• Aerie has 2 marketed products and decent pipeline after a recent acquisition.
• Aerie unfortunately still has extremely high cash burn for a company of its size.
• Despite this, Aerie shares appear to be somewhat undervalued at present even after accounting for the almost certain dilution that will be needed to raise cash.

Aerie Pharmaceuticals (NASDAQ:AERI) is a stock I’ve owned for a while, and lately I wanted to revisit my prior analysis to see if it was worth buying more to average down my cost basis after a substantial share price decline from higher levels in 2018 and 2019. Although it’s a fairly close call, I do think Aerie offers some potential upside for long-term investors from its current levels.

Aerie’s 2 Marketed Products Should Start to Show Substantially Increasing Sales in the Coming Years

Aerie has 2 marketed products, Rhopressa and Rocklatan. Rhopressa was first to hit the market, launching in April 2018. Rhopressa is a once-daily eye drop for the treatment of open angle glaucoma. Rhopressa is a Rho kinase inhibitor which works to lower intraocular pressure by directly impacting outflow through the trabecular meshwork, rather than targeting aqueous humor outflow like the prior standard of care class of drugs, prostaglandins. Rhopressa’s launch represents the first new class of drugs approved to treat glaucoma in years. Rhopressa appears to have a better safety profile and more universal efficacy versus prostaglandins as well as reducing the required number of daily drops for 2 to just 1.

Rocklatan is a very similar product to Rhopressa — in fact, Rocklatan is actually just a combination of Rhopressa and one of the prostaglandin drugs, latanoprost. Rocklatan in particular, though, appears to compare favorably with prior standard of care therapies like latanoprost.

Figure 1: Efficacy Comparison for Rhopressa and Rocklatan (source: corporate presentation)

Rocklatan was launched in May 2019, and sales have continued to grow since release for both drugs, albeit at a slower pace than originally projected.

Figure 2: Rhopressa and Rocklatan Sales Charts (source corporate presentation)

As you can see from Figure 2, it appeared Aerie’s drugs might be picking up some momentum earlier this year, but then there is a clear sales dip due to the COVID-19 pandemic. This led Aerie to withdraw its 2020 guidance. Thankfully, though, it seems as if prescription volumes have already started heading back in the right direction again, although there is still work to be done to get back to the prior rate of increase.

Figure 3: Prescription Volume Data for Aerie’s Glaucoma Franchise (source corporate presentation)

Any continued COVID-19-related effects are worth watching because the speed of Rhopressa and Rocklatan sales increases will be largely determinative of the size of future cash raises for Aerie. Additionally, these therapies should both have strong IP protection until at least 2030, so Aerie should have meaningful sales from both of these products for years to come.

Aerie is also trying to commercialize both drugs in Europe and Japan. A new Rocklatan plant in Ireland just received FDA approval, and the company intends to market both Rhopressa and Rocklatan on its own in Europe, albeit under different trade names. Marketing authorisation was granted for Rhokiinsa (Rhopressa) in November 2019, and Aerie’s MAA for Roclanda (Rocklatan) was accepted for review in December 2019. To support those efforts, Aerie is also conducting a 6-month Phase 3 safety and 90-day efficacy registration trial in Europe, Mercury 3, which compares Rocklatan to another combination therapy for non-inferiority. The top-line data readout from the trial could potentially be in late 2020.

Unlike in Europe, Aerie is actually seeking a partner for a potential approval and launch of these drugs in Japan. Aerie has both drugs ready for Phase 3 studies and hopefully will initiate at least one of the trials later in 2020 regardless of its progress on the partnership front.

Aerie has Expanded its Pipeline to Include a Number of New Potential Therapies in Large Markets

In addition to Rocklatan and Rhopressa, Aerie is developing a dry eye therapy as well as a sustained-release implant platform for retinal diseases.

Figure 4: Aerie’s Pipeline (source: corporate presentation)

The latest-stage drug in Aerie’s pipeline comes from its November 2019 acquisition of Avizorex. AR-15512 is a TRPM8 agonist eye drop for dry eye. This drug is supposed to work by activating cold thermoreceptors in the cornea which increases tear production and blinking rate while decreasing subjective levels of discomfort. Long-term toxicology studies are currently underway, and Aerie is planning to start a Phase 2/3 in the second half of this year.

Aerie also has a sustained-release implant platform. AR-13503 is a Rho kinase and protein kinase C inhibitor implant for wet age-related macular degeneration and diabetic macular edema. Aerie started a first-in-human trial in Q3 2019. Minimum enrollment is already complete, and the company has said the trial is on track for a 2021 data readout.

The other therapy in the sustained-release implant platform is AR-1105, a dexamethasone steroid implant for macular edema due to retinal vein occlusion. A Phase 2 clinical study was commenced Q1 2019, and a data readout is expected sometime later this year.

Between the pipeline and the broader global rollout for Rhopressa and Rocklatan, Aerie has several catalysts coming up in 2020.

Figure 5: Aerie’s 2020 Catalysts (source: corporate presentation)

The AR-1105 Phase 2 data readout in particular would seem to hold the potential to move the price of Aerie’s stock. On the flip side, any failures for Aerie out of these catalysts could be a major setback to the company and result in a decreased share price.

The Slow Rollout of Aerie’s Marketed Products Will Almost Certainly Result in Significant Dilution

At first glance, Aerie would appear to be a reasonably well-funded company — Aerie’s balance sheet showed $264.7 million in cash at the end of the first quarter. Unfortunately though, Aerie also burned $49.1 million in cash in the first quarter. This annualizes to just under $200 million, implying Aerie has a runway to early-to-mid 2021 depending on what Rhopressa and Rocklatan sales look like over the coming year. This rate is also exactly in line with Aerie’s 2019 loss of $199.6 million. On top of that, Aerie also has some debt in the form of $194 million in convertible notes.

Given that Aerie’s products brought in just $69.9 million in revenues in 2019, Aerie is still a long way from being cash flow positive. This almost certainly means that Aerie will have to raise a substantial amount of dilutive capital. In my view, this cash raise — and the potential for it to be far larger than currently estimated — represents the biggest threat to the success of an investment in the company.

Aerie Looks Modestly Undervalued Despite the Threat of Dilution

Even with the likelihood of substantial dilution, Aerie still looks undervalued based on the sales and earnings estimates of multiple analysts. Again, Aerie had $69.9 million in revenue in 2019 and that number should still grow in 2020 despite headwinds from COVID-19.

