The clinical development process can be a long and costly one. For some companies, however, it can be longer and costlier than others. In 2009, Heron Therapeutics, Inc. (NASDAQ:HRTX) submitted an NDA to the FDA, with the goal of getting its post-operative drug Sustol to market. The FDA responded with a complete response letter, and after three years’ worth of additional data collection, the company resubmitted. Fast forward to March, 2013, and the FDA yet again responded with a request for further data. The reasoning behind the request was – among some minor issues – a reevaluation of the data on which the trial was based, in accordance with the (then) new ASCO 2011 guidelines.

After six years of regulatory to and fro, the FDA has set a PDUFA for Sustol of January 17. 2016. Heron has publicly stated (and reinforced the opinion with a fresh data submission) that it believes all of the FDA’s concerns are resolved. IN anticipation of the regulatory agency’s decision, let’s take a look at the drug in question, and see if we can gauge the drug’s potential for approval. Here goes.

So, as mentioned, the drug is called, Sustol, and has target indication of post-operative discomfort. More specifically, it targets (in this indication) delayed nausea and vomiting induced through emetogenic chemotherapy (emetogenic here just means having the potential to cause sickness). The drug is what’s called a 5-HT3 antagonist; it targets the 5-HT3 receptor to suppress the serotonin response that causes the nausea in question. A host of 5-HT3 antagonists are already approved, but they primarily target the nausea and sickness that comes about as an immediate response to chemo. There is a subset of patients that experience sickness a few days after therapy (called delayed onset CINV) and this is what Heron is targeting with Sustol.

So what is the difference this time around? Well, the company has conducted an extended trial called MAGIC, which it believes addresses the FDA’s concerns. Relative to current SOC treatment, Sustol induced a 14% improvement in delayed onset CINV patients, with Sustol showing a 65% complete response rate, versus the 57% of SOC. Safety and tolerability came in on-point, and sustainable production (something that the FDA instructed Heron to revise) has reportedly been resolved. The MAGIC trial included more than 1300 patients – a pretty hefty number for this sort of trial – and so from a scale perspective the FDA should have no issues.

What’s the market potential if Heron gets approval? In the US, there are a little over 7 million chemotherapy administrations dosed each year. Of these, approximately 75%induce nausea and vomiting of the type that Sustol targets. This puts the company’s target market at a little over 5.25 million. Based on a market penetration of 20% (expectations published by the company a few years ago), analysts put a peak sales forecast for Sustol at $420 million – expected by 2023 (assuming approval in January).

So what are we looking for near term, and what is the upside potential in Heron on approval? The company currently trades for just shy of $30 a share, giving it a market capitalization of circa $1 billion. Near term resistance comes in at $42, so expect a test of this level as we approach the PDUFA date of January 17. If the company picks up approval, annual potential revenues come in at circa 50% of current market cap, which gives Heron considerable upside potential on the announcement. We’re looking at a medium term target of $55, with a top end market cap in the $2-2.5 billion range.

The downside? There is, of course, the potential for yet another FDA decline. The agency has requested a renewed NDA on two occasions, and there is every chance that it will do the same this time around. If it does, we might be looking at another multi-year delay before resubmission, or worst case, a dropping of Sustol as lead candidate altogether.

Takeaway – keep an eye on the FDA (and any advance review) as the key driver behind Heron’s valuation going forward. An approval could quickly double the company’s market cap, but its far from guaranteed, given the FDA’s historic approach to Sustol.