What happened

After industry watchers at J.P. Morgan downgraded shares to an underweight rating, La Jolla Pharmaceutical Company (NASDAQ:LJPC) was nosediving 12.6% at 1 p.m. EST.

So what

La Jolla Pharmaceutical reported positive phase 3 results earlier this year for LJPC-501, a drug that may help people suffering from a life-threatening drop in blood pressure. The company followed up that news with a filing for approval from the U.S. Food and Drug Administration; a decision is expected on Feb. 28, 2018.

A man starting at a chart showing a declining stock price holds his head in his hands

IMAGE SOURCE: GETTY IMAGES.

The upcoming decision by the FDA offers a catalyst that could be meaningful for La Jolla, but there's no guarantee that the FDA will approve LJPC-501 or that if it does, it will win widespread use by doctors. The binary risk associated with a decision on this drug makes owning shares ahead of the FDA decision a risky gamble.

Hesitation in warming up to La Jolla Pharmaceutical might be explained by the fact that during its phase 3 trials, LJPC-501 didn't deliver a statistically significant improvement in overall survival or reducing organ failure, a secondary endpoint. It did deliver on its primary endpoint, though. LJPC-501 successfully increased the proportion of patients achieving a mean arterial pressure of at least 75 mmHg, or a 10 mmHg increase from baseline, three hours following the initiation of treatment, without increasing the need for standard-of-care vasopressors.

Now what

It's never encouraging when analysts at respected firms recommend selling or underweighting shares, but investors should do their due diligence before jumping in or out of their shares. The upside is that an approval in February could provide some welcome revenue for the company. The downside is that absent an improvement in overall survival, it's anyone's guess how widespread the use of LJPC-501 could be if it's approved.

Overall, shock patients suffering from the condition LJPC-501 addresses have a 50% mortality rate, so there's a big need for treatment alternatives. It also shouldn't be ignored that the annual addressable market in the U.S. alone is in the hundreds of thousands of patients, many of whom don't respond to existing treatment approaches; that has some industry watchers thinking LJPC-501 could generate significant sales. Only time will tell if the bulls or bears are right on this one, but most investors should probably watch how this plays out from the sidelines for now.

Todd Campbell has no position in any of the stocks mentioned. His clients may have positions in the companies mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.