost or Rhopressa). We expect that the Phase 3 Roclatan will likewise reconfirm the Phase 2 results, which will demonstrate statistical superiority of at least 1.5-3.0 mmHg in IOP lowering ability over either Latanoprost or Rhopressa. Therefore, we believe that Aerie will have the unquestionable #1 drug in IOP lowering ability with Roclatan. It seems reasonable to us that such a drug can capture 25% of the market.

One significant aspect that we need to keep in mind is that both PGAs (e.g. Latanoprost) and BBs (e.g. Timolol) have similar effectiveness profiles. They are most effective at high IOPs, but lose effectiveness at lower IOPs. Together, PGAs and BBs (monotherapy or combination) make up approximately 75% of the glaucoma market. We believe that this presents a significant opportunity for Rhopressa and Roclatan as they don't need to only displace sales of BBs and PGAs but adding Rhopressa and/or Roclatan improves the effectiveness at the low end of the IOP range.

It could be that the new standard of care could actually be to add Rhopressa to a PGA or BB (75% of the market). For this reason, we also believe Aerie should develop a combo BB medication (i.e. Rhopressa + Timolol). Remember that the lower the IOP, the better, and many combo drugs exist to facilitate patient adherence to their medication schedules.

Therefore, for all of the above reasons, we believe that the market share projection that Aerie will have a 43% market share in the glaucoma market as reasonable.

Attempting to value Aerie

By now, we feel that we have demonstrated that it is a reasonable projection that with Rhopressa and Roclatan, Aerie can capture 43% market share. Furthermore, we believe that it is a low risk proposition for Aerie to create other leading class combo medications from existing medications that are both FDA approved and available as generics (e.g. Rhopressa + Timolol).

We assign zero value to any other clinical stage ROCK inhibitors that Aerie may be working on for other indications (i.e. non-glaucoma).

Aerie has conveniently provided some information regarding the size of glaucoma market in several of their presentations:

  • 2013 US = $2.0 Billion

  • 2023 US = $4.9 Billion

  • Current US/EU/Japan = $4.5 Billion

  • 2023 US/EU/Japan = $8.0+ Billion

The growth in the glaucoma market from 2013 to 2023 can be attributed to an aging population, particularly in developed markets. We also know that many top glaucoma medications are off patent protection and generics are available so the dollar value of total glaucoma sales is somewhat depressed. The introduction of any new effective patent protected medications would significantly grow the dollar value of sales above the prescription penetration rate. We therefore expect a disproportionate sales dollar value of the market to be reaped by Aerie. With a new class of medications, we also expect Aerie to grow the market.

A rough rule of thumb is that world-wide drug sales can be modeled equally as ⅓ US + ⅓ non-US developed + ⅓ rest of world. To be conservative, we assume that the rest of the world is price sensitive and will be much less than US and other developed world sales. For our analysis, we will use an estimated $10 Billion in worldwide sales for the glaucoma market in 2023.

Aerie estimates sales of both Rhopressa and Roclatan at a combined 43%, this implies peak sales in 2023 of $4.3 Billion (Scenario A). If 43% of sales seem awfully high, let's keep in mind that Rhopressa and Roclatan will likely be far superior to Timolol and Timolol combination drugs which together capture 29% of the market. Thus, we believe the lower bound for peak sales is 29% or $2.9 Billion in annual sales (Scenario B).

When we wrote this analysis, Aerie's stock was hovering around $30, at this price range and if we assume Aerie's convertible debt will be converted to stock, the fully diluted market cap is approximately $1 Billion. This conveniently tells us the upside in AERI share price when you pick your sales multiple.

Scenario A - Aerie projection

43% Market share =

$4.3 Billion sales

Scenario B - lower bound

29% Market share =

$2.9 Billion sales

3x sales multiple

$12.9 B market cap

= 12.9x gain

$8.7 B market cap

= 8.7x gain

Table 1: Aerie valuation

In this example, we used a 3x sales multiple as we believe that Aerie will be bought out (although we hope Aerie can become an independent major ophthalmic pharmaceutical), and we believe this multiple is reasonable. We believe the logical company to takeover Aerie is Valeant Pharmaceuticals (NYSE:VRX). Valeant has an ophthalmic division and previously bought Bausch + Lomb for around 3x sales. We would also point out that many of Bausch + Lomb's products were mature and offered little opportunity to grow sales. This is not the case with Aerie, there are low-risk opportunities to expand sales with the launch new combo products with low R&D cost.

