What happened

After the company received a refuse to file letter from the Food and Drug Administration for a drug candidate that is designed to treat depression, shares of Alkermes (NASDAQ:ALKS), a biopharma focused on diseases of the central nervous system, fell 20% as of 10:55 a.m. EDT. This news also caused shares of Intra-Cellular Therapies (NASDAQ:ITCI) to fall 16% because it also has a drug that treats diseases of the central nervous system in late-stage development.

So what

The FDA informed Alkermes that it is unable to review its compound ALKS 5461 as a treatment for depression because it was provided with "insufficient evidence of overall effectiveness for the proposed indication." The agency stated that additional clinical trials would have to be run before it would accept a resubmission.

Man in lab coat holding up hand with palm facing outward

Image source: Getty Images.

Alkermes' management team said they "strongly disagree" with the agency's conclusion and that they plan to appeal this decision as soon as possible.

Here's the commentary that CEO Richard Pops offered investors:

We are extremely disappointed with this decision and the implications for patients in the U.S. suffering from major depressive disorder, a serious disease where there is a clear and urgent need for new treatment options for patients and their families. We strongly believe that the clinical development program, including data from more than 1,500 patients with MDD, provides substantial evidence of ALKS 5461's consistent antidepressant activity and a favorable benefit-risk profile.

The company also said that it will share any potential updates to its 2018 financial guidance when it reports its first-quarter results.

While this update didn't mention Intra-Cellular Therapies' lead drug, lumateperone, at all, traders are whacking the company's shares today over fears that the FDA is becoming more strict with its approval criteria for drugs that treat diseases of the central nervous system. If that is true, then it increases the risk that lumateperone could receive a similar response from the agency when the company files the drug for approval as a treatment for schizophrenia later this year.

Now what

There's no doubt that this update is a blow to the bull case for owning Alkermes' stock. While the company has several other growth irons in the fire, the potential approval of ALKS 5461 was a near-term catalyst that promised to create a lot of shareholder value. If the appeal falls through, the company will likely have to spend millions and put in a year (or more) to get the agency the clinical data that it needs to make another go/no go decision.

The story is equally troublesome for Intra-Cellular Therapies because lumateperone doesn't exactly have a flawless clinical track record. If the FDA is becoming more strict with its review of clinical data, then it is possible that lumateperone might not sail through the approval process like investors are hoping.

Alkermes' refuse-to-file letter is worrisome news all around. Investors who are bullish on either of these companies need to seriously consider the ramifications of today's news before they think about putting any more capital at risk. 

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.