Figure 6: Aerie Sales and Earnings Estimates (source: Seeking Alpha)

The numbers from 2023-2025 stand out the most to me because the estimates for these years are within the next 5 years and are based on 8+ analysts for the sales data and 5+ analysts for the earnings. The estimated P/E and P/S ratios for those years are well below the 15 and 5, respectively, that are often considered to be average values.

It’s also worth noting that sales growth has been underwhelming so far, and revenue and sales estimates have been cut on multiple occasions. That’s why it’s particularly significant to me that these estimates are from multiple analysts rather than just wild speculation. It’s also important that, at the current level where Aerie shares have been trading, the company would still look undervalued even if actual sales and earnings numbers were well under these estimates.

The biggest counterargument to Aerie as a buy that I’ve heard is the high current cash burn and additional dilution that is almost certain to follow. I don’t disagree that those are big concerns, but the stock still looks undervalued to me based on sales and earnings estimates even after explicitly factoring in substantial dilution in the future.

Aerie said in its initial 2020 guidance that expenses were expected to stay consistent with 2019 levels, which were $257.4 million in total. For my analysis, I assumed that Aerie will have zero sales growth in 2020, which is almost certainly overly conservative, so I just bumped back analyst estimates for the next several years by one year. I also used that 2019 expense number to project cash flow needs over the next few years.

Figure 7: Chart Showing My Projection for Aerie’s Cash Flow Needs (source: Seeking Alpha, Aerie’s 10-K, and my calculations based on that data)

As you can see from Figure 7, I project Aerie to end up needing just under $250 million in additional cash for operations. This is because as sales pick up, Aerie will have more cash flow coming in to offset expenses, and Aerie should have positive cash flow starting in 2024, if not sooner. What also has to be factored in, though, is Aerie’s debt, which will mature in 2024. Because of that, I estimate Aerie will need something closer to $400 million in total. I then modeled what the impact of dilutive cash raises could be on Aerie’s total share count at various different total amounts raised, including ones above my estimate of Aerie’s cash needs, and at several different share prices above and below where the stock is currently trading.

Figure 8: Chart Showing My Projection for Aerie’s Total Shares Outstanding After Another Cash Raise (source: Seeking Alpha, Aerie’s 10-K, and my calculations based on that data)

Aerie currently has 45,792,504 shares outstanding, so I think it’s pretty safe to say they will end up with at least 65 million shares unless the share price goes substantially higher before cash has to be raised next year.

Figure 9: Chart Showing My Calculation of a Potential Fair Value for Aerie Based on Discounted Sales Estimates (source: Seeking Alpha, Aerie’s 10-K, and my calculations based on that data)

Even with up to 86 million shares outstanding, though, Aerie still looks somewhat undervalued at present. As you can see in Figure 9, Aerie’s sales several years in the future are expected to be large enough that — even after discounting them at 10% per year back to the present — they result in a fair value estimate of about $17/share at a 5 P/S which is about average in this industry. If Aerie can get by with a smaller raise or at a higher price per share, then the company’s fair value could be substantially higher.

Figure 10: Aerie’s Stock Chart (source: finviz)

Aerie’s stock has spent about 3 months now trading below that $17 level. Although it doesn’t have a particularly wide margin of safety, there seems to be some potential upside in the stock from the current level.

Conclusion

Based on my analysis of the impact of the near-certain dilution, I do think Aerie is undervalued at present. I personally did buy some additional shares recently to average down my cost basis, although I have still not accumulated what I would consider a full position in my portfolio. Despite having 2 marketed products, I do think an investment in Aerie is riskier than one might expect due to the high cash burn, so I plan to keep my position smaller than normal for now.

Disclosure: I am/we are long AERI. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: I’m not a registered investment advisor. Despite that I strive to provide the most accurate information, I neither guarantee the accuracy nor the timeliness. Past performance does NOT guarantee future results. I reserve the right to make any investment decision for myself without notification. The thesis that I presented may change anytime due to the changing nature of information itself. Investment in stocks and options can result in a loss of capital. The information presented should NOT be construed as a recommendation to buy or sell any form of security. My articles are best utilized as educational and informational materials to assist investors in your own due diligence process. You are expected to perform your own due diligence and take responsibility for your actions. You should also consult with your own financial advisor for specific guidance as financial circumstances are individualized.

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• Today, we revisit ocular concern Aerie Pharmaceuticals.
• The company has struggled as a newly minted ‘Tier 3’, with the stock down some 60% in 2019 to date.
• A fully updated investment analysis is presented in the paragraphs below.

Art is a revolt against repression.” – Marty Rubin

Today, we revisit an ocular concern that was a big winner a few years ago as it advanced its product portfolio. However, commercialization has been a different story, and the stock has had a sharp drop in 2019. We revisit this small-cap name in the paragraphs below.

Company Overview

Aerie Pharmaceuticals (NASDAQ:AERI) is a North Carolina-based ophthalmic pharmaceutical company that IPO’d in 2013. The company is focused on changing the lives of patients with glaucoma, retinal diseases, and other diseases of the eye. The company has two FDA-approved drugs on the market: Rhopressa which lowers elevated eye pressure in patients with open-angle glaucoma and ocular hypertension, and Rocklatan for the reduction of intraocular pressure in patients with open-angle glaucoma or ocular hypertension. Beyond the two approved drugs, the company’s pipeline is young with the next two most advanced product candidates, AR-1105 and AR-13503, being in Phase 1/2 of development. Aerie Pharmaceuticals trades for just around $18 a share and currently has a market capitalization of roughly $1 billion.

Pipeline:

Source: Company Presentation

Rhopressa:

Rhopressa is a once-daily eye drop for the lowering of elevated intraocular pressure in patients with open-angle glaucoma or ocular hypertension and was approved by the FDA in December 2017. The drug works by increasing the outflow of fluid inside the eye through the trabecular meshwork, which is the primary fluid drain in the eye. The drug was launched in the U.S. in 2018 and is seeking approval in European and Japanese markets. Enrollment for the Rhopressa’s Phase 2 clinical trial in Japan is now complete, ahead of schedule, and topline results should be available in Q4. If successful, a Phase 3 trial will follow. The market for the drug is roughly 50% commercial insurers and 50% Medicare Part D. As of the latest quarter, the company has gained access to the majority of lives covered under both commercial and Medicare Part D plans. Effective May 1st, Rhopressa’s Medicare Part D preferred tier coverage increased from approximately 40% to 75%. At that point in time, commercial coverage for Rhopressa was 90% of lives, with 55% of lives in a preferred tier. Management pointed out that all the feedback from the field is positive when it comes to the performance of the drug. The thing holding back sales is managed care coverage. The number of prescribers continues to grow, but roughly 75% of the target audience of 14,000 eye care professionals haven’t prescribed the drug before.