There would always be efficiencies of scale that can be reaped by the Valeants of the world that can reduce expenses: reduce overhead, more efficient use of sales force, reduction of R&D expenses, and foreign-based tax efficiencies.

We also believe that other pharmaceuticals that would likely find Aerie appealing are specifically those that have existing glaucoma medications and also at risk of losing revenue with their drugs potentially becoming obsolete due to Aerie introducing superior drugs. These pharmaceuticals are: Pfizer (NYSE:PFE), Alcon/Novartis (NYSE:NVS), Allergan (NYSE:AGN), and Merck (NYSE:MRK). (Refer to Table 2 for these companies' medications in glaucoma).

This gives us a lower bound ballpark that we might be able to expect for Aerie's stock price in various scenarios.

The home run scenario (Tylenol, Tylenol #2, and Tylenol #3, Tylenol cold & sinus...)

We want to further introduce the following table:

Table 2: Glaucoma medications

This is not an exhaustive table, but what this table demonstrates is the difficulty in managing glaucoma, therefore there are multiple classes of drugs, multiple drugs in each class, and the need to prescribe combination drugs that consist of multiple drug classes. The combination drugs are needed to maximize IOP lowering, to simplify dosing requirements, to minimize medication administration errors, and to reduce missed doses.

Rhopressa is of course a new class of drug. It makes sense to combine this with a PGA (Latanoprost) or BB (Timolol) since they have complementary response profiles. PGAs and BBs are most effective at high IOP levels, but lose effectiveness at lower IOP levels. Since Rhopressa works equally well at high and low IOP levels, it will enhance the ability to reduce IOP levels to the lowest levels possible. Thus, minimally we would expect Aerie to also develop a 2nd combo drug to Roclatan. We will call this Rhopressa B, which is Rhopressa + Timolol.

The superior IOP lowering ability from combining the response profiles of a PGA + Rhopressa combo is exactly what we see in the Roclatan Phase 2 trials.

Roclatan Responder Analysis

(Source: Aerie Pharmaceuticals, Investor day presentation, Sept. 10, 2014)

Now getting back to an idea we introduced before, due to the introduction of BID dosing arms in the Rhopressa Phase 3 studies, we believe this will demonstrate BID dosing superiority over QD dosing. Minimally, we expect BID dosing to be no worse than QD. This will allow Aerie to be uniquely positioned to create a slew of class leading combo drugs to meet the needs of various responders for each class of drugs:

  • Note that we expect Rhopressa to be superior to Timolol.

  • Timolol has combo drugs with all other classes of medications.

  • Therefore, it likely makes sense to have Rhopressa combo drugs with all other classes of medications. If made, we expect Rhopressa combo drugs to be best in class, as demonstrated by the combo drug Roclatan (Rhopressa + Latanoprost).

  • PGAs have a terrible feature in that when dosed BID, they actually worsen IOP lowering ability. Thus, any combo drug resulting from the combination with a PGA is inherently not reaching its full potential. Consider Xalacom (Latanoprost + Timolol) which is dosed QD. QD dosing loses the full effect of Timolol, as we demonstrated previously, Timolol QD dosing is worse than when it is dosed BID. Conversely, you cannot dose Xalacom BID to maximize the effect of Timolol, since the effect of dosing Latanoprost BID will reduce IOP lowering ability.

We believe that Aerie can build the dominant brand in the glaucoma market by further introducing what we will call Rocmate (i.e. the checkmate for glaucoma). It is not unusual to have 3 different glaucoma medications prescribed to a single patient at the same time. Rocmate will consist of Rhopressa, Latanoprost and Timolol (containing the top 3 IOP lowering drug classes). We are not aware of Aerie publicly discussing a drug like Rocmate, but we would be surprised if these discussions have not already taken place internally. Although once at the 3 combined drug market, we recognize there are diminishing returns to capturing market share (single-digit percentage point potential), however the main benefit extends to building Aerie's brand.

