What happened

Shares of Insmed (NASDAQ:INSM) are down 16% at 12:22 EDT after the company gained Food and Drug Administration approval for its antibiotic Arikayce, which treats Mycobacterium avium complex lung disease. While certainly disappointing for shareholders, it's actually not all that uncommon for shares of a biotech to trade down after an FDA approval.

So what

Most of Insmed's decline today is likely just investors selling the news. The drug passed its phase 3 study -- causing shares to double overnight -- and an FDA advisory committee recommended 12–2 that the drug be approved, so a thumbs-up from the FDA was largely expected. Short-term investors are moving on to the next binary event.

"FDA approved" stamp.

Image source: Getty Images.

Investors might also be concerned about the boxed warning that Arikayce can cause lung problems that have "led to hospitalizations in some cases."

On the surface, that shouldn't be a problem, since the drug is approved for use in patients who have limited or no alternative treatment options. The bacterial infection is already causing lung issues of its own -- including potentially irreversible damage -- so it seems doctors would give Insmed's Arikayce a shot even with the potential side effects.

But investors are hoping the drug will also be used off label to treat newly diagnosed patients. Given the side-effect profile, doctors might be more interested in sticking with the current standard of care in those patients and using Arikayce as a last resort. Insurers might also be more likely to balk at paying for the drug as a first-line treatment if there's risk they could have to pay more to treat the side effects.

Now what

Today's knocked-down price could be a good buying opportunity, but investors will need to be patient, since drug launches are often slow to take off. Getting Arikayce approved is a great first step for Insmed, but convincing doctors to use the drug and insurers to pay for it will be just as difficult.

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.