Source: Company Presentation

Rocklatan:

Rocklatan is a once-daily eye drop that is a fixed-dose combination of latanoprost, the most widely-prescribed prostaglandin analog, and netarsudil, the active ingredient in Rhopressa. The drug was approved by the FDA, launched in May of 2019, and has already gained non-preferred brand coverage with payors that represent over 60% of commercial lives. The company continues to meet with commercial and Medicare Part D plans to accelerate market access for Rocklatan, and they have launched a single savings card to reduce out-of-pocket costs for commercially-insured patients. The company is projecting that Rocklatan will have the majority of lives covered under commercial and Medicare Part D lives by the end of 2019. Also, the company is seeking to gain approval in Europe, and the Phase 3 Mercury trial, being conducted to support commercialization in Europe, continues to progress.

Source: Company Presentation

Ar-1105:

AR-1105 is an intravitreal, fully biodegradable PRINT-manufactured implant that releases the steroid dexamethasone to treat diabetic macular edema. The implant is designed to reduce the treatment burden for DME. The number of people with diabetic retinopathy in the United States is expected to roughly double by 2050, rising from 7.7 million to 14.6 million, and nearly half of all people with diabetic retinopathy will develop DME. An IND was filed in December of 2018, and a Phase 2 study in the treatment of macular edema due to retinal vein occlusion was initiated in March 2019.

Source: Company Presentation

AR-13503:

AR-13503 is an inhibitor of Rho kinase and Protein kinase C designed to treat wet age-related macular degeneration, diabetic retinopathy, and related diseases of the retina. As of August 20th, dosing is underway in a Phase 1 trial evaluating the safety and tolerability of the drug in patients with neovascular age-related macular degeneration or diabetic macular edema. The estimated completion date is September 2021.

Source: Company Presentation

Analyst Commentary and Balance Sheet

As of June 30th, 2019, the company had cash and cash equivalents of roughly $110 million, compared to approximately $200 million as of December 31st, 2018. Research and development expenses for the second quarter were $20.9 million, compared to $18.1 million in Q2 of 2018. Selling, general and administrative expenses for the quarter were $34.4 million, compared to $33.1 million in Q2 of the prior year. Total revenues for the quarter came in at $15.8 million, compared to $2.4 million in Q2 of 2018. The uptick in volumes hasn’t met the expectations of management, “full year 2019 net revenue guidance range to $70 million to $80 million, down $110 million to $120 million.” Overall, the net loss for the quarter was $47.1 million, compared to $55 million in the prior year. The company expects the total cash burn in 2019 to be between $162 million and $170 million, up from their prior projections of $130 million to $140 million. The company did a $275 million convertible debt offering earlier this month to address its near-term funding needs.

Wall Street remains sanguine on the company’s prospects despite the fall in the stock over the past year. Seven analyst firms, including Needham and Piper Jaffray, have reiterated Buy ratings on the stock over the past two months. Price targets proffered have ranged from $45 to $63 a share.

Verdict

Aerie has experienced the growing pains we see so often in ‘Tier 3‘ names as they move from a developmental focus to one based on commercialization. It should be noted that a beneficial owner has added over $20 million to his core holdings since mid-August.

I still have a small ‘watch item’ position in Aerie at this time. The stock may be trying to form a bottom near current levels. It might be worth consideration as a small trading position with a stop loss limit or within a small buy-write option strategy. However, until a significant drop in quarterly cash burn is achieved, AERI does not seem worthy of more than that at this time.

Repression may begin as a means to an end, but it always ends up being an end unto itself“- Garry Kasparov

Bret Jensen is the Founder of and authors articles for the Biotech Forum, Busted IPO Forum, and Insiders Forum.

Disclosure: I am/we are long AERI. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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• Sell-side estimates for this quarter’s revenue are too high and have begun to be cut.
• The guidance of 110m in revenue for the year is very unlikely to be achieved, which will result in even higher than expected cash burn.
• Sales of Rocklatan and Rhopressa to pharmacies and distributors exceed prescriptions, creating a demand headwind for the future.
• Strategic acquirers are unlikely to be interested in buying AERI in the near future.

AERI sell side estimates are too high

Both Rhopressa and Rocklatan are significantly underwhelming street expectations. Guidance is too high and will need to be cut.

I’ll begin with an analysis this quarter’s sales of Rhopressa and Rocklatan using weekly prescription data from Bloomberg / Symphony Health. The dates do not perfectly line up with quarter ends, but the difference is minimal and the monthly data for June is not available yet.

Between the weeks ended January 4, 2019, and March 29, 2019, Bloomberg reports that there were 90,930 total retail prescriptions for Rhopressa. Since the company reported $10,852,000 in revenue for the quarter, that implies a $119.34 of net revenue per retail prescription reported on Bloomberg. Note that the Bloomberg data is an estimate of only retail pharmacy sales. However, I think the data is good enough for our purposes and it’s reasonable to hold this multiplier constant for the next quarter – this is equivalent to assuming that the share of total prescriptions captured by Bloomberg remains constant from this quarter to the next. It is also important to remember that the number of bottles sold is higher than the number of prescriptions.

For the first two months of Q2 2019, Bloomberg reports that there were 64,724 prescriptions for Rhopressa and 1,300 prescriptions for Rocklatan. For the first 4 weeks of June, Bloomberg reports 30,369 Rhopressa Prescriptions and 3,202 Rocklatan Prescriptions. The data series ends on June 28, but the final two days of the month were Saturday and Sunday so the number of missing prescriptions should be minimal.

As for revenue per prescription, I assume that the $119.34 revenue/prescription number from last quarter applies to Rhopressa, and add a $15 premium for Rocklatan based on Vincente Adino’s comments on the Q4 2018 earnings call: “From a pricing perspective, we do expect the price of Rocklatan at a slight premium to Rhopressa. Again, we’ve always talked about a $10 to a $15 premium or so, so we’re trying to make it as easy as possible for the plans to put Rocklatan on.”

All this gets me to the numbers below:

Source: Bloomberg Drug Explorer weekly prescription data, company filings, my calculations

There is one further complication. AERI’s investor presentation includes the following charts, which show “actual sales out to pharmacies” significantly above prescriptions. This implies that pharmacies have built up some inventory.

