Rejected Complete Response Letter

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What happened

Cempra (NASDAQ:CEMP) is down 56% at 12:17 p.m. EST Thursday after announcing that the Food and Drug Administration had issued a complete response letter -- the agency's euphemism for a rejection letter -- for the biotech's antibiotic solithromycin.

So what

The rejection wasn't unexpected since Cempra had already disclosed that the FDA had discovered issues with the company's contract manufacturer for the drug that needed to be resolved before the drug could be approved. Cempra had already put a backup plan in motion, working with another contract manufacturer in case its current one couldn't resolve the issue quickly. There also appears to be an issue with Cempra's manufacturer for the injectable version of the drug, although the FDA didn't disclose the details.

More importantly, the rejection letter also noted that "additional clinical safety information" would be required before the agency would approve solithromycin. The FDA had previously disclosed that patients treated with the drug had signs of liver toxicity, so the problem was known, but investors were hoping that the FDA would overlook the issue given the need for new antibiotics to treat bacteria that have become resistant to older antibiotics. A committee of outside experts voted narrowly -- 7 to 6 -- recommending the drug should be approved because the risk of death from the infection trumped the risk of liver toxicity.

The FDA didn't see it that way. Or more specifically, the agency decided it didn't really know how bad the liver toxicity risk was since only 920 patients received the drug at the proposed dose in the clinical trials, so the reviewers couldn't make an informed decision about the relative risks. To alleviate the worry, the FDA suggested Cempra run a trial with 9,000 patients treated with solithromycin, as well as a group of a to-be-determined number of patients treated with another antibiotic as a control to determine the rate of serious events of drug-induced liver injury.

Now what

Cempra needs to sit down with the FDA to work out the details of the new trial, so the exact timing -- and even a decision about whether to run the trial -- is still up in the air, but acting CEO David Zaccardelli noted on the call that the company doesn't expect an approval prior to 2018.

Beyond an approval for solithromycin in the U.S., Cempra has a few other options. Solithromycin is under review by European regulators, who have sometimes not seen eye to eye with their U.S. counterparts, although most of their differences seem to be about efficacy, not safety issues. Cempra is also testing solithromycin as a treatment for gonorrhea, which has a different dosing regimen that might alleviate regulators' fears about liver toxicity. And Cempra has another antibiotic, Taksta, which is set to read out results from a phase 3 trial in the first quarter of 2017.

Cempra looks cheap at this knocked-down price, but until management discloses more details about the cost and timing of the new safety trial for solithromycin and how the liver issues might affect the gonorrhea program, it's hard to determine the biotech's true value.

Brian Orelli has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.