Take a look at the chart below, and try and guess on which day Aerie Pharmaceuticals, Inc. (NASDAQ:AERI) announced that its phase III trial of its lead candidate failed to its primary endpoint.

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(source)

Correct. On April 23,2015, Aerie reported that Rhopressa did not demonstrate non-inferiority to timolo, the current standard of care treatment for patient suffering from glaucoma and a range of other eye diseases.

Another glance at the chart reveals that, while the company has recovered slightly from the 75% losses it suffered during the three days subsequent to the announcement, it still trades at a close to 50% discount to its pre-announcement valuation. Herein lies an opportunity.

Following the release, Aeri sat down with an FDA review panel and completely redesigned its Rhopressa trials – a redesign that weighs heavily towards success based on previous results. The results from the redesigned trial are due out before the end of this month, and as yet, it looks as though markets have not priced in the potential for success. So, with this said, let’s take a look at the redesigned trial and attempt to gauge what the results – whatever side of the markets they come out on – might mean for the company and Rhopressa going forward.

First, for those not familiar with the treatment here is a quick outline of the science that underpins it and its target indication – glaucoma. Glaucoma is an eye disease that can cause both long term and short term nerve damage in the eye. It primarily arises from increased ocular pressure, and can lead to visual impairment or blindness if gone untreated. There are two main types of treatment, both of which target reduced intraocular pressure – surgery or medication (usually eye drops). Rhopressa is the latter. The treatment inhibits what is called Rho Kinase, and in doing so, promotes the outflow of fluid from the trabecular meshwork in the eye. The reduction in fluid reduces the intraocular pressure, and the glaucoma recedes. At least, this is Aerie’s hypothesis.

So where did things go wrong on the failed phase III? The trial, called ROCKET, was initially broken into three separate sub-trials – Rocket 1, Rocket 2 and Rocket 3. Rocket 1 is the trial for which the company announced the negative results, and is the one that the company has since redesigned into Rocket 4 – due to start enrollment this month. Basically, the company targeted a range of intraocular pressures measured in millimeters of mercury (mmHG) between 20-27 mmHG. Across this full range, it was unable to demonstrate non inferiority. However, at ranges 20-25 mmHG, it did demonstrate non inferiority to standard of care. According to research done by the Baltimore Eye hospital, 80% of newly medicated glaucoma patients fall within the 20-15 mmHG range. So, in response to the outcome, Aerie sat down wit hthe FDA and both parties agreed to alter the primary end point in a redesigned trial that will see Rhopressa go head to head with timolol targeting a range across which the former has already demonstrated non inferiority. All Aerie has to do in this redesigned trial therefore, called Rocket 4, is replicate already achieved results. Even better, the FDA agreed to allowing the company to alter the primary endpoint in the Rocket 2 trial we mentioned a little earlier, which was ongoing at the time of the Rocket 1 failure. Rocket 2’s primary endpoint is now the same as Rocket4’s – to demonstrate non inferiority to timolol across a 2—25 mmHG range. The wider range is now a secondary endpoint.

So where does all this play into the opportunity, and what are the near term catalysts to keep an eye on?

Back in June 2015, Aerie announced the news about the trial redesign. This is what gave the company the kick up in share price illustrated on the above chart. Alongside the announcement, the company gave us an idea of timeframes for both the initiation of the redesigned Rocket 4 trial, and the topline data from the then ongoing Rocket 2 – both being before the end of Q3 2015. What this means is that before the end of this month, we have the results of one trial released, and the initiation of another trial with the exact same primary endpoint. Tolerability and safety is not a problem, as demonstrated by a pivotal phase 2 last year, meaning the Rocket 2 results will be the ones to watch. If we get a meeting of the primary endpoint, it will almost guarantee (well, as close as you can get in biotech) a meeting of the primary endpoint in the trial just beginning.

Which will come first (the trial results or the trial initiation) remains unclear. However, there is an easy way to play the announcements in either scenario. Since investors will be aware that the success or failure of Rocket 2 is a clear indication of the subsequent success of Rocket 4, they will likely wait for the Rocket 2 announcement before they make their move. In short, Rocket 4 will likely not move markets in either direction on its initiation, especially if it comes first. Rocket 2, on the other hand, will. If the company can replicate the Rocket 1 results in Rocket 2, there could be some nice upside, event driven potential in Aerie before the end of the month.

As a final note, what is the potential impact of a Rhopressa approval on Aeries revenues? Well, in the company’s latest investor presentation, it uses the latest glaucoma incidence rates in the US, and the concurrent rates of timolol use, to suggest that Rhopressa could be a blockbuster drug for the company if approved. In biotech, the term blockbuster generally refers to a drug that brings in revenues in excess of $1 billion annually. Unfortunately for Aerie, the chances of Rhopressa bringing in revenues to the tune of $1 billion are small – not because the patient population isn’t there, but simply because the price point that would be required to generate these numbers would price it out of the market versus current standard of care. Especially since the trials are only geared up for non-inferiority endpoints, not superiority endpoints. However, analysts put the market potential at more than $160 million a year, which for a company currently valued at a little of $460 million at last close, could add significant upside to its market capitalization.