Source: AERI investor presentation (linked above)

Going through the prior versions of this chart on the company presentation on EDGAR I was able to compile a table of cumulative Sales-Out to Pharmacies for Rhopressa.

Source: achieved AERI investor presentations found on sec.gov. Note that the data cited by the company comes from IQVIA, which is, of course, different than Bloomberg/Symphony Health so the numbers are slightly different from those that I used above.

In thinking about the excess sales to pharmacies, I rely on Steins’s Law: “If something can’t go on forever, it will stop.” I believe prescribed bottles represent sustainable demand and the inventory build will not continue to outpace sustainable demand for much longer. Burning through that excess inventory at pharmacies and distributors will reduce future sales. Still, in the short term, it seems reasonable to assume that AERI will get a revenue boost from the build up of inventory.

Source: Bloomberg Drug Explorer weekly prescription data, company filings, company presentations, my calculations

If sales-out to pharmacies exceed bottles prescribed by 25% for Rhopressa and by 37% for Rocklatan (as implied by the numbers for the two weeks in May in the table and the full period from the Rocklatan chart), I estimate total revenue of about $15.02 million for the quarter. It is very important to point out that the additional 3.06m in quarterly revenue from sales out to pharmacies is not bullish – it represents sales that has been pulled forward into the current quarter through inventory build.

As of this writing, the sell side consensus estimate for Q2 is $16.82 million. One can quibble with my assumptions, but no minor adjustments will bring the revenue estimate up to $16.8m. The sell side has been slow to update their numbers, but they are beginning to take their estimates down. JMP securities recently lowered their estimate from $19.4 to $13.7m, noting a “lower than forecast ASP [average selling price].” Their estimate was as high as $22.5m in February of this year. Piper Jaffray also lowered their numbers from $16.9m to $15.3m in note dated July 5, citing the updated IQVA prescription numbers. Interestingly, the Piper Jaffray note concluded by warning that, “For now, our 2H19 estimates remain unchanged, but [we] expect to reassess our numbers on the other side of 2Q earnings.”

Unless the sell side continues aggressively taking down their revenue estimates, AERI is probably is going to miss the consensus revenue estimate for this quarter. After that, there is no reason to believe that growth will significantly accelerate and the extra sales out to pharmacies will prove to be an additional headwind. Aerie’s Vincente Adino has described Rocklatan as a “game changer,” but it is nothing more than Rhopressa with a generically available prostaglandin analog mixed in. Rocklatan is presently growing off a small base, but it very well may be cannibalizing Rhopressa sales in the process, resulting in slowing growth for the latter drug. In fact, the Bloomberg / Symphony data shows fewer Rhopressa prescriptions for June 2019 than for the prior month, which is unusual coming from a relatively new drug launch.

One more fact about revenue is worth mentioning. Net revenue per bottle was reported as $100 but GoodRx reports that Rhopressa has a minimum retail cost of around $255. The 2019 first quarter 10-Q contains the following rather interesting footnote on revenue:

The Company calculates its net product revenue based on the wholesale acquisition cost that the Company charges its Distributors for Rhopressa® less provisions for ((i)) trade discounts and allowances, such as discounts for prompt payment and Distributor fees, ((ii)) estimated rebates to Third-party Payers, estimated payments for Medicare Part D prescription drug program coverage gap (commonly called the “donut hole”), patient co-pay program coupon utilization, chargebacks and other discount programs and ((iii)) reserves for expected product returns. Provisions for revenue reserves reduced product revenues by $16.2 million for the three months ended March 31, 2019.

The revenue reserve for Q1 of 2019 is greater than the reported revenue (~$10.9m). The 2018 10-K put the revenue reserve for the year at $19.6m (vs $24m of net revenue.) Aerie has adopted a strategy of selling Rhopressa and Rocklatan at steep premiums over the generic drugs like Latanoprost that dominate this market. The provision for revenue reserves as a percent of gross revenue has been high and increasing, which is a clear warning that AERI is unable to maintain these prices and is being forced to provide incentives to move its products.

The guidance looks unachievable

AERI reported $10.85m in revenue in Q1 2019. For the sake of argument, I’ll round my Q2 estimate of revenue attributable to final demand up to $12 million but assume that the excess sales to pharmacies and distributors will offset future demand in the second half of this year. That would put ‘true’ first half revenue at $22.85 million.

The full year FY2019 guidance is for $110 – $120 million dollars. Specifically, the company reiterated guidance when it reported the first quarter results:

Aerie reiterated that it expects full-year 2019 net revenues in the range of $110 million to $120 million on a U.S. GAAP basis for the combined net revenues for Rhopressa® and Rocklatan®.

Aerie also reiterated its net cash burn guidance for full-year 2019 in the range of $130 million to $140 million. This range includes the gross cash burn guidance of $210 million to $220 million, partially offset by estimated full-year 2019 revenue-related net cash inflows of $80 million, which includes accounts receivable collections and rebate payments.

I doubt that this guidance can be achieved. If my estimate is correct, revenue will have grown by about 10% from Q1 excluding the excess inventory built up by pharmacies and distributors. If revenue continues to grow at 10%, Q3 revenue will come in at $13.1m, far below the sell side consensus of $30.6m, and Q4 would come it at $14.4m, compared with a consensus estimate of nearly $48 million. Note that the sell side consensus is currently below the low end of company revenue guidance.

Another less crude way to estimate the revenue is to assume that Rocklatan will follow the same growth path as Rhopressa. In June 2018, the second full month after the Rhopressa commercial launch, there were 5,380 prescriptions, according to Bloomberg. Over the following 6 months, there were a total of 98,210 prescriptions, or 18.25x the month of June 2018. For June 2019, the second full month after the Rocklatan launch, Bloomberg reports 3,202 prescriptions. If I use the same 18.25x multiplier, I get 58,451 Rocklatan prescriptions for the second half of 2019. Assuming that Rocklatan prescriptions remain stable and the revenue per prescription stays the same, I get $29.6 million in revenue for the second half.

Source: Bloomberg Drug Explorer prescription data, my estimates

Note that this estimate for the second half is lower than the sell side estimate for just the third quarter. These estimates imply full year revenue of $52.4 million, far short of $110-120 million! Once again, I’ve made a lot of assumptions, some of which may be a bit too pessimistic for AERI, but small changes to any of them aren’t enough to bring the revenue estimate up to anything close to guidance.