We expect that once Rhopressa is developed, it would still be profitable to develop Rocmate. We believe development costs to be reasonable as all the components would be FDA approved. Latanoprost and Timolol are also both off patent protection, allowing Aerie to be in the unique position to profitably develop a drug like Rocmate.

Due to its constituent drugs representing the top 3 classes of medications, we expect Rocmate would then have the highest IOP lowering ability on the market of any single medication. At this point, we expect Aerie could have the top 3 IOP lowering drugs on the market (Rhopressa, Roclatan and Rocmate). Further, we believe that Aerie should re-brand its products similar to Tylenol, Tylenol #2, and Tylenol #3, Tylenol cold and sinus, and Tylenol et al.

Commonly known as

Constituent components

Tylenol

Acetamenophen 300mg

Tylenol #2

Acetamenophen 300mg + Codeine 15mg

Tylenol #3

Acetamenophen 300mg + Codeine 30mg

Rhopressa

Rhopressa (0.02%)

Rhopressa #2

Rhopressa (0.02%) + Latanoprost (0.005%)

Rhopressa #3

Rhopressa (0.02%) + Latanoprost (0.005%) + Timolol (0.5%)

Table 3: New Rhopressa branding

This will help build a strong Aerie brand recognition from a medical and patient perspective with having the most effective IOP lowering drugs on the market and as well as establishing a clear pathway for "turning up the heat" on glaucoma. Patients could be started on Rhopressa. If this was not adequate at reducing IOP, other monotherapies could be tried, if those were inadequate, then you would step up to Rhopressa #2, and finally Rhopressa #3 would offer the ultimate level of IOP reducing potential.

Rhopressa #3 also demonstrates why it is beneficial for Aerie to develop other combo drugs. Rhopressa #3's full potential would likely be held back like other PGA combo drugs in that they would not be able to fully take advantage of the superior BID dosing ability of the non-PGA components. Therefore, once a patient is at the Rhopressa #3 level, the ultimate dosing schedule for IOP lowering ability would likely be:

  • Rhopressa B (i.e. Rhopressa + Timolol) in the morning

  • Rhopressa #3 (i.e. Rhopressa + Timolol + Latanoprost) at night

If we threw out the names of the following drugs: Xalatan, Xalacom, Duotrav, Travatan, Lumigan, Ganfort, Combigan, Alphagan, Cosopt, Trusopt, you might be able to recognize that some of these may be related, but you really have no idea which is which or which is the "stronger" drug (i.e. the combination drug). This again highlights the benefit of creating a 3 step pathway by owning the 3 top drugs, and using a branding strategy like Tylenol.

We point out again that there are combo drugs in each class along with Timolol. Since we expect Rhopressa Phase 3 to confirm superiority over Timolol, we expect that Aerie should create combo drugs with all other drug classes. Further, we expect each combo drug would be the best performing drug in their class, as evidenced by Roclatan Phase 2 results.

As ridiculous as this sounds, this could result in Aerie having the top 6 performing drugs in the glaucoma market. Examples of how these top 6 combo drugs could be constructed:

  • Rhopressa
  • Rhopressa #2 (aka Roclatan): Rhopressa + Latanoprost
  • Rhopressa #3 (aka Rocmate): Rhopressa + Timolol + Latanoprost
  • Rhopressa A: Rhopressa + Apraclonidine/AA
  • Rhopressa B : Rhopressa + Timolol/BB
  • Rhopressa C: Rhopressa + Dorzolamide/CAI

It is actually quite convenient how AA, BB, and CAI class of drugs lead to easily branding Rhopressa. From the above, it is abundantly clear that a Tylenol like branding strategy will give Aerie incredible brand recognition in the glaucoma market as well as dominant market share control. By the way, if anyone from Aerie is reading this, we are certainly open to discussing the use of any of the ideas we present in this article.

In a draft version of our analysis, we attempted to value Aerie in our home run scenario. In the editing process, we realized that trying to value Aerie with potentially the top 6 glaucoma medications really results in essentially monopoly like control of the glaucoma market. This then leads to valuations that seem ludicrous and detract from serious analysis. Perhaps, we will save that for a future article.

To put expectations in check, we actually believe the greatest risk to Aerie does not come from the failure of its medications to meet its potential, but rather that success breeds imitation. We would expect other biotechs and pharmaceuticals to eventually develop competing ROCK/NET inhibitor drugs.

