March has proven to be a rollercoaster ride for shareholders of Aurinia Pharmaceuticals (NASDAQ:AUPH), with shares climbing almost 200% at one point before pulling back. Still, shares are up over 90% in March alone -- and almost 250% since the start of 2017. So what's next for this small-cap Canadian biotech? I, for one, believe the party may just be getting started.

Treating a complex condition

Aurinia's leading drug is voclosporin, a potential treatment for Lupus Nephritis (LN). LN is an inflammatory kidney condition caused by systemic lupus erythematosus, or simply "lupus."

Lupus is a complex autoimmune disorder without a cure. The company estimates that lupus affects over 500,000 people in the United States alone, and that 60% of these patients suffer from LN. Within 15 years of diagnosis, between 10% and 30% of patients with LN develop end-stage renal disease, making LN a life-threatening disorder.

Voclosporin is believed to function by blocking the activity of a protein called calcineurin. By doing so, voclosporin is able lower the immune response in lupus patients -- thus resulting in less damage to the kidneys.

In August of last year, the company said that voclosporin had met is primary endpoint in a phase 2 study for LN. But instead of driving shares higher, the news sent them tumbling more than 50%. Why? There were 13 deaths over the course of the trial -- though, importantly, a subsequent review found the deaths to be unrelated to calcineurin and caused instead by the severity of the disease.

In November, Aurinia announced that they had completed their end-of-phase-2 meeting with the FDA and that they planned to launch a single phase 3 trial for voclosporin -- which if successful, would support a submission for approval to the FDA. This trial is expected to start in the second quarter of 2017.

Sky's the limit

While pre-revenue biotechs are tough to value, Aurinia estimates that there are between 125,000 and 200,000 diagnosed LN patients within the U.S., and between 175,000 and 250,000 in the EU. The company furthermore believes that voclosporin could target a price between $50,000 and $100,000 per patient per year within the United States.

Assuming the low end of both patient population and pricing, this would indicate a peak U.S. market value of $6 billion. While 100% market penetration is a lofty goal, the company has estimated peak U.S. sales of voclosporin at greater than $1 billion and around $300 million in the EU. For a company currently trading around a $400 million market cap, Aurinia looks to be significantly undervalued.

The waiting game

Recently, Aurinia's stock dipped on the news of a secondary equity offering. While this generally has the effect of lowering the share price (more shares issued = less value per share), I believe the equity raise was warranted. Now with a net cash position just north of $190 million, I believe Aurinia has the capital necessary to see its phase 3 trial to the end.

Unfortunately, that end may still be far away, as voclosporin's 48-week phase 3 trial has yet to even begin recruitment. Most likely, Aurinia will not release top-line data from this study until at least late 2018 or early 2019. However, for the long-term investor, even after the recent run-up, I believe Aurinia is still severely undervalued relative to its potential. For myself, I'd consider Aurinia a buy.