If revenue falls well short of guidance, that $80 million of revenue related cash inflow is never going to materialize, and the net cash burn could be far worse than the expected $130-140m. The company had ~$149m in cash at the end of 2019 Q1. AERI will need to tap the capital markets soon just to stay in business.

My guess is that Aerie’s management has recognized their predicament and is looking to do an equity deal. According to Street Account, they will be on the road with Needham starting on July 10th, presumably to drum up interest for an offering.

Source: Street Account

They also amended their credit agreement with Deerfield Asset Management to increase the size of their undrawn revolver from $100 to 200 million. These are the actions of a company that understands that it will soon be facing a cash crunch.

There are good reasons why Rocklatan isn’t selling very well

The bull case for Rocklatain as a future blockbuster drug is that

1. It reduces interocular pressure by more than any other eyedrop on the market
2. It only requires one dose per day

Neither of these holds up to scrutiny.

At the end of the three-month double-blind clinical trial named Mercury-2, the efficacy difference between latanoprost monotherapy and Rocklatan was only 1.5 mmHg. While statistically significant, this reduction is not unique. Fixed dose combinations (FDCs) of Travaprost and Timolol, as well as Latanoprost and Timolol, have been studied. In both cases, the reduction in IOP was approximately 1.5 mmHg.

The clinical trials of FDCs of Travaprost and Latanoprost with Timolol enrolled far fewer patients than the Rocklatan FDC study. These studies all produced similar reductions in IOP but the Rocklatan study, which enrolled more patients than the other FDCs, reported a p-value <0.05 even though the magnitude of the effect was the same. I think you would be hard pressed to find an ophthalmologist who would testify that a similarly sized study of Travaprost/Timolol or Xalatan/timolol wouldn’t also produce a p<0.05 on all time points. Having established that you will very likely observe the same clinical outcome with generic prostaglandin plus generic timolol, the remaining advantage is the once daily dosing.

Everyone likes convenience, but it seems unlikely that glaucoma patients, who are mostly over the age of 60, will be willing to pay a substantial amount just to avoid taking more than one eye-drop. Rocklatan costs approximately $270 for one month of therapy whereas latanoprost and timolol cost $23 ($16 for latanoprost and $7 for timolol).

For a premium of nearly $250, you would expect that Rocklatan would have a better tolerably profile than other drug combinations. This not the case, as shown in the comparison table below using data compiled from the clinical trials. Notably, rates of hyperemia in Mercury-1 and Mercury-2 were more than double the highest reported rates observed with other combinations. Corneal deposits and conjunctival hemorrhage were also frequent occurrences in the Mercury trials and yet are not described at all with alternative drug combinations. Rocklatan’s poor tolerability resulted in a dropout rate of 33% over one year of therapy in the Mercury-1 trial.

Source: clinical trials and publications. Data and links to publications are available at clinicaltrials.gov

The bottom line is that Rocklatan is much more expensive than fixed dose combinations of competing drugs but no more effective, and it comes with more frequent side effects. It should not come as no surprise that it’s selling poorly.

The reimbursement picture complicates sales even further. Aerie claims to have 75% coverage for Medicare Part D and 55% Tier 2 coverage for commercial insurance.

However, GoodRx indicates that “In general, Medicare plans do not cover this drug. This drug will likely be quite expensive and you may want to consider using a GoodRx discount instead of Medicare to find the best price for this prescription.” The Q1medicare website, which allows users to search for Medicare Part D plans by drug coverage, shows “No additional gap coverage, only the Donut Hole Discount” or “No gap coverage” for all plans in California, New York, and Texas.

For the 35% of commercial lives for which Rhopressa is a tier 3 drug, reimbursement requires pre-authorization. Even for the 55% where Rhopressa has tier 2 coverage, pre-authorization may be required if the drug is not on the formulary. Here are a few prominent examples of plans that do not list Rhopressa on their formulary (links point to pdf files).

1. Cigna – Rhopressa is not listed on their 2019 formulary, and was listed as “Not Covered” in a document from Cigna in October 2018.
2. UHC – Rhopressa is listed as step therapy under the community plan or w/ OptumRx
3. Aetna Medicare – No Rhopressa listed at all, not even for step therapy or any other options.
4. BCBS – Rocklatan and Rhopressa are included on the Non-Covered Drug List

CEO Vincente Anido alluded to this problem on the 2019 Q1 earnings call:

We do see signs of that already occurring, not just because we think we’re going to get extra coverage, but as I mentioned during the call, we have seen over the last 3 weeks or so a fairly nice bump-up in terms of the shipments from wholesalers to retail and we think that that’s a prime indicator for continued success. And the fact that the sales force has been able to overcome a lot of different things, which — we’ve had probably 40,000-plus prior authorizations written with Rhopressa. And I think folks are beginning to see light of day, or the end of — light at the end of the tunnel here, which is the fact that we’ll be able to get Rhopressa reimbursed. And so we do feel comfortable that the range is at $110 million to $120 million, and all we’ve seen is a little bit of blip from one quarter to the next.

Andio’s remarks do at least clarify that the company has struggled with insurance reimbursement, which is understandable given the high price of Rhopressa and Rocklatan and lack of a demonstrated advantage in efficacy over much lower priced drugs.

The current hope – expansion to Japan & Europe

Aerie is currently running a clinical trial in Japan in preparation for launching Rhopressa in Japan. On July 9, 2019, the company put out the following press release:

Aerie Pharmaceuticals, Inc. ((NASDAQ:AERI)) (Aerie), an ophthalmic pharmaceutical company focused on the discovery, development and commercialization of first-in-class therapies for the treatment of patients with open-angle glaucoma, retinal diseases and other diseases of the eye, today announced that enrollment for its Phase 2 clinical trial of netarsudil ophthalmic solution in Japan is complete, a milestone reached several months earlier than previously anticipated.

The first patients to enter this prospective, double-masked, multi-center, placebo-controlled, parallel group Phase 2 study were dosed in late March 2019. In approximately 3 months, a total of 215 patients were successfully randomized across four treatment arms: netarsudil ophthalmic solution 0.01%, netarsudil ophthalmic solution 0.02%, netarsudil ophthalmic solution 0.04%, and placebo, all administered once daily in the evening. Netarsudil ophthalmic solution 0.02% is known by the name Rhopressa® in the United States where it is approved for the reduction of elevated intraocular pressure (IOP) in patients with open-angle glaucoma or ocular hypertension.