To highlight our optimistic scenario, the following flow chart is one version of how we envision a glaucoma patient's treatment and how "stepping up the heat" could ultimately proceed. Keep in mind that if Rhopressa Phase 3 dosing at BID shows no improvement over QD dosing and only matches Phase 2 results, we expect the flow chart to remain the same for IOPs < 26 mmHg (80% of the glaucoma market) or largely the same except Latanoprost/PGA is switched with Rhopressa for the first step in figuring out the correct treatment for a glaucoma patient.

Rhopressa flow chart

Now in case you have not yet grasped the significance of what the above chart shows, is that the home run potential of Aerie is actually more like a grand slam potential. Let me recap:

Aerie's new class of ROCK/NET inhibitor drug (i.e. Rhopressa) likely allows creation of the top 6 most potent drugs to treat glaucoma. These top 6 drugs will all be patent protected, leaving everyone else to battle over the monotherapy/generic segment of the glaucoma market.

We expect Aerie will become synonymous with treatment for glaucoma.

Further, as demonstrated by Roclatan, which is a combo drug of Rhopressa and Latanoprost (we point out again Latanoprost is off patent), Aerie has access to Latanoprost ingredients, so it has the capability of branding its own version of Latanoprost. Latanoprost is the current standard of care. Therefore, fill in the PGA box above with an Aerie offering.

We extend that logic that by having Rhopressa B (note Timolol off patent), Aerie can likewise brand its own version of Timolol. Note that Timolol was the standard of care prior to Latanoprost. Now also fill in the BB box above with Aerie.

We can further extend this logic to the AA and CAI class of drugs/boxes above.

As we alluded to, we end up with a ludicrous situation of trying to value Aerie where it is synonymous with superior glaucoma treatment and it could essentially control 100% of the glaucoma market for eye drop medications.

To keep expectations realistic, no one likes monopolies, so at most we see Aerie retaining the premium Rhopressa (and related combo drugs/brands) controlled patent protected segment of the glaucoma market with its top 6 best-in-class medications. We also expect Aerie's success to breed competition in the ROCK/NET class. But we cannot ignore the fact that Aerie has a head start in potentially dominating the glaucoma market.

We will leave our home run scenario at that and give you something to think about. We will not attempt to value Aerie in our home run situation in this already lengthy article, perhaps a future article. However, we would like to hear from you as to what you think an appropriate valuation for Aerie is in the comments.

Summary

With no approved products for sale, Aerie is still a high-risk investment. Its future success significantly relies on its development drug Rhopressa, which enables all other combo drugs including Roclatan. It is a binary investment. There will either be a downside to zero or huge upward share price movement depending on the results from upcoming milestones.

Milestones

(Source: Aerie Pharmaceuticals, Investor day presentation, Sept. 10, 2014)

If the bear/short case is correct and longer term Rhopressa and Roclatan Phase 3 results do not demonstrate the same efficacy and safety of the shorter term Phase 2a and 2b studies, Aerie's value for shareholders is essentially zero.

Rhopressa Phase 2a/2b studies and Roclatan Phase 2b support the view that Aerie has two very promising glaucoma medications in development. In our base case scenario, we expect that Phase 3 studies for Rhopressa and Roclatan will provide similar data to the already promising trial data. In our base case scenario, we believe this would support at least a 29% market share (i.e. better than Timolol/BB market share).

In our optimistic scenario, we expect Rhopressa Phase 3 - Rocket 2 to demonstrate that BID dosing is no worse than QD dosing. In this case, Aerie has the possibility of controlling the glaucoma eye drop market with combination drugs that could result in Aerie having the top 6 most effective drugs at reducing IOP.

We expect significant price appreciation for Aerie's stock as each successive development and sales milestones are reached. In the long term, we expect peak sales will eventually support a 10x share price gain going out to 2023. Our home run scenario would imply even greater returns.

We do not recommend being short particularly as we expect continued share price appreciation leading up to the anticipation of the Phase 3 - Rocket 1 results.

Only the release of future milestone data will determine if our bull thesis is correct. We will soon enough know if we are on the correct path with our bull thesis. We expect to revisit this analysis in 3 months with the expected release of the Rhopressa Phase 3 - Rocket 1 trial results.

Disclosure: The author is long AERI.

The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.