Since Rhopressa has been approved in the United States, it is likely that it will be approved in Japan as well. However, Aerie would be launching the second rho kinase (ROCK) inhibitor in that market. Ripasudil, which is sold by Kowa Pharmaceuticals, was first launched in Japan in 2014. There is also a Phase 2 clinical trial for this drug running in Oregon, which may eventually result in its launch in the United States and put further pressure on sales of Rockatan and Rhopressa.

Aerie is also working on expanding into Europe, starting with Rocklatan (it plans to call the drug Rocklandia in Europe for some reason). The company expects to complete a Phase 3 trial there by the end of the year and “have topline data sometime in 2020.” Aerie is going it alone in Europe for commercialization and hiring its own sales force. On the 2018 Q4 earnings call, Anido got a question about this:

Esther P. Rajavelu Oppenheimer & Co. Inc – Executive Director & Senior Analyst –

I’m just curious to understand some of the thought process and some of your considerations in deciding to pursue commercialization in Europe independently.

Vicente J. Anido Aerie Pharmaceuticals, Inc. – CEO & Chairman –

Yes. So it was pretty straightforward. We actually thought that we would go ahead and find a partner in Europe. And one of the things that we couldn’t determine, especially looking at the potential partners for Europe, is that there’s no real sort of European-centric companies. There’s one private one that’s available that has some presidents in many of the countries. Typically, the ophthalmic companies that are available in Europe are the Allergans and the Alcons of the world. And as you know, certainly here in the U.S. and many parts of the world, they’ve also been contracting their commercial operations in ophthalmology. So I didn’t want to get caught up given that my product and all of a sudden realize that they were considerably bringing down their infrastructure there. We did look at some of the European-only sectors. We thought about going country-by-country because there are some interesting companies that are available. But it was just sort of — it was turning out to be far more laborious than we expected it to be. And what we did find was quite a bit of talent available so that we can do it on our own. And so as way of derisking this thing, we will bring in our own commercial management team and the like. We could use a contract sales organization just out of the gate in order to make sure that we understand the dynamics of every country, and we are going to focus only on the top 5 in Europe. So I think that helps considerably. But it was really — the decision was driven by just — again, we did the math, and we could make a lot more money if we did it ourselves than if we try to find a partner.

So… just to reiterate, there are no “real sort of European-centric companies,” finding partners country by country turned out to be too laborious, but they are just going to focus on the top 5 countries in Europe and hire and ramp their own sales force, because doing that will be less laborious and more profitable. I’m deeply skeptical of these assertions. I think it’s far more likely that potential partners looked at the drug, its side effects vs the competition, and the disappointing sales in the United States and decided that the partnership just wasn’t worth it. Even if Aerie is able to launch Rocklandia in Europe, drug prices are far lower in Europe and thus profitability might be difficult to achieve.

Valuation and Potential Strategic Acquirers

Currently, AERI trades at 29.7 EV/S on an LTM basis and 19.8x my estimate of 2019 revenue. This valuation makes no sense for a company that burns 9-figures of cash per year with muted growth prospects. I believe the significant premium above stand-alone fair value being ascribed to the shares is a function of unfounded takeout speculation occurring in the market.

Allergan (AGN) was supposedly interested in buying AERI, according to market rumors on twitter.

Source: Twitter

However, Allergan itself was recently acquired by AbbVie (ABBV) in a transaction involving up to $30B of debt. Given the leverage and integration focus, it’s highly unlikely that AbbVie would acquire AERI any time soon. By the time AbbVie gets its hands around Allergan, it’s likely that both Rhopressa and Rocklatan will be widely understood to be commercial failures.

Another possible acquirer is Bausch Health Companies (BHC), formerly Valeant Pharmaceuticals. This is also highly unlikely. Bausch itself is straining under a heavy debt load of more than $24 billion, but even more importantly, Bausch recently launched Vyzulta, its own medication for glaucoma. Vyzulta prescriptions are presently growing quickly off a small base with a superior safety profile to AERI’s drugs.

Source: Bausch Health Companies Investor Presentation

There are certainly other big pharma companies but without evidence that either Rhopressa or Rocklatan sales are going to “hockey stick”, there’s no reason for any strategic buyer to pay a hefty premium above an already stretched market valuation for AERI.

I estimate the value AERIE as a stand-alone company at 3.2x sales based on a quick peer analysis via Capital IQ.

Source: CapitalIq

Aerie is a money losing pharmaceutical company with essentially one drug that is in the process of falling short of expectations, so the 3.2x multiple may be generous. Even so, here’s the implied value using my FY 2019 revenue estimate.

Source: My calculations

$6.64 would be 74% downside from the current share price of $25.64. Of course, in the event that Rocklatan and Rhopressa never achieve the level needed to attain positive free cash flow, Aerie pharmaceuticals could be worth zero.

Conclusion

AERI traded over $70 in July of last year based on the hope that Rhopressa and Rocklatan would become blockbuster drugs. Hope is now colliding with reality. Rhropressa is priced at a significant premium over competing drugs and has an inferior tolerability profile, and Rocklatan is nothing more than a fixed dose combination of Rhopressa and a generically available prostaglandin analogue. The drugs are not selling nearly as well as expected and sell-side revenue estimates are coming down. When revenue disappoints, the cash burn is likely to be even worse than guidance. The story that sales are suddenly going to hockey stick in the second half is implausible.

If you’re long, you should get out before the price drops even further. If you’re looking for a short, AERI is worth your attention.

Disclosure: I am/we are short AERI. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

The post Aerie Pharmaceuticals: Guidance Is Unachievable After Failed Drug Launches; 70%+ Downside appeared first on Up2info.com.

• We revisit Aerie Pharmaceuticals. The stock has had a wild ride, getting crushed in the back half of 2018 and rising nicely so far in 2019.
• The company is just rolling out its first approved product and has another PDUFA date with the FDA coming up in mid-March.
• We take a deeper look at this ocular concern in the paragraphs below.

“He has all the virtues I dislike and none of the vices I admire.” -Winston S. Churchill, Wealth, War, and Wisdom

It has been quite a while since we looked at Aerie Pharmaceuticals (NASDAQ:AERI). The stock, like most small biotech stocks, was crushed in the back half of 2018. However, the shares have acquitted themselves well so far in 2019. I have gotten a few questions from around this name recently. With a key PDUFA date in mid-March, it is time to revisit this ocular concern.

Company Overview:

Aerie Pharmaceuticals is a North Carolina based ophthalmic pharmaceutical company, focuses on the development and commercialization of first-in-class therapies for the treatment of glaucoma and other eye diseases. The stock came public late in 2013 and sports a market capitalization just north of $2 billion. It stock currently trades for just over $45 a share after a nice rally in January.

Product Portfolio & Pipeline:

Source: Company Website

Rhopressa was approved to treat glaucoma late in 2017 and rolled out in the first half of 2018. Rhopressa is a once daily treatment that lowers eye pressure in patients with open-angle glaucoma and ocular hypertension. In the third quarter, the compound did $7.2 million in revenues. The company expects Rhopressa will generate between $20 million to $30 million in sales in FY2018.

Aerie’s next potential approval is for Roclatan, which has a March 14th PDUFA date. Roclatan is a once-daily eye drop that combines netarsudil – the active ingredient in its approved product, Rhopressa® 0.02% – with latanoprost, prostaglandin analog (PGA) that is the most commonly prescribed medication for lowering Inter Ocular Pressure (IOP) to treat glaucoma.

In recent news, ten days ago the FDA accepted Aerie’s IND application for AR-1105 (dexamethasone intravitreal implant) for the treatment of macular edema due to retinal vein occlusion. A Phase 2 clinical study is expected to begin later this quarter.

Analyst Commentary & Balance Sheet:

The current median analyst price target on Aerie is just north of $80 a share. So far in 2019, both Cantor Fitzgerald ($86 price target) and Mizuho Securities ($77 price target) have reissued Buy ratings on the stock. Here is the commentary from Cantor’s call which came out on January 9th:

We rate Aerie Pharmaceuticals Overweight. AERI is commercializing and developing once-daily eye drops, respectively, for glaucoma. Rhopressa is the first novel drug in a market that has not seen innovation in 20 years. Valuation Summary We value Aerie based on the NPV of the cash flows associated with its glaucoma drug candidates. Our target price is $86/share.

The company came out of the third quarter with just over $235 million of cash on hand. Management guided that it expected cash burn for FY2018 to be in the $210 million to $215 million range after burning through $163 million in the first nine months of 2018.

Verdict:

Aerie looks poised to add a second compound to its product portfolio in mid-March and continues to advance its pipeline. The stock also enjoys solid analyst support and could continue to run up a bit into its March PDUFA date.

That said, we have seen sell-offs after FDA approvals in the biotech space overall including in fellow ocular concern Ocular Therapeutix (OCUL) whose product DEXTENZA received FDA approval on December 3rd of last year. In addition, it appears the company is going to have to raise additional funding sometime this year. Finally, insiders were frequent sellers of the shares throughout 2018.

I have a small “watch item” holding in AERI. I have no plans to add to my holdings currently and if I was going to take an initial position in AERI, it would be through a buy-write option order. Post approval/capital raise, I may revisit this name to see if the risk/reward profile has improved. I offer this analysis up for the several folks that have inquired on this name recently.

“No one gossips about other people’s secret virtues.” – Bertrand Russell

Bret Jensen is the Founder and author of articles on The Biotech Forum, The Busted IPO Forum, and The Insiders Forum. To receive these articles as published on Seeking Alpha, just click the appropriate link and hit the orange follow button.

Disclosure: I am/we are long AERI, OCUL. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Biotech has gotten off to a solid start 2019 after deep losses in the fourth quarter. M&A has picked up as two major acquisitions have happened early this year. We just provided our 2019 Outlook to Biotech Forum members. It contains what we expect in this high beta sector for the rest of year as well as a couple of possible logical takeout candidates. To get it, access to our model portfolio and our investment analysis archives, sign up for your free 14 day trial into The Biotech Forum by clicking here. Hope to see you on Live Chat soon!

The post The Verdict On Aerie Pharmaceuticals appeared first on Up2info.com.

• Aerie Pharmaceuticals was one of my two favorite shorts as recently as August 2018.
• Since then, earnings data and developments have largely played out according to my thesis, and the stock is down as a result.
• In this article, I  review the new data and update my trading position accordingly.

In June of this year, I explained why I was short Aerie Pharmaceuticals (NASDAQ:AERI), which at the time was trading around $70 per share, and in August, I compared my short of Radius Health (RDUS) to the situation developing at AERI. Indeed, given the lessons learned from my RDUS short, I deemed AERI one of my two “favorite” shorts at that time. (Note that Total Pharma Tracker subscribers had early access to both articles.)

Today, as shown in the chart below, AERI is trading just above $40, so I would like to re-visit the original thesis in light of recent developments and then re-evaluate my short position.

Financial Results

The biggest development since August has been the third-quarter earnings release, including the associated conference call and 10-Q.

From them we learned that AERI had quarterly net sales of just over $7.3 million, with SG&A expenses of almost $40 million and a net loss of over $85 million. The net sales number kept the company on target for its guidance of $20-30 million in sales for calendar year 2018, which implies anywhere from $11 million to $21 million in sales for the fourth quarter (we’ll discuss this below).

Note that SG&A expenses are expected to be relatively constant going forward, so we can expect about $40-45 million in such expenses quarterly. Here’s an exchange from the conference call explaining this:

Elliot Wilbur

Okay, fair enough. And then just one final question for Rich. Looking at your SG&A levels, it’s been relatively steady the last couple of quarters. As we think about maybe some of the initial, Rhopressa launch costs tapering off, obviously you have more associated with Rocklatan in early 2019. So, maybe any reason to think that there would be sort of a kind of a large incremental one time step-up from, from current levels or is this kind of cruising speed and expense levels should be relatively, increase relatively modest rate going forward.

Rich Rubino

Yes sir. So, I certainly expect in the world of SG&A that will be consistent fourth quarter compared to third quarter. Obviously, we’ve got the commercial team fully in place and remember as we get into next year, with the Rocklatan launch, it’s the same team, but we may have some launch expenses, but just like they were last year earlier this year for Rhopressa, you’re talking about a relatively nominal amount, low single-digit millions. So, you’re not going to see a huge pop in preparation for the Rocklatan launch.

As an aside, this SG&A expense is quite comparable to that of RDUS, which is on the order of $48.5 million (and hence, is another reason to think the trajectories of the companies are indeed comparable – see my article linked above).

AERI will also continue spending on R&D, to support the launch of Rhopressa and Rocklatan in Europe and Japan, as well as developing the earlier-stage pipeline. Hence it will likely take quarterly net revenues of over $70 million for the company to turn profitable.

On the cash front, AERI ended the quarter with $246 million in current assets (and $211 million in net current assets), while average quarterly operating cash burn is on the order of $40 million, which suggests the company can easily go another year before having to raise cash again.

Uptake Rate and Competition with Vyzulta

Part of my short thesis is that AERI’s launch of Rhopressa, and soon Rocklatan, is contemporaneous with another new product, Vyzulta, produced by Bausch Health Companies (BHC). I also believe that Vyzulta’s safety profile is much more benign than Rhopressa’s (and Rocklatan’s when it becomes available for sale). This ultimately negatively impacts both product pricing and uptake rates, which makes the task of becoming profitable that much more difficult for AERI.

For reference, here are the sales levels through the end of October, as given by Bloomberg, for Vyzulta and Rhopressa.

Assessing the July, August and September histogram bars gives Rhopressa prescriptions of about (8,000+12,000+14,000) = approximately 34,000 prescriptions. Prescriptions are for 2 bottles, so the quarterly net sales of $7.3 million jibe with the company’s stated price of $122 per bottle, which is expected to drop to $100 per bottle by the end of the year. See this exchange from the conference call:

Now as a reminder, as we pick up coverage, particularly in tier two, we do have to pay rebates to the payers that bring our net revenue per bottle down. That net revenue was roughly $135 per bottle in Q2. It was $122 per bottle in Q3. As we pick up more coverage, it will ultimately level-off. As we approach the end of the year and that will get close to about $100 per bottle, which is consistent where we’ve always estimated the net prices to be.

Projecting from the graph above, we can estimate fourth-quarter prescriptions of about 75,000, which would mean $15 million in fourth-quarter net sales and $25 million for annual sales, thereby landing squarely in the middle of the company’s 2018 guidance of $20-30 million.

The problem is that AERI will need $40 million in quarterly sales to simply cover SG&A expenses, which means almost tripling fourth-quarter projected sales. That’s a tall order, as there will no doubt be a tapering in prescription growth rates over time. Also, only now is there six months of doctors’ experience with the drug, which is probably the minimum time frame for any worries about Rhopressa’s safety profile to emerge. The company downplays these concerns, but reading between the lines, it is no doubt an issue, though perhaps less than I originally thought based on dropout rates from clinical trials. Here’s what the company had to say on the matter, from the earnings call:

Adnan Butt

Shifting gears a bit, do you have any updated estimates on what adherence is like our discontinuations? Do they continue to stay low?

Rich Rubino

Yes. One of the things that we did talk to the doctors about is sort of how things are going and the like, you may remember that the discontinuation rates, they’re in that clinical trials where according to some kind of high, but obviously that was just a manufactured kind of a thing. What we noticed is that discontinuation rates are much lower than that now. We do still have them by the way. So there’s that – I want to make sure you understand that there are some folks were the IOP just doesn’t drop as much as they want to, we do have consistent with what we saw in the clinical trials and some folks who get hyperemia that’s persistent and especially if it’s combined with a low IOP drop, they’re just not willing to continue on the medication.

So we do get those. But the doctors are basically going to the patients and saying, stick with it. Let’s see. Let’s make sure that we understand how the drug is performing on you and the like and they appear to be quite happy. That’s why we see the kind of numbers that we’re putting up and that’s why we see the results in the marketplace. Like I said, we’ve got an awful lot of sales reps that are doing extremely well and it’s because the doctors are trying it and appear to be satisfied with it.

Adnan Butt

Vince, just a quick follow-up, is the main cause for discontinuation still hyperemia or is it another side effect?

Vince Anido

No, it’s really not just, the hyperemia. I think it’s usually a combination of perhaps either the hyperemia or maybe some other adverse events, and the fact that 70% of these patients, Rhopressa just is the drug for them. It just doesn’t drop pressure enough or perhaps, they’ve already added it to something else and we just don’t see the incremental pressure drop that we’ve seen in other cases. And so, there’s hardly ever just one single item that doesn’t.

Rocklatan Launch

Since Rocklatan is a combination drug of Rhopressa with latanoprost, and most Rhopressa patients are already using latanoprost or equivalent, I’m not expecting a big bump in sales when (assuming it’s approved) Rocklatan is launched. It will be more convenient than having to take two separate drugs, but most patients will be those that could have used Rhopressa in any case. And the company suggests that pricing won’t be such as to favor one drug over the other, so that shouldn’t bump revenues either.

Here’s part of what AERI had to say on the matter, from the earnings call:

There is an extraordinary level of interest in Rocklatan, as once again that confirmed at AAO, there’s the interest we think stems from how well Rhopressa appears to be performing when it’s added to a prostaglandin. And so many have asked how doctors would prescribe Rhopressa versus Rocklatan and what we think the split is going to be.

Personally, I think it’s going to be very difficult to predict. I’ve mentioned that before. I think the doctors will follow their own path on a patient-by-patient basis. It’s clear to us however, the Rocklatan if and when approved, ultimately have a very significant potential in the marketplace. From a pricing perspective, we do expect to price Rocklatan fairly consistently with Rhopressa, which we believe will write in the market acceptance, including the necessary gains in market access.

Conclusion and Trading Position

Taking this data as a whole, I think my original thesis is bearing out and that the recent stock price reflects the market beginning to share that view. Going forward, I think it’s reasonable to expect 2019 US sales on the order of $100-110 million, and possibly $150 million in 2020. These numbers won’t result in profitability, and may not even cover cash burn depending on how aggressive the company is with R&D expenses. Future sales in Europe and Japan likely will have the same profitability problems unless AERI somehow secures favorable partnerships.

Nonetheless, if we’re optimistic, we can assign a P/S multiplier of eight times 2020 sales, which would give the company an estimated $1.2 billion valuation. It currently has 45.5 million shares outstanding, as well as 6.9 million options out, so on a fully diluted basis, a reasonable price target is on the order of $23 per share.

I am currently short “core” shares to approach that target, but I have covered some “trading” shares on the notion that there will be bounces in the stock price on the way to my ultimate target, and I’d like to leave portfolio room to trade these bounces too. See my article on RDUS linked to above for thoughts on better trading allocation.

A version of this article was previously released to subscribers of Total Pharma Tracker, a Marketplace service with whom I am now collaborating. Some of my work will be available to TPT subscribers either exclusively, or in advance. Please subscribe to TPT by clicking on this link – Total Pharma Tracker.

Disclosure: I am/we are short AERI. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: I actively trade around core positions

The post Updating My Aerie Pharmaceuticals Short appeared first on Up2info.com.